On August 16, 2022, the Inflation Reduction Act of 2022 (the IRA) was signed into law.1 Among a number of changes the IRA introduced to the Internal Revenue Code of 1986 was a new excise tax imposed on what are commonly referred to as stock buybacks by publicly traded corporations. Specifically, this new excise tax, added as Section 4501 of the Code, imposes a one percent excise tax on the fair market value (FMV) of stock repurchased by publicly traded corporations after December 31, 2022.
When this article is published, more than a year will have passed since the enactment of the excise tax, and, with any luck, the Internal Revenue Service and the Department of Treasury will have promulgated proposed regulations with detailed guidance on the application and procedural rules for the excise tax. At the moment, however, we have only the words of the statute itself as well as Notice 2023-02 (released December 27, 2022)2 and Announcement 2023-18 (released June 29, 2023). And, since the IRS and Treasury have requested comments on the notice and continue to receive feedback from taxpayers and tax practitioners, the guidance and our understanding of the rules may change further.
With only scant legislative history and context for the excise tax, and a fair number of published commentaries and articles already discussing that background,3 this article will turn directly to how the excise tax may be expected to apply to taxpayers in light of the statutory language, Notice 2023-02, and Announcement 2023-18.
Core Definitions
As with many Code provisions, the application of the excise tax begins with a number of key definitions and terms. Before getting into how the excise tax rule applies and how it is computed, a review of a few core definitions should be helpful.4
Covered Corporation
The excise tax applies only to “covered corporations.” A “covered corporation” is defined in Section 4501(b) to mean any domestic corporation that has a class of stock that is “traded on an established securities market (within the meaning of Section 7704(b)(1)).” Importantly, and as discussed further below, there are also circumstances in which foreign corporations are indirectly liable for the excise tax through their domestic subsidiaries.
Notice 2023-02 includes a specific cross-reference to Treasury Regulations Section 1.7704-1(b), which provides a list of circumstances under which a corporation’s stock will be treated as traded on an established securities market.5 This includes not only well-known national securities exchanges, such as the NYSE, but also potentially includes foreign exchanges and regional and local exchanges, and even an “interdealer quotation system that regularly disseminates firm buy or sell quotations by identified brokers or dealers.” So, a domestic corporation could find itself subject to the excise tax even if its stock is traded only on a foreign exchange or in an “over-the-counter” market.
Repurchase
To have excise tax liability, a covered corporation must “repurchase” its stock. A “repurchase” is defined to include one of two situations: 1) any acquisition of the stock of the covered corporation that would be a redemption under Section 317(b) of the Code and 2) any transaction that the IRS determines to be “economically similar” to a redemption under Section 317(b). As discussed in the next part below, Notice 2023-02 has provided helpful clarity in setting forth an exhaustive list of economically similar transactions and a non-exhaustive list of transactions that are not economically similar.
Specified Affiliate
A “specified affiliate” of a covered corporation generally means any 1) other corporation in which the covered corporation owns directly or indirectly more than fifty percent of the stock (by vote or value) of that other corporation, or 2) partnership in which the covered corporation owns directly or indirectly more than fifty percent of the capital or profits interests in that partnership.
This is to prevent a covered corporation from avoiding the excise tax by causing its controlled subsidiaries to acquire the covered corporation’s stock. For the remainder of this discussion, unless separately identified, references to a covered corporation will include references to its specified affiliates.
Basic Application and Computation
The excise tax is computed each tax year of the covered corporation and begins with the aggregate fair market value of stock that the covered corporation repurchases during that tax year. The aggregate value of the stock repurchased during that tax year is then reduced by two buckets: the FMV of any applicable statutory exceptions (the “statutory exceptions,” discussed in greater detail below) and the FMV of stock issuances under the netting rule (also discussed in greater detail below). The net result is referred to as the “stock repurchase excise tax base,” and the taxpayer’s excise tax liability is one percent of its stock repurchase excise tax base. As a formula, this would be presented as:
0.01 X stock repurchase excise tax base = excise tax liability
0.01 X [repurchases – statutory exceptions – netting rule] = excise tax liability
Under the above calculation, while it is possible in any given year that a taxpayer may find that its stock repurchase excise tax base is negative, taxpayers are not permitted to carry that deficit backward to claim a refund or forward to offset a future excise tax liability.
