Surprising Impacts of Inflation Reduction Act’s Stock Buyback Excise Tax and Corporate Book Minimum Tax (Including Overblown Concerns About Berkshire)
By Stuart E. Leblang, Michael J. Kliegman, Howard Leventhal and Amy S. Elliott
On August 16, the $737 billion 1 Reduction Act of 2022 2 became law. Congressional Democrats successfully crafted—and passed—a bill to battle the climate crisis, pay down the nation’s debt, reduce prescription drug prices, extend health insurance subsidies and increase taxes on profitable corporations, the wealthy and those who add to the tax gap. The bill passed on party lines in both the Senate and the House and reflects numerous last-minute changes, namely those negotiated by Sen. Kyrsten Sinema (D-AZ) (although the base text was largely crafted by Sen. Joe Manchin III (D-WV) and Senate Majority Leader Chuck Schumer (D-NY)).
As we summarized in our prior report on the legislation (“Build Back Manchin—Now the ‘Inflation Reduction Act of 2022’—Is Back and Includes 15% Corporate AMT,” which is appended), the largest revenue raisers contained in the bill were:
- a new 15-percent corporate alternative minimum tax (AMT) on book income (which raises $222 billion over 10 years 3 —not $313 billion 4 —after changes detailed below);
- prescription drug price controls (which also raise less than anticipated—tens of billions of dollars less5 than a recent $265 billion estimate—as a result of the so-called Byrd Rule review by the Senate Parliamentarian 6 ); and
- IRS tax enforcement spending (by increasing the IRS’s budget by $80 billion over 10 years, lawmakers anticipate increased tax revenue, netting some $124 billion 7 ).
Sen. Sinema only agreed to support[8]the bill if (among other changes) the carried interest tax provision was removed—so that ($13 billion 9 ) revenue raiser is gone. (Although, she has promised to work with Sen. Mark Warner (D-VA) to find ways to “narrow the carried-interest tax break” in future legislation. 10 ) Major changes Sen. Sinema negotiated include the following three modifications to the 15-percent corporate book AMT (or so-called book min tax):
- to preserve the ability of corporations to reduce their taxes through the use of tax depreciation deductions (which, in certain cases, can be used by businesses, including manufacturers, to expense the cost of equipment and machinery they purchase); 11
- to allow adjustments for amortization deductions associated with qualified wireless spectrum; 12 and
- to ensure that businesses owned by private equity (“small businesses” 13 ) would not be subject to the new corporate book AMT. 14 (Technically, this last change was contained in an August 7 amendment sponsored by Senate Minority Whip John Thune (R-SD), 15 and then modified by another August 7 amendment sponsored by Sen. Warner.16)
According to some estimates, these changes to the corporate book AMT provision cost as much as $91 billion over 10 years. 17 Between dropping the carried interest provision, softening the rules for the corporate book AMT and adding $4 billion in new drought mitigation funding (also at the request of Sen. Sinema), lawmakers needed a couple of new revenue raisers to make up the shortfall. The new revenue raisers were:
- a 1-percent excise tax on corporate share repurchases (the so-called stock buyback tax that we have written about before,18 raising some $74 billion) and
- a two-year extension of existing limits on how certain pass-through businesses write off their losses (Internal Revenue Code (IRC) Section 461(l) and raising about $53 billion). 19
This excise tax on stock buybacks (paid by the corporation, not the shareholders) has been proposed before. It was in the House-passed Build Back Better Act 20 and in the Senate Finance Committee version released December 11, 2021,[21]although its score has since decreased from an estimated $124 billion over 10 years 22 to only about $74 billion.23 Only one substantive change has been made to the proposal since the Senate version—the effective date has been pushed back a year (it now applies to stock repurchases made after December 31, 2022).
(While we will not address the Section 461(l) loss limitation change in detail, both the House-passed Build Back Better Act and the December 2021 Senate Finance Committee version would have made the limit permanent, bringing in substantially more revenue at $160 billion. 24 The limitation originates from the 2017 Tax Cuts and Jobs Act (P.L. 115-97) but its implementation was retroactively delayed by the March 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136)—so it really only started to apply to tax years beginning after December 31, 2020.)
In what surprising ways do the new stock buyback tax and corporate book AMT have the potential to impact public trading positions? Read on for an in-depth analysis of each. 25
1% Stock Buyback Excise Tax
The 1-percent stock buyback excise tax 26 paid by domestic and certain foreign 27 publicly traded companies 28 only applies to companies that repurchase more than $1 million of their stock 29 during the taxable year. It is a simple calculation—the tax generally equals 1 percent of the fair market value of any stock repurchased during the taxable year netted against the value of any new stock issuances. 30 The tax payment is not deductible by the corporation for U.S. federal income tax purposes (state treatment is to be determined and may vary).
