On December 27, 2022, the Internal Revenue Service (“IRS”) and the U.S. Department of the Treasury (the “Treasury”) released Notice 2023-2 (the “Notice”), which provides guidance regarding the application of the 1% excise tax on corporate stock buybacks under recently enacted section 4501 (the “Tax”). Taxpayers may rely on the Notice until proposed regulations are published. The Notice also contains a request for comments on the rules included in the Notice and rules not included in the Notice.
The Treasury and the IRS took a literal interpretation of the statute; thus, the Tax applies broadly to stock repurchases and other transactions that are not traditionally viewed as stock buybacks, including a repurchase of mandatorily redeemable preferred stock (even if such stock was issued before January 1, 2023). Special purpose acquisition companies (“SPACs”) will need to analyze whether a transaction is subject to the Tax under the general rules as the Notice does not include any special guidance for SPACs. However, SPACs did receive comfort that redemptions that take place in the same year as a “complete liquidation” under section 331 are not subject to the Tax.