Conopco, Inc. v. UNITED STATES OF AMERICA On Appeal from the United States District Court for the…

Honorable John R. Padova, Senior United States District*
Judge for the Eastern District of Pennsylvania, sitting by
designation.
PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 07-3564
CONOPCO, INC.,
Appellant
v.
UNITED STATES OF AMERICA
On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 04-cv-06025)
District Judge: Honorable Joseph A. Greenaway
Argued January 6, 2009
Before: FUENTES and FISHER, Circuit Judges,
and PADOVA, District Judge.*

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Conopco is a wholly-owned subsidiary of Unilever1
United States, Inc. and is the successor-in-interest to Bestfoods,
Inc. and CPC International, Inc. For convenience, we refer only
2
(Filed: )
Ronald S. Rolfe (Argued)
Cravath, Swaine & Moore
825 Eighth Avenue
Worldwide Plaza
New York, NY 10019
Attorney for Appellant
Ellen P. DelSole (Argued)
United States Department of Justice
Tax Division
950 Pennsylvania Avenue, N.W.
P.O. Box 502
Washington, DC 20044
Attorney for Appellee
OPINION OF THE COURT
FISHER, Circuit Judge.
This appeal requires us to determine whether Conopco,
Inc. is entitled to a federal income tax refund of approximately1

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to Conopco as the taxpayer here.
Although the Government disagreed with several of2
Conopco’s redeemed-shares figures before the District Court,
the Government did not dispute the amount of Conopco’s
claimed deductions. Thus, given the inconsequential nature of
this disagreement, the District Court properly chose to decide
this case as a matter of law.
3
$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. Conopco, a2
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

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The Northern Trust Company was replaced as trustee in3
1994 by Fidelity Management Trust Co. In this opinion, we
refer only to the Trust, rather than the trustees, when discussing
the ESOP.
4
trustee. Near the end of 1989, Conopco issued approximately3
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.

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5
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).

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6
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

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7
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

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Specifically, we question whether the Supreme Court’s4
decision in United States v. Davis, 397 U.S. 301 (1970), in
which the Court formulated its “dividend equivalence” test, as
well as other cases relied upon by the District Court in reaching
its conclusion, are sufficiently similar to this case, given that the
Trust here, unlike the shareholders in those cases, was a
minority shareholder lacking control over the corporation before
and after the redemption. See Rev. Rul. 76-385, 1976-2 C.B. 92
(stating that the redemption of a minority shareholder’s stock
should be excluded from dividend treatment because “as a result
of the redemption, [the shareholder] experienced a reduction of
its voting rights, its right to participate in current earnings and
accumulated surplus, and its right to share in net assets on
liquidation”).
8
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. But4
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).

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Subsection (2) of § 162(k) lists several exceptions to the5
rule in subsection (1), but it is undisputed that the exceptions do
not apply here. Additionally, Congress amended the language
of subsection (1) in 1996, effective for tax years ending after
September 13, 1995, by replacing the statutory phrase “the
redemption of its stock” with “the reacquisition of its stock or of
the stock of any related person (as defined in section
465(b)(3)(C)).” See Small Business Job Protection Act of 1996,
Pub. L. No. 104-188, § 1704(p)(1), 110 Stat. 1755, 1886 (1996).
The parties agree that this amendment does not affect our
disposition of this case.
9
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)).” Section 404(k)(1) is5
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.”

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10
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 dividend’
deductible under § 404(k)(1).”); Ralston Purina, 131 T.C. No.
4, 2008 WL 4159698, at *8 (“[T]he applicable dividend as
defined requires both a payment from a corporation and a
distribution of that payment to departing employees.”). Once
both statutorily required steps are satisfied, a corporation is
permitted to deduct its payment of the applicable dividend under
§ 404(k)(1), subject to the limitation of § 162(k)(1).
Conopco acknowledges that its payments to the Trust
were made in connection with the reacquisition of its preferred
stock. But the company nevertheless asserts that the applicable
dividend payments are not barred by § 162(k)(1) because the
Trust’s distribution of benefits to the participants, the second
requisite step to trigger the § 404(k)(1) deduction, was not made

