Treasury and IRS Issue Proposed Regulations Relating to
Deductibility of Dividends Paid on Employer Securities Held by an ESOP

August 25, 2005 press release from U.S. Treasury

The Treasury Department and IRS issued proposed regulations today to provide guidance under sections 162(k) and 404(k) of the Internal Revenue Code relating to the deductibility of certain dividends paid on stock held by an employee stock ownership plan (ESOP).

The regulations address two issues that have arisen in the application of section 404(k) (which allows a deduction for certain dividends paid in cash by a corporation with respect to its stock that is held by certain ESOPs) and section 162(k) (which generally provides that no deduction is allowed for any amount paid or incurred by a corporation in connection with the reacquisition of its stock). The regulations would provide that the payor of the dividend is entitled to the deduction under section 404(k), regardless of whether the payor is the employer maintaining the ESOP. The regulations would also provide that payments to reacquire stock held by an ESOP, even if properly characterized as dividends, are not deductible.

The regulations would be effective on the date of publication of the final regulations.