Excise Tax on Repurchase of Corporate Stock

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Parts 1 and 58</CFR> <DEPDOC>[TD 10037]</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> Final regulations. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains final regulations that provide guidance regarding the application of the excise tax on repurchases of corporate stock made after December 31, 2022. The regulations affect certain publicly traded corporations that repurchase their stock or whose stock is acquired by certain specified affiliates. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> The final regulations are effective on November 24, 2025. <E T="03">Applicability dates:</E> For dates of applicability, <E T="03">see</E> §§ 1.1275-6(f)(12)(iii)(B), 58.4501-6, 58.4501-7(r), and 58.6011-1(d). </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning § 58.4501-7, Brittany N. Dobi of the Office of Associate Chief Counsel (International) at (202) 317-5469 (not a toll-free number). For all other issues, Kailee H. Hock of the Office of Associate Chief Counsel (Corporate) at (202) 317-3181 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This document contains final regulations under sections 1275, 4501, and 6011 of the Internal Revenue Code (Code). These regulations would amend 26 CFR parts 1 (Income Tax Regulations) and 58 (Stock Repurchase Excise Tax Regulations) by providing guidance regarding the application of the excise tax on repurchases of corporate stock (stock repurchase excise tax) enacted as section 10201 of Public Law 117-169, 136 Stat. 1818 (August 16, 2022), commonly referred to as the Inflation Reduction Act of 2022 (IRA). The additions and amendments to the Income Tax Regulations and Stock Repurchase Excise Tax Regulations are issued pursuant to the express delegations of authority to the Secretary of the Treasury or the Secretary's delegate (Secretary) provided under sections 1275(d), 4501(f), and 7805(a) of the Code. Section 1275(d) states that the Secretary may prescribe regulations providing that where, by reason of varying rates of interest, put or call options, indefinite maturities, contingent payments, assumptions of debt instruments, or other circumstances, the tax treatment under sections 1271 through 1275 or section 163(e) of the Code does not carry out the purposes of those sections, “such treatment shall be modified to the extent appropriate to carry out the purposes of” those sections. Section 4501(f) states that “[t]he Secretary shall prescribe such regulations and other guidance as are necessary or appropriate to carry out, and to prevent the avoidance of, the purposes of [section 4501],” including regulations or other guidance (i) to prevent the abuse of the statutory exceptions provided by section 4501(e), (ii) to address special classes of stock and preferred stock, and (iii) for the application of the special rules for acquisitions of stock of certain foreign corporations under section 4501(d). Section 7805(a) authorizes the Secretary to “prescribe all needful rules and regulations for the enforcement of [the Code], including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.” <HD SOURCE="HD1">Background</HD> <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. Section 4501 imposes on each covered corporation an excise tax (that is, the stock repurchase excise tax) on repurchases of corporate stock made after December 31, 2022. Under section 4501(a), the stock repurchase excise tax is equal to one percent of the fair market value of any stock of the covered corporation that is repurchased by the corporation during the taxable year. Section 4501(b) defines the term “covered corporation” to mean 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(c)(1) provides that, for purposes of section 4501, a “repurchase” includes (1) 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), and (2) any transaction determined by the Secretary to be economically similar to a section 317(b) redemption (economically similar transaction). <HD SOURCE="HD2">B. Specified Affiliates</HD> Section 4501(c)(2)(A) 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 stock of the covered corporation by the covered corporation. Section 4501(c)(2)(B) defines the term “specified affiliate” to mean, 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. <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 “netting rule” of section 4501(c)(3) 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). <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. Under section 4501(d)(3)(A), the term “applicable foreign corporation” means any foreign corporation the stock of which is traded on an established securities market. Under section 4501(d)(3)(B), 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)(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 the netting rule of section 4501(c)(3) 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. <E T="03">Statutory Exceptions to the Application of Section 4501(a)</E> </HD> Section 4501(e) lists six transactions that are statutorily excepted, in whole or in part, from the application of section 4501(a) to a repurchase of a covered corporation's stock. These exceptions, each of which is referred to as a “statutory exception” in this preamble, are: (1) To the extent that the repurchase is part of a reorganization (within the meaning of section 368(a) of the Code) and no gain or loss is recognized on the repurchase by the shareholder under chapter 1 of the Code (chapter 1) by reason of the reorganization (section 4501(e)(1)); (2) In any case in which the stock repurchased, or an amount of stock equal to the value of the stock repurchased, is contributed to an employer-sponsored retirement plan, employee stock ownership plan (ESOP), or sim ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 366k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━