On December 27, 2022, the US Treasury Department and the Internal Revenue Service (“IRS”) issued Notice 2023-2 (the “Notice”), which provides taxpayers interim guidance (until regulations are issued) on how the new 1% excise tax on stock-buybacks will be imposed and administered. The new 1% excise tax was enacted last summer as part of the Inflation Reduction Act of 2022 (“IRA”) and generally applies to any US corporation whose stock is traded on an established securities market and that repurchases more than $1 million of stock over the course of a tax year (a “covered corporation”). Taxpayers may rely on the Notice pending the issuance of proposed regulations.“Repurchases”The Notice clarifies that, for purposes of the stock repurchase excise tax, a repurchase means solely a redemption under § 317(b) of the Internal Revenue Code (the “Code”)1 (with several exceptions discussed below) or an “economically similar transaction.”2The following redemptions will not be treated as repurchases for the purposes of the excise tax:- If § 304(a)(1) (acquisitions by related corporations, other than an acquisition by a subsidiary) applies to an acquisition of stock by an acquiring corporation, the acquiring corporation’s deemed distribution in redemption of its stock will not be considered a repurchase for purposes of the excise tax.- Payments by a covered corporation of cash instead of a fractional share will not be considered a repurchase if (i) the payment is part of a qualified reorganization under § 368(a) or of a distribution of stock and securities of a controlled corporation to which § 355 applies or pursuant to the settlement of an option or a similar financial instrument (for example, a convertible bond or convertible preferred share), (ii) the cash distributed to the shareholder entitled to the fractional share i

ent on their carried interest. The IRA ultimately did not contain any such provision due to opposition from Senator Kyrsten Sinema (D-AZ), whose vote was critical to the bill’s passage in the Senate.Comment - While efforts to prolong the holding requirement for capital gains treatment of carried interest are not dead, such efforts are unlikely to succeed in the near term.Stock RepurchasesTo make-up for revenue lost upon the last-minute down-voting of the above-mentioned carried interest provisions, Congress added an excise tax on stock repurchases. The IRA imposes a 1% excise tax on the value of certain net stock repurchases by publicly traded corporations or their affiliates occurring after December 31, 2022 (with several exceptions, e.g. when repurchased stock is contributed to employee stock ownership plans, or when the total value of stock repurchased during the year does not exceed $1 million). A “repurchase” is defined as a redemption of the stock of a corporation (as defined in Section 317(b) of the Internal Revenue Code of 1986), or any other economically similar transaction (to be defined in future Treasury Regulations). Given the breadth of this definition, the 1% excise tax may apply to a number of different transactions where there are payments to shareholders of cash or property other than the corporation’s own stock.Comment - Given that this new 1% excise tax applies only to stock buybacks of publicly traded corporations and their affiliates, is not expected to have a large effect on private equity and venture capital funds that hold primarily private investments.Increased IRS FundingAmong other funding commitments, the IRA provides for an additional $80 billion in funding for the IRS. Approximately $45 million of that amount is allocated to enforcement, and the remainder is allocated to various operational improvements and modernization. The additional funding is expected to generate $124 billion in revenue, net of expenses, through improved enforcement efforts.CHIPS and Science Act Tax IncentivesIn a

The AMT will impact a relatively small number of companies. In 2021, 368 companies made enough to cross the threshold into corporate AMT territory, and of those, only 127 paid less than the required 15% rate.Excise Tax on Repurchase of Corporate StockThe IRA imposes a new 1% tax on the fair market value of stock repurchased by a publicly traded U.S. corporation during the taxable year, net of stock issuances that occur during the taxable year.The excise tax will apply to a redemption of stock in accordance with IRC §317(b) and economically similar transactions, including a corporation’s repurchase of stock from its shareholders (regardless of whether the acquired stock is cancelled, retired, or held as treasury stock), stock acquired by a corporation’s specified affiliate from another person, and certain acquisitions and repurchases of publicly traded foreign corporation stock.The excise tax has exceptions for (1) Code Section 368 tax-free reorganizations, (2) total repurchased stock of $1 million or less in the taxable year, (3) repurchases that are treated as dividends, (4) repurchases by regulated investment companies, or real estate investments trusts, (5) stock contributed to retirement accounts, pensions, or employee stock ownership plans, and (6) certain other miscellaneous transactions.No Change to Carried Interest Carried interest is income paid to investment managers (i.e., the general partner of a partnership) to treat what is functionally their income (normally taxed at a top federal rate of

The provision is effective for tax years beginning after December 31, 2022.Excise Tax on Corporate Stock RepurchasesThe IRA imposes a 1 percent excise tax on certain net stock repurchases by publicly traded corporations. A “repurchase” is defined generally as a redemption of the corporation’s stock, within the meaning of IRC Section 317(b), and any other economically similar transaction. The new provision applies to repurchases of stock after December 31, 2022.The excise tax also applies to a “specified affiliate” of a publicly traded corporation that performs the repurchase.

The excise tax is imposed on “Covered Corporations” repurchasing their shares directly or through a “Specified Affiliate.” A “repurchase” is defined as a “redemption” under Section 317(b) (i.e., an acquisition by a corporation of its own stock from its shareholders in exchange for property) or any transaction determined by the IRS to be “economically similar” to a redemption.The tax is generally equal to 1% of the fair market value of the stock repurchased by the Covered Corporation or the Specified Affiliate.

In the Act, a covered corporation is defined as “any domestic corporation the stock of which is traded on an established securities market.” A repurchase for purposes of this provision is defined as a redemption within the meaning of section 317(b) of the Internal Revenue Code of 1986, as amended (Code) and anything the IRS will deem to be “economically similar” to a redemption. Section 317(b) of the Code defines a redemption as occurring where “the corporation acquires its stock from a shareholder in exchange for property whether or not the stock so acquired is cancelled, retired, or held as treasury stock.”

The statute applies to buybacks taking place after December 31, 2022 and does not provide any "grandfathering rule" for repurchases pre-authorized on or prior to such date (for example, pursuant to a Rule 10b5-1 plan).A "covered corporation" is a domestic corporation (or certain non-US corporations treated for tax purposes as a domestic corporation under the "inversion" rules) the stock of which is traded on an "established securities market."3 In limited circumstances, acquisitions of stock of certain publicly traded non-domestic corporations by their domestic subsidiaries will be treated as repurchases subject to the Excise Tax.The value of stock treated as repurchased during the taxable year for purposes of computing the Excise Tax is reduced by the value of any new issuances of stock by the corporation during the same taxable year (the "Netting Rule").The statute defines "repurchase" broadly by reference to Section 317(b) of the Internal Revenue Code of 1986, as amended (the "Code"), which generally includes any acquisition of stock by the corporation in exchange for cash or property other than the corporation's own stock or stock rights. The Excise Tax further expands this definition by including any other "economically similar" transaction, as determined by Treasury.The Act excludes the following repurchases from the Excise Tax:To the extent the repurchase is part of a tax-free reorganization under Section 368(a) of the Code, and no gain or loss is recognized by the shareholder by reason of the reorganization.

Thus, the corporation’s taxable income is increased because of the recharacterization of the payment as a nondeductible dividend. IRC Sec. 316 and Sec. 312. IRC Sec. 317. Under some circumstances, the courts have held that a dividend may take the form of services provided by a corporation to its shareholders.

751. [xli] IRC Sec. 317. [xlii] Attribution rules are applied for this purpose.