January 14, 2008

General Mills Prevails in IRS Refund Suit

The U.S. District Court for the District of Minnesota on Jan. 14 granted summary judgment to General Mills, a firm client, approving its refund claims. Judge David Doty held that General Mills could deduct payments to redeem stock held in its employee stock ownership plan (ESOP) under section 404(k)(1) of the Internal Revenue Code.

Previously, General Mills established an ESOP and invested the assets in General Mills stock. Upon leaving General Mills, participants received distributions from ESOPs equal to the value of their accounts—either in stock or in cash at the participant’s election. In some cases, the trust distributed to the participant cash that it had obtained from dividend-equivalent redemptions of company stock. The court held that these "applicable dividends" could be deducted and that section 404(k)(1) includes ESOP distributions to participants from redemption proceeds held by the ESOP.

Significantly, the court rejected the government’s objections to these deductions and specifically rejected an IRS ruling that would have banned this practice as a form of tax evasion. Myron Frans and Nathaniel Zylstra worked with co-counsel from McDermott Will & Emery to represent General Mills.

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