The shareholder that is exchanging stock for cash is not directly impacted by this new tax. (That is unless, to avoid imposition of the new excise tax, the company decides to issue a dividend instead of doing a buyback, in which case foreign shareholders in particular may be subject to a shareholder-level withholding tax of 30 percent, absent treaty relief. 31 )
As we’ve previously written, 32 repurchase is defined so broadly 33 in the new law that it could include partial liquidations; certain private equity acquisitions of public companies, in which the leverage piece is treated as a constructive redemption; the cash component in a cash-and-stock merger; and many redemptions by special purpose acquisition companies (SPACs). Language in the bill extends the tax to apply to certain acquisitions of corporate stock by certain affiliates. 34
Companies that could be hit with the highest amount of new taxes from this provision (assuming recent back buyback history continues 35 ) include Apple Inc. (NASDAQ: AAPL); Alphabet Inc. (NASDAQ: GOOGL); Meta Platforms, Inc. (NASDAQ: META, formerly named Facebook, Inc.); and Microsoft Corporation (NASDAQ: MSFT). 36
The White House characterizes the “surcharge” on corporate stock buybacks as a way “to encourage businesses to invest instead of enriching CEOs or funneling profits tax-free to shareholders.” 37 Some lawmakers see the stock buyback tax as largely hitting the wealthy, even though it is technically imposed on corporations. (While we fully acknowledge that corporate tax incidence means “someone” feels the hit—we will refrain from entering into the debate of whether the majority of that “someone” are high-income executives or laborers with meager 401(k)s.) Further, characterizing the stock buyback tax as targeting the wealthy is, to some extent, belied by the fact that, at a rate of only 1 percent, it is thought that imposition of the tax won’t have a large chilling effect on corporations’ tendencies to buy back their own shares. 38
In addition to the exception for small buybacks (under $1 million aggregate per year) and the adjustment mechanism that reduces the fair market value of the share repurchases subject to the new excise tax by the fair market value of any stock issued or provided to employees during the year (which could arguably increase the incentive for companies to issue new shares in stock-based compensation 39 ), other exceptions to the new tax include buybacks associated with contributions to employer-sponsored retirement plans (or similar vehicles), buybacks that are tax-free to the investor (specifically, if the buyback is part of a nonrecognition transaction—for example, a tax-free Section 355 split-off) and buybacks that are treated as dividends. However, the statute gives Treasury regulatory authority to extend the tax to any transaction determined to be economically similar to a buyback, which is already causing some practitioners concern. 40
Impact on SPACs
We have received a ton of questions about how this new excise tax will apply to SPACs. As mentioned, a plain reading of the statute (absent guidance to the contrary) indicates that many, if not most, SPAC redemptions (which generally occur in connection with a so-called de-SPAC transaction at the time of the initial business combination or IBC—either effected by way of a tender offer or the shareholder vote for the IBC) would generally be caught by this tax unless, of course, the redemption occurs in the same taxable year as the SPAC initial public offering, which is unlikely. 41 Note that the SPAC may be able to net the shares issued to Target shareholders against those it redeems to reduce the tax hit, depending on how the transaction is structured.
We do not expect that the excise tax will apply to a SPAC effectively redeeming all of its stock in liquidation (making cash distributions as part of its windup), because (say) it failed to consummate an IBC during the required timeframe. 42 However, we understand there are some who are concerned that Treasury might write regulations to apply the excise tax on liquidation (an outcome we believe, that while theoretically possible, is unlikely, and if it were to occur, we would expect such an outcome to be effective prospectively). 43
Although, as mentioned, the excise tax only applies to foreign corporations in a very limited set of circumstances, if a foreign SPAC merges with a U.S. target company, such a transaction could trigger the tax absent careful planning.
Treasury was also given regulatory authority to issue guidance addressing special classes of stock, including preferred stock (as redemption rights can be a feature of preferred stock). Maybe such authority will be utilized to provide relief for SPACs.
Another question that has come up is the impact of this new tax on the issuance of tracking stock. Such issuances generally should not be subject to the excise tax (as tracking stock is ordinarily issued in a tax-free recapitalization or stock dividend).
Beyond SPACs, this new tax could also impact common mergers and acquisitions (M&A) transactions (namely those that involve Sections 302(b) and 356). While we expect that the drafters may not have intended to sweep such transactions in, given the way the statute is drafted (which includes “economically similar” transactions), a lot of them arguably do get swept in unless and until Treasury puts out guidance to the contrary. For example, in a cash/stock option merger, a shareholder that only gets cash is treated as redeeming stock—so the excise tax would apply. The shareholder getting only stock would not trigger it. As for the shareholder getting both, even though the so-called “boot” taxed under Section 356 is (strictly speaking) not a redemption, it may still trigger the excise tax. 44
The new stock buyback excise tax goes into effect for repurchases of stock after December 31, 2022. Pushing the effective date back a year from what it was in the Senate Finance Committee version of the proposal was not the only change (although it was the only substantive45 one). Given this new deadline, we expect end-of-year buybacks will increase.
15% Corporate Book AMT
While the stock buyback tax is purportedly targeted at wealthy individuals, the 15-percent corporate book AMT is purportedly targeted at wealthy corporations (55 of which “got away without paying a cent in federal income taxes in 2020” according to the White House 46 ). As it turns out, some analysts are predicting the new tax will initially only impact as few as 55-60 companies, 47 even though the Joint Committee on Taxation previously projected that about 150 taxpayers annually would be subject to the new tax. 48
Technically, the new tax (enshrined in part in new Section 56A, which defines adjusted financial statement income, and newly amended Section 55, which was where the traditional corporate AMT existed before it was repealed by the 2017 Tax Cuts and Jobs Act) is only supposed to hit corporations 49 that report over $1 billion in annual profits averaged over a three-year testing period. Note that certain domestic corporations that are part of a foreign-parented multinational group could be in scope at a much lower threshold. 50 For this purpose, the U.S. branch of a foreign corporation is treated as if it were a separate domestic corporation. This provision is most likely relevant to non-U.S. banks, which typically operate in the United States through branches.
