ACCT 618 Week 8 Discussion Board Forum 2 Example

Discussion Board Forum 2: Newer Corporate Taxes and Their Effect on Shareholders

ACCT 618 Advanced Topics in Corporate Taxation, Discussion Board Forum 2

Thread by [Student Name]

The company and classmates are composites; the Code sections, studies and Bible passage cited are real.

Harlan Industrial, a publicly traded domestic manufacturer, has $2 billion of cash it does not need and is deciding whether to return it through a share buyback or a special dividend. Two taxes enacted in 2022 now enter that decision, the excise tax on repurchases and the corporate alternative minimum tax, and both bear on what Harlan's shareholders finally receive.

The repurchase excise tax is 1 percent of the fair market value of stock a covered corporation repurchases during the year, reduced by the fair market value of stock it issues during the same year, including stock issued to employees (I.R.C. § 4501, 2025). If Harlan buys back $2 billion of stock and issues $200 million of stock to employees through its equity plans, the tax base is $1.8 billion and the excise tax is $18 million. A special dividend of the same amount carries no excise tax. At the shareholder level, the comparison runs the other way. A dividend is taxable to every holder, at rates up to 20 percent plus the net investment income tax for qualified dividends, whereas a buyback reaches just the holders who tender shares, and then just their gain over basis. Shoven (1987) showed that repurchases and other non-dividend payments had already become a major channel for returning cash, precisely because they let shareholders defer or avoid the tax a dividend would impose. A 1 percent toll on buybacks is small next to the shareholder tax a dividend triggers. The comparison narrows for owners who hold through pension funds or retirement accounts, since neither a dividend nor a sale is taxed to them; for those holders the excise tax is the only tax difference between the two routes, and it favors the dividend.

The corporate minimum tax raises a separate question. A corporation whose average annual adjusted financial statement income exceeds $1 billion over three years must pay at least 15 percent of that book income (I.R.C. § 55, 2025). Harlan's book income has averaged about $1.3 billion, so it is an applicable corporation, but its regular tax already exceeds 15 percent of book income in most years. Research suggests that is typical: Blouin and Born (2024) found that the group of firms apparently subject to the minimum tax is small, that it will likely raise far less revenue than projected, and that most firms say little about their exposure. For Harlan, the minimum tax is a compliance burden more than a cost, though the company must still compute its adjusted financial statement income each year to prove it.

My conclusion is that Harlan should prefer the buyback. The $18 million excise tax is real, but it is outweighed by the tax its shareholders would owe on a $2 billion dividend, and the buyback lets each shareholder decide whether to realize income. Paul's instruction to pay taxes to whom taxes are owed fits a decision like this one (English Standard Version Bible, 2001/2016, Romans 13:7): choosing the lawful option that costs less is not avoidance, so long as the company pays the excise tax it does owe.

Reply to Nathan

Nathan, your thread argued that the 1 percent repurchase tax is too small to change corporate behavior, and on the arithmetic I mostly agree. A tax of 1 cent per dollar repurchased is modest compared with the shareholder-level advantage buybacks have long held over dividends, which Shoven (1987) documented when repurchases first grew into a major payout channel. If the excise tax is meant to push companies toward dividends, the price signal is weak.

Still, I doubt that it changes nothing, because the statute's design creates incentives at the margin that a flat percentage hides. The netting rule reduces the base by the value of stock the corporation issues during the year, including stock issued to employees (I.R.C. § 4501, 2025). That gives a company a reason to time its repurchases to the same year as large stock grants, or to settle equity compensation in shares rather than cash. A company that issues $500 million of stock to employees and repurchases $500 million in the same year owes nothing, while one that repurchases in a year with no issuance pays the full 1 percent. Timing and plan design, not the overall level of buybacks, are where I would expect to see the tax's effect.

There is also a de minimis rule: a corporation that repurchases $1 million or less during the year owes no tax at all. That matters little to large companies, but it means the tax is aimed squarely at the largest repurchase programs, which are concentrated in a relatively small number of firms. So the tax may raise meaningful revenue from a few companies without changing what the typical public company does.

The Bible reference in my thread speaks to this too. Paying what is owed includes paying a tax we think is poorly designed. Romans 13:7 does not make the obligation depend on the tax being wise (English Standard Version Bible, 2001/2016, Romans 13:7), and the right response to a weak tax is to argue for a better one, not to structure around it in ways that hide the substance of the transaction.

Finally, I think your thread could have said more about who bears the excise tax. A corporation pays it, but economically it reduces the cash available to shareholders, so it works like a small tax on the remaining owners. Whether that burden matters depends on whether investors were already counting on buybacks as their main return. For a company like Harlan, whose shareholders include many tax-exempt funds and retirement accounts, the shareholder-level advantage of a buyback is smaller than for a company owned mostly by taxable individuals, which could make the 1 percent tax a larger share of the remaining difference. Do you think that ownership mix should change how a board weighs the choice?

Reply to Priya

Priya, your thread treated the corporate alternative minimum tax as a major new burden on large corporations, citing the number of companies with book income above $1 billion. I think the research supports a narrower view. Blouin and Born (2024) revisited the question using public financial statements and found that the group of firms seemingly subject to the minimum tax is small and includes some surprises, that it is likely to raise far less revenue than projected, much as the book-income adjustment of the older minimum tax did, and that most firms disclose very little about their potential liability, which is consistent with the amounts being small.

The reason is that crossing the $1 billion threshold only makes a company an applicable corporation; it does not create a liability. The tax is owed only to the extent that 15 percent of adjusted financial statement income exceeds the company's regular tax, so a company whose regular tax is already above 15 percent of book income owes nothing (I.R.C. § 55, 2025). Most large companies with significant domestic income pay regular tax well above that level. The firms most exposed are those whose taxable income falls far below book income because of large timing differences, for example accelerated depreciation, or because of credits.

That leads to the part of your thread I found most useful, your example of a company with large research credits. Credits reduce regular tax, and if they reduce it far enough, the minimum tax can take back part of the benefit. However, the minimum tax paid generates a credit that can be carried forward against regular tax in later years when regular tax exceeds the minimum, so for many companies the tax is a matter of timing rather than permanent cost. A company that consistently uses large credits could pay minimum tax year after year, and for that company the cost is real. That is a narrower group than the headline threshold suggests, which fits what Blouin and Born found.

I would also note how much work the tax creates even for companies that owe nothing. Determining whether a company is an applicable corporation requires aggregating financial statement income across related entities, and computing adjusted financial statement income requires many adjustments to book income. For a company like Harlan, the compliance cost could exceed the tax itself, which raises a fair policy question about whether the tax reaches its target efficiently. The research by Blouin and Born (2024) suggests that the revenue gained may be small relative to that cost.

Your thread ended by asking whether the minimum tax will change financial reporting. The history of the old book-income adjustment suggests it might: when taxes depend on reported income, companies have a reason to manage that income. If that happens, the effect would show up in shareholders' information as well as in their returns, which would be a cost the original estimates did not count. Which industries do you expect to be most exposed?

References

Blouin, J., & Born, N. (2024). The corporate alternative minimum tax: A congressional folly. National Tax Journal, 77(2), 413-447. https://doi.org/10.1086/730211

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

I.R.C. § 4501 (2025).

I.R.C. § 55 (2025).

Shoven, J. B. (1987). The tax consequences of share repurchases and other non-dividend cash payments to equity owners. Tax Policy and the Economy, 1, 29-54. https://doi.org/10.1086/tpe.1.20061762