Section 4501 imposes a 1% excise tax on each covered corporation based on the fair market value of stock repurchased during the taxable year.
Section 4501(c) provides that a repurchase means (1) section 317(b) redemptions, and (2) economically similar transactions (as determined by Treasury). Stock acquisitions by specified affiliates of a covered corporation are also treated as repurchases for purposes of calculating the excise tax with respect to that covered corporation. Special rules apply to certain situations involving foreign corporations.
Exceptions to the excise tax (excepted repurchases) include repurchases that are part of a section 368 reorganization (to the extent that no gain or loss is recognized), contributions of repurchased stock to certain types of employee plans, and repurchases totaling $1 million or less in a taxable year. A netting rule allows for the reduction of repurchases by excepted repurchases and offsetting issuances during the taxable year.
Notice 2023-2 clarifies the law by providing an exclusive list of economically similar transactions that will be treated as repurchases, a nonexclusive list of transactions that are qualifying property repurchases that reduce the repurchases for the taxable year, and methods of calculating the ‘stock repurchase excise tax base’ in accordance with these rules.
The notice also provides that an acquiring corporation’s deemed distribution in redemption of its stock during the application of section 304(a)(1) and payments in lieu of fractional shares are not generally considered repurchases.
The stock repurchase excise tax base is calculated by aggregating the repurchases and then subtracting the qualifying property repurchases and issuances (while avoiding double-counting).
Pursuant to the notice, the exclusive list of economically similar transactions (i.e., transactions that are treated as repurchases) includes:
Transactions that are explicitly determined not to be economically similar transactions in the notice include any divisive transactions under section 355 where the shareholders of the distributing corporation do not exchange stock of the distributing corporation for stock of the controlled corporation (i.e., a spin-off) and complete liquidations to which either section 331 or section 332 applies (but not both). Any distribution to which section 332(a) applies is not a repurchase.
Excepted qualifying property repurchases (i.e., those that reduce the stock repurchase excise tax base) are described in the notice as follows:
The notice provides taxpayers with 26 examples illustrating the application of these rules (illustrated below).
Example 1: Redemption of preferred stock
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Facts. Corporation X has outstanding common stock that is traded on an established securities market, as well as mandatorily redeemable preferred stock that is not traded on an established securities market. The preferred stock is stock for Federal tax purposes. On January 1, 2023,Corporation X redeems the preferred stock pursuant to its terms.
Analysis. The redemption by Corporation X of its mandatorily redeemable preferred stock is a repurchase because (i) Corporation X redeemed an instrument that is stock for Federal tax purposes (that is, mandatorily redeemable preferred stock issued by Corporation X), and (ii) the redemption by Corporation X is a § 317(b)redemption. See section 3.04(2)(a) of this notice.
Example 2: Valuation of repurchase
Facts. On April 15, 2023, whenCorporation X’s common stock is trading at $0.70x per share, Corporation X purchases50x shares of its common stock for $35x from one of its shareholders.
Analysis. Corporation X’s purchase of 50x shares of Corporation X common stock is a repurchase because the transaction is a § 317(b) redemption. See section3.04(2)(a) of this notice. For purposes of calculating Corporation X’s stock repurchase excise tax base, the fair market value of the 50x shares of common stock repurchased on April 15, 2023, is the aggregate market price of those shares on that repurchase date, or $35x ($0.70x per share x 50x shares = $35x). See section 3.06(2)(a) of this notice. Accordingly, the repurchase by Corporation X increases its stock repurchase excise tax base for the 2023 taxable year by $35x.
Application of netting rule. The facts are the same as in section 3.09(2)(a) of this notice (this Example 2), except that, on August 1, 2023, Corporation X issues 20x shares of its common stock to an unrelated party, at which time ownership of the stock transfers to the unrelated party for Federal income tax purposes. On that date, the common stock of Corporation X is trading at $0.50x per share. For purposes of calculating Corporation X’s stock repurchase excise tax base, Corporation X is treated as issuing its 20x shares of common stock on August 1, 2023 (the date on which 34ownership of the stock transfers to the recipient for Federal income tax purposes). See section 3.08(2) of this notice. In addition, the fair market value of that issued stock is its aggregate market price on the date of issuance by Corporation X, or $50x ($0.50x per share x 20x shares = $10x). See sections 3.03(3)(a) and 3.08(5)(a) of this notice.Accordingly, the net increase in Corporation X’s stock repurchase excise tax base for its2023 taxable year is $25x ($35x repurchase - $10x issuance = $25x). See section3.08(1) of this notice.
Example 3: Acquisition partially funded by the target corporation
Facts. On May 30, 2023, Corporation X acquires all of Target’s outstanding stock (Target Stock Acquisition). To effectuate the Target Stock Acquisition, Corporation X causes the following transaction steps to occur: (i) Corporation X contributes $40x to a newly formed corporation (Merger Sub); and (ii) Merger Sub merges into Target, with Target surviving the merger (Subsidiary Merger). At the time of the Subsidiary Merger, the stock of Target has an aggregate fair market value of $100x. In the Subsidiary Merger, Target’s shareholders exchange all their Target stock for $100x of cash, of which $60x is funded by Target and $40x is funded by Corporation X. For Federal income tax purposes, the transitory existence of Merger Sub is disregarded, and Target is treated as if Target redeemed 60% of its outstanding stock for $60x as part of the Subsidiary Merger. (This treatment results from the fact that Target funded $60x of the consideration received by Target’s shareholders in exchange for their Target stock.)
