U.S. Department of the Treasury and IRS Release Proposed Guidance on Stock Buyback Excise Tax to Ensure Large Corporations Pay More of Their Fair Share in Taxes

WASHINGTON – Today, the U.S. Department of the Treasury and Internal Revenue Service (IRS) issued two Notices of Proposed Rulemaking (proposed regulations) on the stock buyback or “repurchase” excise tax included in President Biden’s Inflation Reduction Act, a key provision that helps ensure large corporations pay more of their fair share in taxes. As the tax code has favored stock buybacks, many companies have failed to reinvest profits in their workers, growth, and innovation. The stock buyback excise tax begins to change that.

“President Biden’s Inflation Reduction Act helps ensure that large corporations pay their fair share, just as American families do,” said U.S. Secretary of the Treasury Janet L. Yellen. “This proposed rule is a key part of the Biden Administration’s efforts to improve tax fairness and reduce the deficit by closing loopholes and ensuring wealthy individuals, large corporations, and complex partnerships pay taxes owed.”

The proposed regulations provide additional clarity to taxpayers and tax professionals on how to properly calculate and pay the new stock buyback excise tax on corporate stock buybacks, and largely adopt the framework of  Notice 2023-2, published on January 17, 2023. 

The stock buyback excise tax applies at a rate of one percent of the fair market value (FMV) of any stock of a covered corporation that is repurchased by the corporation during its taxable year, minus the aggregate FMV of stock issued by the taxpayer during that year. The statute generally defines a “covered corporation” as a domestic corporation whose stock is publicly traded on an established securities market. An established securities market for this purpose includes U.S. national securities exchanges, certain foreign securities exchanges, regional or local exchanges, and certain interdealer quotation systems. “Repurchases” (or buybacks) include a corporation’s acquisition of any of its stock from a shareholder for property that qualifies as a redemption of the stock as defined in the tax code. 

The Inflation Reduction Act also provides that a “repurchase” (buyback) includes any other transaction that the Secretary determines in regulations or other guidance to be “economically similar” to a redemption of stock. These economically similar transactions include buybacks of corporate stock that occur in connection with certain corporate mergers, separations, and other M&A transactions.  A “repurchase” also may include acquisitions of the corporation’s stock by certain specified affiliates.

The proposed regulations also provide a targeted anti-abuse rule to foreign-parented multinational corporations pay their fair share of the stock buyback excise tax, without ordinary course intercompany funding transactions among their corporate affiliates being inadvertently captured.

The proposed regulations would provide that the stock repurchase excise tax must be reported on the IRS Form 720, Quarterly Federal Excise Tax Return, with the Form 7208 attached. The Form 7208 would be used to figure the amount of stock repurchase excise tax owed. A draft version of the Form 7208 is currently accessible, and the final version of the form will be released prior to the first due date on which the stock repurchase excise tax must be reported and paid. 

As anticipated in Announcement 2023-18, the proposed regulations would establish that, for taxpayers with a taxable year ending after December 31, 2022, but before the publication of final regulations, any liability for the stock repurchase excise tax for the taxable year must be reported on the Form 720 that is due for the first full quarter after the date the final regulations are published, and that the deadline for payment of the tax is the same as the filing deadline.

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