IRS Tackles Inflation Reduction Act Share Buyback Rules

The Internal Revenue Service is starting to implement two provisions in the Inflation Reduction Act of 2022 that could eventually affect the cost and availability of financial services products.

The IRS sketched out proposed regulations for a provision that would add a new 1% excise tax on repurchases of corporate stock in Notice 2023-2.

The agency has talked about how it might implement a provision that creates a corporate alternative minimum tax in Notice 2023-7.

What It Means

The new notices are unlikely to have a direct impact on many clients, but, if they increase financial services companies’ tax bills or move them into investors’ doghouse, that could hurt the supply of attractive products.

The Inflation Reduction Act of 2022

The Inflation Reduction Act, enacted in August, includes many provisions meant to promote clean energy, lower drug prices and update some tax rules.

According to Congressional Budget Office estimates, the stock buyback excise tax could raise as much as $74 billion over 10 years by requiring a company that buys back its own stock, under certain conditions, to pay a tax equal to 1% of the value of the transaction.

The corporate alternative minimum tax, or CAMT, provision, could raise $313 billion over a 10-year period by imposing a 15% tax rate on companies with more than $1 billion in revenue.

Notice 2023-2

Many financial services companies, and especially life insurers, spend more than $100 million on buying back their own stock every year.

The repurchases improve per-share performance ratios, and they add to the value of investors’ holdings without immediately producing taxable income.

Some financial services companies have bought back shares of their own stock in connection with efforts to turn life and annuity operations into separate businesses.

Critics say excessive repurchases may hurt the economy and society as a whole, by reducing the resources have to innovate and respond to crises.

The Inflation Reduction Act created the 1% repurchase excise tax by adding section 4501 to the Internal Revenue Code.

IRS officials say they put out the new guidance interpreting Section 4501 to provide interim guidance while the IRS is developing section 4501 regulations.

Notice 2023-7

Congress developed the corporate alternative minimum tax (CAMT) in an effort to keep companies from using overseas companies and other mechanisms to hold tax payments to very low levels.

The Inflation Reduction Act created the CAMT by changing sections 55, 56A and 59 of the Internal Revenue Code.

IRS officials say they put out the new CAMT notice to provide guidance on time-sensitive issues while it develops CAMT regulations.

Relatively new accounting rules, and accounting rules that will soon come online, can cause life insurers to report huge net income and net loss figures, by putting changes in the estimated market value of assets and liabilities in current income statements.

The IRS says it will put out additional interim guidance to look at how life insurers should handle items that are marked-to-market for financial statement purposes and embedded derivatives related to reinsurance contracts in CAMT calculations.

“This additional interim guidance would be intended to help avoid substantial unintended adverse consequences to the insurance industry and certain other industries,” officials say.

Officials have included a set of 20 questions for the public in the notice.

One question is about how the IRS should handle reinsurance contracts in the CAMT regulations, and another asks whether the IRS should disregard mark-to-market gains and losses when making CAMT calculations.

“Should this depend on the extent to which the taxpayer marks to market the item for regular tax purposes?” officials ask.