Further Clarifications on What Constitutes a Repurchase
A few more important rules provide clarity as to what’s included and excluded as a repurchase under the basic definition; the statutory exceptions are detailed further below.
First, only repurchases that occur after December 31, 2022, are repurchases included in the stock repurchase excise tax base.
Second, with only two exceptions, any acquisition of a covered corporation’s stock that is treated as a redemption under Section 317(b) is treated as a repurchase and included in the stock repurchase excise tax base. One of the two exceptions is for a constructive redemption that a covered corporation would be treated as undertaking if Section 304(a)(1) applied to a covered corporation’s acquisition of stock.6 The other exception is for cash issued in lieu of fractional shares of the covered corporation if certain conditions are met.7
Third, as noted earlier, there is an exhaustive list of transactions that are “economically similar” to a Section 317(b) redemption, and a non-exhaustive list of transactions that are not economically similar to a Section 317(b) redemption. In the first basket (“economically similar transactions”), to be discussed under the statutory exceptions, are reorganizations, split-offs (i.e., transactions under Section 355 in which distributing corporation shareholders surrender shares in exchange for controlled corporation stock), and corporate liquidations that qualify under both Sections 332 and 331 (that is, a subsidiary corporation that has both an eighty percent or greater corporate shareholder and a minority public float).8 In the second basket (not “economically similar transactions”) are complete liquidations to which only Section 332 or Section 331 applies (but not both),9 and transactions qualifying under Section 355 that are not split-offs.
Fourth, it is important to note that while status as a covered corporation requires at least one of its classes of stock be traded on an established securities market, a covered corporation can have an excise tax liability even if it repurchases a different class of stock that is not traded on an established securities market. It is not uncommon for publicly traded corporations to have outstanding multiples classes of stock, some of which may be privately held. During the pandemic, a number of publicly traded corporations sought private funding through preferred equity issuances, and those instruments may have terms extending into 2023 or beyond.
Fair Market Value and Timing for Repurchases
The fair market value of the stock repurchased in any given tax year is determined based on the “market price” on the date the stock is repurchased. For this purpose, it is irrelevant what is actually paid for the stock, for example, if the repurchase is under an option and the option is in the money at the time of exercise. The “market price” for the stock will depend on whether the stock repurchased is in a class traded on an established securities market or not. If it is, then the market price is one of four pricing methods on the date of repurchase: 1) the daily volume-weighted average price, 2) the closing price, 3) the average of the high and low prices, or 4) the actual trade price at the time of repurchase (if there is one).10 If the stock is not traded on an established securities market, then taxpayers are directed to use principles set out in regulations under Section 409A.11
Taxpayers are required to use the same pricing methodology for an entire tax year and are also required to use the same methodology during that tax year for determining the value of non-compensatory stock issued under the netting rule.12 However, taxpayers do not appear to be required to stick with the same pricing methodology across tax years.
As to timing, stock is treated as repurchased on the date that ownership of the repurchased stock is treated as transferring to the covered corporation under US federal income tax rules. In some cases, this may leave taxpayers with some uncertainty, for example, with open market purchases where the execution of a trade and the settlement of a trade may extend across the end of a tax year.
Statutory Exceptions
Several statutory exceptions exist under Section 4501(e), implementing a combination of administrative relief, taxpayer-specific relief, and transactional relief. Although the statutory language is sparse, the interim rules in Notice 2023-02 have provided significant clarity as to whether and how these exceptions may apply for taxpayers. It is worth highlighting that in computing a taxpayer’s excise tax liability, these exceptions are taken into account through a reduction in the stock repurchase excise tax base, rather than being treated as exempt from the excise tax rules entirely.
