Comment letter on ESOP dividend deductions 112205

Djohnson

Informations

• Publié par: Chuwyung
• Nombre de lectures: 12
• Langue: English

Extrait

November 22, 2005

Via Electronic Filing

CC:PA:LPD:PR (REG-133578-05)

Courier’s Desk

Internal Revenue Service

1111 Constitution Avenue, NW

Washington, DC 20044

Re:

Proposed Rule on Dividends Paid Deduction for Stock Held in ESOP

Dear Sir or Madam:

The American Benefits Council (Council) appreciates the opportunity to

comment on the proposed regulations concerning which corporation is entitled

to the deduction for applicable dividends under Internal Revenue Code Section

404(k).

The Council is a public policy organization representing principally

Fortune 500 companies and other organizations that assist employers of all sizes

in providing benefits to employees.

Collectively, the Council’s members either

sponsor directly or provide services to retirement and health plans that cover

more than 100 million Americans. In addition to our comments below, we

respectfully request that a hearing be scheduled on this issue and the Council

would appreciate testifying at this event.

The Council is very concerned that the regulations, as proposed, would

discourage employers with a foreign parent from establishing or maintaining an

Employee Stock Ownership Plan (ESOP), resulting in harm to their American

employees.

The proposed regulations would harm these workers by denying the

tax deduction to American employers that have a foreign parent, effectively

eliminating one of the primary motivations for employers to establish ESOPs for

employees.

This contradicts the expressed intent of Congress to encourage

employers to establish ESOPs.

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The proposed rule directly reverses the position previously taken by the Internal

Revenue Service (the Service) in a private letter ruling that the domestic

subsidiary of the foreign parent is entitled to the dividend deduction even

though the dividends are paid by the foreign parent.

Although private letter

rulings can only be used by the recipient company and cannot be cited as

precedent, it is reasonable and common for other companies to look to the

Service’s stated position when implementing such plans in the absence of any

other guidance since 404(k) was first enacted 21 years ago. The Council is also

concerned that the proposed rule is inequitable to those companies that had not

yet received a written private letter ruling but, in some cases, had been told

informally that they would receive a favorable ruling.

Further, the Service’s statement in the preamble to the proposed rule, to the

effect that the statutory language of Section 404(k) can be clearly read only one

way – to support its new position that only the direct payor of the applicable

dividend (in this case, the foreign parent) and not the employer is entitled to the

deduction under 404(k) – is not only contradicted by the prior ruling, but by the

legislative history of Section 404(k).

Section 404(k) was introduced in section 542(a) of the Tax Reform Act of 1984,

P.L. 98-369 (TRA ’84). Although Section 404(k) has been amended a number of

times since 1984, the relevant part of the statutory language has continued to

read substantively the same.

The legislative history of several bills supports the

Service’s prior position that the employer sponsor of the ESOP is the corporation

entitled to the dividend deduction.

For example, the Senate Committee report to

TRA ’84, which was generally followed by the Conference Committee report,

states:

“Because such dividends are deductible to the employer corporation, they

do not qualify for the partial exclusion from income otherwise permitted

under Code section 116.” [Emphasis added].

Similarly, the General Explanation of the Revenue Provisions of the Tax Reform

Act of 1984 prepared by the Staff of the Joint Committee on Taxation states that

“[u]nder the Act, an employer is entitled to deduct the amount of any dividends

paid in cash during the employer’s taxable year with respect to stock of the

employer….” [Emphasis added].

Legislative history of subsequent amendments to Section 404(k) also reflects the

view that it is the employer corporation that receives the deduction rather than

the non-employer:

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“Under prior and present law, an employer is entitled to deduct the

amount of any dividends paid in cash during the employer’s taxable year

with respect to stock of the employer that is held by an ESOP.”

General Explanation of the Tax Reform Act of 1986 Prepared by the Staff of the

Joint Committee on Taxation, at 843.

[Emphasis added].

“Present Law.

Dividends paid deduction.

In certain circumstances,

present law permits an employer to deduct dividends paid on securities

held by an ESOP to the extent the dividends are (1) paid out currently to

plan participants or (2)used to repay a loan used to acquire employer

securities (sec. 404(k))…. The present-law tax incentives for ESOPs were

designed to encourage employers to establish ESOPs…”

Committee Report to the Omnibus Budget Reconciliation Act of 1989, P.L. 101-

239.

[Emphasis added].

We do not believe that this repeated reference to the employer as receiving the

deduction under 404(k) can be disregarded.

For example, the definition of

“applicable employer security” with respect to which dividends are deductible

under Code Section 404(k)(3)(B) is by statute determined on a controlled group

basis.

Yet the Service’s narrow interpretation in the proposed regulations

effectively makes that statutory provision meaningless if a parent corporation is

foreign.

Rather, the legislative history indicates that, in the controlled group

context, it is the employer of the employees participating in the ESOP who

receives the deduction for the dividends paid.

The words of the statute

“dividends paid in cash by such corporation” should not be narrowly interpreted

as “dividends paid in cash DIRECTLY by such corporation”.

To give full effect

to the statute, it should include dividends paid in cash by a member of the

controlled group of corporations of which the corporation that employs the

ESOP participants is a member.

Such dividends should be treated as indirectly

paid by the employer corporation.

Furthermore, the proposed regulation contradicts fundamental principals of tax

law, which treat the service recipient as the entity entitled to the deduction.

The

mere fact that parent stock is used to provide the compensation is irrelevant.

In

this regard, for example, the Section 1032 regulations explicitly reconstruct

transactions of this type as a transfer of stock from the parent to the subsidiary,

followed by a compensatory payment to the subsidiary’s employee.

See also

Revenue Ruling 80-76, Internal Revenue Code Section 83(h) and Treas. Reg.

Section 1.83-6, as well as numerous private letter rulings where the person for

whom the services were performed (i.e., the subsidiary-employer) is entitled to a

deduction with respect to the transfer of property by a shareholder or parent

company to an employee of the employer.

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For these reasons, the Council recommends that the Service and the Department

of Treasury revise this portion of the proposed regulations to allow the

sponsoring employer to take the deduction under 404(k).

In the alternative, the

Council recommends that the Service simply withdraw this portion of the

proposed regulations.

Again, we appreciate the opportunity to comment on the regulations relating to

deduction of ESOP dividends.

We believe that the American Benefits Council

offers an important and unique perspective of the employer sponsors of

retirement plans and we would be pleased to make this perspective and

additional information available to the Service.

If this would be helpful, please

call me at 202-289-6700.

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Director, Retirement Policy

American Benefits Council