DealLawyers.com Blog

This White & Case memo says that the 1% excise tax on stock repurchases contained in the Inflation Reduction Act that President Biden signed into law earlier this month could impact certain M&A transactions as well. Here’s an excerpt:

Several other types of transactions that appear not to involve a repurchase in form, but nonetheless constitute a “redemption” under Section 317(b) of the Code could also result in unexpected application of the Excise Tax. For example, where a covered corporation is acquired with transaction consideration funded in part from cash on the covered corporation’s balance sheet and/or debt proceeds borrowed (or treated as borrowed) by the covered corporation, such transaction consideration would generally be treated as paid to the shareholders in redemption of their stock for income tax purposes.

Similarly, in partially tax-free reorganizations where a covered corporation is acquired by another corporation for at least the requisite minimum stock consideration to qualify for tax deferral and taxable cash “boot,” it is possible that all or a portion of the cash consideration would be treated as paid to shareholders in redemption of their shares for income tax purposes. It is also not entirely clear on the face of the statute whether the stock component of the consideration in such transactions (which is generally permitted to be received on a tax-deferred basis) would trigger the Excise Tax, because the statutory exclusion only exempts repurchases that are part of a tax-free reorganization where no gain or loss is recognized.

A type of tax-deferred reorganization known as a “split-off” could also trigger the Excise Tax under the statute. A split-off involves an exchange (treated as a redemption for income tax purposes) by certain shareholders of their stock in a corporation for stock of the corporation’s corporate subsidiary in a transaction that otherwise satisfies the requirements for tax-deferral. There is a technical question as to whether shareholder-level tax-deferral in the split-off is available “by reason of” the reorganization, which creates uncertainty as to whether the applicable statutory exclusion would apply.

The memo also addresses the potential implications of the excise tax on privately negotiated repurchases, ACRS programs, SPAC redemptions and other capital markets transactions.

– John Jenkins