On June 29, 2023, the Internal Revenue Service (IRS) issued Announcement 2023-18 (the Announcement), which provides transitional guidance with respect to the stock repurchase excise tax under section 4501 (the Buyback Tax). For previous coverage of the Buyback Tax by Eversheds Sutherland, see Inflation Reduction Act imposes a nondeductible 1% excise tax on certain corporate stock buybacks and Unpacking The New Stock Buyback Tax And Its Exceptions. The IRS confirms in the Announcement that, prior to the time specified in the forthcoming proposed regulations addressing the application of the Buyback Tax (the Proposed Regulations), taxpayers are not required to (1) report the Buyback Tax during a covered corporation’s taxable year on any returns filed with the IRS or (2) make any payments of such tax.

Background

In general, the Buyback Tax is effective for repurchases occurring in taxable years after December 31, 2022. On December 27, 2022, Treasury and the IRS released Notice 2023-2 (the Notice), which provides taxpayers with interim guidance regarding the application of the Buyback Tax. The Notice also announced that Treasury and the IRS intend to issue the Proposed Regulations. For previous coverage of the Notice by Eversheds Sutherland, see Unpacking The Interim Guidance On New Stock Buyback Tax. Among other things, the Notice describes anticipated procedures for reporting and paying any liability for the Buyback Tax.

Taxable years ending after December 31, 2022, but prior to publication of the Proposed Regulations

The Announcement states that it is expected that the Proposed Regulations will require any liability for the Buyback Tax for a taxable year ending after December 31, 2022, but prior to the publication of the Proposed Regulations, to be reported on the IRS Form 720 that is due for the first full quarter after the date of publication of the Proposed Regulations, with the payment of any tax due expected at the same time.

Requirement to maintain complete and detailed records

The Announcement also states that it is anticipated that the Proposed Regulations will require covered corporations to maintain complete and detailed records for the purpose of accurately establishing liability under the Buyback Tax, including repurchases made after December 31, 2022, but prior to publication of the Proposed Regulations, for as long as the contents of the records may become material.

Conclusion

Confirming that taxpayers are not required to report the Buyback Tax during a covered corporation’s taxable year, or make any payments, prior to the publication of the Proposed Regulations, is a welcome development that provides taxpayers with additional clarity until the Proposed Regulations are available. Based on the posture of Treasury and the IRS, it is likely they will permit taxpayers to rely on the Proposed Regulations, which would be a welcome development considering the complexities of the Buyback Tax. In the meantime, affected taxpayers should maintain complete and detailed records of any repurchases or deemed repurchases that may be subject to the Buyback Tax.

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