Dividends and fair market value test

[Guest tmills]

404(k)(2)(B) allows C Corp. dividends on allocated shares to be deducted if the participant receives shares at least equal to the dividend they otherwise would have received (aka the fair market value test.) 4975(f)(7) contains a similar provision for S Corps. That section says the plan will not be treated as violating 401, 409, or 4975(e)(7) or engaging in a prohibited transaction if the participant receives shares at least equal to the earnings distribution they otherwise would have received. There is no deductibility question for S Corps.

The issue is in the case of a C Corp. that for whatever reason does not deduct the dividend, can it then ignore the the FMV test and allocate stock worth less than the FMV of dividends forgone to participants? I find nothing that would explicitly stop a C Corp. from doing that. However, if the issue on the S Corp side is 401, 409, etc., I would think that also applies to C Corps and their dividends regardless of whether or not they are deducted, even though nothing says that. As always, any thoughts would be appreciated.