Excise Tax on Repurchase of Corporate Stock

DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Parts 1 and 58</CFR> <DEPDOC>[REG-115710-22]</DEPDOC> <RIN>RIN 1545-BQ59</RIN> <SUBJECT>Excise Tax on Repurchase of Corporate Stock</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Notice of proposed rulemaking. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains proposed regulations that would provide guidance regarding the application of the new excise tax on repurchases of corporate stock made after December 31, 2022. The proposed regulations would affect certain publicly traded corporations that repurchase their stock or whose stock is acquired by certain specified affiliates. Another notice of proposed rulemaking (REG-118499-23) on this topic is published in the Proposed Rules section of this issue of the <E T="04">Federal Register</E> to propose rules on procedure and administration applicable to this new excise tax. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Written or electronic comments and requests for a public hearing must be received by June 11, 2024. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at <E T="03">https://www.regulations.gov</E> (indicate IRS and REG-115710-22) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment submitted electronically or on paper to its public docket. <E T="03">Send paper submissions to:</E> CC:PA:01:PR (REG-115710-22), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning proposed §§ 58.4501-1 through 58.4501-6, Samuel G. Trammell at (202) 317-6975; concerning proposed § 58.4501-7, Brittany N. Dobi at (202) 317-5469; concerning proposed § 1.1275-6(f)(12)(iii), Jonathan A. LaPlante at (202) 317-3900; concerning submissions of comments and requests for a public hearing, Vivian Hayes at (202) 317-6901 (not toll-free numbers) or by email at <E T="03">publichearings@irs.gov</E> (preferred). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Background</HD> This notice of proposed rulemaking proposes regulations under section 4501 of the Internal Revenue Code (Code) that would implement the new excise tax on repurchases of corporate stock (stock repurchase excise tax) imposed by section 4501 for repurchases made after December 31, 2022. As proposed in this notice of proposed rulemaking, the regulations are proposed to be added as proposed subpart A of new 26 CFR part 58 (Stock Repurchase Excise Tax Regulations), which is proposed to be added to subchapter D of 26 CFR chapter I (Miscellaneous Excise Taxes). This notice of proposed rulemaking also proposes to amend regulations under section 1275 of the Code in 26 CFR part 1 (Income Tax Regulations) to implement the provisions of section 4501. Another notice of proposed rulemaking published in the Proposed Rules section of this issue of the <E T="04">Federal Register</E> relating to the stock repurchase excise tax proposes rules on procedure and administration applicable to the reporting and payment of the stock repurchase excise tax that would be added as proposed subpart B of 26 CFR part 58. <HD SOURCE="HD1">I. Overview of Section 4501</HD> <HD SOURCE="HD2">A. In General</HD> Section 4501 was added to a new chapter 37 of the Code by the enactment of section 10201 of Public Law 117-169, 136 Stat. 1818 (August 16, 2022), commonly referred to as the Inflation Reduction Act of 2022 (IRA). Section 4501 imposes the stock repurchase excise tax on each covered corporation for repurchases made after December 31, 2022. The stock repurchase excise tax is equal to one percent of the fair market value of any stock of the corporation that is repurchased by the corporation during the taxable year. Section 4501(a). For purposes of the stock repurchase excise tax, the term “covered corporation” means any domestic corporation the stock of which is traded on an established securities market (within the meaning of section 7704(b)(1) of the Code). Section 4501(b). Section 4501(c)(1) provides that repurchases of covered corporation stock to which the stock repurchase excise tax may apply include the following two types of transactions. First, the term “repurchase” means a redemption within the meaning of section 317(b) of the Code with regard to the stock of a covered corporation (section 317(b) redemption). Section 4501(c)(1)(A). Second, the term “repurchase” also means any transaction determined by the Secretary of the Treasury or her delegate (Secretary) to be economically similar to a section 317(b) redemption (economically similar transaction). Section 4501(c)(1)(B). <HD SOURCE="HD2">B. Specified Affiliates</HD> For purposes of the stock repurchase excise tax, section 4501(c)(2)(A) provides