Rule2025-20721
Excise Tax on Repurchase of Corporate Stock
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 24, 2025
Effective
November 24, 2025
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
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.
Full Text
<html>
<head>
<title>Federal Register, Volume 90 Issue 224 (Monday, November 24, 2025)</title>
</head>
<body><pre>
[Federal Register Volume 90, Number 224 (Monday, November 24, 2025)]
[Rules and Regulations]
[Pages 53144-53190]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-20721]
[[Page 53143]]
Vol. 90
Monday,
No. 224
November 24, 2025
Part III
Department of the Treasury
-----------------------------------------------------------------------
Internal Revenue Service
-----------------------------------------------------------------------
26 CFR Parts 1 and 58
Excise Tax on Repurchase of Corporate Stock; Final Rule
Federal Register / Vol. 90, No. 224 / Monday, November 24, 2025 /
Rules and Regulations
[[Page 53144]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 58
[TD 10037]
RIN 1545-BQ59
Excise Tax on Repurchase of Corporate Stock
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: 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.
DATES:
Effective date: The final regulations are effective on November 24,
2025.
Applicability dates: For dates of applicability, see Sec. Sec.
1.1275-6(f)(12)(iii)(B), 58.4501-6, 58.4501-7(r), and 58.6011-1(d).
FOR FURTHER INFORMATION CONTACT: Concerning Sec. 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).
SUPPLEMENTARY INFORMATION:
Authority
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.''
Background
I. Overview of Section 4501
A. In General
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).
B. Specified Affiliates
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.
C. Adjustment to Amount Taken Into Account Under Section 4501(a)
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).
D. Special Rules for Certain Acquisitions and Repurchases of Stock of
Certain Foreign Corporations
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
[[Page 53145]]
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.
E. Statutory Exceptions to the Application of Section 4501(a)
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 similar plan (section 4501(e)(2));
(3) In any case in which the total value of the stock repurchased
during the taxable year does not exceed $1,000,000 (section 4501(e)(3))
(de minimis exception);
(4) Under regulations prescribed by the Secretary, in cases in
which the repurchase is by a dealer in securities in the ordinary
course of business (section 4501(e)(4));
(5) By a regulated investment company (RIC), as defined in section
851 of the Code, or by a real estate investment trust (REIT), as
defined in section 856(a) of the Code (section 4501(e)(5)); or
(6) To the extent that the repurchase is treated as a dividend for
purposes of the Code (section 4501(e)(6)).
II. Prior Guidance
On January 17, 2023, the Department of the Treasury (Treasury
Department) and the IRS published Notice 2023-2, 2023-3 I.R.B. 374, to
provide initial guidance regarding the application of the stock
repurchase excise tax. On July 24, 2023, the Treasury Department and
the IRS published Announcement 2023-18, 2023-30 I.R.B. 366, announcing
that taxpayers would not be required to report the stock repurchase
excise tax, or to make any payments of the tax, before the time
specified in forthcoming regulations.
On April 12, 2024, the Treasury Department and the IRS published a
notice of proposed rulemaking (REG-115710-22) in the Federal Register
(89 FR 25980) proposing to add a new part 58 to 26 CFR chapter I and
providing proposed regulations in subpart A thereof that would
implement the stock repurchase excise tax for repurchases made after
December 31, 2022 (proposed computational regulations). On April 12,
2024, the Treasury Department and the IRS also published a separate
notice of proposed rulemaking (REG-118499-23) in the same issue of the
Federal Register (89 FR 25829) providing proposed regulations in
subpart B of proposed 26 CFR part 58 regarding the reporting and
payment of the stock repurchase excise tax (proposed procedural
regulations). After taking into account comments received on the
proposed procedural regulations, the Treasury Department and the IRS
published final regulations (TD 10002) in the Federal Register (89 FR
55045) on July 3, 2024 (final procedural regulations) adopting the
proposed procedural regulations with modifications as subpart B of 26
CFR part 58 (Stock Repurchase Excise Tax Regulations).
A public hearing regarding the proposed computational regulations
was held on August 27, 2024. As described in the Summary of Comments
and Explanation of Revisions, this Treasury decision adopts the
proposed computational regulations, with modifications in response to
the comments received at the public hearing as well as additional
written comments, as subpart A of the Stock Repurchase Excise Tax
Regulations and amends the final procedural regulations under section
6011 in subpart B of the Stock Repurchase Excise Tax Regulations. This
Treasury decision also amends the Income Tax Regulations under section
1275 by adopting proposed Sec. 1.1275-6(f)(12)(iii) without
substantive modification.
Summary of Comments and Explanation of Revisions
I. Application of the Stock Repurchase Excise Tax to Various Types of
Stock
Proposed Sec. 58.4501-1(b)(29)(i) generally would define ``stock''
as any instrument issued by a corporation that is stock or that is
treated as stock for Federal tax purposes at the time of issuance,
regardless of whether the instrument is traded on an established
securities market. However, proposed Sec. 58.4501-1(b)(29)(ii) would
exclude from the definition of ``stock'' preferred stock that (i)
qualifies as additional tier 1 capital (within the meaning of 12 CFR
3.20(c), 217.20(c), or 324.20(c)), and (ii) does not qualify as common
equity tier 1 capital (within the meaning of 12 CFR 3.20(b), 217.20(b),
or 324.20(b)) (additional tier 1 preferred stock). The proposed
computational regulations otherwise would apply the stock repurchase
excise tax to preferred stock (including preferred stock issued prior
to the enactment date of the IRA) that is treated as ``stock'' for
Federal tax purposes in the same manner as to common stock.
A. Preferred Stock Generally; Section 1504(a)(4) Preferred Stock
Several commenters recommended excluding redemptions of all
preferred stock from the application of the stock repurchase excise
tax. The commenters contended that, although preferred stock is treated
as ``stock'' for Federal tax purposes, applying the stock repurchase
excise tax to repurchases of such stock would contravene congressional
intent that the tax apply solely to repurchases
[[Page 53146]]
of common stock. Commenters further contended that (i) because
repurchases of preferred stock (particularly ``plain vanilla''
preferred stock described in section 1504(a)(4) of the Code) are more
akin to repaying debt, repurchases of such stock do not implicate the
policy concerns underlying the stock repurchase excise tax, and (ii) if
redemptions of preferred stock were subject to the stock repurchase
excise tax, publicly traded corporations might be incentivized to
increase their leverage by issuing debt in lieu of preferred stock.
Commenters also contended that the grant of authority in section
4501(f) to address special classes of stock and preferred stock
essentially directs (or, at the very least, is a statement of
congressional intent) that the Secretary issue regulations excluding
preferred stock from the stock repurchase excise tax.
The plain language of the definitions and operative rules in
section 4501 does not differentiate between common stock and preferred
stock, and a repurchase of preferred stock is a ``redemption'' within
the meaning of section 317(b). Additionally, the grant of regulatory
authority in section 4501(f) is neither a mandate to exclude all
preferred stock from the stock repurchase excise tax nor an indication
that Congress intended the Treasury Department and the IRS to provide
such an exclusion in regulations. If Congress had intended to exclude
all preferred stock, it would have so provided in the statute.
Accordingly, these final regulations do not exclude all preferred stock
from the stock repurchase excise tax.
However, the Treasury Department and the IRS agree that preferred
stock described in section 1504(a)(4) is more akin to debt.
Accordingly, the Treasury Department and the IRS do not view
repurchases of such stock as implicating the policy concerns underlying
the stock repurchase excise tax. Consequently, these final regulations
provide that repurchases of preferred stock described in section
1504(a)(4) are not subject to the stock repurchase excise tax. See
Sec. 58.4501-1(b)(34)(iii) (excluding section 1504(a)(4) stock from
the definition of ``stock'' for purposes of the stock repurchase excise
tax regulations). As discussed in the remainder of this part I of the
Summary of Comments and Explanation of Revisions, these final
regulations also provide additional exceptions for special classes of
stock and for certain preferred stock under the grant of authority in
section 4501(f).
B. Mandatorily Redeemable Stock; Stock Issued Prior to Enactment of the
IRA
Several commenters recommended that, if the final regulations do
not generally exclude preferred stock from the stock repurchase excise
tax, the final regulations should provide (i) an additional exception
for mandatorily redeemable preferred stock, or (ii) transition relief
for repurchases of preferred stock issued prior to the date of
enactment of the IRA (that is, August 16, 2022). One commenter
recommended excluding all mandatorily redeemable preferred stock from
application of the stock repurchase excise tax. Another commenter
recommended transition relief for all types of preferred stock issued
prior to the date of enactment of the IRA. Still other commenters
recommended limiting transition relief to (i) mandatorily redeemable
stock (or at least mandatorily redeemable preferred stock), and (ii)
stock subject by its terms to unilateral put options of the holders, if
such stock was outstanding as of the date of enactment of the IRA.
According to the commenters, the requested relief is appropriate
because (i) absent such relief, previously established economic
entitlements will be undermined, (ii) covered corporations are required
to repurchase mandatorily redeemable stock, and (iii) mandatorily
redeemable preferred stock may resemble other instruments treated as
debt for tax purposes.
The Treasury Department and the IRS agree that transition relief is
appropriate for certain types of stock issued prior to the date of
enactment of the IRA if the covered corporation no longer has
discretion as to whether to repurchase such stock after that date.
Accordingly, these final regulations incorporate transition relief for
mandatorily redeemable stock and for stock subject by its terms to a
unilateral put option of the holder, if such stock was outstanding
prior to August 16, 2022. See Sec. 58.4501-2(e)(3)(iii).
C. Additional Tier 1 Preferred Stock
As previously discussed in this part I of the Summary of Comments
and Explanation of Revisions, proposed Sec. 58.4501-1(b)(29)(ii) would
exclude certain additional tier 1 preferred stock from the definition
of ``stock'' for purposes of the stock repurchase excise tax. The
proposed computational regulations would define ``additional tier 1
preferred stock'' to mean preferred stock that qualifies as additional
tier 1 capital (within the meaning of 12 CFR 3.20(c), 217.20(c), or
324.20(c)) and does not qualify as common equity tier 1 capital (within
the meaning of 12 CFR 3.20(b), 217.20(b), or 324.20(b)). Consequently,
under the proposed computational regulations, additional tier 1
preferred stock described in those regulations would not be subject to
the stock repurchase excise tax, and the issuance of that additional
tier 1 preferred stock would not be taken into account for purposes of
the netting rule.
1. Farm Credit System Stock; Savings and Loan Holding Companies With
Significant Insurance Operations
Commenters recommended expanding the definition of ``additional
tier 1 preferred stock'' to include preferred stock issued by
cooperative banks, agricultural credit associations, Federal land
credit associations, and production credit associations in the Farm
Credit System, which are collectively referred to as ``system
entities.'' According to the commenters, system entities are chartered
under the Farm Credit Act of 1971 (Pub. L. 92-181, 85 Stat. 583) and
subject to regulation and oversight by the Farm Credit Administration
(FCA). For example, according to the commenters, system entities are
subject to regulatory capital requirements prescribed by the FCA and
issue and redeem preferred stock governed by 12 CFR 628.20(c) to meet
these regulatory capital requirements.
