ABA responds to IRS guidance on stock buyback excise tax

Responding to initial IRS guidance on the provision for stock buyback excise taxes within last year’s Inflation Reduction Act, the American Bankers Association last week recommended that one-year carryforward and carryback periods should be granted for net preferred stock issuances. Within the IRA, a 1% excise tax is applied to the net redemptions of stock during a year, subject to certain specific exemptions. President Biden recommended quadrupling the rate during his recent State of the Union speech.

“Preferred stock issuance and redemption is a routine practice within the banking industry predominately executed … to manage regulatory capital and liquidity risk,” ABA said in a letter to the IRS. The association noted the differences between preferred shares and common shares and explained how—over long periods of time—banks will likely be net issuers of preferred stock, though they could be subject to the tax in some years for reasons out of their control. “We do not believe it is the intent of the IRA to penalize companies that have redemption programs as part of their good faith efforts to manage capital and liquidity risks,” the association wrote.