De Minimis Exception
Although not likely to be widely used, taxpayers are not subject to the excise tax if the aggregate FMV of stock repurchased during a taxable year does not exceed $1,000,000. Importantly, the threshold is further limited, as the exception applies only if the amount of repurchases for the year does not exceed that threshold without applying any of the other statutory exceptions or taking into account issuances under the netting rule.13
RICs and REITs
Regulated investment companies (RICs) and real estate investment trusts (REITs) are effectively exempt; in calculating the stock repurchase excise tax base, they are permitted a corresponding reduction under this statutory exception for each repurchase they undertake in a tax year. Note that even though RICs and REITs generally will not have excise tax liability, they may nonetheless have to make an annual reporting, discussed toward the end of this article.
Dealers
If a covered corporation is a dealer in securities (defined by reference to Section 475(c)(1)), then its repurchases are excepted from the excise tax to the extent several conditions are met, including that it acquires the stock in the ordinary course of the dealer’s business of dealing in securities and it accounts for the stock as securities held primarily for sale to customers in the ordinary course of its business.14
Dividends
Any repurchase by a covered corporation that is treated for US federal income tax purposes as a dividend is also excepted from the excise tax through a corresponding reduction to the stock repurchase excise tax base. This may be the case where a particular shareholder fails to meet any of the tests set forth in Section 302(b) or an exchange is characterized as a dividend under Section 356(a)(2), and then only to the extent such redemption or exchange is treated as a dividend for US federal income tax purposes.
Notice 2023-02 provides that any such redemption or exchange is presumed to not be a dividend, and, to rebut that presumption, a taxpayer needs to meet a number of conditions essentially certifying that both the covered corporation and the particular shareholder are treating the excepted amount as a dividend.15
As a final note, legally declared distributions by covered corporations to which Section 301 applies directly (as opposed to which Section 301 applies by virtue of Section 302(d)) are not definitionally redemptions under Section 317(b) and are not treated as economically similar transactions, and so are not within the scope of the excise tax rules.
Retirement Plan Contributions
Prior to Notice 2023-02, there appeared to be uncertainty about the potential scope of the exception in Section 4501(e)(2), which excepts repurchases up to an amount of stock that is contributed to an “employer-sponsored retirement plan [ESRP], employee stock ownership plan [ESOP], or similar plan.” Questions arose as to what might constitute a “similar plan,” such as an employee stock purchase plan (ESPP).
The IRS and Treasury have interpreted this statutory exception to cover any repurchased stock (or an amount of other stock equal to the FMV of the repurchased stock) that is contributed to an ESRP that is qualified under Section 401, including an ESOP described in Section 4975(e)(1).16 Moreover, generally only contributions made during a taxable year are permitted as reductions to the stock repurchase excise tax base in that year.17
To the extent that a taxpayer reduces its stock repurchase excise tax base for the year under this statutory exception, the taxpayer may not also treat the stock contributed as an issuance for that year and apply the netting rule.
Reorganizations
Perhaps one of the most complex (and arguably convoluted) exceptions is the one for reorganizations and similar transactions that may occur during a tax year. As briefly noted above, reorganizations and split-offs are treated as transactions that are “economically similar” to a redemption and so are potentially subject to the excise tax. Fortunately, a companion rule in the statutory exceptions permits an offset to such redemptions (explained below).
