New 1% Excise Tax on Stock Buybacks May Have Far-Reaching Consequences for Capital Markets, SPAC and M&A Transactions

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On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, H.R. 5376 (the "Act"), a reconciliation bill that revives parts of the tax legislation from the ill-fated Build Back Better Act as part of a larger package also addressing climate change, energy and health care. In particular, the Act establishes a new one-percent excise tax on certain stock buybacks by domestic public companies (the "Excise Tax").  As discussed below, the Excise Tax has a broad reach that could unexpectedly affect a range of capital markets, SPAC and M&A transactions beyond plain vanilla stock buybacks.


The statutory language implementing the Excise Tax is identical to that of the excise tax proposed at the end of 2021 as part of the Build Back Better Act. The purported policy goals of the Excise Tax are to raise revenue1 for other legislative initiatives, encourage reinvestment by public companies of funds that otherwise might be earmarked for a buyback, and to curb stock buybacks, which proponents of the tax argue inappropriately enrich corporate executives and wealthy shareholders and enable tax avoidance.2 The tax avoidance argument ostensibly relates to the fact that a typical buyback of appreciated stock by a public company (as opposed to a typical dividend) allows holders to reduce taxable income by the cost basis in the repurchased shares.

The Excise Tax was not part of the Senate's original bill of the Act, and was added as a compromise reached with Senator Krysten Sinema, D-Arizona, that included dropping the proposal to extend the holding period for carried interest payable to private equity fund managers to qualify as long-term capital gains.

Scope of the Excise Tax

The Excise Tax generally consists of a non-deductible one-percent tax on the value of stock of a "covered corporation" that is either repurchased by, or acquired by certain affiliates of, such covered corporation during a taxable year. The statute applies to buybacks taking place after December 31, 2022 and does not provide any "grandfathering rule" for repurchases pre-authorized on or prior to such date (for example, pursuant to a Rule 10b5-1 plan).

A "covered corporation" is a domestic corporation (or certain non-US corporations treated for tax purposes as a domestic corporation under the "inversion" rules) the stock of which is traded on an "established securities market."3 In limited circumstances, acquisitions of stock of certain publicly traded non-domestic corporations by their domestic subsidiaries will be treated as repurchases subject to the Excise Tax.

The value of stock treated as repurchased during the taxable year for purposes of computing the Excise Tax is reduced by the value of any new issuances of stock by the corporation during the same taxable year (the "Netting Rule").

The statute defines "repurchase" broadly by reference to Section 317(b) of the Internal Revenue Code of 1986, as amended (the "Code"), which generally includes any acquisition of stock by the corporation in exchange for cash or property other than the corporation's own stock or stock rights. The Excise Tax further expands this definition by including any other "economically similar" transaction, as determined by Treasury.

The Act excludes the following repurchases from the Excise Tax:

  • To the extent the repurchase is part of a tax-free reorganization under Section 368(a) of the Code, and no gain or loss is recognized by the shareholder by reason of the reorganization.
  • The repurchased stock, or an amount of stock equal to the value of such repurchased stock, is contributed to an employer-sponsored retirement plan, employee stock ownership plan, or similar plan.
  • The total amount of repurchases within the taxable year does not exceed $1 million.
  • Under regulations prescribed by Treasury, the repurchase is by a dealer in securities in the ordinary course of business.
  • The repurchase is by a regulated investment company or a real estate investment trust.
  • To the extent the repurchase is treated as a "dividend" (as opposed to being treated as a "sale or exchange") for US federal income tax purposes.

In addition, the statute explicitly authorizes Treasury to prescribe regulations and other guidance as are necessary to carry out, and to prevent avoidance of the Excise Tax, including to address special classes of stock and preferred stock.

These exclusions make sense when viewed in light of the purported policy objectives of the Excise Tax. For example, distributions treated as a dividends for tax purposes were presumably excluded due to the view that dividends do not present the same tax avoidance concerns.

Nevertheless, the statute leaves open a number of questions as to its intended scope. The policy objectives of subjecting corporations to the Excise Tax in connection with several of the transactions discussed below are not readily apparent. Guidance from Treasury clarifying ambiguities in the statute and excluding from the statute's reach transactions the taxing of which do not further the statute's stated policy goals will be important to clear implementation.

