On December 27, 2022, the U.S. Department of the Treasury (Treasury) and the IRS issued Notice 2023-2 (the Notice), providing interim guidance on the corporate stock repurchase excise tax, which became effective on January 1, 2023 under the Inflation Reduction Act (IRA). This 1% excise tax applies to the aggregate fair market value of publicly traded stock repurchased by certain corporations during the taxable year. This interim guidance is intended to provide notice to taxpayers on what the IRS and Treasury plan to include in upcoming regulations.
Here are some of the notable highlights of Notice 2023-2:
- Transactions to which the excise tax applies. Stock repurchases to which the excise tax applies include Section 317(b) redemptions and to “economically similar” transactions, which are defined as acquisitive reorganizations, §368(a)(1)(E) reorganizations, §368(a)(1)(F) reorganizations, split-offs, and complete liquidations to which both §§331 and 332 apply. Transactions that are not “economically similar” include complete liquidations and divisive transactions under §355 other than split-offs.
- Reporting and payment of the stock repurchase excise tax. Excise tax on stock repurchases will be reported and paid once per taxable year on Form 720, Quarterly Federal Excise Tax Return, that is due for the first full quarter after the close of the taxpayer’s taxable year. For example, for a taxpayer on a calendar taxable year, the stock buyback excise tax would be due on April 30, 2024 for the 2023 tax year. There will not be any extensions allowed for reporting or paying the stock repurchase excise tax owed. Here is the draft Form 7208 recently released by the IRS for purposes of computing and reporting the stock repurchase excise tax.
- De minimis exception. There is an exception for stock repurchases that in aggregate do not exceed $1 million during a taxable year. This threshold is determined before consideration of statutory exceptions and application of the netting rule. The statutory exceptions include all of the following:
- Qualifying property repurchases
- Stock contributions to an employer-sponsored retirement plan
- Repurchases by a dealer in securities in the ordinary course of business
- Repurchases by a RIC or REIT
- Repurchases treated as a dividend
- The netting rule provides that a taxpayer’s excise tax base is reduced by the corporations’ aggregate fair market value of stock issued (including stock provided to employees as compensation for services) during the taxable year. Stock withheld to satisfy an employer’s income tax withholding obligation or to satisfy the exercise price of a stock option is not considered stock issued to employees under the netting rule.
- No double-benefit is permitted where the same issuance could fall under both a statutory exception and the netting rule. Stock issued as part of §368(a) reorganization or §355 distribution is not treated as issued by the issuing corporation if:
- The stock constitutes property permitted to be received under §354 or §355 without the recognition of gain,
- The stock is used by the corporation to repurchase its stock in acquisitive reorganizations, §368(a)(1)(E) reorganizations, §368(a)(1)(F) reorganizations, and split offs, and
- The repurchase is not included in the corporation’s stock repurchase excise tax base because that purchase is a qualifying property repurchase (which is defined in the Notice as repurchase by a target corporation as part of an acquisitive reorganization; a repurchase by a covered corporation or a covered surrogate foreign corporation as part of an E reorganization; a repurchase by a transferor corporation as part of an F reorganization; and a repurchase by a distributing corporation as part of a split-off (whether or not part of a D reorganization)).
- Acceptable methods. Multiple acceptable methods are provided for determining the market price of stock traded on an established securities market, including:
- The daily volume-weighted average price as determine on the date the stock is issued;
- The closing price on the date the stock is issued;
- The average of the high and low prices on the date the stock is issued; or
- The trading price at the time the stock is issued.
The same method must be consistently applied to determine the fair market value of all stock repurchased through the taxable year. If the issued stock is not traded on an established securities market, then the market price is determined as of the date the stock is issued.
The Notice also provides examples with various fact patterns to provide guidance for clients on how to apply these rules.
Accounting Considerations
This new guidance does not change how this excise tax should be accounted for. From a U.S. GAAP and financial reporting perspective, the stock buyback excise tax should not be considered subject to accounting under ASC 740, and instead should generally be recognized as treasury stock based on the “cost” to repurchase the shares. Learn more about accounting considerations on the stock repurchase excise tax.
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