The commenters also noted that, although the stock of cooperatives
that are system entities generally is not publicly traded, the
preferred stock of such entities occasionally is traded over the
counter (OTC), and such trades are reported on the Financial Industry
Regulatory Authority OTC Reporting Facility (ORF). The commenters
further noted that the U.S. Securities and Exchange Commission (SEC)
has designated the ORF as a qualifying electronic quotation system for
purposes of the penny stock rules and as an automated interdealer
quotation system for purposes of the definition of ``penny stock''
under 17 CFR 240.3a51-1. Accordingly, the commenters noted that the ORF
potentially could qualify as an ``established securities market'' as
defined in proposed Sec. 58.4501-1(b)(13).
Another commenter noted that the capital adequacy rules for
qualifying preferred stock as additional tier 1 capital are
functionally the same for bank holding companies as for savings and
loan holding companies with significant insurance operations (savings
and loan holding companies). Additional tier 1 capital requirements for
savings and loan holding companies are described in 12 CFR 217.608. The
commenter requested that preferred
[[Page 53147]]
stock qualifying as additional tier 1 capital issued by savings and
loan holding companies be included in the definition of ``additional
tier 1 preferred stock.''
According to the commenters, the preferred stock issued by system
entities and governed by 12 CFR 628.20(c), as well as the preferred
stock issued by savings and loan holding companies and governed by 12
CFR 217.608, have the same requirements and restrictions as the
additional tier 1 preferred stock governed by 12 CFR 3.20(c),
217.20(c), and 324.20(c). Specifically, the system entity and the
savings and loan holding company may not redeem or repurchase the
preferred stock without prior approval from the FCA or the Board of
Governors of the Federal Reserve System (Board), respectively.
Moreover, if such preferred stock is callable by its terms, (i) it may
not be called for at least five years, (ii) the system entity or the
savings and loan holding company must receive prior approval from the
FCA or the Board, respectively, to exercise the call option, and (iii)
the system entity or the savings and loan holding company either must
replace the instrument with other tier 1 capital or demonstrate to the
FCA or the Board, respectively, that it will continue to hold capital
commensurate with risk.
The Treasury Department and the IRS agree with the commenters that
the requirements and restrictions for certain stock issued by system
entities and savings and loan holding companies are similar to the
requirements and restrictions for additional tier 1 preferred stock
governed by 12 CFR 3.20(c), 217.20(c), and 324.20(c). Accordingly,
these final regulations provide an exception to the stock repurchase
excise tax for stock of system entities that qualifies as additional
tier 1 preferred stock that is not common equity tier 1 capital, as
well as for stock of savings and loan holding companies that qualifies
as additional tier 1 preferred stock that is not common equity tier 1
capital. See Sec. 58.4501-1(b)(34)(ii).
2. Foreign Additional Tier 1 Preferred Stock
Another commenter recommended expanding the definition of
``additional tier 1 preferred stock'' to include instruments issued by
foreign-parented banks that issue additional tier 1 capital pursuant to
their own local rules implementing the Basel III Accord. According to
the commenter, the Basel III Accord established numerous requirements
that an instrument must meet to qualify as additional tier 1 capital,
including that: (i) the issuer must obtain supervisory approval prior
to repurchasing or redeeming the instrument; (ii) the instrument may be
callable only after a minimum of five years; and (iii) the issuer may
not exercise a call option unless it either (A) replaces the called
instrument with capital of the same or better quality, or (B)
demonstrates that its capital position is well above the minimum
capital requirements after the call option is exercised. See Basel
Committee on Banking Supervision, Basel III: A Global Regulatory
Framework for More Resilient Banks and Banking Systems, at 16 (rev.
June 2011). The commenter noted that such requirements are reflected in
the framework for the rules and regulations adopted by the United
States with respect to an instrument's qualification as additional tier
1 capital under 12 CFR 3.20(c), 217.20(c), and 324.20(c).
These final regulations do not include an exception for additional
tier 1 preferred stock of a foreign issuer. As described in part VIII.B
of this Summary of Comments and Explanation of Revisions, these final
regulations do not adopt the proposed funding rule. Moreover, the
commenter did not identify any regulatory reason why an applicable
specified affiliate would acquire additional tier 1 preferred stock of
a foreign parent. By contrast, it is common for a U.S. issuer of
additional tier 1 preferred stock to repurchase or redeem its stock in
order to manage its compliance with U.S. regulatory rules. Accordingly,
the reasons for providing an exception for U.S. additional tier 1
preferred stock do not apply to additional tier 1 preferred stock of a
foreign issuer.
II. Becoming or Ceasing To Be a Covered Corporation
Under the proposed computational regulations, a corporation
generally would be treated as (i) becoming a covered corporation at the
beginning of the date on which its stock begins to be traded on an
established securities market (initiation date), and (ii) ceasing to be
a covered corporation at the end of the date on which all of its stock
ceases to be traded on an established securities market (cessation
date). See proposed Sec. Sec. 58.4501-1(b)(3) and (16) and 58.4501-
2(d)(1) and (d)(2)(i). Proposed Sec. 58.4501-4(b)(2) would provide
that stock issued by a covered corporation or provided by a specified
affiliate before the initiation date or after the cessation date is not
taken into account in computing the covered corporation's stock
repurchase excise tax base.
However, proposed Sec. 58.4501-2(d)(2)(ii) would provide an
exception for certain repurchases after the cessation date. Under this
exception, if a corporation ceased to be a covered corporation pursuant
to a plan that included a repurchase, and if the cessation date
preceded the date of any repurchase undertaken pursuant to the plan,
the corporation would continue to be a covered corporation with regard
to each repurchase pursuant to the plan until the end of the date of
the last repurchase pursuant to the plan. For example, all repurchases
of target covered corporation stock in an acquisitive reorganization
pursuant to the plan of reorganization would be subject to the stock
repurchase excise tax (if no exception applied), even if all the target
covered corporation's stock ceased to be traded on an established
securities market prior to the last repurchase made pursuant to the
plan of reorganization.
One commenter recommended narrowly tailoring this exception to
apply only in situations in which (i) there is a binding commitment to
execute a series of steps that include a cessation date and a
repurchase, (ii) the repurchase and cessation of publicly traded status
are part of the same series of steps, and (iii) the repurchase relates
to the shares outstanding at the time the covered corporation entered
into the plan. Commenters also recommended expanding the exception to
include issuances that occur as a part of a ``take private'' plan for
purposes of the netting rule. For example, one commenter noted that
certain ``take private'' transactions are structured to include both
issuances to new shareholders and repurchases from other shareholders,
and that the timing of the issuances may not always precede the date
that a corporation ceases to have stock that is traded on an
established securities market. The commenter recommended that, if a
corporation continues to be treated as a covered corporation after the
cessation date, its status as a covered corporation should be respected
for both repurchases and issuances. A commenter also recommended
clarifying whether a corporation is treated as a covered corporation
until the date of the final repurchase (i) only for purposes of
repurchases made pursuant to the plan, or (ii) for all purposes.
These final regulations do not include an exception for certain
repurchases after the cessation date because, as discussed in parts III
and IV.C of this Summary of Comments and Explanation of Revisions, the
Treasury Department and the IRS have concluded that section
[[Page 53148]]
4501 does not apply to ``take private'' transactions (including but not
limited to acquisitive reorganizations). See Sec. 58.4501-2(e)(3)(ii)
and (e)(5)(v). For the same reason, these final regulations do not
provide an exception for issuances after the cessation date.
III. Target-Sourced Cash in Take-Private Transactions
Under the proposed computational regulations, unless an exception
applies, the target-corporation-funded portion of the consideration in
a leveraged buyout or other ``take private'' transaction would be
treated as a repurchase for purposes of computing the target
corporation's stock repurchase excise tax base. See proposed Sec.
58.4501-2(e)(2); see also Rev. Rul. 78-250, 1978-1 C.B. 83
(disregarding the creation and merger of a transitory corporation into
an existing corporation and treating the cashing out of the existing
corporation's minority shareholders as a redemption subject to section
302).
To determine the target-corporation-funded portion of the
consideration used to pay shareholders in such transactions, one
commenter recommended against applying a tracing rule and, instead,
recommended a rule treating cash on a target corporation's balance
sheet or cash borrowed by the target corporation as being used to
satisfy the target corporation's liabilities in order of seniority
(similar to the priority of claims on a corporation's assets in an
insolvency or bankruptcy under title 11 of the U.S. Code) before being
distributed to its shareholders. Under this approach, cash on the
target corporation's balance sheet or borrowed at the target
corporation level would not be treated as resulting in a repurchase to
the extent there were transaction expenses, accrued cash amounts owed
to employees, or target corporation debt that was being repaid, as any
of these liabilities would be senior to shareholders' rights to
payment.
In a prior comment received with respect to Notice 2023-2, a
stakeholder also contended that taxable acquisitions generally should
not be subject to the stock repurchase excise tax because, like other
M&A transactions, taxable acquisitions generally do not bear the
traditional hallmarks of conventional, often opportunistic stock
repurchase transactions and programs that, in the stakeholder's view,
were the intended target of the stock repurchase excise tax. In other
words, taxable acquisitions are not single-company transactions that
distribute corporate value to shareholders in exchange for the
surrender of corporate stock.
The Treasury Department and the IRS agree with the commenter that
Congress generally did not intend for the stock repurchase excise tax
to apply to transactions, such as leveraged buyouts and other ``take
private'' transactions, that fundamentally restructure corporate
ownership or control through combinations of separate business
entities. Accordingly, these final regulations provide that redemptions
by a covered corporation that occur as part of a transaction in which
the covered corporation ceases to be a covered corporation are not
treated as repurchases for purposes of the stock repurchase excise tax.
See Sec. 58.4501-2(e)(3)(ii). Because the Treasury Department and the
IRS have concluded that since section 4501 does not apply to
transactions that fundamentally restructure corporate ownership or
control through combinations or separate business entities, the
Treasury Department and the IRS have determined that it is not
necessary for these final regulations to address how to determine the
target-corporation-funded portion of the consideration in such
transactions.
IV. Economically Similar Transactions
Consistent with section 4501(c)(1), proposed Sec. 58.4501-2(e)(2)
would define a ``repurchase'' to mean solely (i) a section 317(b)
redemption (unless otherwise excluded under proposed Sec. 58.4501-
2(e)(3)), or (ii) an economically similar transaction. Proposed Sec.
58.4501-2(e)(4) would provide an exclusive list of transactions that
are economically similar transactions, including: (i) an acquisitive
reorganization under section 368(a)(1)(A) (including by reason of
section 368(a)(2)(D) and (E)), section 368(a)(1)(C), or section
368(a)(1)(D) or (G) (if the reorganization satisfies the requirements
of section 354(b)(1) of the Code) in which the target corporation is a
covered corporation; (ii) a reorganization under section 368(a)(1)(E)
(E reorganization) in which the recapitalizing corporation is a covered
corporation; (iii) a reorganization under section 368(a)(1)(F) (F
reorganization) in which the transferor corporation is a covered
corporation; (iv) a split-off under section 355 of the Code by a
distributing corporation that is a covered corporation; (v) a
distribution to which section 331 of the Code applies if the
distribution is part of a complete liquidation of a covered corporation
to which both sections 331 and 332(a) of the Code apply; and (vi)
certain forfeitures and clawbacks of stock of a covered corporation.
