On April 12, Treasury and the IRS issued proposed regulations regarding the excise tax on corporate stock repurchases under the Inflation Reduction Act of 2022 (IRA). The proposed regulations provide guidance regarding the types of transactions subject to the excise tax and the computation of the excise tax (operational regulations). On the same day, Treasury and the IRS issued proposed regulations regarding procedural rules for the new excise tax, including rules for the timing of reporting and payment of the tax (procedural regulations). Comments and requests for hearings are due on June 11 for the operational regulations and on May 13 for the procedural regulations. A draft of the new form (Form 7208, “Excise Tax on Repurchase of Corporate Stock”) that must be attached to the Form 720, “Quarterly Federal Excise Tax Return,” to report the stock repurchase excise tax was released on April 9, accompanied by draft instructions.
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 whose 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 or real estate investment trust are not subject to the tax. The excise tax applies to repurchases of stock after Dec. 31, 2022, and is a nondeductible tax payment.
In early 2023, Treasury and the IRS issued Notice 2023-02 to provide interim guidance for stock repurchases occurring after 2022. While the proposed regulations generally follow the guidance provided in the notice, they make several important changes, including to the definition of stock repurchase transactions.
The IRS also released Announcement 2023-18 delaying reporting and payment of the stock repurchase excise tax until a date specified in forthcoming regulations. While the announcement delayed reporting and payment of the excise tax, it did not remove the obligation to report and pay the tax at some future date.
Proposed regulations
Definition of stock repurchase transactions
IRC Section 4501 defines a stock repurchase transaction as a redemption under Section 317(b) or an economically similar transaction. Under Notice 2023-02, an economically similar transaction includes any transaction in which a covered corporation acquires its stock from shareholders in exchange for property and encompasses otherwise tax-free acquisitive reorganizations with boot. The notice also includes split-off transactions and complete liquidation transactions in which Section 331 and Section 332 apply in the definition of repurchase transaction.
In addition, the proposed regulations clarify the ordering rule for the exception for stock repurchases that do not exceed $1 million. Under the clarification, the $1 million exception applies before any of the other statutory exceptions or netting provisions.
For acquisitions of foreign corporations on or after April 13, the proposed regulations also replace the per se rule in the notice regarding acquisitions and repurchases funded by applicable specified affiliates with a rebuttable presumption. The proposed regulations provide that the per se rule under the notice continues to apply for stock repurchased after Dec. 31, 2022, and prior to April 13, 2024.
Delayed reporting and payment continue until final regulations issued
The stock repurchase excise tax reporting is based on the taxable year of the covered corporation in which the repurchase occurred. Under Notice 2023-02, reporting generally will be required on the Form 720 due for the first full quarter following the close of the covered corporation’s taxable year in which the repurchase occurred. Payment of the tax is due on the date on which the Form 720 is required to be filed. For taxpayers with a calendar tax year ending Dec. 31, the reporting and payment of the excise tax would be April 30 of the following year. There are no extensions for reporting or paying the excise tax on stock repurchases.
The proposed regulations follow the general rule for reporting and payment described in Notice 2023-02. However, for stock repurchases after Dec. 31, 2022, the proposed regulations delay the requirement to report and pay the excise tax until after the final regulations are issued. Under this transition rule, reporting (and therefore payment) is required on the due date of the Form 720 for the first full quarter after the date the final regulations are published. Depending on when the final regulations are published and the covered corporation’s taxable year, reporting and payment of the excise tax for multiple years could be required.
Crowe observation
The transition rule continues the delay in reporting and payment that was provided in Announcement 2023-18. Despite the continued delay, covered corporations eventually will be required to report and pay the excise tax with respect to all stock repurchases after Dec. 31, 2022.
Looking ahead
The excise tax rules are extremely complex, and, despite reporting and payment delays, they are applicable to repurchase transactions completed after Dec. 31, 2022. The proposed regulations provide additional guidance, but final regulations could make further changes, and it will take time to evaluate the impact of the final regulations on covered corporations. Because the tax applies to repurchases after Dec. 31, 2022, covered corporations should consult with their tax advisers now to navigate the new rules.
