WASHINGTON, D.C. (February 27, 2008) — On January 14, 2008, McDermott Will & Emery obtained a ruling from the U.S. District Court for the District of Minnesota on behalf of Firm client General Mills that distributions to employee stock ownership plan (ESOP) participants from the proceeds of redemptions of company stock held by the ESOP qualified as deductible "applicable dividends" under section 404(k)(1) of the Internal Revenue Code.
General Mills established an ESOP, the assets of which were invested in its common stock. When a participant left General Mills, the ESOP was obligated to distribute to the participant the value of his/her ESOP account, either in stock or in cash at the participant’s election. In some cases in which a participant elected to receive the value of his/her ESOP account in cash, the trust distributed to the participant cash that it had obtained from dividend-equivalent redemptions of company stock.
Section 404(k)(1) allows a deduction for "applicable dividends," which include ESOP distributions to participants from the redemption proceeds held by the ESOP. In this case, General Mills claimed that the distributions of the redemption proceeds were deductible under section 404(k)(1). The government raised numerous objections to these deductions, but the district court held for General Mills. The government claims for deductions under section 404(k)(1) for ESOP distributions of the proceeds of dividend-equivalent redemptions.
The McDermott team advising General Mills included Bill Goldman, Robin Greenhouse and Joseph Selby.