A. List of Economically Similar Transactions
Several commenters recommended that any transactions added to the
exclusive list of economically similar transactions in future guidance
should be subject to the stock repurchase excise tax only on a
prospective basis, in order to provide clarity and certainty.
As stated in the preamble to the proposed computational
regulations, the Treasury Department and the IRS anticipate that most
transactions treated as economically similar transactions in future
regulations would be treated as such only on a prospective basis. See
section 7805(b)(1), which generally limits the retroactive application
of temporary, proposed, or final regulations under the Code.
However, under section 7805(b)(3), the Secretary may provide that
any regulation may take effect or apply retroactively to prevent abuse.
The Treasury Department and the IRS decline to preemptively provide
that future regulations will not retroactively treat any additional
transactions as economically similar transactions, as such retroactive
treatment may be necessary in certain situations to prevent abuse.
Accordingly, these final regulations do not adopt this recommendation.
B. Complete Liquidations
Under proposed Sec. 58.4501-2(e)(5), a distribution in complete
liquidation of a covered corporation to which either section 331 or 332
(but not both) applies would not be a repurchase and, thus, would not
be subject to the stock repurchase excise tax. However, under proposed
Sec. 58.4501-2(e)(4)(v)(A), if sections 331 and 332 both apply to a
complete liquidation, then (i) the distribution to the 80-percent
distributee (see section 332(b)(1)) would not be subject to the stock
repurchase excise tax, but (ii) each distribution to which section 331
applies (that is, the surrender of covered corporation stock by each
minority shareholder) would be subject to the stock repurchase excise
tax. Such a complete liquidation is substantively similar to an
upstream reorganization of the liquidating subsidiary into the 80-
percent distributee in which the minority shareholders receive only
non-qualifying property in exchange for their stock in the liquidating
subsidiary.
As discussed in parts IV.C.1 and 4 of this Summary of Comments and
Explanation of Revisions, the Treasury Department and IRS have
concluded that section 4501 does not apply to upstream reorganizations
and other
[[Page 53149]]
acquisitive reorganizations. Accordingly, to provide consistency, these
final regulations also provide that complete liquidations to which
sections 331 and 332 both apply are not subject to the stock repurchase
excise tax. See Sec. 58.4501-2(e)(5)(i).
C. Acquisitive Reorganizations
In the case of an acquisitive reorganization in which the target
corporation is a covered corporation, proposed Sec. 58.4501-2(e)(4)(i)
would treat the exchange by the target corporation shareholders of
their target corporation stock pursuant to the plan of reorganization
as a repurchase by the target corporation. Under proposed Sec.
58.4501-2(c)(1)(i) and (e)(4)(i), the effect of an acquisitive
reorganization on a target corporation's stock repurchase excise tax
base would be computed by first including in that tax base the fair
market value of all target corporation stock exchanged in the
transaction (regardless of the type of consideration for which the
stock is exchanged) (gross repurchase amount). Under proposed Sec.
58.4501-2(c)(1)(ii), the gross repurchase amount then would be reduced
under the statutory exception in section 4501(e)(1) (reorganization
exception) by the fair market value of the target corporation stock
exchanged for property permitted to be received by the target
corporation shareholders without recognition of gain or loss under
section 354 or 355 (that is, qualifying property). Thus, under the
foregoing approach, the target corporation generally would have been
subject to the stock repurchase excise tax only to the extent of the
fair market value of target corporation stock exchanged for property
that is non-qualifying property.
1. Acquisitive Reorganizations as Economically Similar Transactions
Several commenters recommended excluding acquisitive
reorganizations from the stock repurchase excise tax in whole or in
part. The commenters disagreed with subjecting all exchanges of target
corporation stock as part of an acquisitive reorganization to the stock
repurchase excise tax. According to the commenters, a multi-step
analysis is required to ensure the properly tailored application of the
stock repurchase excise tax to merger and acquisition (M&A)
transactions: (i) first, there must be a threshold determination that a
``repurchase'' (as defined in section 4501(c)(1)) has occurred; (ii)
second, the repurchase must be determined to be part of a section
368(a) reorganization; and (iii) third, the reorganization exception
must be applied to determine the extent to which the repurchase is
excluded from the stock repurchase excise tax.
One commenter asserted that, if Congress had intended the exchange
of target corporation stock in connection with any type of
reorganization under section 368(a) to be treated as a repurchase,
Congress could have provided explicit language to that effect in the
statute. In a prior comment received with respect to Notice 2023-2, a
stakeholder also contended that acquisitive reorganizations should not
be subject to the stock repurchase excise tax because acquisitive
reorganizations and other M&A transactions do not bear the traditional
hallmarks of conventional, often opportunistic stock repurchase
transactions and programs that, in the stakeholder's view, were the
intended target of the stock repurchase excise tax.
The Treasury Department and the IRS agree with the commenters that
Congress generally did not intend for the stock repurchase excise tax
to apply to transactions, such as acquisitive reorganizations, that
fundamentally restructure corporate ownership or control through
combinations of separate business entities. In other words, as noted by
one commenter, reorganizations are not single-company transactions that
distribute corporate value to shareholders in exchange for the
surrender of corporate stock. Moreover, as discussed in parts III and
IV.B of this Summary of Comments and Explanation of Revisions, the
Treasury Department and the IRS have concluded that section 4501 does
not apply to a covered corporation that ceases to be a covered
corporation (for example, through a merger or a liquidation for Federal
income tax purposes) as a result of the reorganization. Accordingly, in
the case of an acquisitive reorganization in which the target
corporation is a covered corporation prior to the transaction, these
final regulations do not treat the exchange by the target corporation
shareholders of their target corporation stock pursuant to the plan of
reorganization as a repurchase by the target corporation. See Sec.
58.4501-2(e)(5)(v).
2. Sourcing Approach to Acquisitive Reorganizations
Several commenters recommended that, if the final regulations do
not wholly exempt acquisitive reorganizations from the stock repurchase
excise tax, this tax should apply solely to the extent that any non-
qualifying property is sourced from the target corporation (sourcing
approach). Under the proposed computational regulations, a sourcing
approach would apply to taxable acquisitions involving partial
redemptions using cash sourced from the target corporation, but not to
acquisitive reorganizations. According to the commenters, this
disparate treatment of taxable transactions and acquisitive
reorganizations is contrary to the plain language of section 4501(c)(1)
and extending the sourcing approach would strike a better balance
between the statutory language of section 4501 and the types of single-
entity corporate contractions to which, in the commenters' view, the
excise tax was intended to apply.
Another commenter recommended applying a sourcing approach to cash
paid to dissenting shareholders. Under this approach, the stock
repurchase excise tax would apply to the extent cash sourced from the
target corporation was used to satisfy dissenting shareholders' claims.
By concluding that section 4501 does not apply to acquisitive
reorganizations, these final regulations have addressed this comment.
3. Reverse Triangular Mergers
One commenter recommended that, if the foregoing recommendations
regarding acquisitive reorganizations are not adopted, the stock
repurchase excise tax base should exclude any non-qualifying property
sourced from the acquiring corporation and paid to target shareholders
in connection with a reorganization qualifying under section
368(a)(1)(A) by means of section 368(a)(2)(E) (reverse triangular
merger). According to the commenter, a reverse triangular merger (like
a reorganization under section 368(a)(1)(B) (B reorganization)) is a
stock-based reorganization that does not involve an actual or a deemed
redemption within the meaning of section 317(b). Another commenter
recommended providing an overlap rule for reverse triangular mergers
that also qualify as B reorganizations (because the consideration
provided includes only qualifying property). Under this overlap rule,
such transactions would be treated as B reorganizations and would not
be subject to the stock repurchase excise tax.
By concluding that section 4501 does not apply to acquisitive
reorganizations, these final regulations have addressed this comment.
4. Upstream Reorganizations
One commenter requested clarification as to whether an actual or
deemed upstream reorganization of a specified affiliate into a covered
corporation in a transaction that
[[Page 53150]]
qualifies under section 368(a)(1)(A) or (C) is a ``repurchase'' for
purposes of the stock repurchase excise tax. See Rev. Rul. 69-617,
1969-2 C.B. 57. For Federal income tax purposes, the transaction would
be treated as if (i) the specified affiliate's assets were transferred
to the covered corporation in exchange for covered corporation stock in
an exchange that qualifies for nonrecognition under section 361(a), and
then (ii) the specified affiliate transferred the covered corporation
stock back to the covered corporation in exchange for the specified
affiliate's stock (that is, the covered corporation is treated as
acquiring its own stock) in an exchange that qualifies for
nonrecognition treatment to the covered corporation under section 354
and to the specified affiliate under section 361(c).
Under the proposed computational regulations, the deemed exchange
described in clause (ii) of the prior sentence may implicate the stock
repurchase excise tax, because the acquiring covered corporation is
deemed to acquire its stock from the specified affiliate in exchange
for property (that is, stock of the specified affiliate). Additionally,
the reorganization exception would not apply, because that exception is
limited to situations where a covered corporation is the target
corporation. The commenter recommended providing that such transactions
are not repurchases for purposes of the stock repurchase excise tax if
the target corporation is not also a covered corporation.
By concluding that section 4501 does not apply to acquisitive
reorganizations, these final regulations have addressed this comment.
D. Single-Entity Reorganizations
1. In General
Under proposed Sec. 58.4501-2(e)(4)(ii) and (iii), respectively, E
reorganizations and F reorganizations would be treated as economically
similar transactions in the same manner as other reorganizations for
purposes of the stock repurchase excise tax. Accordingly, a
recapitalizing corporation in an E reorganization or the transferor
corporation in an F reorganization would have a repurchase to the
extent of the fair market value of the shares exchanged by its
shareholders in the transaction. However, under proposed Sec. 58.4501-
3(c)(2) and (3) (applying the reorganization exception to E
reorganizations and F reorganizations, respectively), the fair market
value of the repurchased shares exchanged for qualifying property (that
is, property permitted to be received by the shareholders without
recognition of gain or loss under section 354) would reduce the
corporation's gross repurchase amount. As a result, the corporation
would be subject to the stock repurchase excise tax only to the extent
of the fair market value of its shares repurchased with non-qualifying
property (if any). Additionally, stock issued by the recapitalizing
corporation in the E reorganization, or by the resulting corporation in
the F reorganization, would be disregarded for purposes of the netting
rule under the ``no double benefit rule.'' See proposed Sec. 58.4501-
4(f)(3).
A distribution of non-qualifying property by the transferor
corporation in an F reorganization is treated as a separate transaction
(for example, under section 302) for Federal income tax purposes. See
Sec. 1.368-2(m)(1)(iii) (providing that any distribution of money or
other property from either the transferor corporation or the resulting
corporation, including any money or other property exchanged for
shares, in an F reorganization is treated as an unrelated, separate
transaction from the reorganization). The proposed computational
regulations would not have changed the application of this rule for
purposes of the stock repurchase excise tax.
