April 25, 2024
Stock Repurchase Excise Tax: Impact of Proposed Regulations on Compensatory Transactions
Earlier this month, the Treasury Department and IRS jointly announced proposed regulations with new guidance on the stock repurchase excise tax created by the Inflation Reduction Act. The IRS previously published temporary interim guidance in Notice 2023-2. This Wilson Sonsini alert notes that “the newly published proposed regulations will effectively replace the Notice and may generally be relied upon by taxpayers until the regulations are finalized.”
The alert then details the impact of the tax and guidance on various transactions, including compensatory transactions. Here’s an excerpt regarding the treatment of net share settlements, sell to cover arrangements and forfeitures of restricted stock:
Net Share Settlements: The proposed regulations generally expand the approach taken in the Notice to provide that stock withheld by a corporation to satisfy the exercise price of a stock option or to cover any withholding obligation (including state or foreign tax withholdings in addition to federal tax withholdings) is not treated as issued for purposes of the “netting rule.”
“Sell to Cover” Transactions: The proposed regulations provide that stock issued pursuant to a “sell to cover” arrangement (where stock is typically issued to a third-party broker and then sold to satisfy a corporation’s withholding obligations) is treated as an issuance for purposes of the “netting rule.”
Restricted Stock: The Notice did not expressly address the treatment of a subsequent forfeiture of restricted stock for purposes of the excise tax. In general, the proposed regulations treat a forfeiture of restricted stock as a repurchase on the date of forfeiture (in an amount equal to the fair market value of such stock on the date of forfeiture) if such forfeited stock was originally treated as issued because a Section 83(b) election was made. As a result, a corporation may have a potential mismatch (positive or negative) for purposes of the “netting rule” with respect to the fair market value of restricted stock that may be issued in one taxable year and subsequently forfeited in another taxable year.
– Meredith Ervine