Legislation proposed by the Senate would impose minimum excise taxes on corporations; Increase IRS Funding

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Practices: Taxation

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On August 7, 2022, the Senate passed the Reducing Inflation Act of 2022 (the “Act”) which, among other provisions:

  1. Establishes a new 15% alternative minimum corporate tax for certain large corporations based on adjusted financial statement income,
  2. Establishes an excise tax on public company stock redemptions, and
  3. Increases IRS funding.

In contrast, the law does not include the proposal included in the original bill to extend the special holding period rules applicable to deferred interest, which was discussed in our previous Alert.

(i) Minimum corporate tax of 15%

  • Insight: The corporate Alternative Minimum Tax (“AMT”) rules included in the act are substantially similar to a proposal included in the Senate Finance Committee version of the Build Back Better Act released on December 11, 2021. If a company is subject to AMT, the AMT would be 15% of Adjusted Financial Statement Income (“AFSI”), reduced by certain AMT foreign tax credits based on taxes paid to foreign countries and included in the applicable financial statement of the company.
  • Scope – “relevant company”: The AMT would only apply to an “applicable company”, which is generally a company whose average annual adjusted financial statement (“AAAFSI”) revenue exceeds $1 billion in any consecutive three-year period preceding the tax year in question. A “relevant corporation” may also be a U.S. subsidiary of a foreign parent group if the group meets the criteria described above and the subsidiary has an AAAFSI of at least $100 million over three consecutive tax years preceding the tax year in question. Once a company meets the income test in one year, it will continue to be subject to the AMT in perpetuity, subject to an exclusion for companies that do not meet the income test for one year. number of consecutive taxation years, with such number of years to be dealt with in the regulations, and which meet other requirements to be dealt with in the regulations.

    In particular, an aggregation rule applies such that if a corporation is treated as a single employer with other corporations under Sections 52(a) or (b) of the Internal Revenue Code (the “Code ”) (which is generally the case for companies under common control), the AFSI of these other companies is taken into account for the purposes of the result test. (As originally proposed, the law amended section 52 for the purposes of the AMT so that companies controlled by private equity funds would be grouped together under this rule, but later changes to the law removed this change.)

  • Exclusions: AMT does not apply to S corporations, regulated investment companies or real estate investment trusts. The AMT also does not apply to companies that are undergoing a “change of ownership”, which will be dealt with in greater detail in the regulations, and which meet other requirements which will be dealt with in the regulations.
  • Result of the adjusted financial statements: A company’s ISFA for a tax year is generally the company’s net income (or loss) as shown in the company’s applicable financial statements (for example, financial statements prepared in accordance with generally accepted accounting principles ) with the adjustments set forth in the Act, including:
    • adjustments for any difference between the period of the financial statements and the tax year;
    • adjustments relating to related entities to take into account the financial results of a company presented in the consolidated financial statements, of a company that is part of a consolidated group and the treatment of non-consolidated members of the group;
    • for a corporation that is a member of a partnership, adjustments to include only the corporation’s distributive share in the partnership’s ISFA;
    • for a corporation that is a U.S. shareholder of a controlled foreign corporation, adjustments to include a proportionate share of the income or loss of that controlled foreign corporation (except that the aggregate adjustment in respect of all controlled foreign corporations cannot be negative, with the excess only being carried forward to reduce the following year’s positive adjustments for controlled foreign corporations);
    • for a foreign company, adjustments to apply the principles of “effectively linked income” as reflected in article 882 of the Code;
    • adjustments to disregard U.S. and foreign federal income taxes deducted in an applicable financial statement;
    • adjustments to account for the AFSI of a company’s disregarded entities;
    • for a tax-exempt entity, adjustments to only take into account income from an unrelated trade or business or income from debt-financed property treated as unrelated business taxable income;
    • adjustments for reduction by deductions for capital cost allowance in respect of depreciable property up to the amount authorized as a deduction in the calculation of the company’s taxable income; and
    • further rule adjustments to come.