Several commenters contended that an exchange of stock for
qualifying property in an E reorganization or an F reorganization
should not be subject to the stock repurchase excise tax. Stated
differently, commenters recommended that E reorganizations and F
reorganizations should not give rise to a repurchase unless and to the
extent that shareholders receive non-qualifying property. One commenter
contended that stock issued by a covered corporation is not
``property'' for purposes of section 317(b). Therefore, according to
the commenter, the issuance of qualifying property in exchange for
stock in an E reorganization or an F reorganization should not be
treated as an economically similar transaction that results in a
repurchase for purposes of section 4501(a). A commenter recommended
analyzing the distribution of non-qualifying property separately under
section 301 and/or section 302 of the Code for purposes of the stock
repurchase excise tax, consistent with general principles of Federal
income tax law. The commenter also requested clarification as to
whether all E reorganizations and F reorganizations are covered, or
only those in which an ``exchange'' occurs in form.
The Treasury Department and the IRS agree with the commenters that
the issuance of qualifying property in exchange for stock in an E
reorganization or an F reorganization should not be treated as an
economically similar transaction. Accordingly, these final regulations
provide that E reorganizations are treated as repurchases for purposes
of the stock repurchase excise tax only if and to the extent that (i)
shareholders receive non-qualifying property (that is, property not
permitted to be received by the shareholders without recognition of
gain or loss under section 354), and (ii) the receipt of such property
is not treated as a distribution under section 301 (either by reason of
Sec. 1.301-1(j), 1.305-7(c)(2), or 1.368-2(e)(5)). See Sec. 58.4501-
2(e)(4)(i). As a result, E reorganizations in which the recapitalizing
corporation's shareholders receive only qualifying property (i) are not
treated as repurchases for purposes of the de minimis exception, and
(ii) do not need to be reported on the stock repurchase excise tax
return under Sec. 58.6011-1(a).
Because any distribution of money or other property from either the
transferor corporation or the resulting corporation in an F
reorganization is treated as an unrelated, separate transaction (see
Sec. 1.368-2(m)(1)(iii)), and because such a distribution to the
corporation's shareholders in exchange for their stock in the
corporation constitutes a section 317(b) redemption (see Sec. 58.4501-
5(b)(10) (Example 10)), these final regulations do not include an
explicit rule treating F reorganizations in which the transferor
corporation's shareholders receive non-qualifying property as
economically similar transactions. See Sec. 58.4501-2(e)(4). As is the
case with E reorganizations, F reorganizations in which the transferor
corporation's shareholders receive only qualifying property (i) are not
treated as repurchases for purposes of the de minimis exception, and
(ii) do not need to be reported on the stock repurchase excise tax
return under Sec. 58.6011-1(a).
2. Debt-for-Debt Exchanges
The proposed computational regulations provided that the stock
repurchase excise tax would apply to E reorganizations only if there is
an exchange by the recapitalizing corporation shareholders of their
recapitalizing corporation stock. See proposed Sec. 58.4501-
2(e)(4)(ii); see also proposed Sec. Sec. 58.4501-1(a) (excise tax is
imposed on ``any stock of the corporation that is repurchased'');
[[Page 53151]]
58.4501-1(b)(29) (definition of ``stock''); 58.4501-2(c)(1)
(determination of stock repurchase excise tax base). Nevertheless, one
commenter recommended clarifying that the stock repurchase excise tax
does not apply to E reorganizations in which there is no exchange of
recapitalizing corporation stock (for example, in a recapitalization
solely with respect to debt securities). Accordingly, although these
final regulations continue to provide that the stock repurchase excise
tax applies to E reorganizations only if there is an exchange by the
recapitalizing corporation shareholders of their recapitalizing
corporation stock (see Sec. 58.4501-2(e)(4)(i)), these final
regulations also include an example illustrating that such debt-for-
debt exchanges are not subject to the stock repurchase excise tax. See
Sec. 58.4501-5(b)(2) (Example 2).
3. Preferred Stock With Dividends in Arrears
Another commenter recommended that, to the extent shares are
repurchased in an E reorganization in exchange for qualifying property,
the fair market value of those repurchased shares should be a reduction
to the excise tax base, regardless of whether any shares (that is,
qualifying property) issued are treated as distributed under sections
301 and 305(b) of the Code pursuant to section 305(c) and Sec. 1.305-
7(c)(1)(ii). (Section 305(c) concerns certain transactions that are
treated as distributions, and Sec. 1.305-7(c)(1)(ii) provides that a
recapitalization is deemed to result in a distribution to which section
305(c) and Sec. 1.305-7 apply if a shareholder owning preferred stock
with dividends in arrears exchanges the stock for other stock and, as a
result, increases the shareholder's proportionate interest in the
assets or earnings and profits (E&P) of the corporation.) In other
words, the commenter recommended that the reorganization exception
apply to the entire repurchase in connection with the E reorganization,
and not just to the part of the repurchase that is not treated as a
distribution under sections 301 and 305(b).
The Treasury Department and the IRS agree that the fair market
value of shares exchanged in an E reorganization attributable to
dividends in arrears should not be subject to the stock repurchase
excise tax. As discussed in part IV.D.1 of this Summary of Comments and
Explanation of Revisions, these final regulations treat E
reorganizations as repurchases for purposes of the stock repurchase
excise tax only if and to the extent (i) shareholders receive non-
qualifying property, and (ii) the receipt of such property is not
treated as a distribution under section 301 by reason of Sec. 1.305-
7(c)(2) or 1.368-2(e)(5). Accordingly, these final regulations have
addressed this comment through narrowing the scope of what constitutes
a repurchase, which has the added benefit of eliminating the reporting
burden for such exchanges.
E. Split-Offs
Proposed Sec. 58.4501-2(e)(4)(iv) would provide that, in the case
of a split-off qualifying under section 355 (or so much of section 356
of the Code as relates to section 355) by a distributing corporation
that is a covered corporation, the exchange by the distributing
corporation shareholders of their distributing corporation stock is a
repurchase by the distributing corporation. Thus, under the proposed
computational regulations, a split-off that involves the exchange of
distributing corporation stock solely for qualifying property would be
taken into account for purposes of the de minimis exception and would
be required to be reported on the stock repurchase excise tax return.
However, under proposed Sec. 58.4501-3(c), the distributing
corporation would be able to reduce its repurchase amount pursuant to
the reorganization exception (see part V.A of this Summary of Comments
and Explanation of Revisions for a discussion of the reorganization
exception).
The Treasury Department and the IRS have concluded that section
4501 applies to the exchange by the distributing corporation
shareholders of their distributing corporation stock for the stock of a
controlled corporation in a split-off. Accordingly, these final
regulations continue to treat the acquisition by a distributing
corporation that is a covered corporation of its stock in a split-off
as a repurchase by the distributing corporation. See Sec. 58.4501-
2(e)(4)(ii).
V. Statutory Exceptions
A. Reorganization Exception
With respect to the reorganization exception, the proposed
computational regulations would adopt a consideration-based approach to
the requirement in section 4501(e)(1) that no gain or loss is
recognized on the repurchase by the shareholder under chapter 1 by
reason of the reorganization. The approach would focus on whether the
target corporation shareholders receive property permitted to be
received without the recognition of gain or loss under section 354 or
355 (that is, qualifying property). See proposed Sec. 58.4501-3(c).
This approach would be consistent with the interpretation of similar
requirements elsewhere in subchapter C of chapter 1 of the Code
(subchapter C). See, for example, Sec. Sec. 1.306-2(b)(2)
(interpreting the exception to section 306(a) for a disposition of
section 306 stock in which no gain or loss is recognized); 1.355-
3(b)(4)(i) (interpreting the requirement under section 355(b)(2)(C) and
(D) that an active trade or business not be acquired direct or
indirectly within the five-year period preceding the distribution in a
transaction in which gain or loss was recognized in whole or in part).
A commenter recommended that the determination of whether a
shareholder recognized gain or loss also should take into account
whether, and the extent to which, a shareholder receiving non-qualified
property actually recognized gain (that is, whether the amount realized
by the shareholder exceeds the shareholder's basis). According to the
commenter, this interpretation is closer to the language of the statute
than the proposed consideration-based approach. However, in prior
comments provided with respect to section 4501, a different stakeholder
expressed the view that the consideration-based approach is superior
from a policy perspective.
The Treasury Department and the IRS disagree with the commenter
that the determination of whether the reorganization exception applies
should take into account the basis and amount realized in the
transaction of each shareholder of a covered corporation. Congress
overlaid the stock repurchase excise tax on top of the provisions and
principles of subchapter C. As specifically applicable to the
reorganization exception, Congress defined a ``repurchase'' in section
4501(c)(1) to mean solely a section 317(b) redemption (and any
transaction determined by the Secretary to be economically similar to a
section 317(b) redemption), and then provided an exception in section
4501(e)(1) to the extent that the repurchase is part of a
reorganization (within the meaning of section 368(a)) and no gain or
loss is recognized on the repurchase by the shareholder under chapter 1
by reason of the reorganization. The Treasury Department and the IRS
have determined that, consistent with the interpretation of similar
provisions of subchapter C (and taking into account the narrowed scope
of economically similar transactions), the reorganization exception in
these final regulations applies only if section 355 prevents the
[[Page 53152]]
shareholder of a covered corporation from recognizing gain or loss on
the exchange of the covered corporation's stock (that is, if the
shareholder receives only qualifying property). This interpretation
gives effect to the statutory language ``by reason of such
reorganization.''
The consideration-based approach also is consistent with the
Treasury Department's and the IRS's view that the reorganization
exception should be available to the extent shareholders' interests in
the covered corporation are preserved. Moreover, basing the application
of the reorganization exception on whether shareholders actually
recognized gain as an economic matter would be inconsistent with the
statutory structure of section 4501, because the general statutory
definition of ``repurchase'' in section 4501(c)(1) includes any section
317(b) redemption or economically similar transaction regardless of
whether the shareholder recognizes gain or loss in an economic sense.
In addition, the Treasury Department and the IRS continue to be of
the view that the consideration-based approach not only implements the
plain language of the reorganization exception but also provides a rule
that is readily administrable by taxpayers and the IRS. In contrast, an
approach that focuses on whether each shareholder of a covered
corporation actually recognized gain or loss would impose an
unreasonable administrative burden on taxpayers and the IRS. Therefore,
these final regulations do not adopt the commenter's recommendation.
Instead, consistent with the views expressed by the other
stakeholder, these final regulations maintain an approach based on the
type of consideration provided in the reorganization, and, thus,
similar to the applicability of the ``no recognition of gain or loss''
rules in section 355. Relatedly, however, and as previously discussed
in part IV of this Summary of Comments and Explanation of Revisions,
the reorganization exception in these final regulations also reflects
the narrower scope of reorganizations that are economically similar
transactions for purposes of section 4501.
B. Stock Contribution Exception
Section 4501(e)(2) provides an exception to the application of the
stock repurchase excise tax ``in any case in which the stock
repurchased is, 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, or similar plan.''
One commenter recommended that, to better reflect the reality of
group employee plans and align with congressional intent, the final
regulations should exempt a stock repurchase from the stock repurchase
excise tax if the repurchase is related to either (i) the granting of
stock to employees as part of a long-term incentive plan, or (ii) a
cancellation of stock triggered by a previous capital increase carried
out as part of an employee shareholder program. The commenter also
requested exempting all repurchases made in connection with employee
stock plans if (i) such repurchases are made using trust assets by a
grantor trust established in connection with unfunded deferred
compensation arrangements (commonly referred to as a ``rabbi trust''),
and (ii) the shares continue to be held by the rabbi trust for use in
connection with those employee stock plans.