The application begins with examining the type of transaction. If it is one of several “acquisitive reorganizations,”18 such as a merger, in which the target corporation is a covered corporation, then the target corporation is treated as repurchasing its stock from its shareholders for the consideration issued in the acquisitive reorganization. If the transaction is a recapitalization or a reorganization under Section 368(a)(1)(F) (an “F reorganization”), in which the corporation is a covered corporation, then it is similarly treated as repurchasing its stock from its shareholders for the consideration issued in the recapitalization or F reorganization.19 Finally, if Section 355 applies, in that the distributing corporation is a covered corporation and its shareholders surrender distributing corporation shares in exchange for shares in the controlled corporation, then the distributing corporation is treated as repurchasing its stock for the stock of the controlled corporation. Thus, the stock repurchase excise tax base is increased by the full value of the consideration issued in each such transaction.20
From there, taxpayers are then permitted to reduce the stock repurchase excise tax base by the value of the consideration issued in the transaction that is permitted to be received without the recognition of gain or loss under Section 354 or Section 355. Generally, then, in wholly nontaxable reorganizations, recapitalizations, or split-offs, the stock repurchase excise tax base should not be affected by these transactions (although a reporting obligation may still exist). However, to the extent nonqualifying consideration is issued in the deal, such as cash, debt, nonqualified preferred stock, etc. (“boot”), the stock repurchase excise tax base would be expected to be increased by the value of that boot, with potential for an additional carve-out to the extent the boot is treated as a dividend under Section 356(a)(2), as discussed above.21
The Netting Rule
As with the statutory exceptions, taxpayers are permitted to reduce their stock repurchase excise tax base for any given tax year by the fair market value of the stock issued during that tax year. Such stock issuances can fall into one of three categories: 1) disregarded issuances, 2) non-compensatory issuances, and 3) compensatory issuances.
Disregarded Issuances
Certain issuances of stock, however, are disregarded and so no reduction is permitted. These include: 1) stock dividends, 2) stock issued by a covered corporation to a specified affiliate or transferred among specified affiliates,22 3) issued stock that is claimed as a reduction under the statutory exception for reorganizations or split-offs, 4) deemed issuances of fractional shares or resulting from Section 304(a)(1) transactions, and 5) stock issued by dealers in securities in the ordinary course of the dealer’s business.
Non-compensatory Issuances
Taxpayers are allowed to reduce the stock repurchase excise tax base by an amount equal to the fair market value of the stock of the covered corporation that is issued by the covered corporation to any person other than an employee (that is, non-compensatory issuances).
The methodology for determining the fair market value of the stock issued, including the different rules for publicly traded and non-publicly traded classes of stock, must be the same as that used to determine the fair market value of stock repurchased during that same tax year. Similarly, stock will be treated as issued on the date ownership of the stock passes to the recipient for US federal income tax purposes.
Oddly, there appears to be a gap in the netting rule insofar as it apparently does not allow a covered corporation to reduce its stock repurchase excise tax base if its stock is issued by a specified affiliate to a nonemployee to acquire property (as discussed below, covered corporation stock issued by a specified affiliate to its employee is included). So, an indirect acquisition through a subsidiary of a covered corporation in which the latter’s stock is used as part or all of the consideration appears to fall through the cracks.
Compensatory Issuances
As for compensatory stock issuances, stock of the covered corporation that is issued or provided to employees of either the covered corporation or a specified affiliate, and that is treated as compensation for employees’ service, may also reduce the covered corporation’s stock repurchase excise tax base under the netting rule.23
Specific timing rules govern when stock issued or provided as compensation will be treated as issued and so potentially affect the year in which a reduction is permitted. These timing rules depend on the nature of the compensatory arrangement—for example, restricted stock awards (RSA), restricted stock units (RSU), compensatory options, or stock purchases under an employee stock purchase program (ESPP).
Unlike for non-compensatory issuances, the fair market value of stock issued or provided to an employee is determined under Section 83 on the date the stock is treated as issued or provided to the employee, and there is no requirement that this value, or the valuation methodology under Section 83 generally, match the methodology used for determining the value of stock repurchased or for non-compensatory issuances.
