The Treasury Department and the Internal Revenue Service (IRS) released initial guidance on Dec. 27, 2022, concerning two corporate tax increases included in the climate and energy reconciliation bill commonly known as the Inflation Reduction Act (IRA, P.L. 117-169). Notice 2023-2 provides interim guidance with respect to the new excise tax applicable to certain stock repurchases, while Notice 2023-7 provides interim guidance on the new 15% book-minimum tax applicable to certain large corporations. Both notices indicate the Treasury Department’s and the IRS’ intention to issue proposed regulations that will include more comprehensive rules for implementing the new taxes, which take effect starting in 2023. Taxpayers may rely on the interim guidance until final regulations are promulgated.
Stock Buyback Excise Tax
The interim guidance on the new stock buyback excise tax under new section 4501 of the Internal Revenue Code (Code) is broadly applicable to stock repurchases and “economically similar” transactions entered into after Dec. 31, 2022, of domestic corporations, including specified affiliates. The excise tax also applies to certain expatriated corporations. The new excise tax generally equals 1% of the fair market value of any stock of a corporation that is repurchased during the taxable year. A $1 million de minimis rule applies to corporations with low-volume annual stock repurchases.
Broad Application. Notice 2023-2 sweeps in a broader array of transactions than conventional open-market stock buyback programs, including mandatorily redeemable preferred stock. However, it also includes exceptions that effectively exclude most mergers, acquisitions and complete liquidations from the excise tax to the extent they are treated as tax-free for income-tax purposes. Repurchases by regulated investment companies (i.e., mutual funds) and real estate investment trusts (REITs) are also excluded from the excise tax. Additionally, the guidance clarifies the contours of the netting rule that allows companies to offset qualifying issuances of stock against repurchases subject to the excise tax. The Notice includes 26 examples, with accompanying analyses, that illustrate the operating rules and definitions.
Determination of Timing and Fair Market Value. Detailed rules are provided with respect to the timing and fair market value of qualifying stock repurchases and issuances. According to the Notice, stock is generally treated as repurchased at the time ownership of the stock transfers to the repurchasing corporation(s) or relevant acquirer of the stock. Companies may use one of four acceptable methods to determine the fair market value of stock repurchased or issued, subject to a consistency rule applicable to repurchases and issuances during the taxable year. Specifically, the market price for stock traded on an established securities market may be determined based on: (1) the daily volume-weighted average price, (2) the closing price, (3) the average high and low price or (4) the trading price at the time the stock is repurchased or issued.
Employee Stock Exception. The guidance includes interim rules for determining the exception for stock issued or provided to employees through stock-based compensation and employee retirement plans, including provisions relating to the timing and valuation of such issuances.
Reporting. Under the Notice, the excise tax is to be determined on an annual basis and reported on IRS Form 720, Quarterly Federal Excise Tax Return, with an additional form contemplated to help with the computation of the excise tax. While Form 720 is generally filed quarterly, the Notice provides that the stock buyback excise tax is to be reported on the form due for the first full quarter after the close of the corporation’s taxable year (e.g., due April 30, 2024, for a calendar year corporation reporting the excise tax for 2023).
Book-Minimum Tax
Notice 2023-7 provides interim rules for the new minimum-tax regime based on financial statement net income—commonly known as the book-minimum tax (BMT) or corporate alternative minimum tax (CAMT). The BMT applies to taxable years beginning after Dec. 31, 2022, and generally is equal to 15% of the corporation’s adjusted financial statement net income (AFSI), after applicable foreign tax credits, to the extent it exceeds the corporation’s regular federal income tax liability, including any Base Erosion Anti-abuse Tax (BEAT).
Scope. The new minimum tax generally applies to corporations with AFSI in excess of $1 billion (based a trailing three-year average), as well as U.S. subsidiaries of foreign corporations where the foreign group exceeds the $1 billion threshold and the U.S. subsidiaries have AFSI in excess of $100 million. The Notice provides a limited safe harbor for certain small corporations, which the IRS describes as providing “an easy method for demonstrating that the new alternative minimum tax does not apply to them.” Guidance is also provided regarding consolidated financial statements and returns, determination of AFSI with respect to partners and partnerships, and treatment of certain cancelation of indebtedness income.
Mergers and Acquisitions. The Notice addresses questions that had been raised regarding the BMT’s application to mergers and acquisitions, in particular split-off transactions, by specifying that any gain or loss, and corresponding basis adjustments, from tax-free reorganizations under the Code generally are not taken into account for purposes of determining the minimum tax.
Depreciation Adjustments. The guidance provides specific rules for determining the depreciation adjustment provided in Code section 56A(c)(13), under which an asset’s tax attributes (e.g., depreciation deduction and basis adjustments) are determined under federal income tax rules rather than financial accounting rules for the lifecycle of the asset from its acquisition to sale or other disposition.
Adjustments Regarding Tax Credits. The Notice clarifies that AFSI does not take into account certain amounts a corporation may receive with respect to tax credits. Specifically, refunds under the new direct-pay elections for certain energy credits (i.e., sections 48D(d) and 6417) are disregarded in the determination of AFSI. Similarly, amounts received with regard to the transfer of applicable tax credits under Code section 6418 also are disregarded.
Pending Issues. While the interim guidance is intended to address urgent issues for the new tax that goes into effect next month, the Notice calls out the omission of several major issues, which the Treasury Department and the IRS intend to address, likely before the BMT proposed regulations anticipated in the first quarter of next year. In particular, the Notice indicates that additional interim guidance is expected on the treatment of:
- Items that are marked-to-market for financial statement purposes,
- The treatment of items reported in other comprehensive income (OCI), and
- The treatment of embedded derivatives in certain reinsurance contracts.
These are among the 20 issues not addressed in the Notice on which the Treasury Department and the IRS are specifically requesting feedback.
Request for Comments
Both notices request comments on specific questions relating to rules discussed in the interim guidance, and they solicit feedback on issues not addressed in the guidance. Comments are due 60 days following the publication of the notices in the Federal Register.
For additional information regarding these notices and assistance in filing comments, please contact a member of the Brownstein Tax Team. Brownstein’s Tax Team stands ready to assist you with the preparation and filing of comments.
THIS DOCUMENT IS INTENDED TO PROVIDE YOU WITH GENERAL INFORMATION REGARDING TAX GUIDENCE FOR THE IRA AND THE CORESPONDING COMMENT PERIOD. THE CONTENTS OF THIS DOCUMENT ARE NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT OR IF YOU NEED LEGAL ADVICE AS TO AN ISSUE, PLEASE CONTACT THE ATTORNEYS LISTED OR YOUR REGULAR BROWNSTEIN HYATT FARBER SCHRECK, LLP ATTORNEY. THIS COMMUNICATION MAY BE CONSIDERED ADVERTISING IN SOME JURISDICTIONS.