Observations and Open Questions

"Repurchases" of "Stock"

The Excise Tax applies broadly to repurchases of all types of stock of a covered corporation. The statute's broad applicability seemingly brings within its reach repurchases of non-traded stock acquired in privately negotiated transactions, and stock that is puttable by the holder, callable by the issuer or mandatorily redeemable pursuant to its terms (such as mandatorily redeemable preferred stock), even if such stock was issued prior to January 1, 2023.

Repurchases of other instruments that do not constitute equity securities for corporate purposes, but are treated as stock for applicable tax purpose, such as penny warrants, could also trigger the Excise Tax.

Convertible Debt

An issuer of convertible debt might repurchase shares of its own stock ahead of or concurrently with the issuance of convertible debt to limit the dilutive impact of the potential conversion of the debt. The repurchase would be subject to the Excise Tax without an offset to the amount repurchased under the Netting Rule unless the debt is converted into stock in the same taxable year.

The Excise Tax could also affect equity hedging transactions commonly entered into by companies in connection with their convertible debt issuances. Issuers of convertible debt often enter into either a capped call or a bond hedge with a warrant to mitigate the potential share dilution and offset cash outlays associated with the debt conversions. Upon conversion, these hedge transactions allow issuers to buy back shares from hedging counterparties at pre determined prices (i.e., physically settle the transaction) or, in the alternative, cash settle the hedging transaction by obtaining the upside entirely in cash or net share settle the transaction by only obtaining an amount of shares representing the upside.

In the case of a physical settlement or a net share settlement of such hedging transaction, the issuer will receive its own shares at a below-market price, and therefore the Excise Tax could apply. It is not clear, however, if and to what extent the Excise Tax and/or the Netting Rule would apply to net cash settlements of such hedging transactions or convertible debt. For instance, further guidance might clarify that in circumstances (such as a cash settlement of these hedging transactions) where a cash payment could be considered the economic equivalent of a series of transactions involving a repurchase followed by an issuance (or vice versa), the Excise Tax will apply in the same manner as it would have to such equivalent transactions when viewed together.

Because there is no grandfathering for existing transactions, companies that currently have these hedging transactions should pay particularly close attention to the Excise Tax, especially when selecting the method of settlement.


Another type of transaction that may be subject to the Excise Tax is an accelerated share repurchase ("ASR"). In an ASR, a company enters into a forward transaction with a dealer under which in exchange for a prepayment amount (which corresponds to the amount the company is committing to spend on repurchasing its shares), the company receives a number of shares usually representing approximately 80% of the total shares it could repurchase based on the then-current price. The dealer typically would have borrowed the shares it delivered to the company, and would enter into open market transactions to purchase the company's shares and close out its borrowed positions throughout the term of the ASR. The final price per share of the company's repurchase under an ASR is generally the mean of the volume-weighted average price of the shares over the term of the transaction. Depending on the final price per share, the dealer would deliver more shares to the company at the final settlement or the company may have to return some shares or cash to the dealer (e.g., if the final price is higher than the share price at the prepayment date).

An ASR is a repurchase of the company's own shares to which the Excise Tax is expected to apply. However, it is unclear if the Excise Tax would apply at the initial prepayment date (i.e., when the company first receives the majority of its purchased shares) or the final settlement date (i.e., when the final price of the repurchase is determined). This delineation is of particular importance to ASRs entered into this year with a final settlement date that occurs on or after January 1, 2023, the date on which the Excise Tax goes into effect. Similar to the point discussed above with respect to convertible notes and corresponding hedging transactions, it is not clear how and/or to what extent the Excise Tax and/or Netting Rule would apply to cash settlements of an ASR.

Employee Plans and Anti-Dilution Buybacks

Many companies use stock buyback programs to manage the dilutive effect of stock issued to (or for the benefit of) employees through retirement plan contributions, such as 401(k) plan matching contributions, or to satisfy awards under incentive compensation plans (e.g., stock options and RSUs). While the Act includes an exception for repurchases intended to offset contributions to "an employer-sponsored retirement plan, employee stock ownership plan, or similar plan," the scope of this exception is uncertain absent more guidance from Treasury.