a special rule that treats the acquisition of stock of a covered corporation by a specified affiliate of the covered corporation, from a person who is not the covered corporation or a specified affiliate of the covered corporation, as a repurchase of the stock of the covered corporation by the covered corporation. For this purpose, the term “specified affiliate” means, with regard to any corporation, (i) any corporation more than 50 percent of the stock of which is owned (by vote or by value), directly or indirectly, by the corporation, and (ii) any partnership more than 50 percent of the capital interests or profits interests of which is held, directly or indirectly, by the corporation. Section 4501(c)(2)(B). <HD SOURCE="HD2">C. Adjustment to Amount Taken Into Account Under Section 4501(a)</HD> The stock repurchase excise tax is applied to the fair market value of any stock of the covered corporation repurchased by the covered corporation during its taxable year. However, the amount of these repurchases is reduced by the fair market value of any issuances of the covered corporation's stock during the covered corporation's taxable year (netting rule). Specifically, the netting rule provides that the amount taken into account under section 4501(a) with respect to any stock repurchased by a covered corporation is reduced by the fair market value of any stock issued by the covered corporation during the taxable year, including the fair market value of any stock issued or provided to employees of the covered corporation or employees of a specified affiliate of the covered corporation during the taxable year (whether or not the stock is issued or provided in response to the exercise of an option to purchase the stock). Section 4501(c)(3). <HD SOURCE="HD2">D. Special Rules for Certain Acquisitions and Repurchases of Stock of Certain Foreign Corporations</HD> Section 4501(d) provides special rules for the imposition of the stock repurchase excise tax on acquisitions of stock of applicable foreign corporations and covered surrogate foreign corporations. For purposes of section 4501(d), the term “applicable foreign corporation” means any foreign corporation the stock of which is traded on an established securities market. Section 4501(d)(3)(A). The term “covered surrogate foreign corporation” means any surrogate foreign corporation (as determined under section 7874(a)(2)(B) of the Code by substituting “September 20, 2021” for “March 4, 2003” each place it appears) the stock of which is traded on an established securities market, but only with respect to taxable years that include any portion of the applicable period with respect to that corporation under section 7874(d)(1). Section 4501(d)(3)(B). Section 4501(d)(1) applies in the case of an acquisition of stock of an applicable foreign corporation by a specified affiliate of the corporation (other than a foreign corporation or a foreign partnership (unless the partnership has a domestic entity as a direct or indirect partner)) from a person that is not the applicable foreign corporation or a specified affiliate of the applicable foreign corporation. If section 4501(d)(1) applies, then for purposes of determining the stock repurchase excise tax: (i) the specified affiliate is treated as a covered corporation with respect to the acquisition; (ii) the acquisition is treated as a repurchase of stock of a covered corporation by the covered corporation; and (iii) the adjustment under section 4501(c)(3) (that is, the netting rule) is determined only with respect to stock issued or provided by the specified affiliate to employees of the specified affiliate. Section 4501(d)(2) applies in the case of either a repurchase of stock of a covered surrogate foreign corporation by the covered surrogate foreign corporation, or an acquisition of stock of a covered surrogate foreign corporation by a specified affiliate of such corporation. If section 4501(d)(2) applies, then for purposes of determining the stock repurchase excise tax: (i) the expatriated entity (within the meaning of section 7874(a)(2)(A)) with respect to the covered surrogate foreign corporation is treated as a covered corporation with respect to the repurchase or acquisition; (ii) the repurchase or acquisition is treated as a repurchase of stock of a covered corporation by the covered corporation; and (iii) the adjustment under section 4501(c)(3) is determined only with respect to stock issued or provided by the expatriated entity to employees of the expatriated entity. <HD SOURCE="HD2">E ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 694k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━