For a rough idea of which companies might be in the cross-hairs (with the caveat that there are many adjustments that could impact which firms are ultimately hit by the tax), The Washington Post published a list of companies averaging $1 billion in profits and less than 15 percent cash-effective tax rates (based on pretax income and taxes paid for 2019 through 2021 for companies listed on the S&P 500). 51 The top 15 ranked by pretax income (but listed here alphabetically) were: Alphabet Inc. (NASDAQ: GOOGL); Amazon.com, Inc. (NASDAQ: AMZN); AT&T Inc. (NYSE: T); Bank of America Corporation (NYSE: BAC); Berkshire Hathaway Inc. (NYSE: BRK.A) (Berkshire); General Motors Company (NYSE: GM); Intel Corporation (NASDAQ: INTC); MetLife, Inc. (NYSE: MET); Nvidia Corporation (NASDAQ: NVDA); QUALCOMM, Incorporated (NASDAQ: QCOM); Texas Instruments Incorporated (NASDAQ: TXN); Truist Financial Corporation (NYSE: TFC); United Parcel Service, Inc. (NYSE: UPS); U.S. Bancorp (NYSE: USB); and Verizon Communications Inc. (NYSE: VZ). (But see page 11 regarding relief that some of these companies, and in particular Berkshire, may benefit from.)
Others have tried to do a more precise analysis, including Martin Sullivan of Tax Notes, who also took into account estimated tax credits and estimated benefits of tax depreciation, which had the effect of taking a couple of the companies listed above out of the running, namely Alphabet and United Parcel Service. 52 His list of S&P companies most likely subject to the new tax in 2023 totaled 90, with an aggregate estimated liability of $26.4 billion. 53
As a reminder, you can’t simply assume that any company 54 that reports more than $1 billion in book pretax income (averaged over the three preceding years) and that historically had an effective tax rate below 15 percent will be a so-called applicable corporation and will owe taxes equal to 15 percent of the aggregate net income reported on its financial statement. For more detail on how the 15 percent corporate AMT works, see our July 29 report, which is appended. However, the following are some high-level points to note regarding the calculation:
- The additional tax due under the corporate book AMT is generally calculated by taking 15 percent of the adjusted financial statement income of the company (net of certain foreign tax credits or FTCs) and then subtracting out that company’s regular income tax and any tax it may owe under the Section 59A base erosion and anti-abuse tax (BEAT).
- When additional tax is paid under the corporate book AMT, the taxpayer is given a credit that can generally be used in future years to reduce the taxpayer’s regular tax if it is ever higher than 15 percent of the taxpayer’s adjusted financial statement income (which is why we have previously described this new tax as essentially forcing in-scope taxpayers to pay on an accelerated basis the regular tax they would have owed in the future).
- Financial statement loss carryovers cannot be used to zero out adjusted financial statement income (loss carryovers are capped at 80 percent).
- If a company (the applicable corporation) reports its financial results on a group’s consolidated financial statement, the company would generally include in its adjusted financial statement income any income allocable to it from related firms including controlled foreign corporations (CFCs). Although adjusted financial statement income is calculated net of certain foreign tax credits (FTCs) paid by the applicable corporation’s CFCs, the corporate AMT FTC amount is also subject to a cap. 55
- Further, although the financial statement income of a profitable foreign subsidiary is generally included in the calculation of the applicable corporation’s adjusted financial statement income, if the foreign subsidiary is in a net loss position, that loss cannot be used to offset the applicable corporation’s own financial statement income.
- The value of general business credits (including the research and development tax credits and other business credits treated under Section 38) also cannot be used to zero out adjusted financial statement income. Specifically, the amount of Section 38 general business credits available to use as an offset will generally be limited to an amount that equals 75 percent of the corporation’s combined regular and minimum tax. 56
Once a corporation has exceeded the relevant thresholds and finds itself within scope of the tax, it is very hard to fall out of scope in future years even if the corporation’s income shrinks (absent to-be-written guidance from Treasury potentially providing exceptions in some cases). 57
Last-Minute Changes
The final statutory text of the corporate book AMT contained at least half a dozen fairly significant changes (the three biggest of which we flagged on page 2 of this report).
The most important change would allow all corporations (not just advanced manufacturers) to reduce their corporate book AMT by taking deductions for accelerated depreciation 58 (with adjustments for related expenses). This is arguably a huge change and it had the effect of taking a lot of companies—even oil and gas companies with sizable book-tax differences from other provisions (including intangible drilling, percentage depletion or lease/license accounting)—out of scope of the new tax. Nevertheless, industry groups such as the National Association of Manufacturers say the relief is insufficient. 59
Note that while certain depreciation deductions are allowed, most amortization deductions under Section 197 are not. However, the final text did allow adjustments for amortization deductions in one narrow case—those associated with qualified wireless spectrum (which is generally defined as wireless spectrum used in the trade or business of a wireless telecommunications carrier and acquired after December 31, 2007 and before enactment of the Inflation Reduction Act of 2022). Before the new language came out, the trade association that represents the U.S. wireless communications industry, CTIA, issued a statement July 28 urging lawmakers to “[treat] spectrum purchases like other business investments” and predicting that, absent a change, the tax “will slow rollouts, undermine bipartisan attempts to close the digital divide . . . and jeopardize America’s competitiveness in the emerging, global 5G economy.”60 Needless to say, CTIA was pleased with the change, which it characterized as an important technical fix.[61] One economist estimated that the potential benefit of the change could well exceed $1 billion aggregated across the four largest U.S. wireless companies (Verizon Communications Inc. (NYSE: VZ); AT&T Inc. (NYSE: T); T-Mobile US, Inc. (NASDAQ: TMUS); and DISH Network Corporation (NASDAQ: DISH)).[62]
Speaking of technical fixes, as each day passes, practitioners are flagging more issues and questions presented by the new corporate book AMT, raising the stakes for Treasury to timely issue guidance providing certainty and relief for taxpayers. For example, on August 18, the accounting firm Ernst & Young LLP wrote a letter to Treasury and the Internal Revenue Service requesting urgent guidance 63 to exempt the gain reported on financial statements as a result of certain divisive tax-free transactions (namely, IRC Section 355 split-offs involving gain that would ordinarily not have been recognized for tax purposes) from the new tax—which applies to tax years beginning after December 31, 2022. Given that such separations planned for 2023 may now be threatened by the new tax, advisors are hoping regulators will exercise their authority to exclude the gain from such transactions from the corporate book AMT calculation. (While we fully expect Treasury will ultimately provide that split-offs do not trigger the tax despite the hysteria, 64 this issue is particularly problematic in the case of “spin-offs” where there is tracking stock. We plan to address this concern in a future report.)
