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Notice 2023-2 Provides Helpful Guidance Regarding the Stock Repurchase Excise Tax

On December 27, 2022, Treasury issued interim guidance regarding the new excise tax on stock “repurchases” after December 31, 2022 in the form of Notice 2023-2, which taxpayers can rely on until Treasury publishes additional guidance. As mentioned in prior coverage, the Inflation Reduction Act of 2022 added this tax to the Internal Revenue Code, requiring publicly traded corporations to pay a non-deductible 1% tax on the fair market value of stock repurchases, which includes stock redemptions and certain economically similar transactions as determined by Treasury. The excise tax primarily applies to repurchases by domestic publicly traded corporations, although certain repurchases involving foreign publicly traded corporations and their affiliates may also be subject to the tax.

Summarized below are a few key takeaways from Notice 2023-2:

  • Liquidations: The Notice clarifies that complete liquidations subject to either Section 332(a) or 331 are not repurchases subject to the excise tax. However, in the case of a publicly traded corporation with an 80% owner and minority shareholders, liquidating distributions to the minority shareholders would be subject to the excise tax. This carve-out for complete liquidations is expected to be helpful to liquidating SPACs. SPACs should make clear whether their redemptions are pursuant to a plan of liquidation.
  • Increased Exposure for Foreign Publicly Traded Corporations: Repurchases by a foreign publicly traded corporation generally are not subject to the excise tax, but acquisitions of the foreign publicly traded corporation’s stock by certain of its domestic corporate or partnership affiliates (“specified affiliates”) may be subject to the excise tax.

    The Notice significantly expanded the application of the excise tax to foreign publicly traded corporations through the new funding and per se rules. Under the funding rule, the excise tax should apply if a specified affiliate of a foreign publicly traded corporation funds “by any means” a redemption or acquisition of the foreign publicly traded corporation’s stock by such corporation or certain foreign affiliates with a principal purpose of avoiding the excise tax. The per se rule expands the funding rule by deeming that such a principal purpose exists whenever such funding is provided within two years of such acquisition.
  • Narrow Exemption for Deemed Dividends: The Notice added an exemption for repurchases treated as dividends that could have been helpful, but documentation requirements may render it impractical. In particular, to claim the exemption, a corporation subject to the tax must provide a certification from each shareholder that the shareholder is treated as receiving a distribution for tax purposes and that any applicable withholding occurred. Treasury has asked for comments regarding whether there should be other methods to qualify for this exemption, so proposed regulations may expand this rule in the future.
  • Leveraged Taxable Acquisitions: The Notice clarifies that taxable acquisitions of a domestic publicly traded corporation’s shares should be subject to the excise tax to the extent the acquisition is funded with the target’s cash or the proceeds of a loan against the target’s assets. More specifically, the acquisition of a publicly traded corporation’s stock generally should be subject to the excise tax to the extent it is funded by debt incurred by a transitory merger subsidiary because the target is treated as incurring the debt.
  • Treatment of Reorganizations: Consistent with the statute, the Notice confirms that acquisitions of stock pursuant to reorganizations and split-offs should not be subject to the excise tax to the extent they qualify for income nonrecognition. Thus, the excise tax should only apply to such transactions to the extent stock is acquired for “boot,” meaning cash or other property that does not qualify for nonrecognition treatment.
  • Transfers of Stock to Employees: The Notice provides guidance regarding the treatment of stock issued to employees and when it is treated as issued. Under the “netting rule,” a corporation can offset stock repurchases that are subject to the excise tax with stock issued to employees during the same taxable year. Thus, the timing of when stock is considered issued to employees is important to determine the corporation’s excise tax. The Notice clarified, for example, that stock transferred to an employee should be treated as issued for purposes of the excise tax when the stock is substantially vested or upon transfer if the employee makes a valid section 83(b) election.

Key Contacts

 

Adam Blakemore
Partner
T. +44 (0) 20 7170 8697
adam.blakemore@cwt.com

Linda Z. Swartz
Partner
T. +1 212 504 6062
linda.swartz@cwt.com

Jon Brose
Partner
T. +1 212 504 6376
jon.brose@cwt.com

Andrew Carlon
Partner
T. +1 212 504 6378
andrew.carlon@cwt.com

Mark P. Howe
Partner
T. +1 202 862 2236
mark.howe@cwt.com

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