These final regulations do not adopt the commenter's
recommendations. The Treasury Department and the IRS are of the view
that the stock contribution exception should not be used to encourage
executive compensation arrangements. The definition of an ``employer-
sponsored retirement plan'' in proposed Sec. 58.4501-1(b)(11) is
limited to plans that are qualified under section 401(a) of the Code
(including ESOPs). These final regulations do not broaden this term to
include executive compensation arrangements.
C. RIC/REIT Exception
To implement the exception for repurchases by a RIC or a REIT in
section 4501(e)(5), proposed Sec. 58.4501-3(f) would provide that a
repurchase by a covered corporation that is a RIC or a REIT is a
reduction for purposes of computing the covered corporation's stock
repurchase excise tax base. These final regulations retain this rule.
See Sec. 58.4501-3(f).
A commenter recommended extending the exception for RICs to all
funds registered under the Investment Company Act of 1940, 15 U.S.C.
80a-1 et seq., including funds that do not qualify as RICs for Federal
income tax purposes (non-RIC funds). The commenter suggested that
Congress's rationale for excepting RICs from the stock repurchase
excise tax also applies to non-RIC funds, because the organizational
structure, operations, applicable securities laws, and accounting
standards are the same for those funds as for funds that are RICs for
Federal income tax purposes. The commenter indicated that the majority
of non-RIC funds affected by the stock repurchase excise tax fail to
qualify as RICs solely because their investments in publicly traded
partnerships exceed the limits in section 851(b)(3). According to the
commenter, those investments do not distinguish these funds from RICs
in any way relevant to the stock repurchase excise tax. The commenter
also noted that most non-RIC funds are required to redeem shares at the
demand of a shareholder, which means that the stock repurchase excise
tax will not deter repurchases. Moreover, the commenter noted that
because shares of non-RIC funds are priced based on net asset value,
such funds are incapable of using stock repurchases to artificially
increase their share value.
The Treasury Department and the IRS agree that certain non-RIC
funds are obligated to redeem shares at the demand of a shareholder
and, therefore, are limited in their ability to use stock repurchases
for other purposes, such as artificially increasing share value.
Accordingly, under the grant of authority in section 4501(f), these
final regulations provide an exception for certain non-RIC funds that
parallels the exception for RICs in Sec. 58.4501-3(f). Under these
final regulations, the exception applies only to a covered corporation
that is described in section 851(a)(1)(A) but that has not elected to
be a RIC under section 851(b) (non-RIC '40 Act fund) and that is
either: (i) an ``open-end company'' as defined in section 5(a) of the
Investment Company Act of 1940 (15 U.S.C. 80a-5); or (ii) a ``closed-
end company'' as defined in section 5(a) of the Investment Company Act
of 1940, if the repurchase occurs as part of a periodic repurchase
offer of the closed-end non-RIC '40 Act fund (sometimes referred to as
an ``interval fund'') pursuant to SEC Rule 23c-3 (17 CFR 270.23c-3).
D. Dividend Exception
To implement the ``dividend exception'' of section 4501(e)(6),
proposed Sec. 58.4501-3(g)(1) generally would provide that the fair
market value of stock repurchased by a covered corporation is a
reduction for purposes of computing the covered corporation's stock
repurchase excise tax base to the extent the repurchase is treated as a
distribution of a dividend under section 301(c)(1) or 356(a)(2).
Proposed Sec. 58.4501-3(g)(2)(i) would provide a rebuttable
presumption that a repurchase to which section 302 or 356(a) applies is
subject to section 302(a) or 356(a)(1), respectively (and, therefore,
is ineligible for the dividend exception). Under proposed Sec.
58.4501-3(g)(2)(ii), a covered corporation would
[[Page 53153]]
be permitted to rebut this presumption with regard to a specific
shareholder solely by establishing with sufficient evidence (sufficient
evidence requirement) that the shareholder treats the repurchase as a
dividend on the shareholder's Federal income tax return.
Proposed Sec. 58.4501-3(g)(2)(iii) would provide that, to satisfy
the sufficient evidence requirement, the covered corporation must
obtain the shareholder's certification, in accordance with proposed
Sec. 58.4501-3(g)(3), that the repurchase either (i) constitutes a
redemption treated as a distribution to which section 301 applies, or
(ii) has the effect of the distribution of a dividend under section
356(a)(2). The covered corporation also would be required to (i) treat
the repurchase consistent with the shareholder certification, (ii) have
no knowledge of facts indicating that the shareholder certification is
incorrect, and (iii) demonstrate sufficient E&P to treat as a dividend
either the redemption under section 302 or the receipt of money or
other property under section 356.
Several commenters recommended adopting a sufficient evidence
requirement that does not require shareholder certification (at least
in certain circumstances). According to commenters, covered
corporations may be unable to compel their shareholders to provide a
certification in accordance with proposed Sec. 58.4501-3(g)(3), and
obtaining certification from foreign shareholders that do not file U.S.
tax returns and otherwise have no U.S. tax nexus may be difficult.
Accordingly, one commenter recommended requiring shareholder
certification only if the covered corporation lacks sufficient evidence
to determine that a repurchase should be treated as a dividend.
Several commenters also recommended adopting a sufficient evidence
requirement that does not require shareholders to treat the repurchase
as a dividend on their Federal income tax return, because some
shareholders are not required to file a Federal income tax return. One
commenter recommended modifying the sufficient evidence requirement to
permit U.S. companies to provide IRS Form 1042-S, Foreign Person's U.S.
Source Income Subject to Withholding, to show payment of a dividend to
foreign shareholders in lieu of obtaining certifications from those
shareholders.
The Treasury Department and the IRS agree with the commenters that
the sufficient evidence requirement should be modified to facilitate
administrability and reduce taxpayer burden. Accordingly, under these
final regulations, the sufficient evidence requirement no longer
requires shareholders to treat a repurchase as a dividend on their
Federal income tax return. Instead, a covered corporation may rebut the
presumption of no dividend equivalence in Sec. 58.4501-3(g)(2)(i) with
regard to a specific shareholder by establishing with sufficient
evidence that the covered corporation and the shareholder treat the
repurchase as a dividend for Federal income tax purposes. See Sec.
58.4501-3(g)(2)(ii).
Moreover, the sufficient evidence requirement no longer requires a
shareholder certification, although the final regulations continue to
allow covered corporations to satisfy this requirement by obtaining a
shareholder certification. Instead, the sufficient evidence requirement
may be satisfied if the covered corporation: (i) establishes, based on
information known to the covered corporation (for example, through
legal documentation of share ownership, publicly available information,
the pro rata nature of the repurchase, or the shareholder certification
safe harbor), that the repurchase either (A) is a redemption that is
treated as a distribution to which section 301 applies by reason of
section 302(d), or (B) has the effect of the distribution of a dividend
under section 356(a)(2); (ii) has no knowledge of facts indicating that
the treatment described in clause (i) of this sentence is incorrect;
(iii) treats the repurchase consistent with such treatment, including
by withholding the applicable amounts if required; and (iv)
demonstrates sufficient E&P to treat as a dividend either the
redemption under section 302 or the receipt of money or other property
under section 356. See Sec. 58.4501-3(g)(3).
Like the aforementioned documentation requirement in Sec. 58.4501-
3(c)(4) for the reorganization exception, Sec. 58.4501-3(g)(4)
requires a covered corporation to retain the evidence described in
Sec. 58.4501-3(g)(3), make that evidence available for inspection to
the IRS if any of the evidence becomes material in the administration
of any internal revenue law, and retain records of all information
necessary to document and substantiate such evidence.
The Treasury Department and the IRS continue to be of the view that
reliance solely on the Form 1042-S does not provide sufficient evidence
that a shareholder treats a repurchase as a dividend. The Form 1042-S
is based on the presumption that share repurchases are dividends
subject to withholding tax. Consequently, reliance solely on the Form
1042-S for purposes of substantiating the dividend exception could
overstate the amount of repurchases that qualify for this exception.
VI. Netting Rule
A. Overview
Proposed Sec. 58.4501-4 would provide rules implementing the
netting rule. In general, under proposed Sec. 58.4501-4(b)(1), the
stock repurchase excise tax base with regard to a taxable year of a
covered corporation would be reduced by the aggregate fair market value
of stock of the covered corporation: (i) issued by the covered
corporation during its taxable year in connection with the performance
of services for the covered corporation by employees or other service
providers of the covered corporation; (ii) provided by a specified
affiliate of the covered corporation in connection with the performance
of services for the specified affiliate by an employee of the specified
affiliate during the covered corporation's taxable year; or (iii)
issued by the covered corporation during the covered corporation's
taxable year not in connection with the performance of services.
Proposed Sec. 58.4501-4(c) would provide additional rules
regarding stock issued or provided to an employee of a covered
corporation or specified affiliate as compensation for services
performed as an employee, including transfers of stock in connection
with the performance of services described in section 83 of the Code
(such as pursuant to a nonqualified stock option or pursuant to a stock
option described in section 421 of the Code).
Proposed Sec. 58.4501-4(f)(3) contains the ``no double benefit
rule'' under which stock issued by a covered corporation as part of a
transaction qualifying as a reorganization under section 368(a) or a
distribution under section 355 would be disregarded for purposes of the
netting rule if: (i) the stock is qualifying property; (ii) the stock
is used by another covered corporation (second covered corporation) to
repurchase stock of the second covered corporation in an acquisitive
reorganization, an E reorganization, an F reorganization, or a split-
off; and (iii) the repurchase described in clause (ii) of this sentence
is not included in the second covered corporation's stock repurchase
excise tax base because that repurchase is a qualifying property
repurchase.
[[Page 53154]]
B. No Double Benefit Rule; Issuances in E Reorganizations, F
Reorganizations, and Section 355 Transactions
Commenters agreed with the proposed exclusion of stock issued by a
recapitalizing corporation in an E reorganization or a resulting
corporation in an F reorganization for purposes of the netting rule.
See proposed Sec. 58.4501-4(f)(3). One commenter agreed with the end
result under the proposed regulations but recommended that, because a
corporation's own stock is not ``property'' for purposes of section
317(b), a special rule should be added to disregard such issuances for
purposes of the netting rule.
Another commenter queried whether the ``no double benefit rule''
would apply to an E reorganization. As noted previously, this rule
applies to disregard the issuance of stock by a covered corporation if,
among other conditions, the stock is ``used by another covered
corporation (second covered corporation) to repurchase stock of the
second covered corporation.'' However, the commenter noted that there
is no second corporation in an E reorganization.
These final regulations do not include the ``no double benefit
rule,'' because that rule is no longer necessary in light of other
changes under these final regulations. For example, as discussed in
part IV.D.1 of this Summary of Comments and Explanation of Revisions,
these final regulations (i) treat E reorganizations as repurchases only
if and to the extent that non-qualifying property is distributed by the
recapitalizing corporation to its shareholders in exchange for their
stock, and (ii) treat a distribution of non-qualifying property by the
transferor corporation in an F reorganization as a separate
transaction. Moreover, as discussed in part IV.C.1 of this Summary of
Comments and Explanation of Revisions, the exchange by target
corporation shareholders of their target corporation stock pursuant to
the plan of reorganization in an acquisitive reorganization is not a
repurchase by the target corporation under these final regulations.