Impact on Berkshire and Other Companies with Large Stock Holdings
Another question raised by the new corporate book AMT is how it will apply to public companies that have certain nonconsolidated investments in marketable equity securities of other public companies (specifically, investments that aren’t accounted for under the equity method but are accounted for under the fair value method). Such public entities are required by an accounting rule adopted in 2018 65 to mark their large stakes in portfolio stocks to market each year 66 —reporting in the net income line of their books the change in fair value of the investments 67 —even though the underlying stock is not sold. Headlines in Barron’s such as “Berkshire Hathaway Could Owe Billions on Stock Gains Under the New Tax Law” 68 are making traders in such public companies anxious—but it would appear the anxiety may be overstated.
In the case of Berkshire Hathaway Inc. (NYSE: BRK.A), the holding company reported about $76 billion of net unrealized gains (year-over-year) associated with its investments in equity securities (largely American Express Company, Apple Inc., Bank of American Corporation and The Coca-Cola Company) as of December 31, 2021. The Barron’s article quoted Robert Willens, a New York tax expert, as saying that Berkshire would likely be taxed at 15 percent on its unrealized gains under the new law, but it turns out that may not be the case thanks to a change to the draft corporate book AMT proposal made between when it was released by the Senate Finance Committee in Build Back Better and when Sen. Machin included the proposal in his July 27 Inflation Reduction Act draft.
Under current tax law (as the corporate book AMT doesn’t go into effect until 2023), these companies don’t have to pay tax on the unrealized gains (or losses) reported on their books each year under the fair value accounting method, because they never actually sold the underlying stocks. But starting in 2023, there was a concern that adjusted financial statement income as defined in the corporate book AMT proposal could take into account these paper gains, which would have potentially subjected them to 15 percent tax. There is a line of thinking that tax writers may have effectively resolved this concern by changing a few of the words in the proposal. 69 Those changes seem to have been enough to convince at least two accounting firms (KPMG 70 and Deloitte 71 ) that the new language should allow companies such as Berkshire to potentially back out the net unrealized gains associated with their fair value investments when calculating the corporate book AMT.
Risks Connected to Book-Tax Differences
As should be obvious by now, the corporate book AMT mixes complicated tax laws with complicated accounting rules, 72 which is one reason why basing a tax on book income has not been a popular approach. 73 With that caveat, we wanted to take a crack at providing our readers with some general guidance on how they might know whether a corporation is at risk of being subject to the new tax. Any time there is a large disparity between financial statement income and taxable income (so-called book-tax differences), there is potential for the corporate book AMT to apply in surprising ways—ways that could put a company within scope at risk of paying additional tax. Although we are not saying that the following may—on their own—be enough to tip the scales, some features to be on the lookout for include large amounts of:
- Low-taxed foreign income—for example, Nvidia Corporation (NASDAQ: NVDA), which reported an effective tax rate of 1.9 percent for fiscal year 2022, reported that it was so low in part due to “income earned in jurisdictions, including the British Virgin Islands and Israel, that are subject to taxes lower than the U.S. federal statutory tax rate.” 74
- Deduction for foreign derived intangible income (FDII)—this deduction which was created as part of the 2017 Tax Cuts and Jobs Act can reduce the effective corporate tax rate on certain U.S. income associated with exports (but at the same time arguably creates an incentive to offshore income). For example, QUALCOMM, Incorporated (NASDAQ: QCOM), which reported an effective tax rate of 12 percent for 2021, stated that the FDII deduction is the largest factor in its low rate. 75
- Stock compensation expenses—for example, Amazon.com, Inc. (NASDAQ: AMZN), which reportedly paid $4.8 billion in cash taxes in 2021, had nearly $13 billion in stock-based compensation adjustments that same year. 76 Meta Platforms, Inc. (NASDAQ: META), which had an effective tax rate of 16.7 percent in 2021, reported that its effective tax rate would be two percentage points higher were it not for the tax benefits it recognized from share-based compensation. 77
[1] This is an estimate, of which about $300 billion will be used to reduce the deficit and $437 billion will be spent. See estimates dated Aug. 11, 2022: https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_one_page_summary.pdf
[2] P.L. 117-169; for the enrolled bill, see https://www.congress.gov/117/bills/hr5376/BILLS-117hr5376enr.pdf; note that while the bill is commonly cited as the Inflation Reduction Act of 2022, its name is technically “An Act To provide for reconciliation pursuant to title II of S. Con. Res. 14” (modified S.A. 5194 to the bill H.R. 5376). For an earlier version of the text of the Act, see https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_of_20221.pdf (which, as of press time, was to a document with the following header—ERN22410 5DM—reflecting the text as of Aug. 6, 2022). The prior draft text released July 27, 2022 had a header of ERN22335 9K1. For a list of amendments, see https://www.congress.gov/amendment/117th-congress/senate-amendment/5194.
[3] Unless otherwise noted, the latest revenue estimates are over a period of 10 years from the Aug. 9, 2022 report prepared by the Joint Committee on Taxation (JCX-18-22), available at https://www.jct.gov/publications/2022/jcx-18-22/.