Analysis. Target’s redemption of 60% of its outstanding stock is a § 317(b) redemption. In addition, Target’s redemption is not included in the exclusive list of transactions under section 3.04(3) of this notice that are treated as a § 317(b) redemption but are not a repurchase. Accordingly, the redemption is a repurchase. See section 3.04(2)(a) of this notice. Therefore, as a result of the Target Stock Acquisition, Target’s stock repurchase excise tax base for its 2023 taxable year is increased by $60x. See section 3.03(3)(a) of this notice.
Example 4: Leveraged buyout
Facts. The facts are the same as in section 3.09(3)(a) of this notice (Example 3), except that $60x of the consideration received by Target’s shareholders in exchange for their Target stock is funded by a $60x loan to Merger Sub from an unrelated lender (Loan). In the Subsidiary Merger, Target assumes Merger Sub’s obligation on the $60x Loan. As a result of the disregarded transitory existence of Merger Sub, the Target Stock Acquisition is treated for Federal income tax purposes as though Target (i) directly borrowed $60x from the unrelated lender, and then (ii) used the Loan proceeds to redeem $60x of its stock from the Target shareholders.
Analysis. The analysis and Federal income tax consequences are the same as in Example 3.
Example 5: Pro rata stock split
Facts. On October 1, 2023, Corporation X distributes three shares of Corporation X common stock with respect to each existing share of its outstanding common stock (Corporation X Stock Split). 35
Analysis. The common stock distributed by Corporation X to its shareholders through the Corporation X Stock Split is not an issuance because Corporation X distributed the stock to its shareholders with respect to its outstanding common stock. See section 3.08(4)(b) of this notice. Therefore, the stock distributed by Corporation X is not taken into account for purposes of the netting rule. See section 3.08(4)(a) of this notice (disregarding such types of issuances). Accordingly, Corporation X’s stock repurchase excise tax base for its 2023 taxable year is not reduced by the Corporation X Stock Split.
Example 6: Acquisition of a target corporation in an acquisitive reorganization
Facts. On October 1, 2023, Target merges into Corporation X (Target Merger). The Target Merger qualifies as an A reorganization. On the date of the Target Merger, the fair market value of Target’s outstanding stock is $100x. In the Target Merger, Target’s shareholders exchange $60x of their Target stock for Corporation X common stock, and $40x of their Target stock for $40x of cash.
Analysis regarding repurchase treatment, timing, and amount. The exchange by the Target shareholders of their Target stock for the consideration received in the Target Merger is a repurchase by Target because that exchange is an economically similar transaction. See section 3.04(4)(a)(i) of this notice. This repurchase occurs on October 1, 2023 (that is, the date on which the Target shareholders exchange their Target shares as part of the Target Merger). See section 3.06(1)(b) of this notice. The amount of this repurchase by Target is $100x, which equals the aggregate fair market value of the Target stock at the time that stock is exchanged by the Target shareholders as part of the Target Merger (that is, October 1, 2023). See section 3.06(2)(a) of this notice.
Analysis regarding impact of Target Merger on Target’s stock repurchase excise tax base. Target’s stock repurchase excise tax base for its 2023 taxable year is initially increased by $100x on account of the Target Merger. Under the qualifying property exception, the fair market value of the Target stock exchanged by the Target shareholders for Corporation X stock in the Target Merger (that is, $60x of Target stock) is a qualifying property repurchase that reduces Target’s stock repurchase excise tax base. See sections 3.03(3)(a) and 3.07(2)(a) of this notice (regarding acquisitive reorganizations). However, the fair market value of the Target stock exchanged by the Target shareholders for the $40x of cash in the Target Merger does not qualify for the qualifying property exception. See sections 3.03(3)(a) and 3.07(2)(a) of this notice. Therefore, Target’s stock repurchase excise tax base for its 2023 taxable year is increased by $40x ($100x repurchase - $60x exception = $40x).
Analysis regarding Corporation X’s stock repurchase excise tax base. Corporation X’s transfer of Corporation X stock to Target in the Target Merger is not an issuance for purposes of the netting rule because Corporation X’s issuance of that stock is part of a transaction to which the qualifying property exception applies. See generally section 3.08(4)(d) of this notice. Specifically, Corporation X’s transfer of Corporation X 36 stock to Target is not an issuance for purposes of the netting rule because (i) the Corporation X stock constitutes property permitted to be received under § 354 without the recognition of gain, (ii) the Corporation X stock is used by a covered corporation (that is, Target) to repurchase its stock in a transaction that is a repurchase under section 3.04(4)(a)(i) of this notice, and (iii) the repurchase by Target is not included in Target’s stock repurchase excise tax base because it is a qualifying property repurchase. See section 3.08(4)(d) of this notice. Therefore, Corporation X does not take into account any of the $60x of its stock transferred to Target in the Target Merger to reduce its stock repurchase excise tax base for Corporation X’s 2023 taxable year. See section 3.08(4)(a) of this notice (disregarding such types of issuances).
