United States Court of Appeals

FOR THE EIGHTH CIRCUIT

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No. 09-1381

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Nestlé Purina Petcare Co., *

*

Petitioner-Appellant, *

* Appeal from the United States

v. * Tax Court.

*

Commissioner of Internal Revenue, *

*

Respondent-Appellee. *

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Submitted: December 15, 2009

Filed: February 9, 2010

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Before LOKEN, Chief Judge, ARNOLD and BENTON, Circuit Judges.

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BENTON, Circuit Judge.

The tax court ruled, on summary judgment, that Nestlé Purina Petcare Company

— hereafter Ralston, its name during the relevant years — could not deduct payments

for cash distribution redemptive dividends. Ralston Purina Co. v. Comm’r, 131 T.C.

29 (2008). Ralston appeals. Having jurisdiction under 26 U.S.C. § 7482, this court

affirms.

I.

In 1989, Ralston established an employee stock ownership plan (“ESOP”). See

26 U.S.C. §§ 401(a), 401(k), 4975(e)(7). A trust held the ESOP’s assets, primarily
Ralston preferred stock. Ralston contributed to the ESOP for the benefit of

participating employees. In 1994 and 1995, Ralston claimed deductions, totaling over

$66 million, for its stated dividends on the preferred stock, which are not at issue.

When a participant left Ralston, the participant was required to direct the ESOP

to convert the value of preferred stock allocated to his or her ESOP account into cash,

shares of Ralston common stock, or a combination of both. If a participant elected

cash, the trust could require that Ralston purchase stock from it, paying the trust a

dividend (a “redemptive dividend”). From the redemptive dividend, the Trust could

distribute to the participant a “cash distribution redemptive dividend” as part of the

total cash distributed to a participant.

Cash Distribution Total Cash

Redemptive Redemptive Distributions

Tax Year Dividends Dividends To Participants

1994 $3,128,066 $2,317,656 $3,907,352

1995 $6,277,965 $7,088,374 $8,205,589

Total $9,406,031 $9,406,030 $12,112,941

Ralston seeks to deduct $9,406,030, the value of the cash distribution

redemptive dividends. Ralston argues that 26 U.S.C. § 404(k)(1) allows a deduction

for the cash distribution redemptive dividends, or alternatively that a deduction is

permitted by § 162(k)(2)(A)(iii). The tax court ruled for the Commissioner. 

II.

“Summary judgment is appropriate when there are no genuine issues of material

fact, and the moving party is entitled to a judgment as a matter of law.” Bearden v.

Int’l Paper Co., 529 F.3d 828, 831 (8th Cir. 2008), citing Fed. R. Civ. P. 56(c). This

court reviews the tax court’s grant of summary judgment de novo and views the

evidence in the light most favorable to the nonmoving party. See Cox v. Comm’r, 121

F.3d 390, 391 (8th Cir. 1997). This court also reviews de novo the tax court’s

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interpretation of tax statutes. See Scherbart v. Comm’r, 453 F.3d 987, 989 (8th Cir.

2006).

A.

The first issue is whether 26 U.S.C. § 162(k)(1) – enacted two years later – bars

the deduction allowed by § 404(k)(1). In General Mills, Inc. v. United States, 554

F.3d 727, 730 (8th Cir. 2009) (“GMI”), this Court held that § 162(k)(1) bars a

deduction under § 404(k) for amounts paid to a corporation’s ESOP trust in order to

redeem shares of the corporation’s stock. See also Conopco, Inc. v United States, 572

F.3d 162, 166-67 (3d Cir. 2009) (following the GMI opinion, and disagreeing with

Boise Cascade v. United States, 329 F.3d 751 (9th Cir. 2003)). “In sum, while §

404(k)(1) allows a deduction, § 162(k)(1) bars it.” GMI, 554 F.3d at 730. Since the

facts of GMI do not materially differ from the facts here, GMI controls. See, e.g.,

Passmore v. Astrue, 533 F.3d 658, 660 (8th Cir. 2008) (“‘This panel is bound by

Eighth Circuit precedent’ and cannot overrule an earlier decision by another panel.”)

(citations omitted).

B.

In GMI, the parties agreed that no exception in § 162(k)(2) applied. See GMI,

554 F.3d at 728. One exception, § 162(k)(2)(A)(iii), provides that §162(k)(1) shall

not apply to: “Any deduction for dividends paid (within the meaning of section 561).” 

Ralston invokes this exception to justify deducting its cash distribution redemptive

dividends. Consistent with the cursory briefing, the tax court did not discuss this

exception, except to say: “The redemption dividends do not fall within the exceptions

provided in section 162(k).” Ralston, 131 T.C. at 35. 

Ralston argues that it is claiming a “deduction for dividends paid” within the

meaning of § 561. Section 561 refers to §§ 562 and 563 for the rules to determine the

deduction-for-dividends-paid. Ralston focuses on the general rule in § 562(a) that the

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deduction-for-dividends-paid includes “only dividends described in section 316.” 

Because the parties stipulated that Ralston paid § 316 dividends to the trust, Ralston

concludes it paid dividends within the meaning of § 561, and therefore satisfies the

§ 162(k)(2)(A)(iii) exception. 

