                      131 T.C. No. 4



                UNITED STATES TAX COURT



RALSTON PURINA COMPANY AND SUBSIDIARIES, Petitioner v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 7357-00.                Filed September 10, 2008.




     P, a Missouri corporation, claimed a deduction
under I.R.C. sec. 404(k) for payments made to its
employee stock ownership plan in redemption of P’s
preferred stock owned by the plan, where the proceeds
of that payment were distributed to employees
terminating their participation in the plan. R argues
that payments to redeem stock are not deductible under
either I.R.C. sec. 404(k)(1) or (5), or in the
alternative that deduction of these payments is barred
by the provisions of I.R.C. sec. 162(k).

     Held: I.R.C. sec. 162(k) renders the payments
nondeductible because the payments are in connection
with a redemption of stock. The result to the contrary
reached by the U.S. Court of Appeals for the Ninth
Circuit on almost identical facts in Boise Cascade
Corp. v. United States, 329 F.3d 751 (9th Cir. 2003),
respectfully will not be followed.
                                 - 2 -

       Kenneth A. Kleban, for petitioner.

       Lawrence C. Letkewicz and Dana E. Hundrieser, for

respondent.



                                OPINION


       NIMS, Judge:   Before the Court are petitioner’s and

respondent’s cross-motions for summary judgment pursuant to Rule

121.

       Unless otherwise indicated, all Rule references are to the

Tax Court Rules of Practice and Procedure, and all section

references are to the Internal Revenue Code in effect for the

years in issue.

       Rule 121(a) provides that either party may move for summary

judgment upon all or any part of the legal issues in controversy.

Full or partial summary judgment may be granted only if it is

demonstrated that no genuine issue exists as to any material fact

and that the legal issues presented by the motion may be decided

as a matter of law.    See Rule 121(b); Sundstrand Corp. v.

Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th

Cir. 1994).    As to the issues presented on these cross-motions

for summary judgment, we conclude that there is no genuine issue

as to any material fact and that a decision may be rendered as a

matter of law.
                                - 3 -

     The sole issue remaining for decision is whether petitioner

may claim deductions for amounts paid in redemption of preferred

stock held by its employee stock ownership plan (ESOP) for its

1994 and 1995 tax years.    This issue was raised for the first

time by petitioner in its second amendment to petition (second

amendment).    All other issues, of which there were many, have

been settled.    Respondent consented to the filing of the second

amendment.

                             Background

     The parties filed an extensive stipulation of facts with

accompanying exhibits which forms the factual setting for their

respective arguments and which provides the basis for our

Background discussion.

     Petitioner is a Missouri corporation and had its principal

place of business in St. Louis, Missouri, when its petition was

filed.   In 1989 petitioner amended its Savings Investment Plan

(SIP or plan) for employees, adding an employee stock ownership

plan (ESOP).    Boatmen’s Trust Co. (Boatmen’s) was trustee of the

ESOP portion of the SIP.    Vanguard Fiduciary Trust Co. was named

recordkeeper for the SIP and was responsible for making

distributions to plan participants.     The trust fund under the SIP

was exempt from income tax under section 501(a).    For

convenience, references hereinafter to the SIP include, where

appropriate, the trust fund under the SIP.
                               - 4 -

     The managers of the SIP created a Benefits Policy Board

(BPB) comprising employees appointed by petitioner’s chief

executive officer.   They also created an Employee Benefit Asset

Investment Committee (EBAIC), the members of which were appointed

by petitioner’s board of directors.    Petitioner’s board of

directors, the BPB, the EBAIC, and the trustees were among the

fiduciaries responsible for the administration of the SIP.

     Boatmen’s trust agreement provided that Boatmen’s would make

distributions from the SIP in cash or in kind to such person, in

such amounts, at such times, and in such manner as directed by

the EBAIC.   The EBAIC could, at its sole discretion, direct

Boatmen’s to pay any cash dividends on shares of preferred stock

(see below for definition) directly to plan participants.      The

EBAIC could also decide how any payments to plan participants

would be funded.   Petitioner could not use amounts in the SIP for

any purpose other than the benefit of the SIP participants.

     In connection with the creation of the ESOP, petitioner’s

board authorized the issuance of 4,600,000 shares of newly

created convertible preferred stock (preferred stock).    These

shares could be issued only in the name of an ESOP trustee and

were not readily tradable on an established market.    Shares of

the preferred stock were entitled to receive, when, as, and if

declared by petitioner’s board, cumulative cash dividends (stated
                               - 5 -

dividends) in an amount per share equal to $7.48 per annum,

payable semiannually, one-half on June 29 and one-half on

December 30 of each year commencing June 29, 1989.

     On February 1, 1989, the SIP purchased 4,511,414 shares of

preferred stock from petitioner at $110.83 per share.    To finance

this purchase, the SIP borrowed $500 million from institutional

lenders.   Petitioner guaranteed the ESOP loans.   The loans

matured in approximately 10 years with principal and interest

payable semiannually.

