Boise Cascade Corp. v. U.S., 01-36086.

• Decision Date: 20 May 2003
• Docket Number: No. 01-36086.,01-36086.
• Citation: 329 F.3d 751
• Parties: BOISE CASCADE CORPORATION, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

329 F.3d 751

BOISE CASCADE CORPORATION, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 01-36086.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 10, 2003.

Filed May 20, 2003.

Edward T. Pereluter and Richard Farber, Tax Division, United States Department of Justice, Washington, D.C., attorneys for the appellant.

William L. Goldman and Christopher Kliefoth, McDermott, Will & Emery, Washington D.C. and William R. VanHole, Boise, Idaho, attorneys for the appellee.

Appeal from the United States District Court for the District of Idaho; B. Lynn Winmill, District Judge, Presiding. D.C. No. CV-97-00312.

Before D.W. NELSON, THOMAS, Circuit Judges, and PREGERSON, District Judge.^*

OPINION

THOMAS, Circuit Judge.

This appeal presents the question of whether payments made by Boise Cascade Corporation ("Boise Cascade") to redeem stock held by its Employee Stock Ownership Plan are deductible as dividends paid pursuant to 26 U.S.C. § 404(k). We conclude, under the circumstances presented by this case, that they are and affirm the judgment of the district court.

I

Boise Cascade is an integrated forest products and office products company headquartered in Boise, Idaho. It maintained the Boise Cascade Corporation Savings and Supplemental Retirement Plan ("Plan") for its employees. Effective May 25, 1989, the Plan was amended to add an employee stock ownership plan ("ESOP") component. A trust was established to hold and invest assets accumulated under the Plan. On July 10, 1989, in order to further the inclusion of the ESOP portion of the Plan, the Boise Cascade Board of Directors adopted a resolution creating a new series of convertible preferred stock consisting of 6,745,347 shares. Under the terms of the Certificate of Designation, the convertible preferred stock could only be issued to the Trustee of the fund; if the stock were transferred to any person other than the Trustee, the stock so transferred would convert automatically into shares of Boise Cascade common stock. On the same day the stock was created, July 10, 1989, the Trustee purchased all 6,745,347 shares of the convertible preferred stock from Boise Cascade for an aggregate purchase price of $303,540,615 ($45 per share). In order to finance the purchase of the convertible preferred stock, the Trustee borrowed $295,000,000 from various institutional investors, and $8,541,000 from Boise Cascade.

Upon a Plan Participant's termination of employment for any reason, convertible preferred stock equal in value to the Participant's vested account balance in the ESOP fund was redeemed, regardless of any election by the Participant with respect to the disposition of the vested account balance. At Boise Cascade's election, redemption payments could be made in either cash or in Common Stock; all redemption payments in 1989 were in cash. Following termination of employment, the Participant could make elections with respect to the disposition of his or her vested account balances, including the ESOP fund. If the total of the Participant's vested account balance was $3,500 or less, the entire amount of vested account balances was distributed to the Participant. If the Participant's total of vested balances exceeded that amount, the Participant could elect: (1) to receive distribution of the entire amount of vested balances, including the vested amount in the ESOP fund; (2) to defer distribution of the entire amount, including his or her vested amount in the ESOP fund; or (3) to receive distribution of his or her vested account balance in the ESOP fund and defer distribution of the vested account balances in the other Investment Funds.

During 1989, Participants with vested account balances totaling 507.336 shares of convertible preferred stock terminated employment with Boise Cascade; accordingly, 507.336 shares of convertible preferred stock were presented by the Trustee to Boise Cascade for redemption. Of the cash paid for the redemption of the stock, most but not all was distributed to Participants who elected a distribution of either cash or common stock. The Participants received a Form 1099 for these amounts. For those amounts for which Participants elected to make a fund-to-fund transfer rather than receive a distribution, no Form 1099 was issued and Boise does not claim a deduction for these amounts.

On December 12, 1989, the Boise Cascade Board of Directors declared a dividend on the convertible preferred stock payable December 28, 1989. On December 28, 1989 a dividend of $11,192,244.47 was paid to the Trustee and applied to repay the ESOP loans in accordance with the terms of the Plan. Pursuant to 26 U.S.C. § 404(k), Boise Cascade claimed a deduction on its 1989 Federal income tax return for the entire amount of the December 28, 1989, Dividend. The IRS has allowed the deduction.