There are also additional rules governing the impact of withholding for stock-based compensation on how much credit a taxpayer may receive under the netting rule. Generally, stock withheld by a covered corporation to cover a withholding obligation or exercise price is not counted as issued or provided to the employee under the netting rule, but other mechanisms for satisfying a withholding obligation or exercise price may produce different results (such as selling to cover the obligation).24
Foreign Corporations
When first enacted, Section 4501 seemed to have only limited application to publicly traded foreign corporations. Following the introduction of a “funding rule” in Notice 2023-02, the IRS and Treasury have potentially greatly expanded the scope of the excise tax rules and added much uncertainty to the equation.
In General
As to the general operation of the excise tax to foreign corporations, as with domestic corporations, the rules require that the foreign corporation be similarly traded on an established securities market (referred to as an “applicable foreign corporation”). Where an applicable foreign corporation is so traded, however, the general application of the excise tax rules is tied to whether 1) that foreign corporation is subject to certain of the inversion rules in Section 7874 (specifically, if it is a “surrogate foreign corporation” under Section 7874(a)(2)(B)), and, 2) if not, whether one or more domestic specified affiliates has directly acquired stock of the foreign corporation from an unrelated shareholder.25
If the applicable foreign corporation is not a surrogate foreign corporation, and one or more of its domestic specified affiliates undertakes a direct acquisition of that foreign corporation’s stock, then any liability for the excise tax resulting from the acquisition is imposed directly on that domestic specified affiliate.26 Moreover, that domestic specified affiliate is permitted to reduce its stock repurchase excise tax base under the netting rule only for stock issued by or provided to that domestic specified affiliate’s own employees.27
If, on the other hand, the foreign corporation is a surrogate foreign corporation,28 then the excise tax rules are applied much more broadly, since the surrogate foreign corporation generally is subject to the same rules as if it were a domestic covered corporation. That is, repurchases by it or any of its specified affiliates potentially give rise to liability, but, as above, with a limited application of the netting rule only to stock issued or provided to employees of the “expatriated entity,” and any liability for the excise tax imposed directly on that “expatriated entity.”29
Enter the Funding Rule
Notice 2023-02 did more than provide clarity and certainty for taxpayers, unfortunately. Embedded in the notice’s interim rules governing the application of the excise tax to foreign corporations was a new “funding rule.”30 This new funding rule has the potential to expand the scope of the excise tax well beyond direct repurchases of a foreign corporation’s stock by its domestic specified affiliates.
The funding rule addresses what appears to be a potential for abuse under the rules in which domestic specified affiliates provide funds to their foreign parent corporations to then undertake a stock buyback. This perceived abuse is attacked through two rules: 1) an intent-based test and 2) a per se funding rule.
The intent-based test requires that a domestic specified affiliate funds the repurchase of an applicable foreign corporation’s stock “by any means (including through distributions, debt, or capital contributions),”31 and that such funding is undertaken for a principal purpose of avoiding the excise tax. If funded with such a principal purpose, then the domestic specified affiliate is treated as acquiring the stock repurchased by the applicable foreign corporation and potentially liable for the excise tax. There is a cap on the imputed repurchases: they cannot exceed the amount funded by the domestic specified affiliate.
The per se funding rule creates an irrebuttable presumption that a principal purpose exists if 1) the domestic specified affiliate funds by any means—other than by a distribution—its applicable foreign corporation or another foreign specified affiliate, and 2) a repurchase of the applicable foreign corporation’s stock occurs within two years after the funding.32
No more specificity is given as to what may count as funding and, while it may be appropriate to expect the IRS and Treasury to further circumscribe the scope of the rule, there’s little indication or guidance as to what shape it may take. Moreover, the two-year time frame also leaves foreign-parented taxpayers in the unusual circumstance of potentially not knowing whether they’ve properly reported and paid their excise tax liability until a year after the fact. Additional guidance will almost certainly be needed to provide foreign-parented taxpayers the necessary certainty to apply the rule.