Example 7: Cash paid in lieu of fractional shares
Facts. The facts are the same as in section 3.09(6)(a) of this notice (Example 6). Additionally, the exchange ratio in the Target Merger is 1.25 shares of Corporation X stock for each share of Target stock. As part of the Target Merger, Shareholder A, who owns two shares of Target stock, receives two shares of Corporation X stock as well as additional cash in lieu of a 0.5 fractional share in Corporation X. The payment by Corporation X to Shareholder A of cash in lieu of a fractional share of Corporation X stock (i) was not separately bargained-for consideration (that is, the cash paid by Corporation X in lieu of a fractional Corporation X share represented a mere rounding off of the two Corporation X shares issued in the exchange), (ii) was carried out solely due to administrative necessity (and therefore, solely for non-tax reasons), and (iii) was for an amount of cash with regard to a fractional share of Corporation X stock that did not exceed the value of one share.
Analysis. The payment by Corporation X of cash to Shareholder A in lieu of a fractional share of Corporation X stock is treated for Federal income tax purposes as though the 0.5 fractional share were (i) distributed by Corporation X to Shareholder A as part of the Target Merger, and then (ii) redeemed by Corporation X for cash. Corporation X’s deemed redemption of the fractional share treated as received by Shareholder A in the Target Merger is not a repurchase because, in addition to the facts described in section 3.09(7)(a) of this notice (this Example 7), the payment of cash by Corporation X is carried out as part of a transaction that qualifies as an acquisitive reorganization (that is, the Target Merger). See section 3.04(3)(b) of this notice. In addition, Corporation X’s deemed issuance of the fractional share to Shareholder A is not taken into account for purposes of the netting rule. See section 3.08(4)(f) of this notice.
Example 8: Two-step asset acquisition
Facts. Corporation X acquires the assets of Target through the following transactions, each of which occurs pursuant to an integrated plan to effect the acquisition. First, on September 30, 2023, Corporation X contributes $60x of Corporation X stock and $40x of cash to a newly formed subsidiary (Merger Sub). Second, on October 1, 2023, Merger Sub merges into Target in a statutory merger, with Target surviving (Reverse Merger). Third, on October 15, 2023, Target merges into Corporation X in a statutory merger (Upstream Merger). On the date of the Reverse Merger, the fair market value of Target’s outstanding stock is $100x. In the Reverse Merger, $60x of Target stock is exchanged for Corporation X 37 stock, and $40x of Target stock is exchanged for $40x of cash. For Federal income tax purposes, the Reverse Merger and the Upstream Merger are integrated into a single statutory merger of Target into Acquiring that qualifies as an A reorganization.
Analysis. The analysis is the same as in section 3.09(6) of this notice (Example 6).
Example 9: E reorganization
Facts. On November 1, 2023, Corporation X issues new common stock, with an aggregate fair market value of $100x (New Common Stock), to Corporation X’s shareholders in exchange for their outstanding common stock in Corporation X (Old Common Stock). The exchange (Recapitalization) qualifies as an E reorganization. At the time of the Recapitalization, the fair market value of Corporation X’s outstanding common stock is $100x.
Analysis regarding repurchase treatment, timing, and amount. The exchange by the Corporation X shareholders of their Corporation X stock (that is, the Old Common Stock) for New Common Stock is a repurchase by Corporation X because that exchange is an economically similar transaction. See section 3.04(4)(a)(ii) of this notice. This repurchase occurs on November 1, 2023 (that is, the date on which the Target shareholders exchange their Old Common Stock as part of the Recapitalization). See section 3.06(1)(b) of this notice. The amount of this repurchase by Corporation X is $100x, which equals the aggregate fair market value of the Old Common Stock at the time that stock is exchanged by the Corporation X shareholders as part of the Recapitalization (that is, November 1, 2023). See section 3.06(2) of this notice.
Analysis regarding impact of repurchase of Old Common Stock on Corporation X’s stock repurchase excise tax base. Corporation X’s stock repurchase excise tax base for its 2023 taxable year is initially increased by $100x on account of the Recapitalization. Under the qualifying property exception, the fair market value of the Old Common Stock exchanged by the Corporation X shareholders for New Common Stock in the Recapitalization (that is, $100x of Old Common Stock) is a qualifying property repurchase that reduces Corporation X’s stock repurchase excise tax base. See sections 3.03(3)(a) and 3.07(2)(b) of this notice (regarding E reorganizations). Consequently, because all the Old Common Stock was exchanged by the Corporation X shareholders for New Common Stock, the Recapitalization does not increase Corporation X’s stock repurchase excise tax base for its 2023 taxable year ($100x repurchase - $100x exception = $0).