     The SIP purchased an additional 88,586 shares of preferred

stock during the years 1990-92, also at $110.83 per share.      The

SIP funded these purchases through employee contributions.

     Plan participants could make contributions to the ESOP up to

6 percent of their before-tax income.    Any contributions in

excess of 6 percent were invested outside the SIP in investment

funds of the participant’s choosing.    Participants were not

permitted to invest any after-tax income in the ESOP.

Participants’ basic matched contributions were fully vested at

all times.   Company matching contributions became vested over a

period of 4 years.   These matching contributions also included

payments by petitioner to the ESOP preferred stock fund in

amounts necessary to make ESOP loan amortization payments.

     Employee participation in the SIP ended upon termination of

employment for any reason.   Terminated participants had the
                               - 6 -

option, among others, to cash out their investment in the ESOP.

The SIP could, in its sole discretion, require petitioner to

redeem shares of preferred stock at any time upon notice, when

and to the extent necessary to provide required distributions to

terminated participants electing to cash out their investments,

or to make payments on the ESOP loan.   The payment by the SIP to

terminated participants could be made, at the SIP’s option, in

cash or shares of petitioner’s common stock.   The SIP also had

the option to satisfy distributions to terminated participants

without forcing petitioner to redeem stock.

     At all relevant times the plan year of the SIP was the

calendar year.   For plan years 1989 through 1993 the SIP made

distributions to terminated participants using cash otherwise

available to it.

     The first relevant redemption by petitioner of preferred

stock held by the SIP occurred in August 1994.    Petitioner

redeemed 28,224 shares of preferred stock for $3,128,066.      The

SIP distributed that entire amount to terminated participants by

December 31, 1994.   During this period the SIP also made

$1,589,696 in distributions to terminated participants out of

cash otherwise available.

     In February 1995 petitioner redeemed another 56,645 shares

of preferred stock from the SIP for $6,277,965.    All of the

proceeds were distributed to terminating participants from
                               - 7 -

February 21 through July 20, 1995.     During this period the SIP

made additional distributions of $1,927,624 from cash otherwise

available.

     Petitioner timely filed consolidated Forms 1120, United

States Corporation Income Tax Return, for its taxable years

ending September 30, 1994 and 1995.     Respondent issued a

statutory notice of deficiency to petitioner dated April 6, 2000,

pertaining to petitioner’s 1993, 1994, and 1995 tax years.

Petitioner filed a petition contesting many of the adjustments

respondent made in the notice of deficiency, none of which

concerned petitioner’s ESOP.   Petitioner filed an amendment to

petition on February 24, 2003, and the second amendment on

December 9, 2003.   In the second amendment petitioner asserted

for the first time that it was entitled to an additional

deduction, under section 404(k), for amounts it paid to the SIP

to redeem its preferred stock that were then distributed to plan

participants.

                            Discussion

     Petitioner claims as deductions its payments in redemption

of preferred stock held by the SIP the proceeds of which the SIP

subsequently distributed to terminating employees.     Petitioner

contends these payments are essentially equivalent to dividends

within the meaning of section 302(b)(1) (redemption dividends).

Respondent does not challenge this contention--rather that the
                              - 8 -

redemption dividends are deductible.   The SIP used the redemption

dividends to make distributions to the employee participants in

the SIP who had terminated their participation because of

retirement or for some other reason.

     Petitioner asserts that the redemption dividends qualify as

applicable dividends under section 404(k)(2).   For the taxable

years at issue, section 404(k) provided in relevant part:

          SEC. 404(k). Deduction for Dividends Paid on
     Certain Employer Securities.--

               (1) General rule.--In the case of a
          corporation, there shall be allowed as a deduction
          for a taxable year the amount of any applicable
          dividend paid in cash by such corporation during
          the taxable year with respect to applicable
          employer securities. Such deduction shall be in
          addition to the deductions allowed under
          subsection (a).

               (2) Applicable dividend.--For purposes of
          this subsection--

                    (A) In general.--The term
               “applicable dividend” means any
               dividend which, in accordance with
               the plan provisions--

                         (i) is paid in cash to
                    the participants in the plan
                    or their beneficiaries,

                         (ii) 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, or

                         (iii) is used to make
                    payments on a loan described
                    - 9 -

          in subsection (a)(9) the
          proceeds of which were used to
          acquire the employer
          securities (whether or not
          allocated to participants)
          with respect to which the
          dividend is paid.

          *    *    *       *    *   *     *

     (3) Applicable employer securities.--For
purposes of this subsection, the term
“applicable employer securities” means, with
respect to any dividend, employer securities
which are held on the record date for such
dividend by an employee stock ownership plan
which is maintained by--

          (A) the corporation paying
     such dividend, or

          *    *    *       *    *   *     *

     (4) Time for deduction.--

          (A) In general.--The deduction
     under paragraph (1) shall be
     allowable in the taxable year of
     the corporation in which the
     dividend is paid or distributed to
     a participant or his beneficiary.