Procedural Considerations
General Timing for Reporting and Payment
The excise tax is anticipated to be reported alongside other excise taxes on Form 720, which will also be accompanied by an additional form that is intended to be attached to Form 720 and to detail taxpayers’ computations of their excise tax liability (currently drafted as Form 7208).33
Although Form 720 generally must be filed quarterly for other excise taxes, the excise tax on stock buybacks will be reported only once each taxable year. The due date for Form 720 is the end of the month that follows the close of the first full quarter after the taxable year in question. So, for example, taxpayers whose taxable year ends on December 31, 2023, would file Form 720 on April 30, 2024. Fiscal-year taxpayers would have a due date determined by reference to the end of their fiscal year rather than the end of the calendar year.
Payment of the excise tax is expected to be the same as the due date for Form 720, and no extensions will be permitted for reporting or paying the excise tax.
A Temporary Reprieve: Announcement 2023-18
In an apparent acknowledgment of the incompleteness of the guidance provided so far with respect to the excise tax (perhaps most especially concerning the funding rule), the IRS and Treasury released Announcement 2023-18 to give taxpayers a temporary reprieve. The announcement indicates that prior to publication of proposed excise tax regulations, any liability for the stock repurchase excise tax for such taxable year need not be reported on Form 720 until the first full quarter after the date such proposed regulations are published. Furthermore, the deadline for payment of any excise tax liability will be the same as the Form 720 filing deadline, and there will be no addition to tax under Section 6651(a) (or any other provision) for failure to file or for failure to pay any excise tax liability before the time specified in those forthcoming regulations.
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Christian Miller is a principal at Deloitte.
Endnotes
- Public Law No. 117-169, 136 Stat. 1818 (August 16, 2022).
- The IRS and Treasury issued Notice 2023-02 to announce their intention to promulgate proposed Treasury regulations for the excise tax and to provide interim rules and procedures that are expected to be included in those proposed regulations. Taxpayers are permitted to rely on the rules set forth in Section 3 of Notice 2023-02 until the proposed regulations are released.
- See, for example, New York State Bar Association, Tax Section, Report on the Section 4501 excise tax on Repurchases of Corporate Stock, Report No. 1469, at 12-16.
- While several of these definitions come directly from Section 4501, many were created by the IRS in Notice 2023-02 to help clarify how the IRS expects the proposed regulations to implement the excise tax.
- Treasury Regulations Section 1.7704-1(b)(1) indicates that an “established securities market” includes five different categories. Presumably that list is intended to be a complete rather than merely indicative list.
- This exception applies regardless of whether the fictional redemption qualifies for sale or exchange treatment under Section 302(a) or a distribution under Section 301 pursuant to Section 302(d).
- These conditions include: 1) the cash payment must occur in certain nonrecognition transactions or in settlement of financial instruments, 2) the cash is not separately bargained for consideration, 3) the use of cash is solely for administrative convenience and not for tax avoidance, and 4) the amount of cash does not exceed the value of one full share. See Notice 2023-02, Section 3.04(3)(b).
- This last item, liquidations to which both Sections 332 and 331 apply, has a special rule set that treats the distributions to which Section 332 applies as not being repurchases, and distributions to which Section 331 applies as being repurchases. The treatment here, as compared to the treatment for liquidations of covered corporations to which Section 331 applies in its entirety, as noted below, seems rather incongruous.
- Notice 2023-02 further provides that any distribution by a covered corporation in the same year in which it completely liquidates under Section 331, whether that distribution is part of the complete liquidation or not, is excepted from being treated as a repurchase. See the notice, Section 3.04(4)(b)(i)(B).
- If the repurchase date is not a trading day, Notice 2023-02 instructs that the market price on the immediately preceding trading day will be used. See the notice, Section 3.06(2)(a)(ii).
- Specifically, Treasury Regulations Section 1.409A-1(b)(6)(iv)(B)(1). In addition, if the stock trades in a foreign currency, the “market price” is to be translated into US dollars at the spot rate on the date of repurchase.
- Notice 2023-02, Section 3.06(2)(a)(iii).
- Notice 2023-02, Section 3.03(2).