Analysis regarding impact of issuance of New Common Stock on Corporation X’s stock repurchase excise tax base. Corporation X’s issuance of the New Common Stock is not an issuance for purposes of the netting rule because Corporation X’s issuance of that stock is part of a transaction to which the qualifying property exception applies. See generally section 3.08(4)(d) of this notice. Specifically, Corporation X’s issuance of its New Common Stock to Corporation X’s shareholders is not an issuance for purposes of the netting rule because (i) the New Common Stock constitutes property permitted to be received under § 354 without the recognition of gain, (ii) the New 38 Common Stock is used by a covered corporation (that is, Corporation X) to repurchase its stock in a transaction that is a repurchase under section 3.04(4)(a)(ii) of this notice, and (iii) the repurchase by Corporation X is not included in Corporation X’s stock repurchase excise tax base for its 2023 taxable year because it is a qualifying property repurchase. See section 3.08(4)(d) of this notice. Therefore, Corporation X does not take into account any of the $100x of New Common Stock issued to Corporation X’s shareholders to reduce its stock repurchase excise tax base for Corporation X’s 2023 taxable year. See section 3.08(4)(a) of this notice (disregarding such types of issuances).
Example 10: F reorganization
Facts. In order to reorganize under the laws of State B, on November 15, 2023, Corporation X forms Corporation Y, a State B corporation, and merges into Corporation Y (Corporation X Merger). The Corporation X Merger qualifies as an F Reorganization. On the date of the Corporation X Merger, the fair market value of Corporation X’s stock is $100x. Shareholder A owns $25x of Corporation X’s outstanding stock. In the Corporation X Merger, Shareholder A transfers its $25x of Corporation X stock to Corporation X in exchange for $25x of cash, which is treated for Federal income tax purposes as an unrelated, separate transaction from the F Reorganization to which § 302(a) applies (Shareholder A Redemption). See § 1.368-2(m)(3)(iii). The remaining Corporation X shareholders exchange their Corporation X stock for Corporation Y stock as part of the F Reorganization.
Analysis regarding repurchase treatment, timing, and amount. The exchange by Shareholder A of their Corporation X stock is a repurchase by Corporation X in the amount of $25x because it is a § 317(b) redemption. See section 3.04(2)(a) of this notice. In addition, the exchange by Corporation X’s other shareholders of their Corporation X stock for Corporation Y stock is a repurchase by Corporation X in the amount of $75x because that exchange is an economically similar transaction. See section 3.04(4)(a)(iii) of this notice. These repurchases occur on November 15, 2023 (that is, the date on which the Corporation X shareholders transfer their Corporation X stock to Corporation X as part of the Corporation X Merger). See section 3.06(1)(a) and (b) of this notice. The total amount of these repurchases by Corporation X is $100x, which equals the sum of (i) the fair market value of the Corporation X stock redeemed in the Shareholder A Redemption on the date of the redemption, and (ii) the aggregate fair market value of the Corporation X stock at the time that stock is exchanged by the Corporation X shareholders as part of the F Reorganization (that is, November 15, 2023). See section 3.06(2)(a) of this notice.
Analysis regarding impact of Shareholder A Redemption and F Reorganization on Corporation X’s stock repurchase excise tax base. Corporation X’s stock repurchase excise tax base for its 2023 taxable year is initially increased by $100x on account of the Shareholder A Redemption and F Reorganization. Under the qualifying property exception, the fair market value of the Corporation X stock exchanged by the Corporation X shareholders for Corporation Y stock in the F Reorganization (that is, $75x of Corporation X stock) is a qualifying property repurchase that reduces Corporation X’s stock repurchase excise tax base. See 39 sections 3.03(3)(a) and 3.07(2)(c) of this notice. Accordingly, Corporation X’s stock repurchase excise tax base for its 2023 taxable year is increased by $25x ($25x repurchase + ($75x repurchase - $75x exception) = $25x).
Analysis regarding Corporation Y’s stock repurchase excise tax base. Corporation Y’s transfer of the $75x of its stock to Corporation X in the Corporation X Merger is not an issuance for purposes of the netting rule because Corporation Y’s issuance of that stock is part of a transaction to which the qualifying property exception applies. See generally section 3.08(4)(d) of this notice. Specifically, Corporation Y’s transfer of its stock to Corporation X is not an issuance for purposes of the netting rule because (i) the Corporation Y stock constitutes property permitted to be received under § 354 without the recognition of gain, (ii) the Corporation Y stock is used by a covered corporation (that is, Corporation X) to repurchase its stock in a transaction that is a repurchase under section 3.04(4)(a)(iii) of this notice, and (iii) the repurchase by Corporation X is not included in Corporation X’s stock repurchase excise tax base for its 2023 taxable year because it is a qualifying property repurchase. See section 3.08(4)(d) of this notice. Therefore, Corporation Y does not take into account any of the $75x of its stock transferred to Corporation X to reduce its stock repurchase excise tax base for Corporation Y’s 2023 taxable year. See section 3.08(4)(a) of this notice (disregarding such types of issuances).