The parties agree that § 561 does not in itself authorize a deduction, but rather

defines a deduction that another section of the Code may authorize. The parties also

agree that § 561 defines the deduction-for-dividends-paid for regulated investment

companies and real estate investment trusts, and for the purposes of computing the

accumulated earnings tax and personal holding company tax. See Treas. Reg. §

1.561-1(a) (1962) (“The deduction for dividends paid is applicable in determining

accumulated taxable income under section 535, undistributed personal holding

company income under section 545, undistributed foreign personal holding company

income under section 556, investment company taxable income under section 852, and

real estate investment trust taxable income under section 857.”). 

The government interprets the Treasury Regulation as listing the only

applications of § 561. Ralston responds that the Treasury Regulation pre-dates §§

404(k) and 162(k), and still refers to a repealed section of the Code (§ 556). Ralston

concludes that the Regulation’s list is not exhaustive, and that § 404(k)’s “Deduction

for dividends paid on certain employer securities” authorizes a § 561 deduction-fordividends-paid.

The language of the Code refutes Ralston’s conclusion. “The long established

plain language rule of statutory construction requires examining the text of the statute

as a whole by considering its context, object, and policy.” Knudsen v. IRS, 581 F.3d

696, 710 (8th Cir. 2009). Section 162(k)(2)(A)(iii) permits a deduction-for-dividendspaid “within the meaning of section 561.” It does not say “within the meaning of

section 404(k).” Each Code section listed in the Treasury Regulation expressly

incorporates the dividends paid deduction “as defined in section 561.” See 26 U.S.C.

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§§ 535(a), 545(a), 852(a), 857(a). The Code only references § 561 in §

162(k)(2)A)(iii) and in sections implementing the sections that expressly incorporate

§ 561. See 26 U.S.C. §§ 547, 564, 565, 860, 4981, 4982.1

 Section 404(k), which

Ralston contends authorizes its deduction, does not reference § 561. “[D]eductions

are strictly construed and allowed only ‘as there is a clear provision therefor.’”

INDOPCO, Inc. v. Comm’r, 503 U.S. 79, 84 (1992), quoting New Colonial Ice Co.

v. Helvering, 292 U.S. 435, 440 (1934); Deputy v. Du Pont, 308 U.S. 488, 493

(1940). Because § 404(k) does not provide for a deduction-for-dividends-paid under

§ 561, Ralston does not have a “deduction for dividends paid (within the meaning of

section 561)” needed to satisfy the exception in § 162(k)(A)(iii).

“[T]he true meaning of a single section of a statute in a setting as complex as

that of the revenue acts, however precise its language, cannot be ascertained if it be

considered apart from related sections, or if the mind be isolated from the history of

the income tax legislation of which it is an integral part.” Comm’r v. Engle, 464 U.S.

206, 223 (1984), quoting Helvering v. Morgan’s Inc., 293 U.S. 121, 126 (1934). The

conference report on the deduction-for-dividends-paid exception in § 162(k)(2)(A)(iii)

indicates the scope of the exception: 

House Bill

The House bill provides that no portion of payments by a corporation

in connection with a redemption of its stock is deductible . . . . 

Senate Amendment

The Senate amendment is generally the same as the House bill,

except the provision does not apply to (1) interest deductible under

section 163, (2) amounts constituting dividends for purposes of the

1 See also 26 U.S.C. § 583 (1954 Code, repealed 1976) (Under the 1954 Code,

§ 583 allowed banks a deduction for dividends paid on certain preferred stock,

expressly referencing § 561.

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accumulated earnings, personal holding company, and foreign personal

holding company taxes, and for purposes of the regular income tax in the

case of regulated investment companies and real estate investment trusts,

or (3) otherwise deductible expenses incurred by a regulated investment

company that is an open-end mutual fund in connection with the

redemption of its stock upon demand of a shareholder . . . . 

Conference Agreement

The conference agreement generally follows the Senate amendment,

with certain modifications and clarifications . . . . 

H.R. Rep. No. 99-841, at II-168 (Conf. Rep. 1986), reprinted in 1986 U.S.C.C.A.N.

4075, 4256. Ralston emphasizes the years-earlier floor statements about § 404(k),

reflecting Congress’s intent to encourage ESOPs. The later conference report on §

162(k) trumps the legislative history Ralston cites. See Sierra Club v. Clark, 755 F.2d

608, 615 (8th Cir. 1985), quoting Demby v. Schweiker, 671 F.2d 507, 510 (D.C. Cir.

1981) (“Because a ‘conference report represents the final statement of terms agreed

to by both houses, next to the statute itself it is the most persuasive evidence of

congressional intent.’”). The conference report confirms the language of the Code. 

The exception in § 162(k)(2)(A)(iii) applies only where the Code has authorized the

taxpayer to take a deduction-for-dividends-paid within the meaning of § 561. Section

404(k) does not authorize such a deduction. Therefore, Ralston may not deduct its

cash distribution redemptive dividends. 

III.

The judgment of the tax court is affirmed.

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