# Prop. Treas. Reg. § 1.404(k)-2: Dividends paid by corporation not maintaining ESOP.

Proposed regulation, not in force. REG-133578-05, 70 FR 49897, published 2005-08-25 <https://www.federalregister.gov/documents/2005/08/25/05-16715/dividends-paid-deduction-for-stock-held-in-employee-stock-ownership-plan>. Interprets 26 U.S.C. § 404.

Par. 3. Section 1.404(k)-2 is added to read as follows:

Q-1: What corporation is entitled to the deduction provided under section 404(k) for applicable dividends paid on applicable employer securities of a C corporation held by an ESOP if the ESOP benefits employees of more than one corporation or if the corporation paying the dividend is not the corporation maintaining the plan?

A-1: (a) In general. Under section 404(k), only the corporation paying the dividend is entitled to the deduction with respect to applicable employer securities held by an ESOP. Thus, no deduction is permitted to a corporation maintaining the ESOP if that corporation does not pay the dividend.

(b) Example. (i) Facts. S is a U.S. corporation that is wholly owned by P, an entity organized under the laws of Country A that is classified as a corporation for Federal income tax purposes. P is not engaged in a U.S. trade or business. P has a single class of common stock that is listed on a stock exchange in a foreign country. In addition, these shares are listed on the New York Stock Exchange, in the form of American Depositary Shares, and are actively traded through American Depositary Receipts (ADRs) meeting the requirements of section 409(l). S maintains an ESOP for its employees. The ESOP holds ADRs of P on Date X and receives a dividend with respect to those employer securities. The dividends received by the ESOP constitute applicable dividends as described in section 404(k)(2).

(ii) Conclusion. P, as the payor of the dividend, is entitled to a deduction under section 404(k) with respect to the dividends, although as a foreign corporation P does not obtain a U.S. tax benefit from the deduction. No corporation other than the corporation paying the dividend is entitled to the deduction under section 404(k). Thus, because S did not pay the dividends, S is not entitled to a deduction under section 404(k). The answer would be the same if P is a U.S. C corporation.

Q-2: What is the effective date of this section?

A-2: This section applies with respect to dividends paid on or after the date these regulations are published as final regulations in the Federal Register .