Example 11: Section 355 split-off
Facts. A covered corporation (Distributing) has outstanding common stock that is traded on an established securities market. Distributing owns all the stock of a preexisting subsidiary (Controlled). On December 1, 2023, Distributing distributes all the stock of Controlled and $20x of cash to certain of its shareholders (Participating Shareholders) in exchange for $100x of Distributing stock in a split-off (Participating Shareholders Split-Off). On the date of the Participating Shareholders Split-Off, the Distributing stock has a fair market value of $100x.
Analysis regarding repurchase treatment, timing, and amount. The exchange by the Participating Shareholders of their Distributing stock for the $80x of Controlled stock and $20x of cash in the Participating Shareholders Split-Off is a repurchase by Distributing because that exchange is an economically similar transaction. See section 3.04(4)(a)(iv) of this notice. This repurchase occurs on December 1, 2023 (that is, the date on which the Participating Shareholders exchange their Distributing shares as part of the Participating Shareholders Split-Off). See section 3.06(1)(b) of this notice. The amount of this repurchase by Distributing is $100x, which equals the aggregate fair market value of the Distributing stock at the time that stock is exchanged by the Participating Shareholders in the Participating Shareholders Split-Off (that is, December 1, 2023). See section 3.06(2)(a) of this notice.
Analysis regarding impact of Distribution on Distributing’s stock repurchase excise tax base. Distributing’s stock repurchase excise tax base for its 2023 taxable year is initially $100x on account of the Participating Shareholders Split-Off. However, under the qualifying property exception, the fair market value of the Distributing stock 40 exchanged by the Participating Shareholders for Controlled stock in the Participating Shareholders Split-Off (that is, $80x of Distributing Stock) is a qualifying property repurchase that reduces Distributing’s stock repurchase excise tax base. See sections 3.03(3)(a) and 3.07(2)(d) of this notice. However, the fair market value of the Distributing stock exchanged by the Participating Shareholders for the $20x of cash in the Participating Shareholders Split-Off does not qualify for the qualifying property exception. See sections 3.03(3)(a) and 3.07(2)(d) of this notice. Therefore, Distributing’s stock repurchase excise tax base for its 2023 taxable year is increased by $20x.
Example 12: Section 355 split-off as part of a D reorganization
Facts. The facts are the same as in section 3.09(11)(a) of this notice (Example 11), except that the Participating Shareholders Split-Off is carried out as part of a transaction qualifying as a D reorganization in which Distributing transfers assets to Controlled.
General analysis. Except as provided in section 3.09(12)(c) of this notice, the analysis and Federal income tax consequences are the same as in section 3.09(11) of this notice (Example 11).
Analysis regarding Controlled’s stock repurchase excise tax base. Controlled’s transfer of the $80x of its stock to Distributing in the Participating Shareholders Split-Off is not an issuance for purposes of the netting rule because Controlled’s issuance of that stock is part of a transaction to which the qualifying property exception applies. See generally section 3.08(4)(d) of this notice. Specifically, Controlled’s transfer of its stock to Distributing is not an issuance for purposes of the netting rule because (i) the Controlled stock constitutes property permitted to be received under § 355 without the recognition of gain, (ii) the Controlled stock is used by a covered corporation (that is, Distributing) to repurchase its stock in a transaction that is a repurchase under section 3.04(4)(a)(iv) of this notice, and (iii) the repurchase by Distributing is not included in Distributing’s stock repurchase excise tax base for its 2023 taxable year because it is a qualifying property repurchase. See section 3.08(4)(d) of this notice. Therefore, Controlled does not take into account any of the $80x of its stock transferred to Distributing to reduce Controlled’s stock repurchase excise tax base for Controlled’s 2023 taxable year. See section 3.08(4)(a) of this notice (disregarding such types of issuances).
Example 13: Spin-off
Facts. The facts are the same as in section3.09(11)(a) of this notice (Example 11), except that Distributing distributes the Controlled stock to its shareholders pro rata without the shareholders exchanging any Distributing stock (Spin-Off).
Analysis. The Spin-Off is not an economically similar transaction. See section 3.04(4)(b)(ii) of this notice. Therefore, the Spin-Off is not a repurchase by Distributing.
Example 14: Section 355 spin-off as part of a D reorganization
Facts - The facts are the same as in section 3.09(13)(a) of this notice (Example 13), except that the Spin-Off is carried out as part of a transaction qualifying as a D reorganization.
Analysis. The analysis and Federal income tax consequences are the same as in section 3.09(13) of this notice (Example 13).
Example 15: Repurchase pursuant to an accelerated share repurchase agreement
Facts. On October 10, 2022, Corporation X entered into an accelerated share repurchase (ASR) agreement with an investment bank (Bank). Under the terms of the ASR agreement, Bank agrees to deliver a number of shares of Corporation X stock to Corporation X during the term of the ASR, in an amount determined by reference to the price of Corporation X stock on specified days during the term of the ASR. Pursuant to the terms of the ASR agreement, Corporation X paid Bank a prepayment amount. Bank borrowed 80x shares of Corporation X stock on the open market. Pursuant to the terms of the ASR agreement, Bank then delivered 80x shares of Corporation X stock to Corporation X on October 12, 2022. On final settlement of the ASR, Bank may be required to deliver additional shares of Corporation X stock to Corporation X or Corporation X may be required to make a payment to Bank. The terms of the ASR agreement and the facts and circumstances cause ownership of the 80x shares to transfer from Bank to Corporation X for Federal income tax purposes at the time of delivery (that is, October 12, 2022). The agreement will settle in 2023. On February 1, 2023, Bank delivers an additional 20x shares to Corporation X in final settlement of the ASR agreement. For Federal income tax purposes, ownership of those 20x shares is treated as transferring from Bank to Corporation X at the time of delivery (that is, February 1, 2023).
