Following a landmark Supreme Court ruling that ended the four-decade era of the Chevron doctrine, a non-profit industry trade group reiterated previous comments against what it says is an unclear rule in proposed regs implementing the 1% excise tax on corporate stock buybacks, arguing the IRS did not sufficiently interpret the statute.
On August 7, the Securities Industry and Financial Markets Association (SIFMA), an organization whose members are comprised of firms, banks, and asset management companies, submitted comments on proposed regs issued in April providing guidance on how to compute the stock repurchase excise tax under Code Sec. 4501, which was created by the Inflation Reduction Act (P.L. 117-169).
SIFMA’s letter supplements its prior comments sent June 11 to make additional points against the so-called proposed funding rule in light of the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo (No. 22-1219).
The proposed funding rule “does not represent the best interpretation of the statutory text” and the regs’ preamble is “too sparse to support its proposed scope and complexity,” SIFMA’s letter told the IRS.
Pursuant to the majority opinion in Loper Bright, courts — and not government agencies — are ultimately responsible for interpreting statutory law. The Court “stated that even when an agency acts under an express delegation of authority, there are still meaningful limits on the agency’s authority because courts must review the relevant statute, ‘fix the boundaries of the delegated authority,’ and ensure that ‘the agency has engaged in “reasoned decisionmaking” within those boundaries,'” wrote SIFMA.
Generally, Section 4501 imposes an excise tax equal to 1% of the fair market value (FMV) of stock repurchased by a publicly traded corporation. Under the Code Sec. 4501(c)(3) “netting rule,” FMV determined by Code Sec. 4501(a) is reduced by the FMV of any stock issued by the corporation during the applicable tax year.
Early guidance released December 2022 in Notice 2023-02 provided initial rules on acquisitions and repurchases funded by applicable specified affiliates. For Code Sec. 4501(d)(1) purposes, such entities:
“… are treated as acquiring stock of an applicable foreign corporation if the applicable specified affiliate funds by any means (including through distributions, debt, or capital contributions) the acquisition or repurchase of stock of the applicable foreign corporation by the applicable foreign corporation or a specified affiliate that is not also an applicable specified affiliate, and such funding is undertaken for a principal purpose of avoiding the stock repurchase excise tax.”
The notice also included a “per se rule” said a “principal purpose” exists if the applicable specified affiliate funds an applicable foreign corporation or specified affiliate and the fund recipient acquires or buys back stock of the foreign entity within two years.
After hearing from stakeholders in requested feedback that the funding rule and especially the per se rule were both overly broad, the IRS in the proposed regs issued in April made “substantial revisions” outlined in the preamble. The per se rule was replaced with a “rebuttable presumption” only applicable in “limited circumstances” and the now-called proposed funding rule was more narrowly tailored. The regs include clarifications on timing and allocation, the principal purpose standard, funding from multiple sources, and various rules regarding foreign entities.
In the preamble, the IRS defended its broad grant of regulatory authority, stating the statutory language of Section 4501 authorizes the proposed funding rule and to “prevent the avoidance” of the excise tax. But SIFMA’s June letter contested that the proposed funding rule exceeds the grant of authority and runs afoul of congressional intent. According to SIFMA, the rule creates more ambiguity and uncertainty for both taxpayers and IRS auditors.
Revisiting its concerns against the rule in last week’s letter, SIFMA said taxpayers, practitioners, and examination agents “would benefit from clear and administrable guidance that targets the hallmarks of excise tax avoidance” instead of “blanket rulemaking that shifts the risks and burdens to taxpayers to prove that an intercompany transaction… did not fund a stock buyback by any foreign affiliate.”
A hearing on the proposed regs is scheduled for August 27.
For more on the treatment of acquisitions of stock of applicable foreign corporations funded by specified affiliates under the proposed stock repurchase excise tax regs, see Checkpoint’s Federal Tax Coordinator ¶ F-11932.
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