Notice 2023-2 does not — Internal Revenue Bulletin 2024-20

address the treatment of payments to dissenting shareholders. Thus, under Notice 2023-2, whether cash paid to dissenting shareholders is treated as a repurchase depends on whether the transaction is treated as a section 317(b) redemption under Federal income tax principles (namely, whether the target corporation is treated as the source of the cash). The Treasury Department and the IRS continue to be of the view that the determination of whether cash paid to dissenting share

holders is treated as a repurchase should be made based upon Federal income tax principles. Accordingly, the proposed regulations would not adopt the stakeholder’s recommendation.

D. Constructive specified affiliate acquisition

The Treasury Department and the IRS have considered whether the acquisition by a covered corporation of a corporation or partnership that owns stock in the covered corporation should be treated as a repurchase. For example, assume that an acquiring corporation (which is a covered corporation) enters into an agreement to purchase all the stock of a privately held target corporation. Prior to the acquisition, the target corporation uses cash on hand to purchase stock of the acquiring corporation on an established securities market. After the acquisition, the target corporation becomes a specified affiliate of the acquiring corporation.

The foregoing transaction is not a section 317(b) redemption by the acquiring corporation, which does not directly acquire its stock for “property” within the meaning of section 317(a). The transaction also is not an acquisition of the acquiring corporation’s stock by an entity that is a specified affiliate at the time of the acquisition. See part IV.B of this Explanation of Provisions (discussion of the determination of specified affiliate status). However, if the target corporation had purchased the acquiring corporation’s stock after becoming a specified affiliate of the acquiring corporation, that purchase would have been treated as a repurchase by the acquiring corporation under section 4501(c)(2) (regarding the treatment of purchases by specified affiliates). Therefore, by purchasing the stock of the target corporation, the acquiring corporation has gained the economic benefits of repurchasing its stock without incurring a stock repurchase excise tax liability.

The Treasury Department and the IRS are of the view that the foregoing transaction should be treated as a repurchase. Accordingly, the proposed regulations would provide that a constructive specified affiliate acquisition of stock by a covered corporation is treated as a repurchase to the extent that: (i) the target corpora

tion or partnership becomes a specified affiliate of the covered corporation; (ii) at the time the target corporation or partnership becomes a specified affiliate, it owns stock of the covered corporation that represents more than one percent of the fair market value of the target corporation or partnership as determined at such time; and (iii) the target corporation or partnership acquired such stock after December 31, 2022 (constructive specified affiliate acquisition rule). See proposed §58.45012(f)(3)(i). Stock that is treated as repurchased in a constructive specified affiliate acquisition is treated as being repurchased at the time the corporation or partnership becomes a specified affiliate of the covered corporation. See proposed §58.45012(g)(4). However, the constructive specified affiliate acquisition rule would not apply to shares of covered corporation stock identified as previously having been treated as repurchased by the covered corporation under the constructive specified affiliate acquisition rule. See proposed §58.4501‑2(f)(3)(ii).

If the corporation or partnership is unable to specifically identify which shares of stock of the covered corporation the corporation or partnership is treated as holding at the time it becomes a specified affiliate, the covered corporation must treat the corporation or partnership as holding the most recently acquired shares of the stock of the covered corporation. See proposed §58.4501‑2(f)(3)(iii).

The constructive specified affiliate acquisition rule would apply regardless of whether the acquisition is a taxable transaction or a tax-free acquisition. Additionally, a transaction in which a target corporation’s redemption of its shares causes the target corporation to become a specified affiliate of the covered corporation would be treated as an acquisition of the target corporation by the covered corporation for purposes of the constructive specified affiliate acquisition rule.

E. Carryover of stock repurchase excise tax base

A stakeholder requested clarification as to whether a positive or negative balance in a target corporation’s stock repurchase excise tax base (that is, an excess of issu

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ances over repurchases, or vice-versa) may carry over to the acquiring corporation following an acquisitive reorganization for purposes of determining the acquiring corporation’s stock repurchase excise tax base for the taxable year that includes the acquisition. The stakeholder recommended against applying a carryover approach if the Treasury Department and the IRS exempt acquisitive reorganizations from the stock repurchase excise tax or limit its application to non-qualifying property sourced from the target corporation. See parts VIII.A.2 and VIII.B of this Explanation of Provisions (discussion of acquisitive reorganizations and the sourcing approach to such reorganizations). The stakeholder also contended that a non-carryover approach may be more consistent with the taxable year determination described in section 3.03(c) of Notice 2023-2.

However, the stakeholder expressed a view that if, under the proposed regulations, the stock repurchase excise tax continues to apply to non-qualifying property sourced from the acquiring corporation, then permitting the balance in a target corporation’s stock repurchase excise tax base to carry over to the acquiring corporation may be reasonable, at least to the extent of any positive balance created in connection with the transaction. The stakeholder also contended that a carryover approach may be appropriate for complete liquidations to which both sections 331 and 332 apply, if the subsidiary and parent corporations are both publicly traded at the time of the liquidation.