Analysis. Corporation X is treated as repurchasing 80x shares of Corporation X stock on October 12, 2022 (that is, the date on which ownership of the 80x shares delivered by Bank transferred from Bank to Corporation X for Federal income tax purposes). See section 3.06(1)(a) of this notice. However, the repurchase by Corporation X of the 80x shares of Corporation X stock does not increase Corporation X’s stock repurchase excise tax base for its 2023 taxable year because the repurchase occurred prior to January 1, 2023. See section 3.03(3)(b) of this notice; see also § 10201(d) of the IRA (providing that the stock repurchase excise tax applies to repurchases after December 31, 2022). The delivery by Bank to Corporation X of 20x shares of Corporation X stock on February 1, 2023, constitutes a repurchase because, for Federal income tax purposes, the terms of the ASR agreement and the facts and circumstances cause ownership of those shares to transfer from Bank to Corporation X on that date. See section 3.06(1)(a) of this notice. Therefore, the repurchase by Corporation X of those 20x shares of Corporation X stock increases Corporation X’s stock repurchase excise tax base for its 2023 taxable year.
Example 16: Distribution in complete liquidation of a covered corporation
Facts. Corporation X adopts a plan of complete liquidation that becomes effective on March 1, 2023 (Corporation X Liquidation). Corporation X has 100x shares of common stock outstanding. On April 1, 2023, all shareholders of Corporation X receive a 42 liquidating distribution by Corporation X in full payment for their Corporation X common stock. At the time at which Corporation X distributes all of its corporate assets to its shareholders in complete liquidation (that is, April 1, 2023), Corporation X stock trades at $1x per share. Each distribution in complete liquidation is subject to § 331.
Analysis. A distribution in complete liquidation of a covered corporation (that is, Corporation X) to which § 331 (but not § 332(a)) applies is not a repurchase by the covered corporation. See section 3.04(4)(b)(i) of this notice. Therefore, none of the distributions by Corporation X in complete liquidation is a repurchase by Corporation X, and Corporation X’s stock repurchase excise tax for its 2023 taxable year is not increased as a result of the Corporation X Liquidation.
Example 17: Complete liquidation of a covered corporation to which both§§ 331 and 332(a) apply
Facts. The facts are the same as in section 3.09(16)(a) of this notice (Example 16), except that one of Corporation X’s shareholders is a corporation (Corporation Z). As of the date of adoption of the plan of liquidation of Corporation X (that is March 1, 2023), Corporation Z has continued to be at all times until the receipt of the Corporation X liquidating distribution the owner of 80x shares of Corporation X common stock. In other words, Corporation Z has continued to be at all times until the receipt of the Corporation X liquidating distribution the owner of stock in Corporation X meeting the requirements of § 1504(a)(2) (that is, Corporation Z is an 80- percent distributee within the meaning of § 337(c)). Therefore, the liquidating distribution by Corporation X to Corporation Z as part of the Corporation X Liquidation qualifies as a liquidation under § 332(a). The liquidating distributions by Corporation X to the other shareholders described in section 3.09(16)(a) of this notice (Example 16) are distributions in liquidation subject to § 331.
Analysis. In the case of a complete liquidation of a covered corporation, if §§ 331 and 332(a), respectively, apply to component distributions of the complete liquidation, (i) a distribution to which § 331 applies is a repurchase by the covered corporation, and (ii) the distribution to which § 332(a) applies is not a repurchase by the covered corporation. See section 3.04(4)(a)(v) of this notice. Therefore, as a result of the component liquidating distributions of the Corporation X Liquidation to which § 331 applies, Corporation X repurchased 20x shares of its stock on April 1, 2023. Accordingly, the Corporation X Liquidation results in a $20x increase in Corporation X’s stock repurchase excise tax base for its 2023 taxable year because the fair market value of Corporation X’s stock at the time of repurchase (that is, April 1, 2023) was $1x per share (20x shares x $1x = $20x). See section 3.06(2)(a) of this notice.
Example 18: Acquisition by disregarded entity
Facts. Corporation X owns all the interests in LLC, a domestic limited liability company that is disregarded as an entity separate from its owner for Federal tax purposes (disregarded entity) under § 301.7701-3 of the Procedure and Administration Regulations (26 CFR part 301). On May 31, 2023, LLC purchases shares of Corporation X’s stock for cash from an unrelated shareholder.
