New Year, New Useful Guidance: Clarification on Inflation Reduction Act’s New Excise Tax for Share Redemptions
January 23, 2023
This past summer under the Inflation Reduction Act, Congress enacted new Internal Revenue Code (“Code”) Section 4501, which imposes an excise tax on certain corporate redemptions or repurchases by a corporation of its own stock. Essentially, Section 4501 only applies to “Covered Corporations”, which more or less translates to corporations whose stock is publicly traded. The excise tax is calculated at 1% of the fair market value of the stock repurchased (the “Excise Tax”).
Interestingly, the Excise Tax is not limited solely to redemptions under Section 317(b) of the Code. Rather, the Excise Tax also applies to “transactions economically similar” to Section 317(b) redemptions and purchases from special affiliated corporations. Given the broad wording in the statute, many practitioners were concerned as to whether this new Excise Tax would apply to reorganizations under Section 368 or spin-offs under Section 355. The short answer? It depends.