Fernway DiarySM

Jan 17, 2023

On December 27, 2022, the Internal Revenue Service and Treasury Department issued initial guidance on the application of the excise tax on repurchases of corporate stock which was created by the Inflation Reduction Act. As the new tax became applicable to stock repurchases as of January 1, 2023, the purpose of Notice 2023-2 is to provide timely information on rules and procedures that the IRS and Treasury intend to include in proposed forthcoming regulations.

Section 4501 of the Internal Revenue Code, which was added by the Inflation Reduction Act, established an excise tax on covered corporations, as well as on specified affiliates and certain foreign corporations, equal to 1 percent of the fair market value of any stock of the corporation repurchased during the taxable year. The statute mandates that the tax applies to most section 317(b) redemptions and those considered “economically similar” to such redemptions. A $1 million de minimis rule applies, as well as many exceptions that effectively exclude most mergers, acquisitions, and complete liquidations, to the extent that they are treated as tax-free for income tax purchases. Repurchases by regulated investment companies and real estate investment trusts (REITs) are also excluded.

Notice 2023-2 includes detailed information that expands on the statutory rules, including definitions of relevant terms, an exclusive list of economically similar transactions, and a nonexclusive list of transactions that are not economically similar. The notice also clarifies the netting rule that allows companies to reduce the stock repurchase excise tax base by the aggregate fair market value of certain qualified issuances of stock in the same tax year.

Twenty-six examples are provided in the notice, each with accompanying analysis, to illustrate the application of operating rules and definitions.

Among other issues addressed by the notice is the determination of timing and fair market value of qualifying stock repurchases and issuances. In general, stock is treated as repurchased at the time ownership of the stock transfers to the repurchasing corporation or relevant acquirer, or as issued at the time ownership transfers to the recipient. Acceptable methods of determining the market price of stock traded on an established securities market are given as the daily volume-weighted average price, the closing price, the average high and low price, or the trading price at the time the stock is repurchased or issued. These determinations are subject to a consistency rule, meaning that the same method must be applied to all stock repurchases and issuances during a covered corporation’s taxable year to determine fair market value.

According to the notice, stock repurchase excise tax will be reported on Form 720, Quarterly Federal Excise Tax Return. An additional form designed to facilitate the computation of the tax will be required as an attachment. Upcoming proposed regulations are anticipated to require reporting of the excise tax once per taxable year, on the Form 720 due for the first full quarter after the close of the taxpayer’s taxable year. Thus, if a corporation’s taxable year ended on December 31, the form would be due on April 30 of the following year. The deadline for both filing and the payment of the stock repurchase excise tax are anticipated to be the same, with no extensions permitted. A draft of Form 7208, Excise Tax on Repurchase of Corporate Stock, was issued on December 28, 2022.

Section 6 of Notice 2023-2 also solicits comments on rules included in the notice, as well as on other issues for which guidance is needed where rules have not yet been formulated. Written comments should be submitted within 60 days of the date of the notice’s publication, per the procedures set out in the same section.

Taxpayers potentially affected by the new stock repurchase excise tax should review Notice 2023-2, as well as monitoring communications from the IRS and Treasury in the coming months to stay abreast of further developments. Those seeking clarity on their individual circumstances are advised to consult a qualified tax professional.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

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