          (B) Repayment of loans.--In
     the case of an applicable dividend
     described in clause (iii) of
     paragraph (2)(A), the deduction
     under paragraph (1) shall be
     allowable in the taxable year of
     the corporation in which such
     dividend is used to repay the loan
     described in such clause.

     (5) Other rules.--For purposes of this
subsection--

          (A) Disallowance of
     deduction.--The Secretary may
     disallow the deduction under
                               - 10 -

                paragraph (1) for any dividend if
                the Secretary determines that such
                dividend constitutes, in substance,
                an evasion of taxation.

                *    *    *     *    *    *    *

                (6) Definitions.--For purposes of this
           subsection--

                     (A) Employer securities.--The
                term “employer securities” has the
                meaning given such term by section
                409(l).

                     (B) Employee stock ownership
                plan.--The term “employee stock
                ownership plan” has the meaning
                given such term by section
                4975(e)(7). Such term includes a
                tax credit employee stock ownership
                plan (as defined in section 409).

     Respondent does not challenge the treatment of the preferred

stock as “employer securities” as defined in section 409(l).

     Petitioner raised this section 404(k) issue for the first

time in the second amendment, which, as stated above, petitioner

filed without objection by respondent, after the decision of the

U.S. Court of Appeals for the Ninth Circuit in Boise Cascade

Corp. v. United States, 329 F.3d 751 (9th Cir. 2003), on May 20,

2003.   In that case the Court of Appeals decided an ESOP

preferred stock redemption issue almost identical to the issue

for decision in this case.    The Boise Cascade Corp. result is not

controlling in this case, in which any appeal would normally lie
                             - 11 -

to the Court of Appeals for the Eighth Circuit.   See Golsen v.

Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.

1971).

     Respondent maintains that the issue was incorrectly decided

by the Court of Appeals for the Ninth Circuit and challenges the

claimed deductions on three grounds:   (1) The redemption

dividends are not applicable dividends within the meaning of

section 404(k); but (2) even if the redemption dividends

otherwise constitute applicable dividends as defined by section

404(k), their deduction should be disallowed as evasions of

taxation under section 404(k)(5); and (3) even if the redemption

dividends are otherwise allowable as deductions under section

404(k), they are disallowed as amounts paid by a corporation in

connection with the redemption of its stock within the meaning of

section 162(k).

     In reaching our decision we need not traverse petitioner’s

convoluted arguments in support of its position that the

redemption dividends qualify as applicable dividends under

section 404(k)(2), or respondent’s arguments regarding section

404(k)(5), because in our view section 162(k) precludes that

result in any event, notwithstanding the contrary position taken

by the Court of Appeals.
                             - 12 -

     Section 162(k) provides:1

          SEC. 162(k). Stock Redemption Expenses.--

               (1) In general.--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.

               (2) Exceptions.--Paragraph (1) shall not
          apply to--

                    (A) Certain specific deductions.--Any--

                         (i) deduction allowable
                    under section 163 (relating to
                    interest), or

                         (ii) deduction for
                    dividends paid (within the
                    meaning of section 561).

                    (B) Stock of certain regulated
               investment companies.--Any amount
               paid or incurred in connection with
               the redemption of any stock in a
               regulated investment company which
               issues only stock which is
               redeemable upon the demand of the
               shareholder.




     1
        The Small Business Job Protection Act of 1996, Pub. L.
104-188, sec. 1704(p), 110 Stat. 1886, amended sec. 162(k)(1) by
striking “the redemption of its stock” and inserting “the
reacquisition of its stock” effective for amounts paid or
incurred after Sept. 13, 1995, in tax years ending after that
date. The net effect of the amendment was simply to broaden the
scope of sec. 162(k)(l) beyond the technical boundaries of
“redemption”. This amendment does not apply to petitioner’s
redemptions, for while petitioner’s 1995 fiscal year ended on
Sept. 30, 1995, all of the redemption and distribution
transactions occurred before Sept. 13, 1995.
                              - 13 -

     The redemption dividends do not fall within the exceptions

provided in section 162(k).

     Petitioner seeks to have us adopt the position taken by the

Court of Appeals that, as discussed below, the distribution

payments from the ESOP were not “in connection with” the

redemption payments made by petitioner and as a result the entire

transaction did not run afoul of section 162(k).

     The Court of Appeals’ rationale runs along the following

lines.   The parties stipulated that for purposes of section

302(b), if the ESOP is treated as the owner of the redeemed

preferred stock, then the redemptions did not result in a

meaningful reduction in the ESOP’s proportionate interest in

petitioner and thus would qualify for dividend treatment under

section 316.   The Court of Appeals concluded that the ESOP was

the owner of the stock; this established the status of the stock

redemption payments as dividends.   The court then had to

determine whether this dividend ran afoul of section 162(k).

