The Inflation Reduction Act of 2022 imposes a one percent excise tax (the “Excise Tax”) on the repurchase of corporate stock under Section 4501 of the Internal Revenue Code (“Section 4501” and the “Code”, respectively) by a publicly traded U.S. corporation (a “covered corporation”) beginning after December 31, 2022. Much welcome guidance was released on December 27, 2022 in Notice 2023-2 (the “Notice”), which provides taxpayers with interim guidance until proposed regulations are issued. For purposes of the Excise Tax, the term covered corporation means any domestic corporation whose stock is traded on an established securities market (within the meaning of Section 7704(b)(1)). A covered corporation also includes any corporation that becomes a surrogate foreign corporation under Section 7874(a)(2)(B) after September 20, 2021. A repurchase of corporate stock by a covered corporation, to which the Excise Tax applies, generally includes (i) redemptions within the meaning of Section 317(b) and (ii) transactions determined by the Secretary of the Treasury or her delegate to be economically similar to a 317(b) redemption. The liability for any Excise Tax may be offset by stock issuances in the same taxable year or other exceptions detailed in the Notice.
Within a month of the Excise Tax taking effect on January 1, major U.S. corporations have already announced multibillion-dollar buyback authorizations. In his State of the Union Address on February 7, President Joe Biden called for an increase in the Excise Tax to 4%. Given the broad scope of transactions to which the Excise Tax may be imposed, if the Excise Tax percentage is increased in spite of a divided Congress, any such Excise Tax liability would have heightened significance for covered corporations in their ongoing business operations and transactional tax planning.
Weil will continue to monitor the developments with respect to the Excise Tax closely and will continue to consider how to address the potential impact of the current guidance, the forthcoming proposed regulations, and any proposed increase in the Excise Tax for our clients. Please let us know if you would like to discuss any aspect of the Excise Tax and how it may impact your specific circumstances. For more information on the Excise Tax and the guidance currently in effect, please see “Notice 2023-2: Proposed Guidance on the Stock Buyback Excise Tax”.