[4] Over 10 years, from the Congressional Budget Office’s (CBO’s) revised score issued Aug. 5, 2022 (https://www.cbo.gov/system/files/2022-08/hr5376_IR_Act_8-3-22.pdf).
[5] https://www.cbo.gov/system/files/2022-08/hr5376_IR_Act_8-3-22.pdf; John Wilkerson, About $40B Of Drug Pricing Bill’s $288B In Savings At Risk During Byrd Bath, Inside Washington, July 21, 2022 (https://insidehealthpolicy.com/inside-drug-pricing-daily-news/about-40b-drug-pricing-bill%E2%80%99s-288b-savings-risk-during-byrd-bath).
[6] Democrats wanted to cap the copayment amount for covered insulin products at $35 for 2023, 2024 and 2025, but the Senate Parliamentarian reportedly ruled against the cap to the extent it applies to individuals with private insurance (and not Medicare). The Senate Parliamentarian also objected to part of a prescription drug inflation rebate rule that would have required pharmaceutical companies to pay reimbursements if they raise drug prices more than an inflation-adjusted amount (such that those who receive health insurance through private employers will not be able to get the rebate, but those with Medicare will). The Senate Parliamentarian found no issue with any of the tax provisions. “[T]he legislation’s tax and environmental provisions also are advancing unscathed,” as reported by Burgess Everett, Caitlin Emma and Marianne Levine, Democrats set to clear major hurdle on signature climate, tax and health care proposal, PoliticoPRO, Aug. 6, 2022 (subscription required).
[7] The amount of increased collections revenue depends on who you ask. CBO thinks revenues would increase by $204 billion over the 2022-2031 period (for a net savings of $124 billion), but the Committee for a Responsible Federal Budget thinks the net savings will be closer to $250 billion (https://www.crfb.org/blogs/ira-changes-could-erase-500-billion-long-term-savings). Note, however, that CBO doesn’t officially include those savings in its deficit reduction estimates due to reconciliation rules.
[8] Burgess Everett and Marianne Levine, Sinema signs onto Dems’ party-line bill ahead of momentous Saturday vote, Politico, Aug. 4, 2022 (https://www.politico.com/news/2022/08/04/dems-agenda-energy-climate-bill-00049875).
[9] According to an Aug. 5, 2022 revised cost estimate published by Congressional Budget Office (CBO) (https://www.cbo.gov/system/files/2022-08/hr5376_IR_Act_8-3-22.pdf).
[10] Steven T. Dennis, Senate’s Warner Says Slimming Carried Interest Tax Break Faces ‘Big Hill’, Bloomberg, Aug. 5, 2022 (https://www.bloomberg.com/news/articles/2022-08-05/warner-says-slimming-carried-interest-tax-break-faces-big-hill). (And see https://www.sinema.senate.gov/sinema-statement-budget-reconciliation.)
[11] Press Release, Sen. Sinema, Sinema Statement on Budget Reconciliation (Aug. 4, 2022) (https://www.sinema.senate.gov/sinema-statement-budget-reconciliation).
[12] Qualified wireless spectrum is generally defined as wireless spectrum used in the trade or business of a wireless telecommunications carrier and acquired after Dec. 31, 2007 and before enactment of the Inflation Reduction Act of 2022.
[13] According to its stated purpose, Amendment No. 5472 was designed to “Remove harmful small business taxes.”
[14] The change stripped out language that modified how the 15-percent corporate AMT provision applies the single employer aggregation rule (for determining whether or not you exceed the $1 billion in-scope threshold). The modified language was not in the Senate Finance Committee version of the proposal, but incorporates a newly defined concept of “component member” that—according to Americans for Tax Reform—would have the effect of defining “any company with private equity in its capital structure [as] a subsidiary of that private equity firm for purposes of the tax.” (https://www.atr.org/breaking-dem-change-to-book-tax-threatens-small-business/); Under the language as enacted, according to an analysis by PwC, there is arguably a position that aggregation in inappropriate in the case of “a partnership fund that is solely organized to acquire stock of corporations, because the fund does not conduct a trade or business under Section 162” (https://www.pwc.com/us/en/services/tax/library/corporate-book-minimum-tax-to-be-effective-for-2023.html).
[15] Sen. Thune’s amendment No. 5472 to S.A. 5194, which passed by a vote of 57 to 43, would have paid for the change with a one-year extension of the $10,000 cap on the ability to deduct state and local taxes (SALT) (under current law, the cap is scheduled to go away in 2026). For Thune amendment, see page 129 of https://www.congress.gov/117/crec/2022/08/06/168/133/CREC-2022-08-06-pt1-PgS4221.pdf.
[16] Sen. Warner’s amendment No. 5488 to S.A. 5194 replaced the SALT offset by extending existing limits on how certain businesses can write off their losses for another two years. For Warner amendment, see page 179 of https://www.congress.gov/117/crec/2022/08/06/168/133/CREC-2022-08-06-pt1-PgS4221.pdf.
[17] According to an Aug. 9, 2022 estimate prepared by the Joint Committee on Taxation (JCX-18-22), the modified corporate AMT provision would only generate some $222.248 billion over 10 years (https://www.jct.gov/publications/2022/jcx-18-22/) as compared to an estimated $313.138 billion over 10 years from the Congressional Budget Office’s revised score issued Aug. 5, 2022 (https://www.cbo.gov/system/files/2022-08/hr5376_IR_Act_8-3-22.pdf). Note that, before the Aug. 7, 2022 changes, Sen. Schumer said that the corporate AMT changes requested by Sen. Sinema only cost $55 billion (Brian Faler, Democrats go with ‘the least bad’ tax, PoliticoPRO, Aug. 5, 2022 (https://www.politico.com/news/2022/08/05/sinema-excise-tax-schumer-00050132)).