     Section 162(k) itself is an exception to the general rule of

section 162(a) that permits a deduction for all “ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business”.    It prohibits deductions for

expenses that would ordinarily be deductible business expenses

but for the fact that those expenses were made in connection with

a repurchase of stock.   In the words of the court in Boise
                                - 14 -

Cascade Corp. v. United States, supra at 756:      “Section 162(k)

prohibits deductions claimed as a consequence of a stock

redemption.   Thus, it acts as a disallowance provision for

otherwise allowable non-capital deductions incurred in connection

with a stock redemption transaction.”      Boise Cascade Corp. goes

on to say that “the key question is whether distributions to the

[ESOP] Participants were payments made ‘in connection with’ the

redemption of the convertible preferred stock.”      Id. at 757.

     In a nutshell, Boise Cascade Corp. appears to proceed on the

premise that if distribution payments to the withdrawing ESOP

participants are made “in connection with” redemption of stock,

then section 162(k) disallows a deduction for the amounts paid.

The Court of Appeals then held that the payments were not made in

connection with the redemption of its stock.      Id. at 757-758.

       The Court of Appeals’ holding relied heavily on its

previous decision in United States v. Kroy (Europe) Ltd., 27 F.3d

367 (9th Cir. 1994), regarding the meaning of the phrase “in

connection with” in section 162(k).      In Kroy, the Court of

Appeals interpreted the phrase narrowly to hold that expenses

incurred to borrow funds used to effect a redemption were not in

connection with a redemption.    The court reasoned that Congress,

in enacting section 162(k), did not intend to overrule the

“origin of the claim” test for determining whether expenses were

deductible under section 162 generally.      Id. at 369-370.
                              - 15 -

Therefore, the court interpreted the phrase “in connection with”

to include only expenses that have their origin in a stock

redemption transaction, excluding expenses that have their origin

in a “separate, although related, transaction”.    Id. at 369.

     We specifically rejected the Court of Appeals’ narrow

interpretation of the phrase “in connection with” in United

States v. Kroy (Europe) Ltd., supra.    See Fort Howard Corp. &

Subs. v. Commissioner, 103 T.C. 345 (1994).   In Fort Howard, we

noted that Congress had expressly intended the phrase to be

construed broadly, to include all deductions necessary or

incident to a redemption transaction.    Id. at 353-354 (citing S.

Rept. 99-313, at 223 (1986), 1986-3 C.B. (Vol. 3) 1, 223).    We

also relied heavily on the opinion of the Court of Appeals for

the Eighth Circuit in Huntsman v. Commissioner, 905 F.2d 1182

(8th Cir. 1990), revg. 91 T.C. 917 (1988), which held that the

phrase “in connection with” should be broadly construed.    We

concluded that the origin of the claim test had no bearing on the

section 162(k) inquiry, rejecting Kroy’s assumption that the “in

connection with” test under section 162(k) must be fashioned in

such a way as to be consistent with the origin of the claim test.

We also concluded that Congress could not have intended section

162(k) as a mere clarification of existing law, because section

162(k) prohibits deductions that are “otherwise allowable” under

present law.   Fort Howard Corp. & Subs. v. Commissioner, supra at
                               - 16 -

356.    Two years after our Opinion in Fort Howard, Congress

enacted retroactive relief for the borrowing expenses involved in

both Fort Howard and Kroy.    See Fort Howard Corp. & Subs. v.

Commissioner, 107 T.C. 187 (1996).      Ultimately, our holding in

this case does not depend on our interpretation of the phrase “in

connection with” because we conclude that Congress expressly

intended section 162(k) to prohibit deduction of the funds used

to effect a redemption.    See infra pp. 21-22.

       Petitioner urges us to adopt the Court of Appeals for the

Ninth Circuit’s reasoning, arguing that while the transaction as

a whole qualifies for a deduction under section 404(k), the

distribution payments from the SIP to terminating employees are

not connected with petitioner’s redemption of its preferred stock

and thus do not run afoul of section 162(k).

       We note at the outset that this line of argument appears to

be facially inconsistent.    Petitioner first argues that the

redemption payments from petitioner to the SIP and the

distribution payments from the SIP to the employees are linked in

an integrated transaction, so that the transaction fits within

one of the transactions permissible under section 404(k)--a

dividend payment from a corporation to a plan and a distribution

of those proceeds to departing employees.     Petitioner then argues

that these payments are in fact not connected for purposes of

section 162(k).    Petitioner seems to want it both ways; it relies
                               - 17 -

on the integrated form of the transaction to justify a section

404(k) deduction only to deny that form in another context.      See

Portland Golf Club v. Commissioner, 497 U.S. 154, 168 (1990)

(noting an “inherent contradiction” where taxpayer relied on two

methods of calculation to simultaneously show actual losses and

an intent to profit).

