On Appeal from the United States District Court for the District of New Jersey, (D.C. No. 04-cv-06025), District Judge: Honorable Joseph A. Greenaway.
The opinion of the court was delivered by: Fisher, Circuit Judge.
Before: FUENTES and FISHER, Circuit Judges, and PADOVA,*fn1 District Judge.
This appeal requires us to determine whether Conopco, Inc.*fn2 is entitled to a federal income tax refund of approximately $13.8 million based on the deduction available under 26 U.S.C. § 404(k)(1) for payments that it made pursuant to an Employee Stock Ownership Plan ("ESOP") during the tax years of 1994 to 2000. The District Court granted summary judgment in favor of the Government, concluding that 26 U.S.C. § 162(k)(1) disallowed Conopco from claiming the deduction. We will affirm.
The material facts are not in dispute.*fn3 Conopco, a publicly-held corporation organized under New York law, created an ESOP in 1989 as part of its Savings/Retirement Plan for Salaried Employees. Conopco also created a trust (the "Trust") in order to implement the ESOP, entering into an agreement with the Northern Trust Company to act as the trustee.*fn4 Near the end of 1989, Conopco issued approximately 2.2 million shares of voting convertible preferred stock, which the Trust purchased from Conopco using funds it acquired by issuing bonds. The Trust, as owner of the shares, had certain rights associated with ownership, including the right to receive dividend payments and liquidation rights.
Under the ESOP's terms, shares of the preferred stock were allocated to the employee-participants' accounts. During the tax years relevant to this appeal, when participants ended their employment with Conopco, the participants could, subject to certain restrictions, choose to receive the value of the preferred stock contained in their accounts in a number of forms: in cash; in Conopco's common stock; as an annuity; or as distributions rolled into an Individual Retirement Account. When participants elected to receive the value of their ESOP account balances as cash payments, Conopco would redeem the preferred stock which had been allocated to those participants' accounts by paying the Trust to buy back the shares. The Trust, upon tendering the shares to Conopco and receiving the redemption payments in return, would then distribute those funds as cash benefit distributions to the participants within 90 days after the close of the plan year.
Title 26 U.S.C. § 404(k)(1) permits a C corporation to claim "as a deduction for a taxable year the amount of any applicable dividend paid in cash by such corporation with respect to applicable employer securities." An "applicable dividend" is defined in relevant part as "any dividend which, in accordance with the plan provisions... is paid to the plan and is distributed in cash to participants in the plan or their beneficiaries not later than 90 days after the close of the plan year in which paid." Id. § 404(k)(2)(A)(ii). Conopco sought to claim corporate income tax deductions under § 404(k)(1) for the tax years of 1994 to 2000 for the redemption payments that it had made to the Trust which the Trust distributed to the ESOP participants. After the Internal Revenue Service denied (or failed to grant) Conopco's claims, Conopco filed the present action in the United States District Court for the District of New Jersey, seeking a tax refund for allegedly wrongfully collected taxes in the amount of $13,823,873.
The parties cross-moved for summary judgment. The District Court concluded that although § 404(k)(1) would have allowed Conopco to claim the deductions for the relevant tax years, the company could not do so under 26 U.S.C. § 162(k)(1), which states that "no deduction otherwise allowable shall be allowed under this chapter for any amount paid or incurred by a corporation in connection with the reacquisition of its stock or of the stock of any related person (as defined in section 465(b)(3)(C))." See Conopco, Inc. v. United States, No. 04-6025, 2007 WL 2122045, at *8-12 (D.N.J. July 18, 2007).
More specifically, the District Court reasoned that Conopco's payments to the Trust in redemption of the stock, as opposed to the subsequent benefit distributions made by the Trust to the participants, were the dividends entitled to deduction under § 404(k)(1). Id. at *10. According to the District Court, those redemption payments were separate from the benefit distribution and, based on the language of the relevant statutory provisions, the District Court focused its § 162(k) analysis on Conopco's payments to the Trust, not the Trust's distributions to the participants. Id. at *11. After reviewing the legislative history of § 162(k)(1), the District Court decided that because Conopco's payments to the Trust were made in return for its shareholder's stock, they ...