January 18, 2006
For additional information:
Deanna Johnson, APR or Jason Hammersla

Council urges Treasury to make available ESOP tax deduction to U.S. companies owned by foreign parents

WASHINGTON, D.C. — In testimony today before the U.S. Treasury Department and the Internal Revenue Service (collectively referred to as Treasury), Joe Marx, a senior consultant with Principal Financial Group, urged Treasury officials to revise their proposed regulation concerning which corporation is entitled to the tax deduction for applicable dividends paid on employer stock held in an employee stock ownership plan (ESOP) under Internal Revenue Code Section 404(k). Marx appeared on behalf of the American Benefits Council during a hearing that included discussion of possible effects the proposed regulations would have on corporations that have foreign parents, and that have or are considering establishing an ESOP.

Marx said, "By denying the tax deduction to American employers with a foreign parent, the regulations, as proposed, would strongly discourage these companies from establishing or maintaining an ESOP. Not only would this harm American employees, it contradicts the expressed intent of Congress: to encourage employers to establish ESOPs. The Council strongly urges you to instead direct that the employer, not the parent company, is entitled to the ESOP dividend deduction. This treatment would be consistent with fundamental principals of tax law and other interpretations of the Internal Revenue Code that treat the employer as the party entitled to a deduction for payments made by a related third party."

"The proposed rule directly reverses a position taken by the IRS in a private letter ruling that held a domestic subsidiary of a foreign parent was entitled to the dividend deduction even though the dividends were paid by the foreign parent," Marx continued. "The Council understands and appreciates that private letter rulings are only intended for use by the company that receives them and cannot be cited as precedent. However, it is reasonable for other companies to look to the IRS' stated position in a letter ruling in the absence of any other guidance since 404(k) was first enacted 21 years ago."

"The Council is also concerned that the proposed rule is inequitable. It treats domestic companies that have a foreign parent less favorably than domestic companies that have a domestic parent. Companies with a domestic parent generally can file consolidated returns to benefit from the deduction," he noted.

Marx concluded, "For these reasons, the Council respectfully requests that Treasury revise these proposed regulations to allow the sponsoring employer to take the deduction under Internal Revenue Code Section 404(k). In the alternative, the Council recommends this portion of the regulations be withdrawn and that Treasury respond favorably to future private letter ruling requests that domestic companies with foreign parents may benefit from the deduction."

A copy of Marx's full testimony is available on the Council's web site. To arrange an interview about this issue with a Council staff member, please contact Deanna Johnson, APR, Council director, communications, at, or Jason Hammersla, Council manager, communications & publications, at Both can be reached by phone at (202) 289-6700.

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The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.