    In addition, a company’s AFSI in a given tax year is reduced by an amount equal to the lesser of (a) the total amount of NOLs from the financial statements carried forward to that tax year and ( b) 80% of the adjusted income of the company’s financial statements calculated without taking into account its NOLs financial statements. In this regard, the Act would allow a company to carry forward NOCs of financial statements generated for tax years ending after December 31, 2019.

  • Effective date: If passed, the AMT will be effective for tax years beginning after December 31, 2022.

(ii) Excise tax

  • Insight: The law also imposes a 1% excise tax on the fair market value of shares repurchased by a listed company. This provision is identical to the excise tax included in the bill known as the “Build Back Better Act” that the House Ways and Means Committee released on September 13, 2021.
  • Scope: This provision imposes a 1% excise tax on corporations whose shares are traded on an established securities market. The tax is imposed on the value of shares that are redeemed during the tax year by the company or certain affiliates of the company. For this purpose, an affiliate includes a corporation in which more than 50% of the shares are held directly or indirectly by the corporation, or a partnership in which more than 50% of the capital interests are held directly or indirectly by the corporation.

    Excise tax also applies to (i) purchases of shares of a publicly traded foreign corporation by a U.S. subsidiary of that corporation, in which case the U.S. subsidiary is liable for excise tax, and (ii ) share repurchases by surrogate foreign companies, which are foreign companies subject to the inversion rules under section 7874 of the Code.

    A share repurchase within the meaning of Section 317(b) of the Code, which is generally an acquisition of shares by the company from a shareholder in exchange for property, and any economically similar transaction, as determined by the Treasury, are considered “redemptions”. » subject to excise tax. To determine the amount of tax due, the value of share redemptions in a given tax year is reduced by the value of any new share issues that occur in the same year.

  • Exclusions: There are a number of excise tax exclusions. Excise tax would not apply in the following circumstances:
    • the redemption occurs as part of a tax-free reorganization under Code Section 368(a) and no gain or loss is recognized, so the exclusion apparently does not apply if a shareholder receives a boot in the reorganization;
    • the repurchased shares are paid into an employer-sponsored pension plan, an employee stock ownership plan or a similar plan;
    • the total value of the shares redeemed during a taxation year does not exceed $1,000,000;
    • pursuant to a pending regulation, the redemption is made by a securities dealer in the ordinary course of business;
    • the redemption is carried out by a sicafi or a regulated investment company; and
    • the redemption is treated as a dividend for federal income tax purposes.
  • Impact on transactions: Excise tax may affect transactions beyond public company stock buyback programs. For example, excise tax may apply to shareholders of special purpose acquisition vehicles (“SPACs”) who redeem their shares as part of the initial formation of the SPAC or a “de-SPAC” transaction. “. The excise tax could also affect how so-called up-C IPOs are done.

    Given the breadth of the definition of “redemption”, excise tax may also apply to transactions that do not include share buybacks as that term is commonly used, including acquisitions of public companies in which payments to shareholders are funded by the proceeds of debt incurred or assumed by the company as part of the acquisition.

  • Effective date: If enacted, the excise tax would apply to redemptions made after December 31, 2022.

(iii) Financing of the SRI

Similar to the Build Back Better Act (released December 2021), the act provides nearly $80 billion in additional IRS funding for taxpayer services, enforcement, operations support, and modernization, with more $45 billion earmarked for IRS tax enforcement over the next nine years. years.

(iv) Others

The Senate voted to extend the limit on excess business loss deductions from Jan. 1, 2027, to Jan. 1, 2029. The Senate originally approved an amendment to the law that would extend the $10,000 cap on domestic tax deductions by one year. and local; however, a subsequent vote overturned the extension and removed it from law. It subsequently approved the extension of the limit on excess business loss deductions to offset the income that would have resulted from the extension of this limit.

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