The Service ruled in Rev. Rul. 2001-6, that payments to redeem stock held by an ESOP which are used to make distributions to terminating ESOP participants are neither deductible nor "applicable dividends" under Sec.404(k)(1).

Facts:

A corporation with a single class of voting common stock maintains an ESOP. Participants may elect to take a cash or stock distribution from the ESOP at retirement or termination. The plan permits the corporation to redeem shares in terminating participants' accounts to fund cash distributions. The corporation asserted that the redemptions should be treated as dividends under Sections 301, 302, and 316.

The Service concluded that Sec. 162(k)(1) doesn't allow a deduction for any amount paid by a corporation in redemption of its stock regardless of whether the payment might be deductible under Sec. 404(k). In addition, the Service concluded that it may disallow a deduction for the redemption payments because permitting the deduction would "constitute, in substance, an evasion of tax." Finally, the Service noted that Rev. Rul 2001-6 applies whether there is appreciation in the ESOP's employer securities.