Additionally, these final regulations adopt the comment
recommending the addition of a special rule providing that stock issued
by the recapitalizing corporation in an E reorganization or the
resulting corporation in an F reorganization is not taken into account
for purposes of the netting rule. See Sec. 58.4501-4(f)(3). These
final regulations also provide that stock issued by a covered
corporation that is a controlled corporation in a distribution
qualifying under section 355 (or so much of section 356 as relates to
section 355) is disregarded for purposes of the netting rule. See Sec.
58.4501-4(f)(9).
C. Issuances in Acquisitive Reorganizations
One commenter recommended against treating qualifying property
issued by the acquiring corporation in connection with an acquisitive
reorganization as being issued in a redemption or as resulting in an
increase in the target corporation's stock repurchase excise tax base.
Instead, the commenter recommended allowing a reduction by the
acquiring corporation for purposes of its stock repurchase excise tax
base.
Because these final regulations eliminate the ``no double benefit
rule,'' the acquiring corporation is no longer prohibited from reducing
its stock repurchase excise tax base under the netting rule for its
stock issued in an acquisitive reorganization.
D. Instruments Not in the Legal Form of Stock
The proposed computational regulations would provide an anti-
avoidance rule to address the issuance or provision of instruments of a
covered corporation that are treated as stock for Federal tax purposes
but are not in the legal form of stock (non-stock instruments). For
example, a taxpayer seeking to avoid the application of the stock
repurchase excise tax might issue deep-in-the-money call options (which
the taxpayer treats as stock for Federal tax purposes) to accommodation
parties with the mutual understanding that such options never would be
exercised.
Under proposed Sec. 58.4501-4(f)(13), the issuance or provision of
a non-stock instrument (including certain deep-in-the-money options)
would be disregarded for purposes of the netting rule unless and until
the instrument is repurchased, and the amount of the issuance for
purposes of the netting rule would be limited to the lesser of the fair
market value of the instrument at the time of issuance or repurchase.
To prevent taxpayers from taking inconsistent positions with respect to
comparable non-stock instruments, proposed Sec. 58.4501-
4(f)(13)(ii)(D) would provide that a taxpayer that fails to timely
report a repurchase of a non-stock instrument may not take into account
any issuances for purposes of the netting rule for comparable non-stock
instruments repurchased within the five taxable years ending on the
last day of the repurchase year, unless the failure to timely report
the earlier repurchase was due to reasonable cause.
Consistent with the general application of the stock repurchase
excise tax to all instruments treated as stock for Federal tax
purposes, the proposed computational regulations would not exclude the
acquisition of non-stock instruments from the definition of a
``repurchase.''
Several commenters recommended removing the special netting rule
for non-stock instruments so that all instruments of a covered
corporation treated as stock for Federal tax purposes, regardless of
legal form, are treated alike for purposes of the stock repurchase
excise tax. One commenter noted that the value of stock issued to
closely related parties (which would be the most likely to accommodate
non-economic abusive behavior) already is excluded for the purpose of
the netting rule. See proposed Sec. 58.4501-4(f)(13)(ii)(A). Another
commenter noted that taxpayers would be unlikely to engage in
transactions involving accommodation parties, because those
transactions would be subject to substance-based challenges by the IRS
and would face other legal and non-tax impediments discouraging non-
economic activity. A commenter also contended that the proposed rule
may encourage taxpayers to strategically choose the legal form of
equity issuances to obtain preferable treatment with regard to the
stock repurchase excise tax, thereby engaging in non-economic activity
strictly for Federal tax benefits.
The commenters also suggested alternatives if the special netting
rule for non-stock instruments is retained. One commenter suggested
that, if the rule is not removed, it should be expanded to apply to
equity instruments that are limited and preferred as to dividends and
do not participate in corporate growth, or at least expanded to
incorporate preferred equity that is mandatorily redeemable or
redeemable at a specified time. Other commenters suggested applying the
rule only to specific cases in which the non-stock instrument is issued
to an accommodation party and subject to a binding repurchase
agreement.
These final regulations adopt the commenters' view that non-stock
instruments generally should be treated the same as stock for purposes
of the netting rule, except in certain potentially abusive
transactions. Under these final regulations, the issuance or provision
of non-stock instruments generally is regarded at the time of issuance.
However, to address certain potentially abusive transactions, these
final regulations retain a limited version of the proposed special
netting rule that
[[Page 53155]]
applies only to non-stock instruments that are (i) not a non-stock
instrument the offer and sale of which was registered with the SEC, and
(ii) issued to a person that owns (or, under the attribution rules of
section 318 of the Code, is considered to own) at least 10 percent of
the stock of the covered corporation, either by vote or value, but only
if the covered corporation has knowledge of facts that would indicate
such ownership, including through legal documentation of share
ownership, publicly available information, or any other means at the
time of issuance by the covered corporation or at the time of the
provision by the specified affiliate of the covered corporation. See
Sec. 58.4501-4(f)(13).
The changes to the special netting rule for non-stock instruments
under these final regulations are intended to avoid the potential
application of the rule to situations that are not abusive, while still
applying to situations in which taxpayers seek to avoid the application
of the stock repurchase excise tax. Consistent with this intent, these
final regulations would not subject public offerings of non-stock
instruments to the special netting rule. In addition, in light of
commenters' suggestion that abusive transactions are likely to involve
accommodation parties, these final regulations limit the application of
the rule to situations in which there is a direct or indirect ownership
relationship between the covered corporation and the holder of the non-
stock instrument. Finally, these final regulations remove the proposed
consistency requirement and the proposed fair market value rule in
order to simplify the application of the rule. Taken together, these
changes are intended to exclude non-tax motivated issuances of non-
stock instruments, thereby facilitating administrability and reducing
taxpayer burden in the application of the special netting rule for non-
stock instruments.
E. Stock Issued or Provided to Non-Employee Service Providers of a
Specified Affiliate
Under the proposed computational regulations, a covered
corporation's stock repurchase excise tax base would be reduced by the
aggregate fair market value of stock of the covered corporation
provided by a specified affiliate of the covered corporation in
connection with the performance of services for the specified affiliate
by an employee of the specified affiliate during the covered
corporation's taxable year. See proposed Sec. 58.4501-4(b)(1)(ii).
Under proposed Sec. 58.4501-4(f)(2)(iv), stock of a covered
corporation issued by the covered corporation in connection with the
performance of services for a specified affiliate would not be treated
as ``issued'' for purposes of the netting rule. However, a transfer of
stock of a covered corporation described in Sec. 1.83-6(d) by a
specified affiliate to an employee (but not a non-employee service
provider) of the specified affiliate would be treated as ``provided''
by the specified affiliate under proposed Sec. 58.4501-4(b)(1)(ii).
Commenters recommended applying the netting rule when a covered
corporation issues its stock to any service provider (employee or non-
employee) of a specified affiliate of the covered corporation in
connection with services performed for the specified affiliate.
Similarly, commenters recommended that the result should be the same
when the specified affiliate provides stock of a covered corporation to
its employee or non-employee service provider as compensation for
services rendered (or when such transfer is deemed to occur under Sec.
1.83-6(d)).
The Treasury Department and the IRS agree with the commenters that
the netting rule should apply to stock provided by a specified
affiliate to a non-employee service provider (other than the covered
corporation or a specified affiliate of the covered corporation) in
connection with the performance of services for the specified
affiliate. Accordingly, these final regulations provide that the stock
repurchase excise tax base with regard to a taxable year of a covered
corporation is reduced by the aggregate fair market value of stock of
the covered corporation provided by a specified affiliate of the
covered corporation in connection with the performance of services for
the specified affiliate by an employee or other service provider of the
specified affiliate during the covered corporation's taxable year. See
Sec. 58.4501-4(b)(1)(ii) and (f)(2)(iv).
VII. Constructive Specified Affiliate Acquisitions
Under proposed Sec. 58.4501-2(f)(3), an acquisition by a covered
corporation of a corporation or partnership that owns stock in the
covered corporation generally would be treated as a repurchase of
covered corporation stock (constructive specified affiliate acquisition
rule). More specifically, shares of stock of a covered corporation
would be treated as repurchased by the covered corporation to the
extent that: (i) the target corporation or partnership becomes a
specified affiliate of the covered corporation; and (ii) at the time
the target corporation or partnership becomes a specified affiliate, it
owns stock of the covered corporation (A) representing more than one
percent of the fair market value of the assets of the target
corporation or partnership (constructive acquisition de minimis
threshold), and (B) that was acquired after December 31, 2022. Shares
of covered corporation stock previously treated as repurchased under
the constructive specified affiliate acquisition rule would not be
subject to the rule a second time (no double detriment rule).
Several commenters asserted that the constructive specified
affiliate acquisition rule is overly broad. For example, rather than
just address transactions in which the covered corporation and a
potential specified affiliate are acting in concert to facilitate
avoidance of the stock repurchase excise tax, this rule would encompass
non-abusive transactions in which (i) the potential specified
affiliate's acquisition of covered corporation stock is entirely
unrelated to the transaction in which it becomes a specified affiliate,
(ii) the covered corporation does not know in advance that its stock is
owned by the potential specified affiliate, and/or (iii) the potential
specified affiliate owns only a small amount of covered corporation
stock. As a result, according to commenters, this rule effectively
could add unexpected transaction costs to ordinary M&A transactions.
Accordingly, commenters recommended limiting the application of
this rule. For example, one commenter recommended applying this rule
only in situations in which either (i) the potential specified
affiliate's acquisition of covered corporation stock occurs pursuant to
a binding agreement, or (ii) the covered corporation stock held by the
potential specified affiliate exceeds a certain threshold.
Additionally, commenters recommended increasing the constructive
acquisition de minimis threshold from one percent to five percent. (One
commenter further recommended changing this threshold from one percent
of the fair market value of the assets of the target corporation or
partnership to five percent of the covered corporation's stock; another
commenter recommended clarifying the meaning of ``fair market value of
the assets.'') A commenter also recommended broadening the no double
detriment rule and providing additional examples to illustrate its
application.
[[Page 53156]]
The Treasury Department and the IRS agree with the commenters that
the constructive specified affiliate acquisition rule is overly broad.
Accordingly, these final regulations do not adopt the constructive
specified affiliate acquisition rule.
VIII. Section 4501(d)--Acquisition of Stock of Certain Foreign
Corporations
A. In General
Proposed Sec. 58.4501-7 would provide rules that relate to the
application of section 4501(d) to the acquisition of stock of certain
foreign corporations (section 4501(d) proposed regulations). The
section 4501(d) proposed regulations generally would apply based on
related rules in proposed Sec. Sec. 58.4501-2 through 58.4501-4, with
modifications as appropriate to reflect differences in the operation of
section 4501(d). See part I.D of the Background. Among other
differences, section 4501(d) provides special rules for the imposition
of the stock repurchase excise tax on specified affiliates treated as
covered corporations under section 4501(d)(1)(A) and expatriated
entities treated as covered corporations under section 4501(d)(2)(A)
(each, a section 4501(d) covered corporation under the section 4501(d)
proposed regulations). In addition, the netting rule applies only to
stock issued or provided by the specified affiliate or expatriated
entity, as applicable, to its employees under section 4501(d)(1)(C) and
(d)(2)(C), respectively.