     While this contradiction tends to undercut petitioner’s

argument, there is a more serious flaw in petitioner’s argument:

both petitioner and the Court of Appeals for the Ninth Circuit

have framed the section 162(k) issue incorrectly.    The Court of

Appeals in Boise Cascade Corp. v. United States, 329 F.3d 751

(9th Cir. 2003), held, and petitioner asserts, that the proper

question for section 162(k) purposes is whether the distribution

payment is “in connection with” a redemption.    The court offers

no rationale for framing the issue as it does.   We infer, as

petitioner does, that the court believed that the distribution

payment from the SIP to the departing employees was the payment

for which the taxpayer sought a deduction.   This belief is

incorrect, as it misunderstands the nature of the deduction

sought under section 404(k).

     Section 162(k) bars the deduction of “otherwise allowable”

deductions that are made in connection with a repurchase of

stock.   The deduction sought is the section 404(k) deduction.

Section 404(k)(1) provides that a corporation is entitled to a
                              - 18 -

deduction for “any applicable dividend” that it pays with respect

to applicable employer securities.     (We shall assume, arguendo,

that deductions for the payments petitioner made here would

normally be allowable under section 404(k).)    A deduction under

section 404(k) is not allowable unless the transaction qualifies

as an applicable dividend.   Thus, the proper question for section

162(k) purposes is whether the otherwise deductible applicable

dividends that petitioner paid are “in connection with” a

repurchase of stock.   To answer this question, we must identify

the transaction that constitutes the applicable dividend.

     As for what payment in this case could constitute an

applicable dividend under section 404(k), there are three

possibilities:   (1) The redemption payment from petitioner to the

SIP, (2) the distribution payments from the SIP to departing

employees, or (3) the redemption payment to the SIP and the

distribution from the SIP as an integrated transaction.     The

court in Boise Cascade Corp. v. United States, supra, without

analysis of section 404(k), determined that the second option was

correct--that the distribution payment from the plan to the

departing employees was the deductible applicable dividend to be

analyzed under section 162(k).   Id. at 754 (“if the distributions

to the employees were a distribution under § 301, then they were

a ‘dividend’ for the purposes of § 316 and the deduction provided

for in § 404(k) applies”).   For the reasons discussed below, that
                              - 19 -

position is unsupportable under section 404(k).   Rather, it is

both the redemption payment and the distribution of that payment,

as an integrated transaction, that constitutes the applicable

dividend under section 404(k).

     Under section 404(k)(1), a corporation is entitled to a

deduction for applicable dividends that the corporation pays--

either to an ESOP or to plan participants directly.   Payments

made to an ESOP must then be distributed by the ESOP, either to

plan participants or to pay off ESOP debt.   Sec. 404(k)(2).    An

applicable dividend, as applied here, is “any dividend which

* * * 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”.    Sec. 404(k)(2)(A).

Thus, the applicable dividend as defined requires both a payment

from a corporation and a distribution of that payment to

departing employees.

     Petitioner made payments in redemption of the preferred

stock held by the SIP.   The redemption payments were made by

petitioner (the corporation) to the SIP (the plan).   The SIP

properly distributed those payments.   The redemption payments fit

the technical definition of a dividend for purposes of sections

301 and 316, because the redemptions did not result in a

meaningful reduction in the ESOP’s proportionate interest in
                                  - 20 -

petitioner.    See sec. 302(b).    However, they would not have been

applicable dividends unless the SIP later distributed those

payments in the prescribed manner.

      Distribution payments from the SIP to terminating employees,

standing alone, do not fit the definition of applicable dividends

for two reasons.   First, an applicable dividend must be paid by

the corporation, and the SIP is not the corporation--petitioner

is.   Second, the distributions from the SIP are not dividends at

all, because a dividend is defined as a payment by a corporation

to its shareholders.   Sec. 316(a).        The SIP is the owner of the

preferred stock; it cannot be the payor of dividends under

section 316.   These distribution payments represent only the

distribution of the proceeds of a dividend paid by petitioner to

the SIP.   Thus, a distribution payment alone cannot be an

applicable dividend as that term is defined under section 404(k).

Rather, both sides of these redemption transactions--redemption

and distribution--are necessary for the transactions to fit the

definition of applicable dividends found in section 404(k).

      Petitioner argues that the SIP distribution alone must be

the deductible applicable dividend because that distribution

determines the timing and the amount of the deduction, as the SIP

can choose the amount of petitioner’s payment that it distributes

to employees and when it distributes that payment.        As stated

above, no payment from petitioner to the SIP would be deductible
                               - 21 -

under section 404(k) without subsequent distribution--either to

terminating participants or to pay off SIP debt.   See sec.

404(k)(2)(A)(ii) and (iii).   However, the reverse is true as

well:   without a payment from petitioner to the SIP, no

distribution from the SIP would be deductible, because section

404(k)(1) requires that the “applicable dividend” be paid “by

such corporation.”   For that reason, petitioner cannot claim a

deduction for the distributions the SIP made to employees out of

cash otherwise available.

