Overview
The IRA enacted IRC Section 4501, which imposes a new excise tax of 1% of the fair market value of any stock repurchased by a covered corporation. A covered corporation is any domestic corporation if its stock is traded on an established securities market within the meaning of Section 7704(b)(1). Exclusions are included for certain repurchases, such as repurchases that are treated as a dividend, contributed to an employer-sponsored retirement plan, or less than $1 million. The amount subject to the tax is reduced for stock issued to the public or to employees meeting certain requirements. In addition, stock repurchases by a regulated investment company (RIC) or real estate investment trust (REIT) are not subject to the tax. The excise tax applies to repurchases of stock after Dec. 31, 2022, and is a nondeductible tax payment.
Interim guidance
Stock repurchase transactions
Generally, the definition of a stock repurchase transaction subject to the excise tax is a redemption under Section 317(b) or an economically similar transaction. An economically similar transaction includes any transaction in which a covered corporation acquires its stock from a shareholder in exchange for property and encompasses other acquisitive reorganizations with boot. For example, if a target corporation that is a covered corporation has its shareholders exchange their target stock in an acquisitive transaction, the exchange would be viewed as a repurchase transaction under the notice. Also included in the repurchase transaction definition are split-off transactions and complete liquidation transactions in which Section 331 and Section 332 apply.
If a transaction is viewed as a repurchase of stock, the entire value of the transaction is not necessarily subject to the excise tax. The notice provides specific exclusions for qualifying property exceptions that are not subject to the excise tax.
Crowe observation
Taxpayers will need to analyze each transaction where stock is being acquired in order to determine if the transaction will be subject to the stock repurchase excise tax.
Computation of stock repurchase excise tax
Generally, the excise tax will be imposed on an annual basis based on the taxpayer’s year-end. For a calendar year-end taxpayer, the computation will be based on transactions that occur from Jan. 1 through Dec. 31. Special rules apply to fiscal year taxpayers for their tax year that includes Jan. 1, 2023. The excise tax applies to all repurchase transactions of the covered corporation, specified affiliates, and certain foreign corporations. The tax may be imposed on transactions of a covered corporation regardless of whether that stock is traded on an established market.
When determining the amount of the excise tax, a taxpayer first must determine if the transaction is a repurchase transaction subject to the rules and, if it is, calculate the fair market value of any repurchases of stock subject to the excise tax that occurred during the covered corporation’s taxable year. The notice provides several examples of the type of transactions that are considered repurchases of stock for this purpose and how the taxable portion of a transaction is computed.
The notice provides specific exclusions and adjustments for computing the amount subject to the excise tax. Following are the statutory exceptions that reduce the covered corporation’s stock repurchase excise tax base:
- Stock repurchases that are part of a reorganization for which no gain or loss is recognized on the repurchased shares by the shareholder (a qualifying property repurchase)
- Certain payments for cash in lieu of fractional shares
- Stock repurchased and contributed to an employer-sponsored retirement plan, employee stock ownership plan, or similar plan
- Stock issued to employees as compensation
- Stock repurchases that do not exceed $1 million for the taxable year (before any other statutory or netting transaction is taken into account)
- Stock repurchases of a dealer in securities in the ordinary course of business
- Stock repurchases made by a RIC or REIT
- Stock repurchases treated as a dividend
- Stock issued to the general public
The notice provides the following acceptable methods to determine the fair market value of the stock being repurchased:
- The daily volume-weighted average price on the date the stock is repurchased
- The closing price on the date the stock is repurchased
- The average high and low prices on the date the stock is repurchased
- The trading price at the time the stock is repurchased
Similar methods are available in determining the value of stock issuance transactions that can be netted to offset the stock repurchase excise tax base.
Taxpayers can rely on these rules until the proposed regulations are issued.
Reporting and payment
It is anticipated that the forthcoming proposed regulations will provide that Form 720, “Quarterly Federal Excise Tax Return,” paired with an additional form still to be determined, will be used for reporting the tax, but that it will be filed once a year rather than quarterly. In addition, the proposed regulations also are anticipated to provide that payment of the tax is due on the same day the Form 720 is due, and no extension of time to report or pay the tax will be allowed.
Request for comments
The notice requests comments on the specific items outlined in the notice as well as on other items not addressed in the notice. The notice also requests that commenters specify the issues where additional guidance is needed and what guidance is most important and highest priority in applying the excise tax. Comments are due by March 20, 2023.
Looking ahead
The excise tax rules are extremely complex and will be effective for repurchase transactions completed after Dec. 31, 2022. Although the notice provides important interim guidance, numerous questions remain unanswered, including when the related proposed regulations will be issued. It is also uncertain whether additional interim guidance will be provided prior to the release of the proposed regulations.
Because the tax applies to repurchases after Dec. 31, 2022, covered corporations that have a fiscal year ending early in 2023 should consult with their tax advisers now to navigate the new rules.
