ESOP Company Allowed to Use Dividends on Previously Acquired Stock to Pay Back Loan

It is clear that a company can use dividends paid on ESOP shares acquired by a qualifying ESOP loan to repay that loan. But what about dividends from stock previously acquired by the ESOP? According to IRS Technical Advice Memorandum 9516003, a company can use these dividends. In 1989, Congress passed a law saying that dividends from shares not acquired by the loan could not be used to repay that loan, but exempted stock acquired prior to 1989. In this memorandum, the IRS approved a plan that met these guidelines. The ruling is more surprising than it might seem at first glance, because in the past the IRS has indicated it would not issue rulings on this subject. Many ESOP advisors believe that to use the dividends on previously acquired shares for a future loan is taking benefits away from participants. Even though Congress may have limited the prohibition on such payments on stock acquired after August 5, 1989, it did not specifically allow dividends to be used this way for previous shares.