Analysis. Because LLC is a disregarded entity, the May 31, 2023, acquisition of Corporation X stock is treated as an acquisition by Corporation X. Accordingly, the acquisition is a § 317(b) redemption and is therefore a repurchase. See section 3.04(2) of this notice. Section 301.7701-2(c)(2)(v) (treating disregarded entities as corporations for purposes of certain excise taxes) does not apply to treat LLC as a corporation because § 4501 is not described in § 301.7701-2(c)(2)(v)(A).
Example 19: Acquisitive reorganization qualifying under § 368(a)(2)(E)
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Facts. On October 1, 2023, Corporation X acquires all of Target’s outstanding stock (Target Stock Acquisition). To effectuate the Target Stock Acquisition, Corporation X causes the following transaction steps to occur: (i) Corporation X contributes $80x of Corporation X common stock and $20x of cash (Merger Consideration) to a newly formed corporation (Merger Sub); and (ii) Merger Sub merges into Target in a statutory merger, with Target surviving (Reverse Merger). The Reverse Merger qualifies as an A reorganization by reason of § 368(a)(2)(E). On the date of the Reverse Merger, the fair market value of Target’s outstanding stock is $100x. In the Reverse Merger, $80x of Target stock is exchanged for Corporation X stock, and $20x of Target stock is exchanged for $20x of cash.
Analysis regarding repurchase treatment, timing, and amount. The exchange by the Target shareholders of their Target stock for the consideration received in the Reverse Merger is a repurchase by Target because that exchange is an economically similar transaction. See section 3.04(4)(a)(i) of this notice. This repurchase occurs on October 1, 2023 (that is, the date on which the Target shareholders exchange their Target shares as part of the Reverse Merger). See section 3.06(1)(b) of this notice. The amount of this repurchase by Target is $100x, which equals the aggregate fair market value of the Target stock at the time that stock is exchanged by the Target shareholders as part of the Reverse Merger (that is, October 1, 2023). See section 3.06(2)(a) of this notice.
Analysis regarding impact of Reverse Merger on Target’s stock repurchase excise tax base. Target’s stock repurchase excise tax base for its 2023 taxable year is initially increased by $100x on account of the Reverse Merger. Under the qualifying property exception, the fair market value of the Target stock exchanged by the Target shareholders for Corporation X stock in the Reverse Merger (that is, $80x of Target stock) is a qualifying property repurchase that reduces Target’s stock repurchase excise tax base. See sections 3.03(3)(a) and 3.07(2)(a) of this notice (regarding acquisitive reorganizations). However, the fair market value of the Target stock exchanged by the Target shareholders for the $20x of cash in the Reverse Merger does not qualify for the qualifying property exception. See sections 3.03(3)(a) and 3.07(2)(a) of this notice. In addition, any Target stock that is deemed to be issued by Target to Merger Sub in exchange for the Merger Consideration is not treated as issued for purposes of computing Target’s stock repurchase excise tax base. See section 3.08(4)(h) of this notice. Therefore, Target’s stock repurchase excise tax base for its 2023 taxable year is increased by $20x ($100x repurchase - $80x exception = $20x).
Analysis regarding Corporation X’s stock repurchase excise tax base.Corporation X’s issuance of Corporation X stock in the Reverse Merger is not an issuance for purposes of the netting rule because Corporation X’s issuance of that stock is part of a transaction to which the qualifying property exception applies. See generally section 3.08(4)(d) of this notice. Specifically, Corporation X’s issuance of Corporation X stock is not an issuance for purposes of the netting rule because (i) the Corporation X stock constitutes property permitted to be received under § 354 without the recognition of gain, (ii) the Corporation X stock is used by a covered corporation (that is, Target) to repurchase its stock in a transaction that is a repurchase under section 3.04(4)(a)(i) oft his notice, and (iii) the repurchase by Target is not included in Target’s stock repurchase excise tax base because it is a qualifying property repurchase. See section3.08(4)(d) of this notice. Therefore, Corporation X does not take into account any of the$80x of its stock issued in the Reverse Merger to reduce its stock repurchase excise tax base for Corporation X’s 2023 taxable year. See section 3.08(4)(a) of this notice(disregarding such types of issuances).
Example 20: Multiple repurchases and contributions of same class of stock
Facts. On January 15, 2023, Corporation X repurchases 100x shares of its Class A stock that have an aggregate fair market value of $1,000x. Corporation X repurchases 50x shares of its Class A stock on September 15, 2023, that have an aggregate fair market value of $200x. Corporation X contributes to its employee stock ownership plan 75x shares of its Class A stock on March 15, 2023, and 75x shares of its Class A stock on October 15, 2023.
Analysis. The amount of the reduction to Corporation X’s stock repurchase excise tax base is determined by dividing the aggregate fair market value of shares of Class A stock repurchased by the number of shares repurchased ($1,200x/150x shares = $8/share) and multiplying the number of shares contributed by the average price of repurchased shares (150x shares x $8/share = $1,200x). See section 3.07(3)(c)(i) of this notice. Therefore, Corporation X’s stock repurchase excise tax base for its 2023 taxable year is $0 ($1,200x repurchase - $1,200x exception = $0).
