Stock buyback tax: IRS issues initial guidance

Executive summary

The IRS issued Notice 2023-2 (the Notice) to address the 1% excise tax on public company stock repurchases (the stock buyback tax). The Notice:

• Specifies the types of transactions that are repurchases that can trigger the stock buyback tax,
• Describes transactions that are excepted from the stock buyback tax, and
• Outlines rules for determining the fair market value (FMV) of repurchased stock.

The Treasury Department and the IRS intend to issue proposed regulations covering these topics; taxpayers may rely on the Notice until those proposed regulations are issued.

Stock buyback tax background

The stock buyback tax was enacted in 2022 (as part of the Inflation Reduction Act of 2022). It applies only to buybacks that take place after Dec. 31, 2022. It is a nondeductible corporate-level excise tax imposed at 1% of the repurchased stock’s FMV. Under a netting rule, the total FMV of a corporation’s repurchased stock each year is reduced by the FMV of the stock it issued during the year before multiplying by the 1% tax rate.

The stock buyback tax applies to domestic corporations whose stock is traded on an established securities market. It may also apply to U.S. affiliates of a foreign corporation whose stock is traded.

Exceptions

While “repurchases” triggering the stock buyback tax are defined broadly, there are exceptions in the tax code. The Notice elaborates on these exceptions from the stock buyback tax:

• De minimis exception: This exception applies where the total amount of repurchases within the taxable year does not exceed $1 million.
• Tax-free reorganization exception: This exception applies where the repurchase is tax-free under the section 368(a) corporate reorganization rules. In this regard, the Notice clarifies the exception’s applicability to only the consideration qualifying for tax-fee treatment, and not to other “boot” consideration.