     Similarly, the court in Boise Cascade Corp. v. United

States, 329 F.3d at 757-758, was incorrect when it framed the

section 162(k) test as being whether the distribution payment

from the plan was “in connection with” a redemption, because the

distribution, standing alone, is not deductible under section

404(k), and without an allowable deduction a section 162(k)

analysis is not necessary.    The “connection” that must be made is

between the redemption payment and the distribution payment as

required by section 404(k).   The payment from petitioner to the

SIP to the departing employees is a statutorily integrated

transaction.   The two sides of the transaction are necessarily

connected, because the SIP must distribute the same funds paid to

it by petitioner.    Once that connection is established, deduction

under section 404(k) is possible.   That entire transaction, now

potentially deductible as an applicable dividend under section
                              - 22 -

404(k), must also pass muster under section 162(k).   The test is

whether the “otherwise allowable” deduction for the payment of an

applicable dividend is nevertheless disallowed because the

payment is “in connection with” a repurchase of stock.

     Petitioner’s payments of these asserted applicable dividends

were certainly in connection with a repurchase of stock.    The

first part of the applicable dividend transaction was the

redemption.   The funds of the transaction, passed from petitioner

to the SIP to the departing employees, are the same funds used to

repurchase stock.   Section 162(k) bars a deduction for the

payment of funds used to repurchase stock.   See S. Rept. 99-313,

at 223 (1986), 1986-3 C.B. (Vol. 3) 1, 223 (“The committee

intends that amounts subject to this provision will include

amounts paid to repurchase stock”).    Therefore, the first part of

the integrated transaction--the redemption of stock from the SIP-

-ensures that section 162(k) bars the deduction of any portion of

the transaction.

     As a result, we hold that section 162(k) prevents petitioner

from claiming as deductions the amounts it paid to repurchase its

own stock from its ESOP which were then distributed to

terminating employees.   For the reasons given, we respectfully

decline to follow the contrary result reached on almost identical
                              - 23 -

facts by the U.S. Court of Appeals for the Ninth Circuit in Boise

Cascade Corp. v. United States, 329 F.3d 751 (9th Cir. 2003).2

     Therefore, we shall grant respondent’s motion for summary

judgment and deny petitioner’s motion for summary judgment.    In

doing so, we have considered all of the parties’ arguments, and

to the extent not discussed, we find them moot.   In accordance

with the foregoing,



                                   An appropriate order will

                              be issued, and decision will be

                              entered under Rule 155.

     Reviewed by the Court.

     COLVIN, COHEN, SWIFT, WELLS, HALPERN, VASQUEZ, GALE,
THORNTON, MARVEL, HAINES, WHERRY, and HOLMES, JJ., agree with
this majority opinion.

     GOEKE and KROUPA, JJ., did not participate in the
consideration of this opinion.




     2
        We note that the decision of the District Court in
Conopco, Inc. v. United States, 100 AFTR 2d 5296, 2007-2 USTC
par. 50,582 (D.N.J. 2007), is to a similar effect, in that it
disagrees with the holding in Boise Cascade. Contra General
Mills, Inc. v. United States, 101 AFTR 2d 550, 2008-1 USTC par.
50,141 (D. Minn. 2008).
                              - 24 -

     SWIFT, J., concurring:   Regardless of whether petitioner’s

redemption dividends should be disallowed under section

162(k)(1), respondent argues in the alternative that the

redemption dividends should be disallowed pursuant to his

determination under section 404(k)(5)(A).   Thereunder, Congress

provided that “The Secretary may disallow the deduction under

* * * [section 404(k)(1)] for any dividend if the Secretary

determines that such dividend constitutes, in substance, an

evasion of taxation.”

     In the light of case authority that redemption dividends

should not be disallowed under section 162(k)(1),1 I believe this

Court should address respondent’s alternative argument under

section 404(k)(5)(A).

     It is most unusual in a particular Code section to have an

express and specific delegation to the Secretary of authority to

disallow on the grounds of tax evasion the very deduction

provided in the section.   On its face and given its placement in



     1
       Although one court has upheld the Commissioner’s
disallowance under sec. 162(k)(1) of deductions for redemption
dividends, see Conopco, Inc. v. United States, 100 AFTR 2d 5296,
2007-2 USTC par. 50,582 (D.N.J. 2007) (unpublished opinion, see
8th Cir. R. 32.1A), three courts have rejected sec. 162(k)(1) as
a basis for disallowing deductions for redemption dividends, see,
e.g., Boise Cascade Corp. v. United States, 329 F.3d 751 (9th
Cir. 2003), affg. 82 AFTR 2d 7249 (D. Idaho 1998); General Mills,
Inc. v. United States, 101 AFTR 2d 550, 2008-1 USTC par. 50,141
(D. Minn. 2008). General Mills and Conopco are pending appeal to
the United States Courts of Appeals for the Third and the Eighth
Circuits, respectively.
                               - 25 -

section 404(k), section 404(k)(5)(A) appears to give the

Secretary authority to do just that.

