Compliance October 5, 2010

State Street Stock Drop Suit Gets Tossed

October 5, 2010 (PLANSPONSOR.com) – A federal judge in Michigan has thrown out a fiduciary breach lawsuit against State Street Bank and Trust filed by General Motors 401(k) participants over company stock-related losses.
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U.S. District Judge Denise Page Hood of the U.S. District Court for the Eastern District of Michigan decided that State Street did not cause losses to the plaintiffs’ accounts because the employees still had control over their investment selections. State Street was hired as the independent fiduciary for the ESOP component of the GM 401(k) plans in June 2006.  

The suit charged State Street waited too long to sell off the GM stock in the company’s 401(k) plans; State Street should have moved by July 2008 rather than waiting until March to April 2009 for the sales because after July 2008, offering it was no longer prudent, according to the allegations. The giant automaker filed for Chapter 11 bankruptcy June 1, 2009.

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In her ruling, Hood said participants could allocate their investments among a range of investment options. She asserted that the participants knew at the time State Street became a plan fiduciary that GM was in financial trouble but continued to invest in GM stock. State Street, Hood ruled, cannot be held liable for the participants’ investment choices.

Even though she dismissed the stock drop suit, Hood also ruled that the participants had made a strong enough initial case that they were likely to overcome the presumption of prudence typically given by court to plans with company stock offerings.

“The Complaint also alleges sufficient facts to allow the reasonable inference that there existed a serious question concerning [GM’]s short-term viability as a going concern without resorting to bankruptcy proceedings or there was no possibility in the short-term of recouping any substantial proceeds from the sale of stock in bankruptcy proceedings sufficient for State Street to exercise its fiduciary discretion,” Hood wrote in the opinion.

Hood contended the plaintiffs had successfully raised a number of “red flags” that should have effectively notified State Street that it needed to stop offering GM stock in the plan or to liquidate company stock holding by March 2009.

The case is Pfeil v. State Street Bank and Trust Co., E.D. Mich., No. 09 CV 12229.

Compliance October 5, 2010

Decision Stands that Nestle Purina Cannot Deduct Distribution Dividends

October 5, 2010 (PLANSPONSOR.com) - The U.S. Supreme Court has turned away a request by Nestlé Purina Petcare Co. to review an 8th U.S. Circuit Court of Appeals decision that the company cannot deduct from its taxes cash distribution dividends paid when it redeemed stock held in an employee stock ownership plan.
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The 8th Circuit agreed with a tax court ruling that Nestlé Purina Petcare Company – or Ralston, its name during the relevant years – could not deduct payments for cash distribution redemptive dividends. Ralston seeks to deduct $9,406,030, the value of the cash distribution redemptive dividends, arguing 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 appellate court previously found in General Mills, Inc. v. United States, 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. “Since the facts of GMI do not materially differ from the facts here, GMI controls,” the 8th Circuit said in the Nestle Purina decision.  

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In addition, the appellate court noted that the conference report out of Congress on the deduction-for-dividends-paid exception in § 162(k)(2)(A)(iii) indicates the scope of the exception, and provides that no portion of payments by a corporation in connection with a redemption of its stock is deductible.  

Under the ESOP, 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 “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.   

The 8th Circuit opinion is in Nestle Purina Petcare Co. v. Commissioner of Internal Revenue, No. 09-1381.

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