According to Congressional Research Service (CRS) report R47397 issued January 25, a few repurchase issues with regards to the recently-enacted 1% excise tax on stock repurchases by publicly traded corporations still need clarification by the IRS and Treasury.
On December 27, 2022, the IRS issued interim guidance on most of the issues that commentators had previously highlighted. The guidance explains how and when the tax would be collected. Certain corporate reorganizations (split-offs) that were not specifically referenced in the law are excluded from the tax, and only the amounts not recognized (stock but not cash or property used to repurchase stock) are excluded for all tax-free corporate reorganizations.
The guidance also covers repurchases of preferred stock, although the IRS has asked for comments about whether special rules should apply in some cases. In addition, the interim guidance addresses several other issues and further guidance is expected, according to the CRS.
Stock repurchases are a way to distribute income to shareholders and, compared to dividends, have favorable tax treatment. The Joint Committee on Taxation estimates this provision to raise $74 billion over the FY2022-FY2031 period. The new provision imposes a 1% tax on the repurchase of stock by a publicly traded corporation. The tax is an excise tax (and thus not contained in the income tax provisions of the U.S. tax code) contained in Code Sec. 4501 of the Internal Revenue Code (IRC). It is effective for repurchases after December 31, 2022. The Inflation Reduction Act specifies (by amending Code Sec. 275) that this 1% excise tax would not be deductible, thus there would be no corporate profits tax offset.
The report notes that there has been extensive and detailed commentary about guidance needed to implement the excise tax, including comments by the American Bar Association (ABA) and the New York State Bar Association (NYSBA) tax sections. Three issues had been identified as particularly urgent for practitioners: how and when to pay the tax; the treatment of certain split-offs in corporate reorganizations and special purpose acquisition company (SPAC) liquidations; and the characterization of preferred stock.
Another commentator specifically identified two issues as important: split-offs, the treatment of corporate reorganizations with compensation in both stock and boot (i.e., cash or property) and certain leveraged buyout transactions that take a company private.
The IRS subsequently provided interim guidance which addressed the issues noted above and others such as exceptions from redemptions in Code Sec. 317, a list of transactions deemed economically similar and those deemed not economically similar, statutory exceptions, and fair market value. However, it omitted other concerns, which may be dealt with in future guidance.
The CRS lists six exceptions to the excise tax:
1. repurchases that are part of a tax-free reorganization under Code Sec. 368(a) (mergers, acquisitions, divisions, or other specified reorganizations), where no gain or loss is recognized to shareholders;
2. repurchases contributed to an employee pension plan, an employee stock ownership plan, or other similar plans;
3. repurchases of $1 million or less during the year;
4. purchases by a securities dealer in the ordinary course of business;
5. repurchases by regulated investment companies (RICs, such as mutual funds) or real estate investment trusts (REITs); and
6. to the extent that repurchases are treated as dividends for tax purposes.
For more information about the 1% excise tax, see Checkpoint’s Federal Tax Coordinator ¶F-11920.
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