Conopco Files Suit for Refund of Payments to ESOP Trust

3. Conopco is a wholly-owned subsidiary of Unilever United States, Inc., a Delaware corporation ("UNUS").

4. Bestfoods was formerly known as CPC International Inc. Its employer identification number was 36-2385545. During all relevant periods and until October 4, 2000, Bestfoods was the common parent of a group of corporations filing a consolidated Federal income tax return.

5. On October 4, 2000, UNUS acquired all the stock of Bestfoods through a wholly-owned subsidiary of UNUS. At that time, the Bestfoods consolidated group automatically terminated. Subsequently, Bestfoods was merged into Conopco.

6. The Defendant is the United States of America.

7. This action arises under the United States Internal Revenue Code, Title 26 U.S.C. (the "Code"), for the recovery of Federal income tax and related interest paid by Bestfoods for the years 1994-2000.

8. This Court has jurisdiction over this action under 28 U.S.C. §§ 1340 and 1346(a)(1) and 26 U.S.C. § 7422.

9. Conopco's principal place of business is located at 800 Sylvan Avenue, Englewood Cliffs, NJ 07632. Venue is proper in this judicial district under 28 U.S.C. § 1402(a)(2).

10. Bestfoods timely filed consolidated Federal income tax returns for each of the calendar years ending on December 31, 1994, 1995, 1996, and 1997. It did not claim the ESOP Deductions on any of such returns.

11. Bestfoods timely filed its consolidated Federal income tax return for the calendar year ending December 31, 1998. Unlike the prior taxable years, it did claim the ESOP Deductions on such return. Bestfoods attached to such return Form 8275, Disclosure Statement (the "1998 Disclosure Statement'), specifically setting forth its claim for the ESOP Deductions.

12. Bestfoods timely filed its consolidated Federal income tax return for the calendar year ending December 31, 1999. It did not claim the ESOP Deductions on such return.

13. Bestfoods timely filed its consolidated Federal income tax return for the calendar year ending October 4, 2000. It did not claim the ESOP Deductions on such return.

14. On or about December 6, 2000, Bestfoods timely filed a Form 1120X claim for refund of overpaid income taxes for the taxable year ending December 31, 1994 (the "1994 Refund Claim"). It claimed the ESOP Deductions on such form. The claim for refund was for $447,338, of which $425,973 represented amounts with respect to the ESOP Deductions.

15. On or about December 6, 2000, Bestfoods timely filed a Form 1120X claim for refund of overpaid income taxes for the taxable year ending December 31, 1995 (the "1995 Refund Claim"). It claimed the ESOP Deductions on such form. The claim for refund was $1,329,743, of which $1,290,189 represented amounts with respect to the ESOP Deductions.

16. On or about December 6, 2000, Bestfoods timely filed a Form 1120X claim for refund of overpaid income taxes for the taxable year ending December 31, 1996 (the "1996 Refund Claim"). It claimed the ESOP Deductions on such form. The claim for refund was $1,838,592, of which $1,767,199 represented amounts with respect to the ESOP Deductions.

17. On or about November 23, 1999, Bestfoods timely filed a Form 1120X claim for refund of overpaid income taxes for the taxable year ending December 31, 1997 (the "1997 Refund Claim"). It claimed the ESOP Deductions on such form. The claim for refund was $429,920, all of which represented amounts with respect to the ESOP Deductions.

18. On or about October 9, 2003, Plaintiff timely filed a Form 1120X claim for refund of overpaid income taxes for the taxable year ending December 31, 1999 (the "1999 Refund Claim"). It claimed the ESOP Deductions on such form. The claim for refund was for $3,022,518, all of which represented amounts with respect to the ESOP Deductions.

19. On or about October 9, 2003, Plaintiff timely filed a Form 1120X claim for refund of overpaid income taxes for the taxable year ending October 4, 2000, (the "2000 Refund Claim"). It claimed the ESOP Deductions on such form. The claim for refund was for $2,484,493, all of which represented amounts with respect to the ESOP Deductions.

20. As grounds for entitlement to the refunds requested herein, Plaintiff hereby incorporates by reference the factual and legal basis set forth in each of the 1994 Refund Claim, 1995 Refund Claim, 1996 Refund Claim, 1997 Refund Claim, the 1998 Disclosure Statement, 1999 Refund Claim and 2000 Refund Claim.

21. On August 30, 2001, Plaintiff executed and delivered to the IRS Form 870 consenting to assessments and refunds of tax for the taxable years 1994-1998. The tax liability for Bestfoods for each of the years in question was determined on the basis that the ESOP Deductions were not allowed.

22. On May 9, 2003 Plaintiff executed a Form 907 (the "Form 907") (subsequently signed by the IRS on June 2, 2003) extending the time to file suit with respect to taxes in certain amounts for each of the taxable years 1994-1998. On the Form 907, Defendant acknowledges that the claims for refund described therein had been timely filed by Plaintiff and denied by Defendant and that Plaintiff may bring suit to recover such taxes on or before December 31, 2005.