- Additional conditions to qualification are found in Section 3.07(4)(b) of Notice 2023-02.
- Notice 2023-02, Section 3.07(6)(b).
- The reduction permitted against the stock repurchase excise tax base depends on whether stock of the same class or a different class is contributed to the ESRP, and Notice 2023-02 provides, in Section 3.07(3)(c), specific rules for determining the amount in each case.
- Notice 2023-02 does, however, provide a limited mechanism for retroactive reductions in the preceding tax year if certain conditions are met. See Section 3.07(d) of the notice.
- Acquisitive reorganization, a defined term, includes reorganizations described in: 1) Section 368(a)(1)(A) (including triangular mergers under Section 368(a)(2)(D) and (E)); 2) Section 368(a)(1)(C); and 3) Section 368(a)(1)(D) (but only if Section 354(b)(1) is satisfied). Conspicuously, reorganizations under Section 368(a)(1)(B) are not captured, but the reason may be that 1) those reorganizations tolerate no boot, and, as explained further on, therefore don’t result in a net increase to the stock repurchase excise tax base, and/or 2) unlike acquisitive asset reorganizations, it is less clear that the US federal income tax rules create a deemed exchange between the target corporation and its own shareholders.
- Including recapitalizations and F reorganizations seems particularly odd, as neither would normally be a redemption under Section 317(b), nor, arguably, a transaction economically similar to one. An exchange of stock in an issuer for new stock in the same issuer could not be a redemption under Section 317(b), because the issuer’s stock is not property under Section 317(a). Moreover, if boot were issued in a recapitalization or an F reorganization, the boot would arguably be severed and treated as a separate redemption or distribution in any event under Treasury Regulations Section 1.301-1(j), Treasury Regulations Section 1.368-2(m)(3)(iii), and long-standing case law, such as Bazley v. Commissioner, 331 US 737 (1947).
- The other category of economically similar transactions—complete liquidations to which both Section 332 and Section 331 apply—occupies a unique place. The distributions to which Section 332 applies are not treated as repurchases, and so are irrelevant. The distributions to which Section 331 applies generally will be taxable to the holders and so generally will be treated as repurchases, with no companion statutory exception for these liquidating distributions as there are for reorganizations.
- Several basic examples in Notice 2023-02 walk through how these rules apply to certain mergers, acquisitions, and similar transactions. See, for example, Examples 9 through 14 in Section 3.09 of the notice.
- As noted below, the excise tax rules appear to exclude stock issued by covered corporations through specified affiliates for acquisitions from third parties in non-compensatory situations but permit such stock to be taken into account under the netting rule when issued to employees of specified affiliates.
- Where the covered corporation is a domestic corporation, this rule applies regardless of whether the specified affiliate is foreign or domestic.
- These rules are spelled out in greater detail in Section 3.08(3) of Notice 2023-02.
- Specifically, a shareholder that is not another specified affiliate of that foreign corporation.
- Notice 2023-02, Section 3.05(2)(a).
- Notice 2023-02, Section 3.04(3)(b)(iii).
- For the excise tax rules, determined by using September 20, 2021, as the relevant date in Section 7874(a)(2)(B), rather than March 4, 2003, and only for taxable years that “include any portion of the applicable period with respect to such corporation under [S]ection 7874(d)(1).”
- “Expatriated entity” is defined by reference to Section 7874(a)(2)(A).
- Notice 2023-02, Section 3.05(2)(a)(ii).
- Emphasis added.
- Although it appears that the two-year window is forward-looking from the date of the funding, that is not entirely clear and may be one among a number of issues that require clarification.
- As of mid-July, the revised Form 720, including a new entry for the stock buyback excise tax in Part II, could be found at www.irs.gov/pub/irs-dft/f720–dft.pdf, and the draft of Form 7208 could be found at www.irs.gov/pub/irs-dft/f7208–dft.pdf. Because these are draft forms, taxpayers should not file them.
