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Nestlé Purina Petcare Co. v. Commissioner of Internal Revenue

February 9, 2010

NESTLÉ PURINA PETCARE CO., PETITIONER-APPELLANT,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT-APPELLEE.



Appeal from the United States Tax Court.

The opinion of the court was delivered by: Benton, Circuit Judge.

Submitted: December 15, 2009

Before LOKEN, Chief Judge, ARNOLD and BENTON, Circuit Judges.

The tax court ruled, on summary judgment, that Nestlé Purina Petcare Company - hereafter Ralston, its name during the relevant years - could not deduct payments for cash distribution redemptive dividends. Ralston Purina Co. v. Comm'r, 131 T.C. 29 (2008). Ralston appeals. Having jurisdiction under 26 U.S.C. § 7482, this court affirms.

I.

In 1989, Ralston established an employee stock ownership plan ("ESOP"). See 26 U.S.C.§§ 401(a), 401(k), 4975(e)(7). A trust held the ESOP's assets, primarily Ralston preferred stock. Ralston contributed to the ESOP for the benefit of participating employees. In 1994 and 1995, Ralston claimed deductions, totaling over $66 million, for its stated dividends on the preferred stock, which are not at issue.

When a participant left Ralston, the participant was required to direct the ESOP to convert the value of preferred stock allocated to his or her ESOP account into cash, shares of Ralston common stock, or a combination of both. If a participant elected cash, the trust could require that Ralston purchase stock from it, 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.

Tax YearRedemptive DividendsCash Distribution Redemptive DividendsTotal Cash Distributions to Participants 1994$3,128,066$2,317,656$3,907,352 1995$6,277,965$7,088,374$8,205,589 Total$9,406,031$9,406,030$12,112,941

Ralston seeks to deduct $9,406,030, the value of the cash distribution redemptive dividends. Ralston argues that 26 U.S.C. § 404(k)(1) allows a deduction for the cash distribution redemptive dividends, or alternatively that a deduction is permitted by § 162(k)(2)(A)(iii). The tax court ruled for the Commissioner.

II.

"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. Int'l Paper Co., 529 F.3d 828, 831 (8th Cir. 2008), citing Fed. R. Civ. P. 56(c). This court reviews the tax court's grant of summary judgment de novoand views the evidence in the light most favorable to the nonmoving party. See Cox v. Comm'r, 121 F.3d 390, 391 (8th Cir. 1997). This court also reviews de novothe tax court's interpretation of tax statutes. See Scherbart v. Comm'r, 453 F.3d 987, 989 (8th Cir. 2006).

A.

The first issue is whether 26 U.S.C. § 162(k)(1) -- enacted two years later -- bars the deduction allowed by § 404(k)(1). In General Mills, Inc. v. United States, 554 F.3d 727, 730 (8th Cir. 2009) ("GMI"), this Court held that § 162(k)(1) bars a deduction under § 404(k) for amounts paid to a corporation's ESOP trust in order to redeem shares of the corporation's stock. See also Conopco, Inc. v United States, 572 F.3d 162, 166-67 (3d Cir. 2009) (following the GMI opinion, and disagreeing with Boise Cascade v. United States, 329 F.3d 751 (9th Cir. 2003)). "In sum, while § 404(k)(1) allows a deduction, § 162(k)(1) bars it." GMI, 554 F.3d at 730. Since the facts of GMI do not materially differ from the facts here, GMI controls. ...


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