[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.404(k)-1T]

[Page 468-469]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.404(k)-1T  Questions and answers relating to the deductibility 
of certain dividend distributions. (Temporary)

    Q-1: What does section 404(k) provide?
    A-1: Section 404(k) allows a corporation a deduction for dividends 
actually paid in accordance with section 404(k)(2) with respect to stock 
of such corporation held by an employee stock ownership plan (as defined 
in section 4975(e)(7)) maintained by the corporation (or by any other 
corporation that is a member of a ``controlled group of corporations'' 
within the meaning of section 409(l)(4) that includes the corporation), 
but only if such dividends may be immediately distributed under the 
terms of the plan and all of the applicable qualification and 
distribution

[[Page 469]]

rules. The deduction is allowed under section 404(k) for the taxable 
year of the corporation during which the dividends are received by the 
participants.
    Q-2: Is the deductibility of dividends paid to plan participants 
under section 404(k) affected by a plan provision which permits 
participants to elect to receive or not receive payment of dividends?
    A-2: No. Dividends actually paid in cash to plan participants in 
accordance with section 404(k) are deductible under section 404(k) 
despite such an election provision.
    Q-3: Are dividends paid in cash directly to plan participants by the 
corporation and dividends paid to the plan and then distributed in cash 
to plan participants under section 404(k) treated as distributions under 
the plan holding stock to which the dividends relate for purposes of 
sections 72, 401 and 402?
    A-3: Generally, yes. However, a deductible dividend under section 
404(k) is treated for purposes of section 72 as paid under a contract 
separate from any other contract that is part of the plan. Thus, a 
deductible dividend is treated as a plan distribution and as paid under 
a separate contract providing only for payment of deductible dividends. 
Therefore, a deductible dividend under section 404(k) is a taxable plan 
distribution even though an employee has unrecovered employee 
contributions or basis in the plan.

[T.D. 8073, 51 FR 4322, Feb. 4, 1986]