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General Mills, Inc. v. United States: TAX - disallowance of deductions for redemptive dividends; dissagreement with 9th Circuit

United States Court of Appeals
No. 08-1638
General Mills, Inc. & Subsidiaries, *
Plaintiff-Appellee, *
* Appeal from the United States
v. * District Court for the District of
* Minnesota.
United States of America, *
Defendant-Appellant. *
Submitted: November 14, 2008
Filed: January 26, 2009
Before WOLLMAN, BEAM, and BENTON, Circuit Judges.
BENTON, Circuit Judge.
General Mills, Inc. (GMI) sued for refunds of corporate income tax. The
district court granted GMI summary judgment. The government appeals. Having
jurisdiction under 28 U.S.C. 1291, this court reverses and remands.
GMI established three employee stock ownership plans (ESOPs). See 26
U.S.C. 401(a), 401(k), 4975(e)(7). A single trust held the ESOPs assets, primarily
GMI common stock. GMI contributed to the ESOPs for the benefit of participating
1There is no dispute that GMIs redemptive dividends are essentially equivalent
to dividends under 26 U.S.C. 302(b)(1) and are treated as dividends under 26 U.S.C.
301, 316.
employees. GMI claimed deductions for payments of principal and interest on the
Trusts purchase of GMI stock (financed by outside lenders). See 26 U.S.C.
404(a)(9), (k)(1), (k)(2)(A)(iv). These deductions, totaling over million, are not
at issue.
When a participant left GMI, the Trust distributed, in cash or stock, the value
of the participants ESOP account. If a participant elected cash, the Trust could
request that GMI purchase company stock from the Trust, paying the Trust a dividend
(a redemptive dividend). From the redemptive dividend, the Trust could distribute
to the participant a cash distribution redemptive dividend as part of the total cash
distributed to a participant.
Cash Distribution Total Cash
Redemptive Redemptive Distributions
Tax Year Dividends1 Dividends To Participants
1992 ,436,174 ,280,358 ,360,959
1993 ,020,426 ,176,241 ,670,106
1994 ,107,588 ,542,502 ,620,110
1995 ,697,636 ,155,139 ,667,805
1997 ,570,650 ,570,650 ,862,158
Total ,832,474 ,724,890 ,181,138
GMI sued to recover ,720,329, the value of deductions for the cash
distribution redemptive dividends. GMI argues that 26 U.S.C. 404(k)(1) allows a
deduction for the cash distribution redemptive dividends. The government counters
that 26 U.S.C. 162(k)(1), or alternatively 404(k)(5), bars any deduction allowed
by 404(k)(1). The district court ruled for GMI.
Summary judgment is appropriate when there are no genuine issues of material
fact, and the moving party is entitled to a judgment as a matter of law. Bearden v.
Intl Paper Co., 529 F.3d 828, 831 (8th Cir. 2008), citing Fed. R. Civ. P. 56(c). This
court reviews the district courts grant of summary judgment de novo and views the
evidence in the light most favorable to the nonmoving party. Id. This court also
reviews de novo the district courts interpretation of statutes. Milavetz, Gallop &
Milavetz, P.A. v. United States, 541 F.3d 785, 791 (8th Cir. 2008).
Section 404(k)(1) allows as a deduction for a taxable year the amount of any
applicable dividend paid in cash by such corporation with respect to applicable
employer securities. 26 U.S.C. 404(k)(1). An applicable dividend includes any
dividend which, in accordance with the plan provisions . . . is paid to the plan and
is distributed in cash to participants in the plan or their beneficiaries not later than 90
days after the close of the plan year in which paid. 26 U.S.C. 404(k)(2)(A)(ii).
The deduction may be claimed only for the tax year when the participant receives
cash. 26 U.S.C. 404(k)(4).
