November 5, 2021
Excise tax on stock buybacks included in House reconciliation manager's amendment
An excise tax that would impose a 1% surcharge on corporate stock buybacks is included in the managers amendment to the House Build Back Better Act reconciliation bill (H.R. 5376).
The proposal was part of President Biden's Build Back Better Framework and is similar to the Stock Buyback Accountability Act (S. 2758), introduced Senators Wyden and Brown on September 20, 2021, which would have imposed a 2% excise tax.
The proposal would apply to repurchases of stock after December 31, 2021.
1% excise tax
The proposal would enact new IRC Section 4501, which would impose a nondeductible excise tax on publicly traded US corporations (Covered Corporations) engaging in stock buybacks. Subject to certain exceptions and adjustments, the excise tax would equal 1% of the value of the stock repurchased by the Covered Corporation during the tax year.
"Repurchase" means (1) a stock redemption under IRC Section 317(b) (i.e., any acquisition of stock by a corporation from a shareholder in exchange for property, which, under IRC Section 317(a), is almost anything other than stock of the distributing corporation), or (2) any other economically similar transaction as determined by Treasury. The repurchase amount subject to the excise tax would be reduced by the value of any stock issued by the Covered Corporation during the tax year, including stock issued to the Covered Corporation's or a subsidiary's employees.
IRC Section 4501 would also apply if the Covered Corporation's Specified Affiliate (a subsidiary or partnership of which the Covered Corporation directly or indirectly owns 50% or more based on vote or value of stock, or capital or profits interest) purchases the Covered Corporation's stock from a person other than the Covered Corporation or any of its Specified Affiliates. In that case, the proposal would treat the Specified Affiliate's purchase of the Covered Corporation's stock as a repurchase of the stock by the Covered Corporation, making the Covered Corporation liable for the excise tax on the Special Affiliate's purchase.
Similar rules apply to a publicly traded foreign corporation that is a surrogate foreign corporation under IRC Section 7874(a)(2)(B) (but substituting "September 20, 2021" as the date after which the surrogate foreign corporation would have to complete the acquisition of the domestic partnership).
The excise tax would also apply to a repurchase of stock of a publicly traded foreign corporation by the foreign corporation's domestic Specified Affiliate. In that case, the domestic Specified Affiliate would be liable for the excise tax.
The excise tax proposal would exclude:
The proposal directs Treasury to issue guidance necessary or appropriate to administer the excise tax.
The Joint Committee on Taxation estimated that the excise tax would raise over $124 billion over 10 years (JCX-45-21, Nov. 4, 2021).
The proposal introduces a new tax consideration — an excise tax — to relatively commonplace transactions that meet its definition of a "repurchase." Effectively, the tax would apply to any corporate stock repurchase unless the receipt of the proceeds were clearly treated as a dividend (i.e., a distribution out of earnings and profits (E&P)). Companies within the proposal's scope would likely have to track the fair market value of stock issuances and redemptions closely so as to determine a "net" repurchase, if any, within a tax year, which would require assigning values and valuation methodology to both issuances and repurchases. Although the proposal clearly focuses on redemptions effected under corporate stock repurchase plans, as discussed next, other, more commonplace transactions could fall within its scope. The definition of repurchase is extremely broad, the list of exceptions is fairly narrow, and Treasury would be given broad latitude to determine other "economically similar" transactions that would be subject to the excise tax.
Based on defined terms and limited exceptions, the proposal has an uncertain scope that may or may not be larger than intended. For example, the proposal appears to apply to a redemption that is treated as an IRC Section 301 distribution rather than a dividend (i.e., a distribution out of E&P), even though the proposal would not apply a pure IRC Section 301 distribution.
In contrast, it is not clear how the proposal would apply to acquisitive reorganizations under IRC Section 368(a) in which target corporation shareholders receive some non-stock property (boot) in exchange for their target company stock; in that case, would the entire exchange be subject to the excise tax, or just the portion of the exchange of stock for boot?
It is also not clear how or whether the proposal would apply to various types of divisive transactions, including a tax-free "straight" split-off under IRC Section 355 of a controlled corporation in which distributing corporation stock is exchanged for controlled corporation stock in a transaction that does not qualify as a divisive reorganization under IRC Section 368(a)(1)(D). Certain leveraged acquisitions of publicly traded corporations, however, could be subject to the excise tax.
Taxpayers and their advisers should pay close attention to whether the proposal is modified further and, if enacted, how Treasury interprets some of the key provisions.