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11
in connection with the redemption. Conopco attempts to bolster
its position through reliance on the decision of the United States
Court of Appeals for the Ninth Circuit in Boise Cascade Corp.
v. United States, 329 F.3d 751 (9th Cir. 2003). In that case, the
Court, in holding that § 162(k)(1) did not preclude the
§ 404(k)(1) deduction, treated the corporation’s stock
redemption payment to the trust and the trust’s subsequent
benefit distribution of those funds to the participants as “two
segregable” and “entirely separate” transactions. Id. at 757.
Specifically, it framed the relevant inquiry under § 162(k)(1) as
“whether the distributions to the [p]articipants were payments
made ‘in connection with’ the redemption of the convertible
preferred stock.” Id.
Relying on this formulation, Conopco argues that, in this
case, the Trust’s distributions to the participants are entirely
separate from the redemption payments for several reasons: the
participants’ rights to the benefit payments and the Trust’s duty
to make those payments were not dependent on whether
Conopco redeemed the stock; the deduction is limited to the
amount of the benefit payments; the deduction may be taken
only in the year that the benefit payment is made; and the
deduction does not require a redemption of stock but does
require a benefit payment.
But § 162(k)(1), by referencing an “otherwise allowable”
deduction for “any amount paid or incurred by a corporation,”
necessarily implicates a corporation’s applicable-dividend
payment under § 404(k)(2)(A)(ii) in its entirety. See General
Mills, 554 F.3d at 729 (determining that the applicable dividend,
consisting of the redemption dividend to the trust “combined

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Conopco asks us to follow Boise Cascade to maintain6
uniformity in the interpretation of federal tax law, but the United
States Court of Appeals for the Eighth Circuit in General Mills
and the United States Tax Court in Ralston Purina have already
disagreed with Boise Cascade’s interpretation of § 162(k)(1).
Cf. Comm’r of Internal Revenue v. Stockly, 221 F.2d 745, 748
(3d Cir. 1955) (noting the interest of maintaining uniformity in
federal tax law unless the “the other courts which have
considered the problem have clearly misconstrued the law”).
Moreover, though inapplicable to this case due to the tax years
12
with” the trust’s cash distribution of that redemptive dividend,
is subject to § 162(k)(1)). As a result, we cannot say, as
Conopco advocates here, that a corporation’s redemption
payment to a trust, on the one hand, is made in connection with
the reacquisition of stock but that, on the other hand, the trust’s
subsequent distribution of that payment is not so made.
Congress has plainly linked the two steps under
§ 404(k)(2)(A)(ii) by requiring that the dividend be both paid by
the corporation to the plan and distributed in cash to the
participants in order for the corporation to be eligible for that
deduction in the first place. Id. at 729-30. While Conopco is
correct that without the plan’s benefit distribution to the
participant there would be no allowable deduction under
§ 404(k)(1), it is equally true that absent the dividend payment
from the corporation to the plan, no distribution from the plan
would be deductible. See Ralston Purina, 131 T.C. No. 4, 2008
WL 4159698, at *9. We therefore disagree with the analysis in
Boise Cascade and, consequently, the position taken by
Conopco here.6

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involved here, we find it worth noting that this particular tax
issue involving a taxpayer’s payments made on or after August
30, 2006, may be affected by Treasury Regulation section
1.162(k)-1, which states that “[a]mounts paid or incurred in
connection with the reacquisition of stock include amounts paid
by a corporation to reacquire its stock from an ESOP that are
used in a manner described in section 404(k)(2)(A).” 26 C.F.R.
§ 1.162(k)-1 (applying to payments made on or after August 30,
2006).
13
Thus, we conclude that where a corporation makes
payment to an ESOP trust in redemption of its stock, the
otherwise allowable § 404(k)(1) deduction for an applicable
dividend inevitably involves an “amount paid or incurred by a
corporation in connection with the reacquisition of its stock”
and is therefore barred by § 162(k)(1). Cf. General Mills, 554
F.3d at 729 (concluding that because the “first step, the
redemptive dividend, is ‘in connection with’ a stock
redemption,” § 162(k)(1) bars the deduction); Ralston Purina,
131 T.C. No. 4, 2008 WL 4159698, at *9 (concluding that
because “[t]he first part of the applicable dividend transaction
was the redemption,” § 162(k)(1) precludes “the deduction of
any portion of the transaction”).
Conopco refers to the legislative history of § 162(k)(1) to
support its position, but “[i]t is a well-established precept of tax
law that, in interpreting statutes, the literal meaning of the
statute is most important, and we are always to read the statute
in its ordinary and natural sense.” Galloway, 492 F.3d at 223
(internal quotation marks omitted); see also Lawrence v. City of