[18] See “Monster Tax Mash: Spooky Tax Proposals Impacting Pubcos Rise from Fresh Grave of Murdered Corporate Rate Hike” (Oct. 26, 2021); “Surprising Breadth of Proposed Tax on Stock Buybacks” (Oct. 11, 2021); “Flurry of Last-Minute Reconciliation Proposals Could Significantly Impact Public Companies” (Sept. 11, 2021); and “Corporate Minimum Tax May Be Falling Out of Favor as One of the Payfors to Fund Smaller Build Back Better Bill” (Feb. 4, 2022).
[19] Specifically, the change extends the Section 461(l) limitation on excess business losses for pass-through businesses and sole proprietors (which has generally been inexistence since 2018, although was retroactively postponed by the CARES Act, and was scheduled to expire in 2026) for an additional two years (so now it will go through 2028).
[20] H.R. 5376 (see Sec. 138102. Excise Tax on Repurchase of Corporate Stock), available at https://www.congress.gov/117/crec/2021/11/18/167/201/CREC-2021-11-18-pt1-PgH6375-4.pdf. The proposal was not in the House Ways and Means version of the Build Back Better bill.
[21] https://www.finance.senate.gov/imo/media/doc/12.11.21%20Finance%20Text.pdf
[22] https://www.democrats.senate.gov/imo/media/doc/21-2093.pdf
[23] “Analysts say it isn’t clear why the figure fell so much but note that stock prices are down sharply since the earlier estimate, and the previous version would have taken effect a year earlier,” as reported by Theo Francis, Stock-Buyback Tax Helps Offset Cost of Changes to Inflation Reduction Act, Wall St. J., Aug. 10, 2022 (https://www.wsj.com/articles/stock-buyback-tax-helps-offset-cost-of-changes-to-inflation-reduction-act-11660123980).
[24] https://www.democrats.senate.gov/imo/media/doc/21-2093.pdf
[25] Note, however, that the legislative history associated with these two provisions is almost nonexistent as the staff of the Joint Committee on Taxation, which often prepares a detailed description of tax-related legislative proposals, has not (to-date) prepared such an analysis of either the stock buyback tax or the corporate book AMT.
[26] While income taxes are governed by the rules in Subtitle A of the tax code, this new tax on stock buybacks will be located in Subtitle D of the tax code (which governs miscellaneous excise taxes), specifically new Chapter 37 (which used to impose excise taxes on sugar under §§4501-4503, but was repealed in 1990).
[27] A 50% or greater owned (by vote or value, directly or indirectly) U.S. subsidiary of a publicly traded foreign corporation is subject to the tax on the purchase of stock in the foreign parent. Different rules apply to surrogate foreign corporations subject to the anti-inversion rules of Section 7874 (at least after September 20, 2021).
[28] Any U.S. corporation that either 1) has its securities listed on a national stock exchange such as Nasdaq or the NYSE or that 2) has more than $10 million of assets and whose securities are held by 2,000 persons would be a covered corporation for this purpose.
[29] For U.S.-parented companies, the tax may apply to repurchases of the parent’s stock by the U.S. parent or by a 50% or greater owned (by vote or value, directly or indirectly) subsidiary. For foreign-parented companies, see Note 27.
[30] There is an adjustment mechanism that reduces the fair market value of the share repurchases by the fair market value of any stock issued or provided to employees during the year, such that the excise tax is only imposed on the value of the net shares effectively taken out of circulation.
[31] Steve Rosenthal, a senior fellow at the Tax Policy Center, believes that the new tax will cause the balance between buyback and dividends to “shift more toward dividends,” as reported by Tim Shaw, The Long Read: Excise Tax on Stock Buybacks Draws Mixed Response, RIA, Aug. 12, 2022 (subscription required).
[32] “Monster Tax Mash: Spooky Tax Proposals Impacting Pubcos Rise from Fresh Grave of Murdered Corporate Rate Hike” (Oct. 26, 2021); “Surprising Breadth of Proposed Tax on Stock Buybacks” (Oct. 11, 2021); “Flurry of Last-Minute Reconciliation Proposals Could Significantly Impact Public Companies” (Sept. 11, 2021).
[33] Repurchase is defined in the bill as “a redemption within the meaning of section 317(b) with regard to the stock of a covered corporation, and . . . any transaction determined by the Secretary to be economically similar”). IRC §317(b) says: “stock shall be treated as redeemed by a corporation if the corporation acquires its stock from a shareholder in exchange for property, whether or not the stock so acquired is cancelled, retired, or held as treasury stock.” The IRC §317(b) definition is expansive enough that it includes a stock redemption even if it flunks the IRC §302(b) tests.
[34] A specified affiliate is generally defined to include (among other things) any corporation more than 50 percent of the stock of which is owned (by vote or by value), directly or indirectly, by the buyback corporation.
[35] The four named companies had the highest total buybacks for Q1 2022 according to S&P Dow Jones Indices (https://www.prnewswire.com/news-releases/sp-500-buybacks-set-quarterly-and-12-month-records---again-301569469.html).
[36] Although these four named companies are also gargantuan with huge cash flow, so it’s really those companies doing buybacks where the buybacks are a larger share of their balance sheet that will feel the pain.
[37] https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/19/fact-sheet-the-inflation-reduction-act-supports-workers-and-families/
[38] Consider that much of public corporate equity is owned directly or indirectly (through ETFs and mutual funds) by public and private pension funds representing the retirement savings of a variety of workers, many of whom would not be considered wealthy. Further, the revenue score associated with the tax is thought to be about the same whether the rate is set at 1 percent or 2 percent. See also “Wall Street analysts say the new levy isn’t necessarily fatal to buybacks once it goes into effect. That’s largely because the 1% rate isn’t high enough to deter a large portion of buybacks,” as reported by Laura Davison, Share Buyback Tax’s Lag Could Spur Rush to Repurchase This Year, Bloomberg, Aug. 6, 2022 (subscription required).