B. Funding Rule
1. Proposed Funding Rule
The proposed funding rule would provide that an applicable
specified affiliate of an applicable foreign corporation is treated as
acquiring stock of the applicable foreign corporation to the extent the
applicable specified affiliate funds by any means (including through
distributions, debt, or capital contributions), directly or indirectly,
an AFC repurchase (as defined in proposed Sec. 58.4501-7(b)(2)(i)) or
an acquisition of stock of an applicable foreign corporation by a
relevant entity (as defined in proposed Sec. 58.4501-7(b)(2)(xiv))
(such repurchase or acquisition, a covered purchase) with a principal
purpose of avoiding the section 4501(d) excise tax. See proposed Sec.
58.4501-7(e)(1). If a principal purpose of a funding is to fund,
directly or indirectly, a covered purchase, then with respect to that
funding, there is a principal purpose of avoiding the section 4501(d)
excise tax. A principal purpose described in proposed Sec. 58.4501-
7(e)(1) would be presumed to exist if the applicable specified
affiliate funds by any means, directly or indirectly, a downstream
relevant entity (as defined in proposed Sec. 58.4501-7(b)(2)(xi)), and
the funding occurs within two years of a covered purchase by or on
behalf of the downstream relevant entity.
2. Comments To Withdraw or Revise the Proposed Funding Rule
Several commenters requested that the proposed funding rule be
withdrawn or revised for various reasons, including the following: (i)
the rule could be burdensome to comply with, given its potential to
apply to common business transactions (such as when an applicable
foreign corporation has a pattern of redeeming its own stock, which was
established before Congress enacted the stock repurchase excise tax,
and an applicable specified affiliate makes regular dividend
distributions to the applicable foreign corporation); (ii) it is
unclear (A) when to determine whether the applicable specified
affiliate has a principal purpose of funding a covered purchase, and
(B) whose purpose to avoid the stock repurchase excise tax is relevant;
(iii) there is insufficient clarity (and examples) surrounding the
application of the rule; and (iv) the priority rule for covered
fundings provided in proposed Sec. 58.4501-7(e)(6) does not take into
account that the foreign group may have a variety of funding sources.
Some commenters either supported the proposed funding rule or
agreed that the Treasury Department and the IRS have the authority to
promulgate the rule. Other commenters supported a narrower application
of the proposed funding rule and suggested applying it to acquisitions
of stock of an applicable foreign corporation by a downstream relevant
entity when the acquisition is funded by an applicable specified
affiliate as well as other transactions structured to avoid section
4501(d). Commenters also noted that it is uncommon for an applicable
specified affiliate, and by extension a downstream relevant entity, to
acquire the stock of an applicable foreign corporation.
Taking into account all comments, these final regulations do not
adopt the proposed funding rule.
C. Section 4501(d) Netting Rule
1. Overview
Section 4501(d)(1)(C) and (d)(2)(C) provide that the adjustment in
section 4501(c)(3) is determined only with respect to stock issued or
provided by the section 4501(d) covered corporation to employees of the
section 4501(d) covered corporation (section 4501(d) netting rule).
Proposed Sec. 58.4501-7(n) would clarify that the section 4501(d)
netting rule applies only to stock of the applicable foreign
corporation or covered surrogate foreign corporation, as applicable,
that is issued or provided by a section 4501(d) covered corporation to
an employee in connection with the employee's performance of services
in the employee's capacity as an employee of the section 4501(d)
covered corporation. Consequently, the section 4501(d) proposed
regulations would provide that the section 4501(d) netting rule applies
only with respect to stock issued or provided by the section 4501(d)
covered corporation to its own employees in connection with the
performance of services.
2. Stock Issued or Provided to Non-Employee Service Providers
Commenters requested clarification that the section 4501(d) netting
rule applies to stock issued or provided by a specified affiliate to a
non-employee service provider (other than the covered corporation or a
specified affiliate of the covered corporation) in connection with
services provided for the specified affiliate. These final regulations
do not adopt this comment. The Treasury Department and the IRS are of
the view that the section 4501(d) netting rule does not apply to non-
employee service providers. Section 4501(d)(1)(C) explicitly states
that the adjustment under section 4501(c)(3) is determined only with
respect to stock issued or provided by a specified affiliate to
employees of the specified affiliate. Accordingly, the section 4501(d)
netting rule precludes the reduction of the section 4501(d) excise tax
base when the section 4501(d) covered corporation issues or provides
shares to someone other than employees of the section 4501(d) covered
corporation.
3. Other Comments Related to the Section 4501(d) Netting Rule
Commenters recommended that the section 4501(d) netting rule apply
to treat all members of a consolidated group as one corporation, rather
than the proposed entity-by-entity approach. Other commenters
recommended extending the section 4501(d) netting rule to cover
employees of all specified affiliates (that is, all employees in the
affiliated group, rather than the employees of an applicable specified
affiliate), because, in the commenters' view, this rule is otherwise
discriminatory against inbound companies. A commenter also recommended
exempting from the
[[Page 53157]]
section 4501(d) excise tax stock repurchases that are (i) related to
either (A) stock grants to employees as part of a long-term incentive
plan, or (B) a cancellation of stock triggered by a previous capital
increase carried out as part of an employee shareholder program, or
(ii) made in connection with employee stock plans using trusts' assets
established in connection with unfunded deferred compensation
arrangements (that is, rabbi trusts) where (A) such shares are held for
use in connection with employee stock plans, and (B) such trusts and
associated plans were established prior to the effective date of the
final regulations. Some commenters also suggested changes to the
section 4501(d) netting rule if the proposed funding rule applies.
These final regulations do not adopt these comments. The Treasury
Department and the IRS have determined that the recommendations related
to consolidated groups and additional exclusions from the section
4501(d) netting rule are inconsistent with the plain language of
section 4501(d), and it is not appropriate to expand the section
4501(d) netting rule beyond its statutory scope. Moreover, as discussed
in part VIII.B.2 of this Summary of Comments and Explanation of
Revisions, these final regulations do not adopt the proposed funding
rule.
D. Foreign Partnerships as Applicable Specified Affiliates
Under section 4501(d)(1), if a foreign partnership that is a
specified affiliate of an applicable foreign corporation has a direct
or indirect partner that is a domestic entity, then the foreign
partnership is an applicable specified affiliate of the applicable
foreign corporation. Proposed Sec. 58.4501-7(h) would provide rules
for determining if a foreign partnership is an applicable specified
affiliate, including treating a domestic entity as an indirect partner
with respect to a foreign partnership if the domestic entity owns an
interest in the foreign partnership through: (i) one or more foreign
partnerships; (ii) one or more foreign corporations controlled by one
or more domestic entities (domestic control requirement); or (iii) an
ownership chain with one or more entities described in the preceding
clauses (i) and (ii). See proposed Sec. 58.4501-7(h)(2)(ii). The
section 4501(d) proposed regulations also would provide a de minimis
rule pursuant to which a foreign partnership with one or more direct or
indirect domestic entity partners would not be considered an applicable
specified affiliate if the domestic entities hold, directly or
indirectly, in aggregate, less than five percent of the capital and
profits interests in the foreign partnership. See proposed Sec.
58.4501-7(h)(5).
One commenter suggested that the proposed de minimis rule produces
a cliff effect that may result in a relatively minimal U.S. nexus
through a domestic partner causing such a foreign partnership to be
treated in the same manner as a domestic corporation. The commenter
recommended applying the stock repurchase excise tax proportionately to
domestic partners of a foreign partnership (that is, based on the
domestic partner's interest in the foreign partnership), rather than
with respect to the entire foreign partnership.
These final regulations do not adopt this recommendation, because
section 4501(d) equates a foreign partnership having a domestic entity
as a direct or indirect partner with a domestic corporation and does
not apply the stock repurchase excise tax proportionately to domestic
partners of a foreign partnership.
With respect to the de minimis rule, the commenter acknowledged its
appropriateness but recommended raising the threshold such that the
rule (i) would apply only to situations in which the domestic partner
has a material interest in, and material influence on, the operations
of a foreign partnership, and (ii) is administrable. The commenter
recommended applying the section 4501(d) excise tax to a foreign
partnership if the foreign partnership's direct or indirect domestic
partners, and related parties of such domestic partners, hold, directly
or indirectly, in aggregate, 80 percent or more of the capital and
profits interests in the foreign partnership. In the alternative, the
commenter recommended that the de minimis threshold be increased to 25
percent for the domestic partner itself or increased to 50 percent to
reflect actual control by the domestic partner and to be consistent
with the percentage used to determine specified affiliate status more
generally under section 4501.
These final regulations do not adopt the foregoing recommendations.
Section 4501(d) does not require the domestic entity partner to have a
material interest in, or material influence on, the operations of a
foreign partnership. Moreover, the de minimis rule addresses compliance
burdens regarding the determination of when direct or indirect
ownership by domestic entity partners causes a foreign partnership to
be an applicable specified affiliate. However, in response to the
comment, these final regulations raise the de minimis threshold so that
a foreign partnership with one or more direct or indirect domestic
entity partners is not considered an applicable specified affiliate if
the domestic entities hold, directly or indirectly, in aggregate, less
than 10 percent of the capital and profits interests in the foreign
partnership.
The commenter further requested clarification on how a foreign
partnership applicable specified affiliate that makes a covered
purchase pays the section 4501(d) excise tax. The commenter stated that
the section 4501(d) proposed regulations do not specify which entity is
responsible for paying the section 4501(d) excise tax when the tax
arises because of a covered purchase by a foreign partnership
applicable specified affiliate. Although acknowledging that the foreign
partnership itself is the payor of the excise tax because it is the
entity whose section 4501(d) excise tax basis is increased as a result
of the covered funding, the commenter stated that this requirement
imposes significant administrative compliance burdens. These asserted
burdens include: (i) tracking direct and indirect domestic entity
partners to determine whether domestic ownership falls outside of the
de minimis threshold; (ii) requiring a foreign partnership to file a
section 4501 excise tax return and pay the section 4501(d) excise tax
liability even though such foreign partnership would not otherwise be
required to file U.S. tax returns or report operations for Federal tax
purposes; and (iii) requiring the foreign partnership to set aside
funds at the partnership level to pay the section 4501(d) excise tax
liability and determine how to allocate that liability among its
partners.
The Treasury Department and the IRS have determined that the
statute is clear that a foreign partnership applicable specified
affiliate is the entity responsible for paying the section 4501(d)
excise tax when the tax arises because that foreign partnership
acquires the stock of the applicable foreign corporation. In respect of
filing the stock repurchase excise tax return and paying the section
4501(d) excise tax liability, see Sec. Sec. 58.6011-1(a) (requirement
to file stock repurchase excise tax return) and 58.6151-1(a) (time and
place for paying tax shown on stock repurchase excise tax return). See
also the discussion of filing issues in respect of foreign partnership
applicable specified affiliates in the preamble to the proposed
computational regulations.