GMIs payments to participants, routed through the Trust, are applicable
dividends under 404(k)(2)(A)(ii). GMI, not the Trust, is the entity (such
corporation) claiming the 404(k)(1) deduction. GMIs payment of the redemptive
dividend to the Trust does not by itself qualify for a 404(k)(1) deduction (nor does
an independently-funded cash distribution by the Trust to a participant). The
404(k)(2)(A)(ii) transaction is a two-step process.
2In 1996, Congress amended 162(k)(1), replacing the redemption of its
stock with the reacquisition of its stock or of the stock of any related person (as
defined in section 465(b)(3)(C)). See Small Business Job Protection Act of 1996,
Pub. L. No. 104-188, 1704(p)(1), 110 Stat. 1755, 1886 (1996). The parties agree
that the amendment has no bearing on this case.
The issue is whether 26 U.S.C. 162(k)(1) enacted two years later bars
the deduction allowed by 404(k)(1). Except as provided in paragraph (2), no
deduction otherwise allowable shall be allowed under this chapter for any amount paid
or incurred by a corporation in connection with the redemption of its stock. 26
U.S.C. 162(k)(1) (1994).2 The parties agree that no exception in paragraph (2)
applies. The parties stipulate that the redemptive dividends are payments for GMIs
redemption of Trust-held company stock.
The district court ruled that 162(k)(1) does not bar the 404(k)(1) deduction.
Noting that 162(k)(1) applies to a deduction that is otherwise allowable, the
district court reasoned that 404(k)(1) does not allow a deduction for a redemptive
dividend alone, but only for that portion of the redemptive dividend distributed in cash
to participants. Accordingly, when applying 162(k)(1), the court focused
exclusively on the cash distribution redemptive dividend, not the two-step applicable
dividend defined in 404(k)(2)(A)(ii).
The district court then considered whether the cash distribution redemptive
dividend was in connection with GMIs stock redemption. Citing a Ninth Circuit
decision and legislative history, the court concluded that the phrase in connection
with should be construed narrowly. See Boise Cascade Corp. v. United States, 329
F.3d 751, 758 (9th Cir. 2003); H.R. Rep. No. 99-841, at 168-69 (1986) (Conf. Rep.),
1986 U.S.C.C.A.N. 4075, 4256-57. Quoting the Ninth Circuit, the court held that
162(k)(1) bars deductions only for fees and other expenditures necessary and
incident to repurchase which would otherwise be deductible business expenses.
Since the Trust had an independent duty to pay participants (although it distributed
nearly all the redemptive dividends to participants), the court concluded that the cash
distribution redemptive dividends were not in connection with GMIs stock
redemption, and thus 162(k)(1) does not apply.
The district court failed to recognize that the deduction otherwise allowable
barred by 162(k)(1) is the deduction for the applicable dividend defined in
404(k)(2)(A)(ii). Three possible interpretations of applicable dividend are
proposed: (1) the redemptive dividend in isolation; (2) the cash distribution
redemptive dividend in isolation; and, (3) the redemptive dividend combined with the
cash distribution redemptive dividend.
The third interpretation is correct. Section 404(k)(2)(A)(ii) defines an
applicable dividend as two connected steps, the redemptive dividend (step 1) and
the cash distribution redemptive dividend (step 2). Neither step alone is sufficient,
and thus neither is an applicable dividend deductible under 404(k)(1).
In this case, the deduction otherwise allowable is the deduction allowed by
404(k)(1) for the applicable dividend defined in 404(k)(2)(A)(ii). GMI
acknowledges that its first step, the redemptive dividend, is in connection with a
stock redemption. Both steps are therefore in connection with the stock redemption.
Section 162(k)(1) bars GMIs deduction.
This court disagrees with the Ninth Circuits analysis in the Boise Cascade
case, which concluded that 162(k)(1) did not bar a 404(k)(1) deduction. Boise
Cascade, 329 F.3d at 756. See North Am. Life and Cas. Co. v. Commr, 533 F.2d
1046, 1051 (8th Cir. 1976) (decisions of other courts of appeals in the area of
taxation may be rejected if there are cogent reasons for not following them). That
court viewed the redemptive dividend and the cash distribution redemptive dividend
as two segregable transactions, not ineluctably linked, and entirely separate.
