Dividend deduction

[Guest ladycpa]

IRC Section 404(k) and further guidance in Notice 2002-2 discuss the timing of the deduction for dividends that are reinvested in employer securities in an ESOP. A dividend that is reinvested is deductible on the later of 1) an irrevocable participant election or 2) reinvestment in employer securities. What do they mean by "reinvestment"? What if the employer pays the dividend to the ESOP but employer securities have not been purchased yet? For example, a client pays quarterly dividends. The last dividend was paid 9/30/02 and for those who irrevocably elected reinvest in dividends, the amount is just sitting in the ESOP since they haven't purchased stock. Would it still be deductible for 2002?

[RLL]

Hi ladycpa ---

It would be difficult to say that there has been a "reinvestment" prior to the time that funds representing the dividend payment have actually been used to acquire employer stock for the electing participants.