     In section 7805(a) Congress has delegated to the Secretary

general authority to promulgate interpretative rules and

regulations, and in a number of Code sections Congress has

delegated to the Secretary additional authority to promulgate

regulations under the specific sections.     The jurisprudence

relating to the deference to be given such regulations is well

known.    See, e.g., Chevron U.S.A., Inc. v. Natural Res. Def.

Council, Inc., 467 U.S. 837 (1984); Swallows Holding, Ltd. v.

Commissioner, 515 F.3d 162 (3d Cir. 2008), vacating 126 T.C. 96

(2006).

     The delegation Congress made to the Secretary in section

404(k)(5)(A), however, is particularly specific and broad and is

not limited to the promulgation of regulations.     In section

404(k)(5)(A) Congress appears to have delegated to the Secretary

authority to place a “tax evasion” label on a particular

transaction or type of transaction by regulation, by ruling, or

by other public or private notice.      No particular requirement or

limitation is set forth in section 404(k)(5)(A)     as to how the

Secretary is to make the “tax evasion” determination, as to how

specific and detailed the Secretary’s public explanation thereof

need be, or as to how the Secretary is to make the “tax evasion”

announcement.
                              - 26 -

     For a number of years now and on a number of occasions,

under authority of section 404(k)(5)(A) a “tax evasion” label has

been placed by the Commissioner and/or by the Government on

redemption dividends and claimed deductions under section

404(k)(1) relating thereto have been disallowed:   First, in the

litigation of Boise Cascade Corp. v. United States, 329 F.3d 751

(9th Cir. 2003); second, by issuance of Rev. Rul. 2001-6, 2001-1

C.B. 491; third, in the litigation of Conopco, Inc. v. United

States, 100 AFTR 2d 5296, 2007-2 USTC par. 50,582 (D.N.J. 2007);

fourth, in the litigation of General Mills, Inc. v. United

States, 101 AFTR 2d 550, 2008-1 USTC par. 50,141 (D. Minn. 2008);

fifth, in the instant litigation; and sixth, in final regulations

promulgated in 2006 under sections 162(k) and 404(k), see secs.

1.162(k)-1(a), 1.404(k)-3, Income Tax Regs.

     Under section 404(k)(5)(A) in 2001 the Commissioner issued

Rev. Rul. 2001-6, supra.2   Certainly, the Office of Chief Counsel

advised the Commissioner and was the primary drafter of Rev. Rul.

2001-6, supra.   The revenue ruling, however, clearly was issued

by the Commissioner as are all revenue rulings to whom the

Secretary has delegated such authority as reflected in Treas.

Dept. Order 150-10 (April 22, 1982).   See sec. 7803(a).




     2
        Sec. 7701(a)(11)(B) defines “Secretary” as “the Secretary
of the Treasury or his delegate.”
                               - 27 -

     Letter rulings and technical advice memoranda are issued by

the Commissioner’s Office of Chief Counsel.   That office,

however, only drafts and proposes revenue rulings and revenue

procedures.   See IRS Deleg. Order 190 (Rev. 4, Oct. 8, 1996),

Internal Revenue Manual (IRM), pt. 1.2.53.5, (Oct. 8, 1996); Gen.

Counsel Order 4 (Jan. 19, 2001), IRM pt. 30.2, Exhibit 30.2.2-6

(Aug. 11, 2004); see also sec. 7803(b)(2)(B).

     Rev. Rul. 2001-6, supra, was approved and issued by the

Assistant to the Commissioner, acting on the Commissioner’s

behalf, and was published in the Internal Revenue Bulletin, 2001-

6 I.R.B. 491, the authoritative publication of the Commissioner

for announcement of official rulings pertaining to internal

revenue matters.   See sec. 601.601(d)(1), Statement of Procedural

Rules (“The Internal Revenue Bulletin is the authoritative

instrument of the Commissioner for the announcement of official

rulings, decisions, opinions, and procedures, and for the

publication of Treasury decisions, Executive orders, tax

conventions, legislation, court decisions, and other items

pertaining to internal revenue matters.”); see also id. sec.

601.601(d)(2)(ii)(a), (vii)(a) and (b).

     Also in 2001 Congress addressed the section 404(k)(5)(A) and

by amendment clarified the Secretary’s authority thereunder by

adding the word “avoidance”.   Economic Growth and Tax Relief
                                - 28 -

Reconciliation Act of 2001, Pub. L. 107-16, sec. 662(b), 115

Stat. 142.