Boise Cascade, 329 F.3d at 757. That court emphasized that the Trustees duty to pay
the participant was not contingent on the companys payment to the Trustee for the
redeemed stock. Id. at 758. The Ninth Circuit ruled that the isolated cash distribution
redemptive dividend was not in connection with the companys stock redemption,
and thus 162(k)(1) did not bar the deduction.
As indicated above, Congress in 404(k)(1) and 404(k)(2)(A)(ii) connects
the two steps, the redemptive dividend and the cash distribution redemptive dividend.
This court cannot rule that one step is in connection with the stock redemption,
while the other step is not. In this circuit, the phrase in connection with in a tax
code setting is broadly construed. Huntsman v. Commr, 905 F.2d 1182, 1184-85
(8th Cir. 1990), citing Snow v. Commr, 416 U.S. 500, 502-03 (1974); Ralston
Purina Co. v. Commr, 131 T.C. No. 4, 2008 WL 4159698 (2008) (citing Huntsman
and applying 162(k)(1) to the two connected steps of a 404(k)(2)(A)(ii) applicable
The Ninth Circuit rejected a broad construction after extensive discussion of the
1986 legislative history of 162(k)(1). To the contrary, the Conference Report states
that the phrase in connection with [a] redemption is intended to be construed
broadly. H.R. Rep. No. 99-841, at 168 (1986) (Conf. Rep.), 1986 U.S.C.C.A.N.
4075, 4256. The House and Senate Reports each explains that while Congress enacted
162(k)(1) in response to corporate taxation strategies in takeover bids, [t]his
provision is not limited to hostile takeover situations but applies to any corporate
stock redemption. S. Rep. 99-313, at 223 (1986); H.R. Rep. 99-426, at 249 n.15
(1985). True, the Conference Report states that 162(k)(1) does not reach a
transaction that has no nexus with the redemption other than being proximate in time
or arising out of the same general circumstances. Here, 404(k)(2)(A)(ii) creates a
nexus between the cash distribution redemptive dividend and the stock redemption.
Further, contrary to Boise Cascade, the legislative history does not say that
Congress intended 162(k)(1) to bar deductions only for expenditures necessary and
incident to stock redemptions. Boise Cascade, 329 F.3d at 758. As the Senate and
House Reports both explain:
The committee intends that amounts subject to this provision
[162(k)(1)] will include amounts paid to repurchase stock; premiums
paid for stock; legal, accounting, brokerage, transfer agent, appraisal, and
similar fees incurred in connection with repurchase; and any other
expenditure that is necessary or incident to repurchase, whether
representing costs incurred by the purchasing corporation or by the
selling shareholder (and paid or reimbursed by the purchasing
corporation), or incurred by persons or entities related to either.
S. Rep. 99-313, at 223 (1986); H.R. Rep. 99-246, at 249 (1985). The legislative
history restates the clear rule that 162(k)(1) disallows amounts paid to repurchase
stock, and in addition, all other necessary or incidental expenses.
Finally, GMI contends that the parties Stipulation requires that the two
transactions be respected as factually separate. GMI highlights these facts:
! GMI was not required always to redeem Trust-held stock, and there were
instances when the Trust sold GMI stock on the open market (although this was
not in the Trusts best interest).
! The Trust had an independent duty to pay participants even if GMI did not
redeem stock.
! The Trust did not always use the redemptive dividends to make cash
distributions to participants.
These facts are irrelevant, as the other payments are not at issue here and the
Trusts duty does not disconnect the two steps required for the deduction. GMI seeks
a deduction for 404(k)(2)(A)(ii) applicable dividends that are in connection with
the redemption of stock. In sum, while 404(k)(1) allows a deduction, 162(k)(1)
bars it.
The judgment of the district court is reversed, and the case remanded.


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