This case is similar to Boise Cascade Corp. v. U.S. (9th Cir., No. 01-36086, 5/20/03):

• The company redeemed stock of participants upon termination and either distributed the cash to participants or allowed it to be invested in another investment account. If the participant received a cash distribution, the company considered the redemption a deductible dividend under IRC Section 404(k) - Deduction for dividends paid on certain employer securities.
  


• The company amended a prior return to take the deduction. The IRS disallowed it. The district court and the appeals court ruled for the company.
  


• As a result of this case, the IRS published IRS Revenue Ruling 2001-6 - Section 404.--Deduction For Contributions Of An Employer To An Employees' Trust Or Annuity Plan And Compensation Under A Deferred-Payment Plan.
  

While the participants were able to roll over the distributions, they would not have been able to do so had the case been resolved at the time the distribution was processed. As a result, the company could have structured their distribution policy as follows to meet the deductibility needs of the company and the rollover needs of the participant:

• If the participant elected a cash distribution, the cash would be treated as a deductible dividend, would not be eligible for rollover treatment, and would not be subject to IRC Section 72(t) - 10-percent additional tax on early distributions from qualified retirement plans.
  


• If the participant elected a stock distribution, the stock would not be treated as a deductible dividend and the distribution would be eligible for rollover treatment.
  

This Employee Ownership Update and Ninth Circuit Case Creates Deduction Opportunity for Companies with ESOPs provide additional discussions of the Boise Cascade case.

Employee Ownership in 1903

The Update discusses an employee ownership plan established in 1903 by Procter & Gamble. The plan “allowed employees to buy stock for a 2.5% down payment, with the rest borrowed from the company, but repaid out of profit sharing (a 12% or more "dividend" on wages available only to those buying stock). The plan was not available to more highly paid employees. P&G would buy the stock back at the purchase price if the employee left and the stock had dropped in value.”

The Update provides a link to The World’s Work, which discusses the plan. The plan is also discussed in Built to Last: Successful Habits of Visionary Companies and mentioned on the Procter & Gamble website.