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And in any event, as the District Court pointed out, the7
legislative history supports a broad reading of § 162(k)(1). See
H.R. Rep. No. 99-841 (1986), as reprinted in 1986
U.S.C.C.A.N. 4075, 4256-57 (indicating that the phrase “in
connection with” should “be construed broadly” and that the
“denial of deductibility will apply to amounts paid in connection
with a purchase of stock in a corporation, whether paid by the
corporation directly or indirectly”). Conopco emphasizes
language in the House Conference Report indicating that
§ 162(k)(1) is not intended to bar payments that have “no nexus
with the redemption,” id., but here, § 404(k)(2)(A)(ii) creates
such a “nexus,” General Mills, Inc. v. United States, 554 F.3d
727, 730 (8th Cir. 2009). Conopco also argues that § 162(k)(1)
bars only expenditures that are “necessary or incident” to the
repurchase of stock. However, the legislative history indicates
that § 162(k)(1) “include[s] amounts paid to repurchase stock
. . . and any other expenditure that is necessary or incident to the
repurchase,” General Explanation of the Tax Reform Act of
14
Phila., 527 F.3d 299, 317 (3d Cir. 2008) (“The plain meaning of
the text should be conclusive, except in the rare instance when
the court determines that the plain meaning is ambiguous. If so,
the court can consider legislative history but should do so with
caution.” (internal citation and quotation marks omitted)).
Section 162(k)(1) on its face conclusively precludes a deduction
for any amount that a corporation pays in connection with the
reacquisition of its stock, and therefore, because Conopco made
payments to the Trust in redemption of the preferred stock and
the Trust then distributed the funds to the participants, there can
be no deduction under § 404(k)(1). See UNUM Corp. v. United7

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1986, H.R. 3838, 99th Cong., Pub. L. No. 99-514, at 278 (1987),
and is better understood as “restat[ing] the clear rule that
§ 162(k)(1) disallows ‘amounts paid to repurchase stock,’ and
in addition, all other necessary or incidental expenses,” General
Mills, 554 F.3d at 730.
Even if we were to determine, like the United States8
Court of Appeals for the Ninth Circuit in Boise Cascade, that
the two steps under § 404(k)(2)(A)(ii), while related for
15
States, 130 F.3d 501, 511 (1st Cir. 1997) (“Section 162(k)(1)
unreservedly prohibits corporations from taking deductions for
distributions made in the course of reacquiring its stock . . . .”);
Huntsman v. Comm’r of Internal Revenue, 905 F.2d 1182, 1184-
85 & n.6 (8th Cir. 1990) (collecting authority standing for the
proposition that Code sections using the phrase “in connection
with” should be “broadly construed”). We will not rely on
legislative history “to narrow the broad language Congress
chose to use when enacting the statute.” Galloway, 492 F.3d at
224.
IV.
Although our reasoning differs to some extent from that
of the District Court, which focused specifically on Conopco’s
dividend payments to the Trust rather than the applicable
dividend payments in their entirety, we nevertheless agree with
its ultimate conclusion that § 162(k)(1) precludes Conopco from
claiming the deductions due to its payments to the Trust in
redemption of the preferred stock. Because we agree with the8

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purposes of § 404(k)(1), must be viewed separately for purposes
of § 162(k)(1), our conclusion would be the same because we
see no principled reason to focus on the Trust’s benefit
distributions to the participants, as Conopco would have us do,
instead of on Conopco’s redemption payments to the Trust. If
anything, the contrary would be more likely: § 162(k)(1) refers
to an otherwise allowable deduction for an amount “paid or
incurred by a corporation,” which in this case is Conopco, not
the Trust. And only Conopco, as opposed to the Trust (i.e., the
shareholder here), would be entitled to the § 404(k)(1) deduction
in the first instance. See 26 U.S.C. § 404(k)(1) (granting a
deduction for “any applicable dividend paid in cash by [a]
corporation”); id. § 316(a) (defining “dividend” as a
“distribution of property made by a corporation to its
shareholders”).
16
District Court on this point, we do not address the Government’s
alternative arguments in favor of granting summary judgment,
namely, that the deductions are disallowed under 26 U.S.C.
§ 404(k)(5) and Revenue Ruling 2001-6 as an evasion of
taxation, and that authorizing the deductions here would be
tantamount to allowing impermissible double deductions.
Accordingly, we will affirm the District Court’s order granting
summary judgment in favor of the Government.

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