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Federal Tax

Comments Offer Roadmap of When to Apply Excise Tax on Corporate Stock Buybacks

Tim Shaw  

· 5 minute read

Tim Shaw  

· 5 minute read

Responding to an IRS notice providing interim guidance and asking for stakeholder input on a recently effective provision of the Inflation Reduction Act, the American Bar Association (ABA) Tax Section reiterated and expanded upon previous comments. (Comments on Notice 2023-2 Regarding the Excise Tax under Section 4501, 3/20/2023)

Code Sec. 4501, which imposes a 1% excise tax on certain corporate stock repurchases based on fair market value (FMV), was created by last summer’s inflation bill as a last-minute edition to secure enough votes in the Senate. The new tax has come with a mixed reception as tax professionals anticipate proposed regs, as it applies to repurchases of stock after December 31, 2022.

In Notice 2023-2, the IRS rolled out initial, interim guidance on the application of the 1% excise tax including, among other things, an exclusive list of transactions that qualify as a repurchase, as well as rules for determining FMV. The ABA had submitted lengthy comments spanning over 70 pages on the tax earlier in December prior to the interim guidance’s release. These initial comments urged the Treasury Department to exercise its regulatory authority by exempting some transactions that “are in form redemptions in cases where there are strong policy reasons to do so, particularly where the redemption is made by a corporation that will not be a covered corporation after the transaction.”

One of the first items the ABA recommended guidance on the so-called netting rule. As stated in the interim guidance, generally, the netting rule provides that the amount taken into account under Code Sec. 4501(a) with respect to any stock repurchased by a covered corporation is reduced by the fair market value of any stock issued by the covered corporation during the taxable year. The ABA initial comments addressed what the netting rule should cover, to which transactions it should apply, and its mechanics.

On March 20, the Tax Section followed up its analysis of guidance opportunity areas with another set of comments, this time addressed to new IRS Commissioner Daniel Werfel. In addition to referencing previously covered recommendations, the latest batch focuses on select issues. Throughout their comments, the ABA illustrates certain transactions and situations where the excise tax should not apply, like acquisitive reorganizations under Code Sec. 368, for example.

“For purposes of the Netting Rule, we recommend that the issuance of qualifying property by the acquiring corporation in connection with an acquisitive reorganization under section 368(a) be treated as not issued in a redemption, and therefore not an increase in the target corporation’s stock repurchase excise tax base; instead, it should be allowable as a reduction by the acquiring corporation for purposes of its stock repurchase excise tax base,” the ABA said.

Other topics covered in the new comments include complete liquidations, leveraged buyouts, preferred and redeemable stock, bankruptcy, and how the netting rule applies to Code Sec. 355 distributions.

When the Tax Cuts and Jobs Act slashed the corporate tax rate, stock repurchases became incredibly popular. In his State of the Union address early February, President Biden echoed sentiments shared by some Democratic lawmakers that the excise tax should be increased from 1%. Previous iterations of the proposal before the Inflation Reduction Act’s enactment had it at 2%, with the policy rationale being that wealthy corporations use stock buybacks to further enrich their shareholders.

In February, Democratic Sens. Sherrod Brown of Ohio and Finance Committee Chair Ron Wyden of Oregon introduced the Stock Buyback Accountability Act of 2023, which would raise the excise tax rate to 4%.

“It is not lost on the American people that corporate profits have climbed right along with the prices that families have been paying for groceries, rent, gas, and other basics over the last few years,” said Wyden in a press release. “To see big multinational corporations announcing record stock buybacks benefitting their executives and wealthy shareholders at a time when so many families are feeling squeezed by inflation is simply offensive.”


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