Conopco, Inc. v. U.S.

• Decision Date: 13 July 2009
• Docket Number: No. 07-3564.,07-3564.
• Citation: 572 F.3d 162
• Parties: CONOPCO, INC., Appellant v. UNITED STATES of America.
• Court: U.S. Court of Appeals — Third Circuit

572 F.3d 162

CONOPCO, INC., Appellant v. UNITED STATES of America.

No. 07-3564.

United States Court of Appeals, Third Circuit.

Argued January 6, 2009.

Filed July 13, 2009.

Ronald S. Rolfe, (Argued), Cravath, Swaine & Moore, New York, NY, for Appellant.

Ellen P. DelSole, (Argued), United States Department of Justice, Washington, DC, for Appellee.

Before: FUENTES and FISHER, Circuit Judges, and PADOVA^* District Judge.

OPINION OF THE COURT

FISHER, Circuit Judge.

This appeal requires us to determine whether Conopco, Inc.¹ is entitled to a federal income tax refund of approximately $13.8 million based on the deduction available under 26 U.S.C. § 404(k)(1) for payments that it made pursuant to an Employee Stock Ownership Plan ("ESOP") during the tax years of 1994 to 2000. The District Court granted summary judgment in favor of the Government, concluding that 26 U.S.C. § 162(k)(1) disallowed Conopco from claiming the deduction. We will affirm.

I.

A.

The material facts are not in dispute.² Conopco, a publicly-held corporation organized under New York law, created an ESOP in 1989 as part of its Savings/Retirement Plan for Salaried Employees. Conopco also created a trust (the "Trust") in order to implement the ESOP, entering into an agreement with the Northern Trust Company to act as the trustee.³ Near the end of 1989, Conopco issued approximately 2.2 million shares of voting convertible preferred stock, which the Trust purchased from Conopco using funds it acquired by issuing bonds. The Trust, as owner of the shares, had certain rights associated with ownership, including the right to receive dividend payments and liquidation rights.

Under the ESOP's terms, shares of the preferred stock were allocated to the employee-participants' accounts. During the tax years relevant to this appeal, when participants ended their employment with Conopco, the participants could, subject to certain restrictions, choose to receive the value of the preferred stock contained in their accounts in a number of forms: in cash; in Conopco's common stock; as an annuity; or as distributions rolled into an Individual Retirement Account. When participants elected to receive the value of their ESOP account balances as cash payments, Conopco would redeem the preferred stock which had been allocated to those participants' accounts by paying the Trust to buy back the shares. The Trust, upon tendering the shares to Conopco and receiving the redemption payments in return, would then distribute those funds as cash benefit distributions to the participants within 90 days after the close of the plan year.

B.

Title 26 U.S.C. § 404(k)(1) permits a C corporation to claim "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." An "applicable dividend" is defined in relevant part as "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." Id. § 404(k)(2)(A)(ii). Conopco sought to claim corporate income tax deductions under § 404(k)(1) for the tax years of 1994 to 2000 for the redemption payments that it had made to the Trust which the Trust distributed to the ESOP participants. After the Internal Revenue Service denied (or failed to grant) Conopco's claims, Conopco filed the present action in the United States District Court for the District of New Jersey, seeking a tax refund for allegedly wrongfully collected taxes in the amount of $13,823,873.

The parties cross-moved for summary judgment. The District Court concluded that although § 404(k)(1) would have allowed Conopco to claim the deductions for the relevant tax years, the company could not do so under 26 U.S.C. § 162(k)(1), which states that "no deduction otherwise allowable shall be allowed under this chapter for any amount paid or incurred by a corporation in connection with the reacquisition of its stock or of the stock of any related person (as defined in section 465(b)(3)(C))." See Conopco, Inc. v. United States, No. 04-6025, 2007 WL 2122045, at *8-12 (D.N.J. July 18, 2007).

More specifically, the District Court reasoned that Conopco's payments to the Trust in redemption of the stock, as opposed to the subsequent benefit distributions made by the Trust to the participants, were the dividends entitled to deduction under § 404(k)(1). Id. at *10. According to the District Court, those redemption payments were separate from the benefit distribution and, based on the language of the relevant statutory provisions, the District Court focused its § 162(k) analysis on Conopco's payments to the Trust, not the Trust's distributions to the participants. Id. at *11. After reviewing the legislative history of § 162(k)(1), the District Court decided that because Conopco's payments to the Trust were made in return for its shareholder's stock, they were nondeductible under § 162(k)(1). Id. at *11-12. As a result, the District Court denied Conopco's motion for summary judgment and granted the Government's cross-motion for summary judgment.