23. The Form 907 states incorrectly that the amount of the tax refund sought by Plaintiff for 1997 is $3,319,810. That number does not reflect the application of the Alternative Minimum Tax. The actual amount of the tax refund claimed by Plaintiff for 1997 is $429,920. The total amount claimed by Bestfoods with respect to the ESOP deductions for the taxable years 1994-1998 is $8,316,862, plus interest.

24. On April 29, 2004, Plaintiff filed a protective refund claim on Form 1120X for the taxable year ending December 31, 1998 (the "Protective 1998 Refund Claim"). It claimed the ESOP Deductions on such form. The claim for refund was for $4,403,581.

25. As of December 1, 2004, Defendant had not responded to the Protective 1998 Refund Claim and had failed to grant the 1999 Refund Claim and the 2000 Refund Claim.

26. As to each of the years 1994-2000, Bestfoods met the jurisdictional requirements of Code section 7422.

28. One component of the Savings Plan was the ESOP. The ESOP was created and operated in accordance with the Savings Plan.

29. The assets of the ESOP were held, apart from other assets of the Savings Plan, in the ESOP Trust.

30. The ESOP Trust was created and operated in accordance with a trust agreement (the "ESOP Trust Agreement").

31. The ESOP Trust was designed to invest, and did invest, primarily in qualified employer securities, as defined in Code section 409(l)(1).

32. During the Relevant Period, an independent trustee (the "ESOP Trustee") managed the ESOP Trust and otherwise performed the duties of the trustee under the ESOP Trust.

33. The duties of the ESOP Trustee are set forth in the ESOP Trust Agreement.

34. The rights of the Members with respect to the assets held in the ESOP Trust are set forth in the Savings Plan and the ESOP Trust Agreement.

35. During the Relevant Period, the ESOP Trust owned shares of Bestfoods' voting convertible preferred stock (the "Preferred Stock").

36. The ESOP Trust acquired all the Preferred Stock from Bestfoods.

37. The Preferred Stock was convertible into a fixed number of shares of Bestfoods common stock. The Preferred Stock was entitled to voting rights equal to the voting rights of the common stock into which such Stock was convertible.

38. Under the terms of the Preferred Stock, such Stock could only be held by the ESOP Trust. Any transfer of such Stock by the ESOP Trust to any party other than Bestfoods would have resulted in the automatic conversion of such Stock into common stock of Bestfoods.

39. Under the Savings Plan, the Preferred Stock acquired by the ESOP Trust was either unallocated, or was allocated to individual Members' ESOP accounts in accordance with the terms of the Plan.

40. Under the Savings Plan, following the termination of employment of a Member, the Member could elect to receive cash equal to the value of the Preferred Stock in the ESOP Trust allocated to the Member's vested accounts.

41. When a Member so elected to receive cash, the ESOP Trust was obligated to transfer such cash to such Member. The ESOP Trust was permitted to sell stock in order to raise the necessary cash. However, in practice Bestfoods generally transferred cash to the ESOP Trust in redemption of the appropriate number of shares of Preferred Stock, even though Bestfoods was not obligated to do so under the terms of the Plan or the ESOP Trust Agreement.

42. A Member could instead elect to receive Bestfoods common stock in exchange for the Preferred Stock in the Member's account. In that case, the ESOP Trust converted the Preferred Stock into common stock of Bestfoods and distributed such common stock to the Member. Any fractional shares were paid in cash.

a. The ESOP Trustee had the right to receive all dividends on the Preferred Stock.

b. The ESOP Trustee determined the manner to invest dividends received with respect to the Preferred Stock, subject to the terms of the ESOP Trust.

c. The ESOP Trustee had the right to receive all proceeds on the liquidation of Bestfoods. Such proceeds would have only been distributed to the Members under the normal rules of the ESOP Trust.

d. The ESOP Trustee could pledge the Preferred Stock to secure indebtedness of the ESOP Trust.

e. The ESOP Trustee was the record owner of the Preferred Stock. As a result, the ESOP Trustee, rather than that the Members, had the right to attend shareholder meetings, nominate directors, vote the shares, inspect corporate records to the extent such right was available to a shareholder, and exercise appraisal rights in a merger.

44. For tax purposes the ESOP Trust, rather than the Members, was treated as the owner of the Preferred Stock. In particular:

a. Members were not taxed on contributions of Preferred Stock to the ESOP Trust, on allocations of Preferred Stock to their accounts in the ESOP Trust, or on the vesting of such Preferred Stock in their accounts.

b. Members were not taxed on dividends received by the ESOP Trust on Preferred Stock allocated to their accounts, or on any gain realized by the ESOP Trust on the sale of Preferred Stock allocated to their accounts.

c. Members were not considered to be constructive owners of the Preferred Stock allocated to their accounts for purposes of various constructive ownership provisions of the Code, e.g., section 318.

d. If the ESOP Trust had any "unrelated business taxable income" that was subject to tax under Code section 511, it was the ESOP Trust, not the Members, that became liable for the tax.