On November 18, 1996, Boise Cascade filed an amended Federal income tax return claiming a refund of Federal income taxes for 1989 in the amount of $1,724 plus allowable interest. Boise Cascade agrees that this refund should be reduced to $840 plus the amount of interest allowed by law. The claimed refund relates to convertible preferred stock redeemed by Boise Cascade due to employee terminations. Boise Cascade only claims a refund for those amounts paid that were actually distributed to Participants. By letter dated March 17, 1997, the IRS disallowed the refund.

On July 11, 1997, Boise Cascade filed an action against the United States in the United States District court in Idaho, claiming entitlement to a refund pursuant to 26 U.S.C. § 404(k) for payments paid in redemption of stock due to employee terminations. On December 16, 1997, the case was referred to Magistrate Judge Larry M. Boyle. Upon cross-motions for summary judgment, on November 24, 1998, Magistrate Judge Boyle concluded that Boise Cascade was entitled to a refund and recommended that its motion for summary judgment should be granted. After considering further briefing by the parties, the district court found that the Magistrate Judge's report accurately set forth the facts and correctly applied the governing legal standards. The court agreed with the Magistrate Judge that the redemptions qualified as dividends under 26 U.S.C. § 302(b) and were therefore deductible under § 404(k). The court further found that Boise Cascade's deduction was not barred by § 162(k)(1) of the Code — the subject of the supplemental briefing submitted when the case was reopened. Accordingly, the district court adopted the Report and Recommendation of the Magistrate Judge as the decision of the district court and granted Boise Cascade's motion for summary judgment. This timely appeal follows. We have jurisdiction pursuant to 28 U.S.C. § 1291. We review a grant of summary judgment de novo. See Oliver v. Keller, 289 F.3d 623, 626 (9th Cir.2002). We also review a district court's interpretation of the tax code and corresponding treasury regulations de novo. See Boeing Co. v. United States, 258 F.3d 958, 962-63 (9th Cir.2001).

II

Generally, dividends paid by a corporation to its share-holders are not deductible by the corporation for federal income tax purposes. See 26 U.S.C. § 311. However, 26 U.S.C. § 404(k) allows a corporation to deduct, for regular income tax purposes, the amount of certain dividends paid by the corporation to an employee stock ownership plan. A deduction is permitted if the dividend is (1) paid in cash to the plan participants or their beneficiaries; (2) paid to the plan and distributed in cash to participants or their beneficiaries not later than ninety days after the close of the plan year in which 6678 paid; or (3) used to make payments on a loan, the proceeds of which were used to acquire stock held by the ESOP.

Specifically, 26 U.S.C. § 404(k) provides as follows:

(k) Dividends Paid deductions. In addition to the deductions provided under subsection (a), there shall be allowed as a deduction to a corporation the amount of any dividend paid in cash by such corporation with respect to the stock of such corporation if

(1) such stock is held on the record date for the dividend by ... an employee stock ownership plan ... and (2) in accordance with plan provisions

* * * * * *

(B) the dividend is paid in cash 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.

The district court correctly concluded that the payments made by Boise Cascade were dividends pursuant to 26 U.S.C. § 404(k). There is no dispute that the payments made by Boise Cascade were paid to the Plan and then distributed to Participants during 1989. The amounts paid were distributed out of current or accumulated earnings and profits as required for the definition of "dividend" under 26 U.S.C. § 316(a). Section 316(a) further provides:

To the extent that any distribution is, under any provision of this subchapter, treated as a distribution of property to which Section 301 applies, such distribution shall be treated as a distribution of property for the purposes of this subsection.

Thus, if the distributions to the employees were a distribution under § 301¹, then they were a "dividend" for the purposes of § 316 and the deduction provided for in § 404(k) applies.

Section 302 governs distributions in redemption of stock. Pursuant to 26 U.S.C. § 302(d), a redemption of stock shall be treated as a distribution of property to which § 301 applies unless § 302(a) applies. If § 302(a) applies, then the distribution will be treated as a part or full payment in exchange for stock rather than a distribution of property. In turn, § 302(b) sets out four circumstances in which redemptions will be treated as exchanges, rather than dividends. Both parties agree that the only possible applicable circumstance is that set out in § 302(b)(1): a redemption that "is not essentially equivalent to a dividend" will...