IRS Notice provides initial stock repurchase guidance: PwC

IRS Notice provides initial guidance on stock repurchase provisions

December 2022

In brief

Treasury and the IRS today released Notice 2023-2 (the Notice), providing interim guidance addressing application of the new excise tax on repurchases of corporate stock under Section 4501 (the Excise Tax), which was enacted as part of the Inflation Reduction Act of 2022. The interim guidance applies until regulations addressing the provision are issued, and taxpayers may rely on the rules described in the Notice until such time. The Excise Tax applies to certain repurchases of stock after December 31, 2022.

Outlined below is a high-level overview of some of the topics covered. A more in depth Insight on this guidance will be issued soon.

Observation: While issuance of a Notice by Treasury and the IRS before the year-end was expected, the scope of what would be covered in the Notice (or would not be subject to any guidance until next year) had been unclear. The Notice is 52 pages long with 26 examples, and covers a broad range of areas in which taxpayers had questions concerning application of the Excise Tax. Treasury and the IRS request comments on rules included in the Notice, as well as additional areas for future guidance.

In detail

Below are a few of the key areas addressed in the guidance.

The Notice provides that the Excise Tax is anticipated to be reported on Form 720, with an accompanying form/worksheet. While Form 720 is filed quarterly, Treasury and the IRS expect that the Excise Tax will be reported once per tax year on the Form 720 that is due for the first full quarter after the close of the taxpayer’s tax year. Treasury and the IRS expect the deadline for payment of the Excise Tax to be the same as the filing deadline.

Several sections of the Notice address nonrecognition transactions, such as split-offs, spin-offs, triangular reorganizations, E reorganizations, and F reorganizations. The Notice provides that a split-off transaction is treated as a repurchase, but that a repurchase that is part of a split-off transaction is treated as reducing the excise tax base (whether or not part of a D reorganization). A divisive transaction under Section 355 other than a split-off is not treated as a repurchase.

Examples walk through the Excise Tax analysis with respect to the acquiring corporation and the target corporation in a variety of situations. In an example on the treatment of leveraged buyouts, the target was treated as repurchasing its own shares for purposes of the Excise Tax where it was treated as borrowing a portion of the acquisition proceeds from a lender and using those proceeds to redeem its stock from the target’s shareholders.

The Notice addresses the timing of repurchases and issuances, providing generally that stock is treated as repurchased and issued at the time ownership of the stock is transferred for US federal income tax purposes. For example, stock transferred pursuant to a restricted stock unit is treated as issued when the corporation initiates the transfer of the shares to the employee. Examples discuss the application of these rules, including stock repurchased subject to an accelerated share repurchase agreement entered into prior to December 31, 2022.

The Notice includes safe-harbor methodologies for determining the fair market value of stock that is repurchased or issued, and requires taxpayers to use consistent methods for issuances and repurchases throughout the tax year.

The Notice provides that an applicable foreign corporation’s purchase of its own shares can be subject to the Excise Tax if a specified affiliate funds by any means (including through distributions, debt, or capital contributions) the acquisition or repurchase of the foreign corporation’s stock and such funding is undertaken for a principal purpose of avoiding the Excise Tax. A principal purpose is deemed to exist if the repurchase occurs within two years of the funding (other than a funding through a distribution).