45. Other than limited rights to direct the voting of ESOP shares allocated to their account and the right to direct the tendering of such shares pursuant to a tender offer, Members had no ownership rights with respect to the Preferred Stock held by the ESOP Trust. In particular:

a. Members did not have the right to dismiss the ESOP Trustee.

b. Members did not have the right to pledge their account balances as security for a loan from a third-party lender.

c. Members did not have the right to order the sale of the Preferred Stock allocated to their accounts except in the unusual case of a tender offer.

d. Members had no right to receive or hold Preferred Stock held by the ESOP Trust.

47. Accordingly, in each of the years 1994-2000, Bestfoods redeemed shares of Preferred Stock from the ESOP Trust for cash (each individual redemption, a "Redemption," and all the Redemptions together, the "Redemptions").

48. In each of the years 1994-2000, no Redemption resulted in a reduction of more than 0.56% in the ESOP's percentage ownership interest in Bestfoods (i.e., the difference in the percentage ownership of the ESOP in Bestfoods immediately before and immediately after the Redemption).

49. In each of the years 1994-2000, the cash received by the ESOP Trust in the Redemptions was distributed to the Members electing cash distributions (each distribution, a "Distribution", and collectively the "Distributions").

51. A redemption distribution is considered to be essentially equivalent to a dividend unless the redemption results in "a meaningful reduction of the shareholder's proportionate interest in the corporation." United States v. Davis 397 U.S. 301, 313 (1970).

52. None of the Redemptions resulted in a meaningful reduction of the ESOP Trust's interest in Bestfoods. As a result, none of the Redemptions was "not essentially equivalent to a dividend."

53. None of the Redemptions was substantially disproportionate with respect to the ESOP Trust.

54. None of the Redemptions completely terminated the interest of the ESOP Trust in Bestfoods.

55. None of the Redemptions was in partial liquidation of Bestfoods.

56. Consequently, Code section 302(a) does not apply to any of the Redemptions, and Code section 301 applies to each of the Redemptions.

57. Under Code section 301, the portion of a Redemption that is a "dividend" (within the meaning of Code section 316) is included in gross income of the recipient.

58. Code section 316 defines "dividend" as any distribution of property made by a corporation to its shareholders out of its earnings and profits that were either accumulated in past years or that arise in the current year.

59. For each of the taxable years 1994-2000, Bestfoods had sufficient accumulated earnings and profits such that, for the purposes of Code section 316, the Redemptions would be considered to be made out of Bestfoods' earnings and profits.

60. Because the Redemptions were made out of Bestfoods' accumulated earnings and profits, the Redemptions constitute dividends under Code section 316.

61. Code section 404(k)(1) provides a deduction to a corporation with respect to the payment of "applicable dividends."

62. Under Code section 404(k)(2), an applicable dividend is a dividend paid to a plan (such as the ESOP Trust) which is subsequently distributed in cash to participants in the plan or their beneficiaries not later 90 days after the close of the plan year in which paid.

63. The amount of each Redemption was paid to the applicable Member in a Distribution within 90 days of the close of the plan year in which the Redemption occurred.

64. Each Redemption is an applicable dividend under Code section 404(k)(2).

65. Bestfoods is entitled to a deduction for each Redemption under Code section 404(k)(1).

67. The ESOP Trust was the owner of the Preferred Stock held in its name for all purposes under the Code, including section 302.

68. The Redemptions were dividends as defined in Code section 316.

69. The Redemptions were "applicable dividends" under Code section 404(k)(2).

70. The Redemptions were dividends for which Bestfoods is entitled to receive a deduction pursuant to Code section 404(k)(1).

71. Plaintiff is therefore entitled to a tax refund of $13,823,873 or such greater amount as may be legally allowable plus interest on such amount as allowed by law.

1. Judgment declaring that:

a. Bestfoods is entitled to deduct the amount of $1,217,066 under Code section 404(k)(1) for its taxable year ending 1994;

b. Bestfoods is entitled to deduct the amount of $3,686,254 under Code section 404(k)(1) for its taxable year ending 1995;

c. Bestfoods is entitled to deduct the amount of $5,049,139 under Code section 404(k)(1) for its taxable year ending 1996;

d. Bestfoods is entitled to deduct the amount of $9,485,172 under Code section 404(k)(1) for its taxable year ending 1997;

e. Bestfoods is entitled to deduct the amount of $12,581,659 under Code section 404(k)(1) for its taxable year ending 1998;

f. Plaintiff is entitled to deduct the amount of $8,635,765 under Code section 404(k)(1) for its taxable year ending 1999;

g. Plaintiff is entitled to deduct the amount of $7,098,553 under Code section 404(k)(1) for its taxable year ending 2000; and

2. Judgment awarding Plaintiff:

a. $13,823,873 or such greater amount as may be legally allowable, representing the tax refunds due Plaintiff as a result of the ESOP Deductions, plus interest as allowable by law;

b. the costs of this action; and

c. such other relief as this Court deems just and proper.

Dated: December 8, 2004