Circuits Split on Deductibility of Proceeds From Stock Redemption Used to Satisfy ESOP Distribution Obligations

An Internal Revenue Service (IRS) official recently commented at an American Law Institute-American Bar Association conference that the IRS will continue to litigate the issue of whether a corporation is entitled to a deduction under Section 404(k)(1) of the Internal Revenue Code (the Code) for payments used to redeem its stock to satisfy the distribution obligations under its employee stock ownership plan (ESOP). See Young, “IRS Will Continue Litigating ESOP-Related Deduction,” Tax Notes, March 23, 2009, p. 1434. This comment appears to be in response to the Eighth Circuit’s decision on this issue in General Mills v. United States, 554 F.3d 727 (8th Cir. 2009), which although favorable to the IRS, is contrary to the decision reached by the Ninth Circuit in Boise Cascade v. United States, 329 F.3d 751 (9th Cir. 2003).

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