[39] David van den Berg, Shareholder Status Will Shape Impact Of Stock Buyback Tax, Law360, Aug. 17, 2022 (https://www.law360.com/tax-authority/federal/articles/1521243/shareholder-status-will-shape-impact-of-stock-buyback-tax).
[40] Naomi Jagoda and Michael Rapoport, Tax Specialists Seek IRS Guidance on New Stock Buyback Tax, Daily Tax Report, Aug. 18, 2022 (subscription required).
[41] In that case, there is an adjustment mechanism that allows a corporation to net any redemptions with any new security issuances as long as they occur during the same taxable year, wiping out the potential stock buyback excise tax hit.
[42] Because—depending on the structure—a liquidation is generally distinct from a redemption within the meaning of §317(b), it would not be subject to the excise tax.
[43] Senate approves tax on stock buybacks and corporate minimum tax, Davis Polk, Aug. 9, 2022 (https://www.davispolk.com/insights/client-update/senate-approves-tax-stock-buybacks-and-corporate-minimum-tax); Analysis: Impact of Inflation Reduction Act’s Stock Buyback Excise Tax and Corporate Minimum Tax, Latham & Watkins Transactional Tax Practice, Aug. 19, 2022 (https://www.lw.com/admin/upload/SiteAttachments/Alert%203001.pdf); Scott Fryman, Colin J. Diamond and Neil Clausen, New 1% Excise Tax on Stock Buybacks May Have Far-Reaching Consequences for Capital Markets, SPAC and M&A Transactions, White & Case, Aug. 19, 2022 (https://www.whitecase.com/insight-alert/new-1-excise-tax-stock-buybacks-may-have-far-reaching-consequences-capital-markets); Inflation Reduction Act of 2022: Excise Tax on Repurchases of Corporate Stock and Interesting Applications to SPACs, V&E Tax Update, Aug. 22, 2022 (https://www.velaw.com/insights/inflation-reduction-act-of-2022-excise-tax-on-repurchases-of-corporate-stock-and-interesting-applications-to-spacs/).
[44] This is because the fact that there is a specific provision in the statute exempting repurchases of stock in a reorganization where the shareholder recognizes no gain or loss implies that where there is boot and some gain is recognized, then the excise tax would apply.
[45] Other minor changes include changing the word “administer” to “carry out” in the regulatory authority section and adding the missing but previously implied phrase “employees of.”
[46] https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/15/by-the-numbers-the-inflation-reduction-act/
[47] Jill R. Shah, Stock-Buyback Tax Seen Boosting Dividends, Fueling Credit Risk, Daily Tax Report, Aug. 10, 2022 (https://www.bloomberglaw.com/product/tax/bloombergtaxnews/daily-tax-report/BNA%200000018288e6de36a3d7aefe42700001).
[48] https://www.finance.senate.gov/imo/media/doc/jct_analysis_book_minimum.pdf; and see https://www.finance.senate.gov/imo/media/doc/8.4.22%20JCT%20Effective%20Tax%20Rate.pdf, which estimates that there were between 175 and 200 companies in 2019 that had average book income of $8.2 billion but only paid 4.5% of that in taxes.
[49] Other than S corporations, regulated investment companies and real estate investment trusts.
[50] In the case of a foreign-parented multinational group with a U.S. corporate member, the average annual adjusted financial statement income (AFSI) for the three-year testing period of the domestic member must only be at least $100 million (although the group as a whole—including all foreign members—would still need to have annual AFSI of over $1 billion).
[51] Kevin Schaul, The corporate minimum tax could hit these ultra-profitable companies, Wash. Post, Aug. 12, 2022 (https://www.washingtonpost.com/business/2022/08/11/minimum-corporate-tax/).
[52] Martin A. Sullivan, Tax Credits and Depreciation Relief Slash Burden of New Corporate AMT, Tax Notes, Aug. 22, 2022 (subscription required).
[53] Id. Other lists are less precise. The Center for American Progress published a list of 19 large companies that allegedly paid little or no taxes in 2021 (https://www.americanprogress.org/article/these-19-fortune-100-companies-paid-next-to-nothing-or-nothing-at-all-in-taxes-in-2021/). Its list also included: American International Group, Inc. (NYSE: AIG); Charter Communications, Inc. (NASDAQ: CHTR); Chevron Corporation (NYSE: CVX); The Coca-Cola Company (NYSE: KO); Dow Inc. (NYSE: DOW); Exxon Mobil Corporation (NYSE: XOM); FedEx Corporation (NYSE: FDX); Ford Motor Company (NYSE: F); JPMorgan Chase & Co. (NYSE: JPM); Merck & Co., Inc. (NYSE: MRK); Microsoft Corporation (NASDAQ: MSFT); and NIKE, Inc. (NYSE: NKE).
[54] Consider that there are aggregation rules that apply to an applicable corporation for this purpose.
[55] In general, the cap is equal to an amount representing the excess of 15% of the applicable financial statement income net of AMT FTCs over the regular tax.
[56] IRC §38(c)(6)(E), which provides that the credit allowed under subsection (a) for any taxable year shall not exceed the excess (if any) of the taxpayer’s net income tax [which includes both regular tax and corporate book AMT] over 25 percent of the taxpayer’s net income tax as exceeds $25,000. And see explanation in Tax Provisions in the Inflation Reduction Act of 2022 (H.R. 5376), Congressional Research Service, Aug. 3, 2022.
