On December 27, 2022, the IRS and the Department of the Treasury issued Notice 2023-2 (the “Notice”) providing initial guidance on the application of Section 4501 of the Internal Revenue Code, which imposes a 1% excise tax on certain repurchases of corporate stock (such tax, the “Excise Tax”).
Notable provisions in the Notice include:
- No exceptions for redemption of preferred stock.
- Redemptions in complete liquidation generally exempt from the Excise Tax (of particular relevance to SPACs).
- Certain tax-free reorganizations and split-offs are subject to the Excise Tax to the extent of taxable “boot”.
- The Excise Tax may apply to repurchases of foreign corporate stock if a related domestic entity “funds” the repurchase.
- The Excise Tax applies to leverage that is taken on by the target in common leveraged buyout structures.