Example 21: Multiple repurchases and contributions of different class from repurchased shares
Facts. On January 15, 2023, Corporation X repurchases 100x shares of its Class A stock that have an aggregate fair market value of $1,000x. Corporation X repurchases 50x shares of its Class A stock on September 15, 2023, that have an aggregate fair market value of $200x. Corporation X contributes to its employee stock ownership plan 75x shares of its Class B stock on October 15, 2023, that have an aggregate fair market value of $1,000x. Corporation X contributes to its employee stock ownership plan 25x shares of its Class B stock on December 15, 2023, that have an aggregate fair market value of $500x.
Analysis. The amount of the reduction to Corporation X’s stock repurchase excise tax base is equal to the sum of the fair market values of the different class of stock at the time that the stock is contributed to the employer-sponsored retirement plan ($1,000x + $500x = $1,500x). However, the amount of the reduction must not exceed 45 the aggregate fair market value of stock of a different class repurchased during the taxable year by Corporation X (that is, $1,200x). See section 3.07(3)(c)(ii) of this notice. Therefore, Corporation X’s stock repurchase excise tax base for its 2023 taxable year is $0 ($1,200x repurchase - $1,200x exception = $0).
Example 22: Restricted stock provided to employee
Facts. Employee M is an employee of Corporation X. In 2024, as compensation for Employee M’s services, Corporation X transfers to Employee M 100x shares of Corporation X restricted stock, when the fair market value of each share is $50x. The shares vest in 2027. Employee M does not make an election under § 83(b). In 2027, when the shares vest, the shares have a fair market value of $70x per share. In 2027, Corporation X withholds from Employee M’s other wages amounts that are required to pay its income tax and employment tax withholding obligations arising from the stock transfer.
Analysis. 100x shares of Corporation X stock are treated as issued or provided to Employee M when they become substantially vested in 2027. See section 3.08(3)(b)(i) of this notice. Therefore, Corporation X’s stock repurchase excise tax base for its 2027 taxable year is reduced by $7,000x (100x shares x $70x per share = $7,000x).
Example 23: Restricted stock provided to employee with § 83(b) election
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Facts. The facts are the same as in section 3.09(22) of this notice (Example 22), except that Employee M elects under § 83(b) to include the fair market value of the shares of restricted stock in gross income when the shares are transferred.
Analysis. 100x shares of Corporation X stock are treated as issued or provided to Employee M when the shares are transferred in 2024. See section 3.08(3)(b)(iii) of this notice. Therefore, Corporation X’s stock repurchase excise tax base for its 2024 taxable year is reduced by $5,000x (100x shares x $50x per share = $5,000x). No shares of Corporation X stock are treated as issued or provided to Employee M when the shares vest in 2027.
Example 24: Vested stock provided to an employee with share withholding
Facts. Employee N is an employee of Corporation X. In 2024, as compensation for Employee N’s services, Corporation X grants Employee N 100x restricted stock units (RSUs). Pursuant to the RSUs, if Employee N remains employed by Corporation X through December 31, 2026, Corporation X will transfer 100x shares of Corporation X stock to Employee N in January 2027. Employee N remains employed by Corporation X through December 31, 2026. In January 2027, when the shares have a fair market value of $50x per share, Corporation X initiates the transfer of 60x shares of Corporation X stock to Employee N and withholds 40x shares to satisfy its income tax and employment tax withholding obligations.
Analysis. 60x shares of Corporation X stock are treated as issued or provided to Employee N when the shares are transferred in 2027. See section 3.08(3)(a)(ii) of this notice. Therefore, Corporation X’s stock repurchase excise tax 46 base for its 2027 taxable year is reduced by $3,000x (60x shares x $50x per share = $3,000x).
Example 25: Stock option net exercise
Facts. Employee O is an employee of Corporation X. In 2024, Corporation X transfers to Employee O options to purchase 100x shares of Corporation X stock with an exercise price of $40x per share. The options are described in § 1.83-7 and do not have a readily ascertainable fair market value. Employee O exercises the option to purchase 100x shares in 2025 when the fair market value is $50x per share. Corporation X withholds 80x shares to pay the exercise price.
Analysis. 20x shares of Corporation X stock are treated as issued or provided to Employee O when the options are exercised in 2025. See section 3.08(3)(a)(iii) of this notice. Therefore, Corporation X’s stock repurchase excise tax base for its 2025 taxable year is reduced by $1,000x (20x shares x $50x per share = $1,000x).
Example 26: Broker-assisted net exercise
Facts. The facts are the same as section 3.09(25) of this notice (Example 25), except that instead of Corporation X withholding shares to pay the exercise price, a third-party broker pays an amount equal to the exercise price to Corporation X. Corporation X transfers 100x shares of Corporation X stock to the third-party broker, who then deposits the 100x shares into Employee O’s account. The third-party broker then immediately sells 80x shares to recover the exercise price paid to Corporation X.
Analysis. 100x shares of Corporation X stock are treated as issued or provided to Employee O when the shares are transferred to the broker in 2025. See section 3.08(3)(a)(iv) of this notice. Therefore, Corporation X’s stock repurchase excise tax base for its 2025 taxable year is reduced by $5,000x (100x shares x $50x per share = $5,000x).
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