Section 1.404(k)-3 - Disallowance of deduction for reacquisition paymentsQ-1: Are payments to reacquire stock held by an ESOP applicable dividends that are deductible under section 404(k)(1)?
A-1:
(a) Payments to reacquire stock held by an ESOP, including reacquisition payments that are used to make benefit distributions to participants or beneficiaries, are not deductible under section 404(k) because- (1) Those payments do not constitute applicable dividends under section 404(k)(2); and(2) The treatment of those payments as applicable dividends would constitute, in substance, an avoidance or evasion of taxation within the meaning of section 404(k)(5).(b) See also § 1.162(k)-1 concerning the disallowance of deductions for amounts paid or incurred by a corporation in connection with the reacquisition of its stock from an ESOP. Q-2: What is the effective date of this section?
A-2: This section applies with respect to payments to reacquire stock that are made on or after August 30, 2006.
T.D. 9282, 71 FR 51474 , Aug. 30, 2006