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TAX CLINIC

Transactions subject to
the excise tax
A “repurchase” of stock is defined as any
(1) redemption within the meaning of
Sec. 317(b); and (2) transaction deter-
mined by the IRS to be economically
similar to a redemption of stock (“eco-
nomically similar transactions”)
(Sec. 4501(c)(1)(A)). Under Sec. 317(b),
a redemption of stock means an acquisi-
tion by a corporation of its own stock
from a shareholder in exchange for
property other than the corporation’s
own stock or rights to acquire such
stock. Notice 2023-2 provides for two
limited and exclusive exceptions with
respect to Sec. 317(b) redemptions. The
first exception is for the deemed re-
demption of acquiring corporation stock
that occurs as a result of the application
of Sec. 304(a)(1) to a related-party stock
acquisition. The second exception is
stock that is not traded on an established Computation of the excise tax for deemed redemptions where cash is
securities market). As mentioned above, Notice 2023-2 sets forth a computa- received in lieu of fractional shares (and
the regulatory authority set forth in Sec. tion for the excise tax that is consistent certain conditions are met).
4501(f) included guidance to address with the 1% computation set forth in Thus, the notice takes a very broad
preferred stock; however, the notice, as Secs. 4501(a) and (c) but allows for the definition of “repurchase” such that,
evidenced by the example, did not con- administration of the rules and constructs other than the two exceptions above,
tain any exceptions for preferred stock, contained in the notice. In this regard, all other transactions that are treated
including where the covered corporation the notice provides that the amount as redemptions under general U.S.
had the obligation (and not the option) of the excise tax imposed on a covered federal income tax principles would be
to redeem the preferred stock. corporation is equal to 1% times the treated as repurchases. For example,
In addition, Sec. 4501(c)(2) provides stock repurchase excise tax base. “Stock leveraged buyout transactions would
that purchases of covered corporation repurchase excise tax base” is defined as be treated as repurchases where the
stock by a “specified affiliate” are treated an amount (not less than zero) equal to cash consideration received by the
as repurchases by the covered corpora- the FMV of all repurchases (as defined in covered corporation shareholders
tion. For this purpose, “specified affiliate” Section 3.04 of the notice) of the covered is sourced from existing cash of the
means (1) any corporation more than corporation’s stock during the tax year (as covered corporation or debt of a
50% of the stock of which is owned (by measured and determined under Section merger subsidiary that is assumed by
vote or by value), directly or indirectly, 3.06 of the notice), subject to reduction in the covered corporation (see the notice,
by the covered corporation; and (2) the following order: Section 3.09, Examples 3 and 4).
any partnership more than 50% of the ■ The FMV of any repurchases that are The notice also includes guidance
capital interests or profits interests of subject to one of the “statutory excep- with respect to economically similar
which is held, directly or indirectly, by tions” under Sec. 4501(e); and transactions, which are treated as re-
the covered corporation (Sec. 4501(c) ■ The FMV of any stock issued by the purchases by covered corporations. In
(2)(B)). However, purchases of covered covered corporation under the “netting particular, the notice sets forth the fol-
corporation stock by a specified affiliate rule” under Sec. 4501(c). lowing exclusive list of transactions that PHOTO BY TETRA IMAGES/GETTY IMAGES
from the covered corporation or another The notice provides that any excess Treasury and the IRS intend to treat as
specified affiliate of such covered cor- reductions under the statutory exception economically similar transactions: (1)
poration are not treated as repurchases and/or the netting rule may not be carried “acquisitive reorganizations,” i.e., reor-
(Sec. 4501(c)(2)(A)). back or carried forward to other tax years. ganizations described in Sec. 368(a)(1)

8 March 2023 The Tax Adviser