[57] “Once a corporation satisfies the Income Test . . . the corporation generally would continue to be an applicable corporation even if its income subsequently declines,” explains KPMG in an analysis where they characterize this feature of the statute “as the once-an-applicable-corporation, almost-always-an-applicable-corporation rule” (https://assets.kpmg/content/dam/kpmg/us/pdf/2022/08/tnf-kpmg-report-tax-law-changes-inflation-reduction-act-aug16-2022.pdf).
[58] Technically, the adjustment is for “depreciation deductions allowed under section 167 with respect to property to which section 168 applies.” So this is not the same as depreciation reported on a financial statement, but rather depreciation allowed for tax. One form of accelerated depreciation—so-called 100% bonus depreciation—refers to IRC §168(k), which essentially provides for immediate expensing (so that in the year the property is placed in service, the entire cost of the property can be deducted). However, this provision generally phases down as follows: placed in service by Dec. 31, 2022, 100% full expensing; placed in service in 2023, 80% partial expensing; placed in service in 2024, 60% partial expensing; placed in service in 2025, 40% partial expensing; placed in service in 2026, 20% partial expensing; after 2026, presumably there is no more bonus depreciation.
[59] https://www.nam.org/manufacturers-remain-staunchly-opposed-to-the-inflation-reduction-act-18530/
[60] https://www.ctia.org/news/statement-on-the-inflation-reduction-act
[61] John Hendel, Wireless industry scores tax win in Democrats’ final reconciliation package, PoliticoPRO, Aug. 6, 2022 (subscription required).
[62] Martin A. Sullivan, Over $100 Billion of Wireless Spectrum Amortizable Under Corporate AMT, Tax Notes, Aug. 29, 2022 (subscription required).
[63] https://aboutblaw.com/4xm
[64] Laura Davison, M&A World Roiled by US 15% Corporate Tax Threatening Split-Offs, Bloomberg, Sept. 12, 2022 (https://www.bloomberg.com/news/articles/2022-09-12/m-a-world-roiled-by-us-15-corporate-tax-threatening-split-offs).
[65] Accounting Standards Codification Topic 321, Investments – Equity Securities (ASC 321), implemented by Accounting Standards Update (ASU) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which became effective for financial statements beginning after December 15, 2017.
[66] Specifically, certain reporting entities must disclose the amount of total gains or losses (attributable to fair value changes in assets and liabilities) recognized in earnings under ASC 820-10-50-2. Note that our use of mark-to-market in this context is somewhat colloquial—we are not talking about the separate requirement that (for example) dealers generally mark their inventory to market, which doesn’t create a book-tax discrepancy, since they are also generally required to mark for tax as well.
[67] Note that Berkshire Hathaway CEO Warren Buffett has been critical of this rule (see https://www.berkshirehathaway.com/letters/2019ltr.pdf).
[68] Andrew Bary, Barron’s, Aug. 24, 2022 (https://www.barrons.com/articles/berkshire-hathaway-taxes-stock-gains-51661208553).
[69] For the track-changes version of the alterations made to Section 56A(c)(2)(C): In the case of any corporation which is not included on a consolidated return with the taxpayer, adjusted financial statement income of the taxpayer shall take into account the earnings of with respect to such other corporation shall be determined by only to the extent of the sum of taking into account the dividends received from such other corporation . . .”
[70] KPMG is interpreting this change to mean that the fair value method can be disregarded when determining a taxpayer’s applicable financial statement income. See Analysis and observations: Tax law changes in the “Inflation Reduction Act of 2022”, KPMG, Aug. 16, 2022 (https://assets.kpmg/content/dam/kpmg/us/pdf/2022/08/tnf-kpmg-report-tax-law-changes-inflation-reduction-act-aug16-2022.pdf).
[71] Deloitte also believes the modification to the language now means that applicable financial statement income of a corporation that holds stock in another corporation that is not a member of the first corporation’s consolidated group is determined by only taking into account the dividends received from such other corporation (and does not include amounts otherwise taken into account with respect to such stock under the mark-to-market method of accounting). See Inflation Reduction Act clears House of Representatives, Deloitte, Aug. 13, 2022 (https://www.taxathand.com/article/26753/United-States/2022/Inflation-Reduction-Act-clears-House-of-Representatives).
[72] Alexander Rifaat, Hard Part Begins for IRS and Treasury as Biden Signs Reconciliation Bill, Tax Notes, Aug. 17, 2022 (subscription required).
[73] Although something similar has been tried before. In 1986, Congress implemented a tax on Business Untaxed Reported Profits (BURP). In response, “many firms and businesses adjusted their financial accounting choices the reduce their income,” distorting the financial results they were disclosing to the markets so as to reduce their tax liability. Because of this, the BURP was only in place from 1987 to 1989, when it was repealed. (https://us.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/aicpa-comments-on-corp-min-tax-on-book-income-10-28-21-submit-cees.pdf; https://us.eversheds-sutherland.com/mobile/NewsCommentary/Legal-Alerts/252668/Back-from-the-dead-Corporate-minimum-tax-resurfaces-at-eleventh-hour-in-Inflation-Reduction-Act-of-2022)
[74] https://www.sec.gov/ix?doc=/Archives/edgar/data/1045810/000104581022000036/nvda-20220130.htm
[75] https://www.sec.gov/ix?doc=/Archives/edgar/data/804328/000172894921000076/qcom-20210926.htm
[76] https://www.sec.gov/ix?doc=/Archives/edgar/data/1018724/000101872422000005/amzn-20211231.htm
[77] https://www.sec.gov/ix?doc=/Archives/edgar/data/1326801/000132680122000018/fb-20211231.htm
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