For example, the term employee stock ownership plan, or ESOP, is usually understood to mean a specific type of tax-qualified retirement plan funded by employer stock, and not a stock option plan or employee stock purchase plan (ESPP). It is also unclear whether an employer-sponsored retirement plan would only cover broad-based retirement plans such as pensions and 401(k) plans, or also so-called "top hat" deferred compensation plans that by design may only benefit a select group of highly compensated employees. Given the policy goals offered by proponents of the Excise Tax noted above, it is notable that pension plans, 401(k) plans and ESOPs are all subject to the Employee Retirement Income Security Act (ERISA), a federal law established to protect employees, while top-hat plans and typical equity incentive plans are not covered by ERISA and may disproportionately benefit senior executives.


The Excise Tax could also have unexpected application to domestic-incorporated special purpose acquisition companies ("SPACs"). In particular, absent guidance from Treasury providing otherwise, redemptions of public A shares in connection with a business combination would be subject to the Excise Tax even though the repurchases are pursuant to the terms of the stock and notwithstanding the fact that the redeemed shareholders might not be realizing any gain on the repurchases. The Excise Tax can also apply where shareholders opt to have their shares redeemed in connection with specified material amendments to SPAC charters to extend investment periods.

The Netting Rule could provide relief in many cases involving domestic-incorporated SPACs where the value of shares issued to shareholders of the target company and PIPE investors in a business combination exceeds the value of shares redeemed, or if the business combination closes in the same year as the IPO. The Netting Rule might be of limited utility, however, where the target shareholders do not roll over into the existing SPAC entity, such as in "up-C," "double dummy" or "target-on-top" structures. It remains to be seen whether Treasury will offer relief in these instances by, for example, expanding the Netting Rule to include issuances by a successor to a covered corporation (such as the new holding company in certain “double dummy” structures), certain exchange rights or options to acquire covered corporation stock (such as in “up-C” structures), or deemed issuances of retained equity in “target-on-top” structures.

Given the broad definition of "repurchase" in the statute, and Treasury's authority to cause transactions economically similar to a repurchase to be treated as such, a distribution of property in whole or partial dissolution or liquidation of a covered corporation may be subject to the Excise Tax. This outcome would be particularly onerous for domestic SPACs, as SPACs are generally required to liquidate if they do not consummate a business combination within a pre-determined period (typically 18 to 24 months, unless an extension is approved).

The potential application of the Excise Tax could provide additional incentives to form SPACs in the Cayman Islands. If a Cayman-domiciled SPAC, however, identifies a domestic target and, as is typically the case, migrates to the United States to effect the business combination, it is not clear whether such SPAC would nonetheless be subject to the Excise Tax if it redeems Class A shares after the migration. It also remains to be seen whether the SPAC could avoid the tax by repurchasing shares prior to the domestication.

Other M&A Transactions

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.


An overarching question is the extent to which covered corporations might change their behavior to avoid or reduce the Excise Tax. Such changes could include curbing buybacks, timing issuances to take place in the same year as buybacks, opting for dividends over buybacks and/or where possible, structuring M&A transactions to avoid causing technical repurchases as discussed above. The impact of the statute will depend in large part on regulatory guidance from Treasury.


1 According to estimates from the Joint Committee on Taxation, the Excise Tax is expected to raise more than $73 billion. See
2 Finance Committee Chair Ron Wyden, D-Ore., August 6, 2022 remarks on the Senate floor;
3 An "established securities market" generally includes (i) a national securities exchange registered under section 6 of the Securities Exchange Act of 1934 ("Exchange Act"), such as the NYSE or NASDAQ, (ii) a national securities exchange that is exempt from the Exchange Act because of the limited volume of transactions, (iii) a foreign securities exchange that satisfies regulatory requirements that are analogous to the regulatory requirements under the Exchange Act (such as the London Stock Exchange or the Tokyo Stock Exchange), (iv) certain regional or local exchanges and (v) inter-dealer quotation systems that regularly disseminate firm buy or sell quotations by identified brokers or dealers by electronic means or otherwise (such as an OTC market).


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