For the reasons discussed in part XI.D of this Explanation of Provisions (discussion of carryovers and carrybacks of issuances of preferred stock), the Treasury Department and the IRS are of the view that a carryover approach is not appropriate for purposes of the stock repurchase excise tax. Accordingly, the proposed regulations would not adopt a carryover approach.

F. Exclusive list of economically similar transactions

One stakeholder recommended that the Treasury Department and the IRS incorporate into the proposed regulations the approach described in Notice

2023-2, which provided an exclusive list of economically similar transactions. The stakeholder further recommended that any transactions added to this list in future guidance should be subject to the stock repurchase excise tax only on a prospective basis. Another stakeholder also recommended that guidance classifying instruments or transactions as economically similar should apply prospectively, except for any transactions deemed abusive that may warrant retroactive application.

The Treasury Department and the IRS continue to be of the view that economically similar transactions should be clearly identified in an exclusive list on which taxpayers may rely. Accordingly, the proposed regulations would retain the exclusive list described in Notice 2023-2, as modified to account for other changes in these proposed regulations. See proposed §58.4501-2(e)(4).

The Treasury Department and the IRS also are of the view that additional transactions added to the list of economically similar transactions should not be required to be apply solely on a prospective basis. Although the Treasury Department and the IRS anticipate that most transactions treated as economically similar transactions would be treated as such only on a prospective basis, there may be transactions that warrant retroactive application, as noted by the other stakeholder. Accordingly, the proposed regulations would not adopt this recommendation.

G. SPACs

Overview

SPACs are companies that raise equity in an IPO in order to seek out and acquire an operating business in a business combination (de-SPAC transaction). A SPAC typically will issue stock to the public in the IPO and deposit the cash received in a trust. The stock is redeemable at the option of the holder, including in connection with a de-SPAC transaction. If a business combination is not completed within a specified period of time (typically, two years), the SPAC liquidates and the cash is returned to the public shareholders.

SPAC Redemptions and Economically Similar Transactions

Several stakeholders requested clarification regarding the application of the stock repurchase excise tax to SPAC-related section 317(b) redemptions and economically similar transactions. For example, stakeholders recommended that non-liquidating redemptions of stock by a SPAC should be wholly excepted from the stock repurchase excise tax. According to one stakeholder, a redemption of stock by a SPAC pursuant to the terms of the stock differs from a conventional stock buyback, in that the SPAC redemption effectively amounts to a return of a shareholder’s capital and does not result in either stock price manipulation or accretion to other shareholders (considerations that the stakeholder hypothesized to be relevant to Congress in enacting the stock repurchase excise tax). According to another stakeholder, an exemption for non-liquidating redemptions by SPACs could be implemented by either (i) an exception to the stock repurchase excise tax for redemptions pursuant to a mandatory redemption right or a unilateral holder put option, or (ii) a broad-based exception for SPAC-related redemptions.

The Treasury Department and the IRS are of the view that adopting special rules for SPACs in the proposed regulations would not be necessary or appropriate to carry out the stock repurchase excise tax. As discussed in part II.A.1 of this Explanation of Provisions, the proposed regulations would not exempt redemptions of stock pursuant to a mandatory redemption right or a unilateral holder put option. These proposed rules would apply to SPACs as well as other taxpayers.

Several stakeholders also recommended that distributions in complete liquidation of a SPAC should not be subject to the stock repurchase excise tax, even if there is not a distribution in cancellation or redemption of all classes of stock. The stakeholders stated that this issue arises because a SPAC sponsor typically waives with respect to their shares any redemption rights in connection with a de-SPAC transaction and any rights to liquidating distributions. Consequently, when a SPAC winds up and liquidates, the shares owned

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by the SPAC sponsor typically will not receive a liquidating distribution.

As discussed in part VI.A.2 of this Explanation of Provisions, the proposed regulations would clarify that a distribution pursuant to a plan of complete liquidation or dissolution of a covered corporation (or an applicable foreign corporation or a covered surrogate foreign corporation) generally is not a repurchase and, thus, generally is not subject to the stock repurchase excise tax. See proposed §58.4501-2(e)(5)(i).

Netting Rule

In certain de-SPAC transactions, the SPAC is not the acquiring corporation. Therefore, the SPAC does not issue any stock in the transaction. Stakeholders recommended that, in such transactions, the SPAC should be allowed to offset its repurchases against (i) issuances by the post-combination entity (which could be viewed as a successor to the SPAC), or (ii) issuances of exchange rights to acquire covered corporation stock issued to the owners of target partnership interests (if the de-SPAC transaction is executed through a transaction commonly referred to as an “Up-SPAC” transaction).

According to stakeholders, such issuances are functionally equivalent to issuances by the SPAC. Stakeholders also recommended similar expansions of the netting rule for acquisitions other than de-SPAC transactions. Alternatively, a stakeholder recommended that SPACs be permitted a one-year carryback or carryforward of excess issuances.