Conopco timely appealed from the District Court's order.

II.

The District Court had jurisdiction under 28 U.S.C. §§ 1340 and 1346(a)(1) and 26 U.S.C. § 7422, and we have jurisdiction under 28 U.S.C. § 1291. We exercise plenary review over the District Court's interpretation of the Internal Revenue Code (the "Code"), Galloway v. United States, 492 F.3d 219, 221 (3d Cir. 2007), as well as its order granting summary judgment, Alcoa, Inc. v. United States, 509 F.3d 173, 175 (3d Cir.2007). Summary judgment is appropriate only if, after drawing all reasonable inferences from the evidence in the light most favorable to the nonmovant, AT & T Corp. v. JMC Telecom, LLC, 470 F.3d 525, 530 (3d Cir.2006), "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law," Fed.R.Civ.P. 56(c). We may affirm the District Court's order granting summary judgment on different grounds, so long as the record supports the judgment. Turner v. Crawford Square Apartments III, L.P., 449 F.3d 542, 548 (3d Cir.2006); Guthrie v. Lady Jane Collieries, Inc., 722 F.2d 1141, 1145 n. 1 (3d Cir.1983).

III.

On appeal, Conopco defends the District Court's decision insofar as it determined that § 404(k)(1) allows the deductions here, but argues that § 162(k)(1), contrary to the District Court's conclusion, does not preclude Conopco from claiming those deductions. In response, the Government contends that the District Court was wrong to conclude that Conopco's payments were deductible under § 404(k)(1) in the first place, but asserts that, even assuming the payments were deductible, the District Court was correct to conclude that § 162(k)(1) prohibits Conopco from claiming them as deductions.

A.

As a preliminary matter, we note that the parties dispute whether Conopco's payments qualify for the deduction available under § 404(k)(1), which, again, allows a C corporation to claim "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." The focal point of this dispute is whether Conopco's payments to the Trust in redemption of its preferred stock qualify as "dividends," within the meaning of the Code, such that they meet the definition of "applicable dividends" under § 404(k)(1). The District Court agreed with Conopco that its payments qualified for the § 404(k)(1) deduction as "applicable dividends." Conopco, 2007 WL 2122045, at *3-8. We have some doubt about whether the District Court reached the correct conclusion on this point.⁴ But we find it unnecessary to resolve this issue because we conclude that even if Conopco's payments do qualify as "applicable dividends" under § 404(k)(1), Conopco is nonetheless barred from claiming deductions for those payments by § 162(k)(1).

B.

Assuming for purposes of this appeal that Conopco's payments are applicable dividends under § 404(k)(1), we turn to § 162(k)(1), which states that "no deduction otherwise allowable shall be allowed under [Chapter One of the Code] for any amount paid or incurred by a corporation in connection with the reacquisition of its stock or of the stock of any related person (as defined in section 465(b)(3)(C))."⁵ Section 404(k)(1) is included in Chapter One of the Code and § 162(k)(1) only bars a corporation from claiming a "deduction otherwise allowable," which, under circumstances like those presented here, refers to the § 404(k)(1) deduction allowed for a corporation's payment of an applicable dividend. Thus, the issue we must resolve is whether Conopco's payments (which we are presuming to be applicable dividends), otherwise allowable as deductions under § 404(k)(1), were made "in connection with the reacquisition of its stock."

We conclude that § 162(k)(1) disallows Conopco from claiming the § 404(k)(1) deductions. In reaching this conclusion, we follow the approach taken by the United States Court of Appeals for the Eighth Circuit in General Mills, Inc. v. United States, 554 F.3d 727 (8th Cir.2009). We also find persuasive the decision of the United States Tax Court in Ralston Purina Co. v. Commissioner of Internal Revenue, 131 T.C. No. 4, 2008 WL 4159698 (2008).

As discussed previously, § 404(k)(2)(A)(ii) defines "applicable dividend" as requiring both the corporation's payment of a dividend to the plan and the plan's subsequent distribution of that dividend, in cash, to the participant. Conopco and the Government agree that both steps under § 404(k)(2)(A)(ii) must be met in order to trigger the § 404(k)(1) deduction. See General Mills, 554 F.3d at 729 ("Neither step alone is sufficient, and thus neither is an `applicable...