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TAX CLINIC

of the reorganization. As described is presumed not to be a dividend and For example, if a specified affiliate uses
above, these transactions (including therefore is ineligible for the exception. covered corporation stock to make an
split-offs) are treated as economically The foregoing presumption may be acquisition (including an acquisitive
similar transactions in which the target rebutted if the covered corporation com- reorganization of a noncovered corpora-
corporation (in an acquisitive reorgani- plies with several requirements that are tion), such covered corporation stock
zation), recapitalizing corporation (in an intended to ensure that the repurchase is does not appear to result in a reduction
E reorganization), transferor corporation a dividend and will be reported as such under the netting rule.
(in an F reorganization), or distributing for U.S. federal income tax purposes As is the case with respect to stock
corporation (in a split-off), as applicable, (e.g., delivery of a Form 1099-DIV, repurchases, the notice provides that
is a covered corporation. Dividends and Distributions). stock generally will be treated as issued
In these cases, the stock repurchase or provided by the covered corporation
excise tax base is reduced to the extent Adjustment to amount subject when ownership of the stock transfers
that the covered corporation makes the to tax-netting rule for U.S. federal income tax purposes.
repurchase with consideration permitted For purposes of calculating the excise Although beyond the scope of this
to be received under Sec. 354 or 355 tax, Sec. 4501(c)(3) provides that the discussion, the notice includes rules for
without the recognition of gain or loss. aggregate FMV of the stock repurchased purposes of determining when stock is
Accordingly, if only qualifying consider- by the covered corporation during the treated as issued or provided to employ-
ation is received under those provisions tax year is reduced by the aggregate ees (e.g., where a Sec. 83(b) election is
(in general, other than “nonqualified FMV of any stock issued by the covered made by the employee to include the
preferred stock” within the meaning of corporation during the tax year. For this FMV of the stock received in gross
Sec. 351(g) unless exchanged for other purpose, stock issued includes stock income). Also, the notice provides that
nonqualified preferred stock), the stock issued or provided to employees of the the market price rules for determining
repurchase excise tax base would be covered corporation or a specified affili- the FMV of repurchases described above
zero (ignoring any other repurchases or ate of the covered corporation. also apply for purposes of determining
issuances). The FMV (under Notice 2023-2, the FMV of stock issued under the
To the extent that one of the forego- the market price) of each repurchase netting rule (including the requirement
ing transactions involves cash or other and issuance must be determined. Con- to consistently use the selected method
property (i.e., “boot”), the stock repur- sequently, excise tax may be due even for a tax year). Such rules, however, do
chase excise tax base would be equal to though the number of shares issued off- not apply with respect to determining
the amount of such boot (see the notice, sets (or more than offsets) the number of the FMV of stock issued or provided
Section 3.09, Examples 6, 8, 9–14, and shares repurchased. In contrast, no excise to employees.
19). Thus, Notice 2023-2 did not adopt tax may be due even though the number In addition, the notice contains a
the construct set forth by the Supreme of shares repurchased is greater than the list of stock issuances that are not taken
Court in Clark, 489 U.S. 726 (1989), number of shares issued. into account under the netting rule. The
for purposes of determining dividend Consistent with Sec. 4501(c)(3), list includes: (1) distributions of stock
treatment under Sec. 356(a)(2), whereby the notice provides that the stock re- by a covered corporation with respect
the acquiring corporation is deemed to purchase excise tax base for a covered to its stock (e.g., stock dividends under
issue stock and then redeem the stock corporation’s tax year (after making any Sec. 305 (see the notice, Section 3.09,
in exchange for any cash or other boot. reductions pursuant to the statutory Example 5)); and (2) stock issued by
Following the Clark construct would exceptions) is reduced by the FMV of the covered corporation to a specified
have resulted in repurchases relating the stock of the covered corporation that affiliate. The list also includes issuances
to boot effectively not being subject is: (1) issued or provided to employees where there was a related repurchase
to the excise tax because there would of the covered corporation or a specified that was excluded under a statutory ex-
have been offsetting deemed issuances affiliate of the covered corporation; or ception. For example, stock issued in an
and redemptions. (2) issued by the covered corporation to acquisitive reorganization, a recapitaliza-
Another statutory exception relates to persons other than employees described tion, an F reorganization, or a split-off is
a repurchase being treated as a dividend in clause (1). Based on the foregoing, for not taken into account under the netting
under Sec. 301(c)(1) or Sec. 356(a)(2). purposes of the netting rule, the notice rule to the extent the stock repurchase
The notice provides that a redemption does not appear to include covered cor- excise tax base was reduced under the
under Sec. 302 or an exchange under poration stock transferred by a specified Sec. 368(a) statutory exception (i.e.,
Sec. 356 that is treated as a repurchase affiliate to persons other than employees. as described above, the stock issued

10 March 2023 The Tax Adviser