Recently released Announcement 2023-18 provides that corporations subject to the new excise tax on corporate stock repurchases imposed by IRC Section 4501 for stock repurchase transactions occurring after Dec. 31, 2022, are not required to report or pay the tax until a date specified in forthcoming regulations. While the announcement delays payment of the excise tax, it does not remove the obligation to pay the tax.
The Inflation Reduction Act of 2022 imposed a new excise tax on corporate stock repurchases by covered corporations for transactions occurring after Dec. 31, 2022. Generally, a covered corporation is any publicly traded domestic corporation (other than a regulated investment company or real estate investment trust), including its specified affiliates. With certain exceptions, the excise tax is imposed on any acquisition of stock by a corporation from a shareholder, including redemptions and economically similar arrangements. The tax equals 1% of the fair market value of the repurchased stock less the value of any stock issued by the covered corporation during the tax year in addition to other adjustments. The excise tax payment is not deductible for income tax purposes.
In January 2023, the U.S. Department of the Treasury and the IRS published interim guidance in Notice 2023-02, which addresses the new excise tax and describes certain rules with respect to reporting and payment obligations. Under the notice, the excise tax will be required to be reported once a year on a Form 720, “Quarterly Federal Excise Tax Return,” due for the first full quarter following the close of the taxpayer’s taxable year, and payment of the tax will be due on the due date of the Form 720. For taxpayers with a taxable year ending after Dec. 31, 2022, and before regulations are published, the excise tax must be reported and paid the first full quarter after the date the regulations are published. No extensions for reporting or paying the excise tax on stock repurchases will be allowed.
A Form 7208, “Excise Tax on Repurchase of Corporate Stock,” computational attachment must be included with Form 720. The IRS has released a draft of Form 7208. A final Form 7208 has not yet been released.
Crowe observation
Although Notice 2023-02 provides interim guidance, many questions remain about the rules for the stock repurchase excise tax.
Proposed regulations have yet to be published. Given the complexity of IRC Section 4501, it is likely to take a significant amount of time to publish the regulations. Therefore, it is uncertain whether regulations will be published with enough lead time before April 30, 2024, the first filing and payment due date for calendar year 2023 stock repurchases under the general due date in Notice 2023-02.
Announcement 2023-18 provides that a corporation subject to the new excise tax is not required to report excise tax liability or make any payments of such tax prior to the time specified in forthcoming regulations. The announcement also provides that penalties will not be imposed under IRC Section 6651(a) for failure to report or pay the excise tax before such time. The announcement also provides that regulations will require taxpayers subject to the excise tax to keep complete and detailed records to accurately determine stock repurchases, including those occurring after the effective date of IRC Section 4501 but before regulations are published. The relief in the announcement is available for calendar and fiscal year taxpayers with taxable years ending after Dec. 31, 2022, until the time specified in the forthcoming regulations.
Crowe observation
The interim guidance does not address how the filing and payment rules apply to fiscal year-end corporations. It would be helpful if the fiscal year-end issues were addressed in the forthcoming regulations.
Announcement 2023-18 delays the filing and payment due date for the new excise tax to provide time for final regulations to be issued before requiring taxpayers to file and pay the excise tax for the 2023 calendar year. However, the announcement does not change the requirements to report and pay the full excise tax liability on whatever due date is set forth in the regulations once they are published. As stated in the announcement, taxpayers must keep complete and accurate records with respect to stock repurchases occurring after Dec. 31, 2022, to support their future tax positions. Given that many questions remain regarding application of the excise tax, taxpayers should consult with their advisers to evaluate potential liability for the tax and information that should be retained.