     I would note that the Commissioner’s disallowance of

deductions under section 404(k)(1), based on the discretion given

to him in section 404(k)(5)(A), need not involve an analysis and

findings of “badges of fraud” typically associated with

prosecutions under section 7201 of affirmative attempts by

taxpayers to engage in willful tax evasion and with

determinations of willful civil tax fraud penalties under section

6663.     See, e.g., Spies v. United States, 317 U.S. 492, 499

(1943).

        Indeed, in this case petitioner filed its corporate Federal

income tax returns for 1994 and 1995 without claiming deductions

for redemption dividends.     At this time no underpayments of tax

are associated with the claimed section 404(k)(1) deductions.

Not until December 9, 2003 (2 years after Rev. Rul. 2001-6,

supra, was issued), did petitioner file (via its second amendment

to petition herein) claims for refund for 1994 and 1995, asking

respondent and this Court to consider the deductibility of

petitioner’s redemption dividends and if allowed to refund

overpayments of taxes paid.     There are no “badges of fraud” to be

found here, and respondent does not contend otherwise.    Rather,

respondent simply contends that allowance of petitioner’s claimed

redemption dividend deductions would be improper and would give
                               - 29 -

rise to underpayments of Federal income taxes which the

Commissioner, exercising his discretion under section

404(k)(5)(A), has described as tax evasion.

     The tax “evasion” or “avoidance” label placed by the

Commissioner on redemption dividends under the authority of

section 404(k)(5)(A) is somewhat analogous to the tax “evasion”

or “avoidance” label that the Commissioner occasionally places on

transactions under the authority given to him in other Code

sections.   For example, in section 269 the Commissioner is given

substantial discretionary authority to label a transaction as

engaged in for the principal purpose of tax evasion or avoidance

and to disallow related deductions.     The tax “evasion” or

“avoidance” which the Commissioner typically identifies under

section 269 refers to the underlying nature and purpose of the

transaction, not to what we typically consider “badges of fraud”,

such as a taxpayer’s double set of books, destruction of

evidence, or omitted income.   The tax evasion or avoidance

typically involved under section 269 may be described simply as

involving a transaction in which a taxpayer is attempting to

secure a tax benefit which it “would not otherwise enjoy” and

which the Commissioner, in his discretion, has identified as
                              - 30 -

having a principal tax evasion purpose.    See Southland Corp. v.

Campbell, 358 F.2d 333, 336 (5th Cir. 1966).3

     Here respondent has labeled redemption dividends as

transactions that inherently provide to a corporate ESOP sponsor

tax deductions to which it is not entitled.     In Rev. Rul. 2001-6,

supra, it is explained that the allowance of deductions for

redemption dividends would give corporate ESOP sponsors

deductions for payments that do not represent true economic costs

and that redemption dividends vitiate important rights and

protections for recipients of ESOP distributions.

     In spite of the brevity of the explanation provided in Rev.

Rul. 2001-6, supra, I believe that in the light of section

404(k)(5)(A) the tax evasion label that has been placed on

redemption dividends by the Commissioner is entitled to

substantial deference.   See Chevron U.S.A., Inc. v. Natural Res.

Def. Council, Inc., 467 U.S. 837 (1984).    While notice-and-

comment rulemaking generally assures Chevron deference for

regulations, the absence of such formality in the issuance of

rulings does not preclude such deference where Congress intended

to grant the agency the power to make rules with the “force of

law” and “the agency interpretation claiming deference was



     3
       I emphasize that the sec. 404(k)(5)(A) authority to
disallow a claimed sec. 404(k)(1) deduction because it would
constitute a tax evasion transaction is even more specific than
the authority set forth in sec. 269.
                                - 31 -

promulgated in the exercise of that authority.”     United States v.

Mead Corp., 533 U.S. 218, 226-227 (2001); see Barnhart v. Walton,

535 U.S. 212, 221-222 (2002).

     Lastly, as stated, in 2006 the Secretary promulgated final

regulations reflecting the position set forth in Rev. Rul. 2001-

6, supra.   See sec. 1.162(k)-1, Income Tax Regs.; sec. 1.404(k)-

3, Q&A-1, Income Tax Regs. (“Payments to reacquire stock held by

an ESOP * * * used to make benefit distributions to participants”

are not allowed under section 404(k)(2) and (5)).    Although the

regulations apply only prospectively and only to amounts paid or

incurred after August 30, 2006, secs. 1.162(k)-1(c), 1.404(k)-3,

Q&A-2, Income Tax Regs., the regulations are relevant as they are

consistent with Rev. Rul. 2001-6, supra, see Smiley v. Citibank

(S.D.), N.A., 517 U.S. 735, 744 n.3 (1996) (“Where * * * a court

is addressing transactions that occurred at a time when there was

no clear agency guidance, it would be absurd to ignore the

agency’s current authoritative pronouncement of what the statute

means.”).

     For the reasons stated, I would address respondent’s

alternative argument and conclude that respondent’s

determination--that the claimed deductions for redemption

dividends, if allowed, would constitute impermissible tax

evasion--should be sustained.
