Sec. 1.404(k)-3 Disallowance of deduction for reacquisition payments.
Q-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.
[Added by T.D. 9282, 71 FR 51471-51474, Aug. 30, 2006.]