[[Page 53158]]
E. Other Modifications to the Section 4501(d) Proposed Regulations
As noted in part VIII.A. of this Summary of Comments and
Explanation of Revisions, the section 4501(d) proposed regulations
generally apply based on related rules in proposed Sec. Sec. 58.4501-2
through 58.4501-4, with modifications as appropriate to reflect
differences in the operation of section 4501(d). Accordingly, these
final regulations modify the section 4501(d) proposed regulations to
reflect modifications to the related rules in proposed Sec. Sec.
58.4501-2 through 58.4501-4, as appropriate.
IX. Other Comments
One commenter recommended that these final regulations distinguish
between ``illegitimate'' repurchases (in the commenter's view,
repurchases that benefit executives rather than investors) and
``legitimate'' repurchases. The Treasury Department and the IRS are of
the view that the statute does not draw a distinction between
repurchases that benefit executives versus those that benefit
investors. Accordingly, these final regulations do not adopt this
comment. However, as reflected in this Summary of Comments and
Explanation of Revisions, these final regulations streamline the stock
repurchase excise tax regulations while preserving clear, bright-line
rules for determining which repurchases are subject to the stock
repurchase excise tax.
X. Applicability Dates
A. In General
These final regulations generally provide that Sec. Sec. 58.4501-1
through 58.4501-5 apply to (i) repurchases of stock of a covered
corporation occurring after December 31, 2022, and (ii) issuances and
provisions of stock of a covered corporation occurring during taxable
years ending after December 31, 2022. See Sec. 58.4501-6(a). However,
Sec. 58.4501-6(b)(1) provides that certain rules in Sec. Sec.
58.4501-2 through 58.4501-4 that were not described in Notice 2023-2
apply to (i) repurchases of stock of a covered corporation occurring
after April 12, 2024 (the date of publication of the proposed
computational regulations in the Federal Register), and (ii) issuances
and provisions of stock of a covered corporation occurring after April
12, 2024. Nevertheless, Sec. 58.4501-6(b)(2) provides that so long as
a covered corporation consistently applies the provisions of Sec. Sec.
58.4501-1 through 58.4501-5, the covered corporation may choose to
apply these final regulations with respect to the provisions described
in Sec. 58.4501-6(b)(1) to (i) repurchases of stock of the covered
corporation occurring on or before April 12, 2024, and after December
31, 2022, and (ii) issuances and provisions of stock of the covered
corporation occurring on or before April 12, 2024, and during taxable
years ending after December 31, 2022.
Except with respect to the rules under Sec. 58.4501-7(p)(2) and
(3), the rules of Sec. 58.4501-7 apply to transactions that occur
after April 12, 2024. See Sec. 58.4501-7(p)(1). Section 58.4501-
7(p)(2) provides a transition rule for the foreign partnership de
minimis rule, allowing a section 4501(d) covered corporation to apply
Sec. 58.4501-7(g)(5) by replacing the phrase ``10 percent'' with
``five percent'' for transactions that occur after April 12, 2024, but
November 24, 2025. Alternatively, a section 4501(d) covered corporation
may apply the final rules of Sec. 58.4501-7 for transactions that
occur after December 31, 2022, provided that the section 4501(d)
covered corporation applies all those rules consistently. See Sec.
58.4501-7(p)(3).
B. Effect on Prior Returns
If a covered corporation previously filed a Form 7208, Excise Tax
on Repurchase of Corporate Stock, applying Notice 2023-2 or the
proposed computational regulations and would like to file a refund
claim after the effective date of these final regulations, the covered
corporation should file a Form 720-X, Amended Quarterly Federal Excise
Tax Return, for the quarter (or previously amended quarter, if
applicable) in which the covered corporation filed the original Form
720, Quarterly Federal Excise Tax Return, and attach a corrected Form
7208 (with the word ``Amended'' added to the top of the corrected Form
7208). If a taxpayer other than the original filer would like to file a
refund claim, the taxpayer should file a claim on Form 8849, Claim for
Refund of Excise Taxes, and attach Schedule 6, Other Claims, and a
corrected Form 7208.
If a covered corporation is filing a Form 720-X for the third
quarter of 2024, and if the covered corporation previously attached two
Forms 7208 (one for a tax year ending in 2023, and one for a tax year
ending in 2024) to the Form 720 for that quarter, the covered
corporation must attach two corrected Forms 7208 (with the word
``Amended'' added to the top of each corrected Form 7208) to the Form
720-X for that quarter.
Special Analyses
I. Regulatory Planning and Review
The Office of Information and Regulatory Analysis (OIRA) of the
Office of Management and Budget (OMB) has determined that these final
regulations are not significant and are not subject to review under
section 6(b) of Executive Order 12866. Therefore, a regulatory impact
analysis is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
generally requires that a Federal agency obtain the approval of the OMB
before collecting information from the public, whether that collection
of information is mandatory, voluntary, or required to obtain or retain
a benefit. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a valid control number assigned by the OMB.
The collections of information in these regulations contain
reporting, third-party disclosure, and recordkeeping requirements in
Sec. Sec. 58.4501-3(g) and 58.4501-7(l)(6). This information is
necessary for the IRS to accurately determine the stock repurchase
excise tax due and is required by law to comply with the provisions of
section 4501 of the Code as enacted by section 10201 of the Inflation
Reduction Act of 2022. The likely respondents are corporations and
partnerships. The burdens associated with these information collections
are included in Form 7208 and its instructions and approved with OMB
control number 1545-2323 in accordance with PRA procedures under 5 CFR
1320.10.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by section 6103.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that these regulations do not have a significant
economic impact on a substantial number of small entities. This
certification is based on the fact that these regulations only apply to
publicly traded corporations, which tend to consist of larger
businesses. Specifically, based on the most recent data available to
the IRS for tax year 2023, approximately 3,800 corporations reported
publicly traded common stock.
[[Page 53159]]
Of those corporations, approximately 3,210 (over 84 percent) reported
total assets over $100 million, and approximately 3,750 (over 98
percent) reported total assets over $10 million. Meanwhile, for tax
year 2023, the IRS received 8,269,075 Corporation Income Tax Returns.
IRS Publication 6292, Fiscal Year Projections for the United States:
2024-2031, Fall 2024, Table 2. Of these corporation returns, 8,009,010
reported total assets below $10 million. Thus, the number of
corporations affected by these regulations that reported total assets
below $10 million is less than one thousandth of one percent of the
total number of corporations that reported total assets below $10
million. Therefore, these regulations do not create additional
obligations for, or impose an economic impact on, a substantial number
of small entities. Accordingly, a regulatory flexibility analysis under
the Regulatory Flexibility Act is not required.
IV. Section 7805(f)
Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking was submitted to the Chief Counsel for the Office of
Advocacy of the Small Business Administration for comment on its impact
on small business, and no comments were received.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. These regulations do not include any Federal mandate that
may result in expenditures by State, local, or Tribal governments, or
by the private sector in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These regulations do not have
federalism implications and do not impose substantial direct compliance
costs on State and local governments or preempt State law within the
meaning of the Executive order.
VII. Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs designated this rule
as not a major rule, as defined by 5 U.S.C. 804(2).
Statement of Availability of IRS Documents
Any IRS Revenue Procedure, Revenue Ruling, Notice, or other
guidance cited in this document is published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and is available from the
Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at <a href="https://www.irs.gov">https://www.irs.gov</a>.
Drafting Information
The principal authors of these regulations are Kailee H. Hock of
the Office of Associate Chief Counsel (Corporate), Naomi Lehr and
Robert C. Weedman of the Office of Associate Chief Counsel (Employee
Benefits, Exempt Organizations, and Employment Taxes), Lucas J.
Eberhart of the Office of Associate Chief Counsel (Financial
Institutions and Products), and Brittany N. Dobi of the Office of
Associate Chief Counsel (International). However, other personnel from
the Treasury Department and the IRS participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 58
Excise taxes, Stocks, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, the Treasury Department and the IRS amend 26 CFR parts
1 and 58 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.1275-6 is amended by adding paragraph (f)(12)(iii) to
read as follows:
Sec. 1.1275-6 Integration of qualifying debt instruments.
* * * * *
(f) * * *
(12) * * *
(iii) Excise tax on repurchase of corporate stock--(A) Application.
If a taxpayer enters into an integrated transaction (for example, a
convertible debt instrument integrated with one or more Sec. 1.1275-6
hedges consisting of an option on the taxpayer's own stock), then,
solely for purposes of section 4501 of the Code and the stock
repurchase excise tax regulations (as defined in Sec. 58.4501-1(b)(37)
of this chapter), the taxpayer must apply the rules that would apply on
a separate basis to the components of the integrated transaction,
rather than the rules that otherwise would apply to the integrated
transaction under this section.
(B) Applicability date. Notwithstanding paragraph (j) of this
section, paragraph (f)(12)(iii)(A) of this section applies to an
integrated transaction outstanding after December 31, 2022 (regardless
of when such integrated transaction was entered into by the taxpayer).
* * * * *
PART 58--STOCK REPURCHASE EXCISE TAX
0
Par. 3. The authority citation for part 58 continues to read in part as
follows:
Authority: 26 U.S.C. 4501(f) and 7805.
* * * * *
0
Par. 4. Subpart A is added to read as follows:
Subpart A--Excise Tax on Stock Repurchases
Sec.
58.4501-0 Table of contents.
58.4501-1 Excise tax on stock repurchases.
58.4501-2 General rules regarding excise tax on stock repurchases.
58.4501-3 Exceptions.
58.4501-4 Application of netting rule.
58.4501-5 Examples.
58.4501-6 Applicability dates.
58.4501-7 Special rules for acquisitions or repurchases of stock of
certain foreign corporations.
Subpart A--Excise Tax on Stock Repurchases
Sec. 58.4501-0 Table of contents.
This section lists the major captions that appear in Sec. Sec.
58.4501-1 through 58.4501-7.
Sec. 58.4501-1 Excise tax on stock repurchases.
(a) Excise tax imposed.
(b) Definitions.
(1) Acquisitive reorganization.
(2) Applicable percentage.
(3) Cessation date.
(4) Clawback.
(5) Code.
(6) Controlled corporation.
(7) Covered corporation.
(8) Covered holder.
[[Page 53160]]
(9) Covered non-stock instrument.
(10) De minimis exception.
(11) Distributing corporation.
(12) E reorganization.
(13) Economically similar transaction.
(14) Employee.
(15) Employer-sponsored retirement plan.
(16) Established securities market.
(17) F reorganization.
(18) Forfeiture.
(19) Gross repurchase amount.
(20) Initiation date.
(21) IRS.
(22) Netting rule.
(23) Non-RIC '40 Act fund.
(24) Non-stock instrument.
(25) Recapitalizing corporation.
(26) REIT.
(27) Reorganization exception.
(28) Repurchase.
(29) RIC.
(30) SEC.
(31) Section 317(b) redemption.
(32) Specified affiliate.
(33) Split-off.
(34) Stock.
(35) Stock repurchase excise tax.
(36) Stock repurchase excise tax base.
(37) Stock repurchase excise tax regulations.
(38) Taxable year.
(39) Treasury stock.
(c) No application for any purposes of chapter 1 of the Code.
(d) Status as a domestic or foreign corporation.
(e) F reorganizations.
Sec. 58.4501-2 General rules regarding excise tax on stock
repurchases.
(a) Scope.
(b) Computation of excise tax liability.
(1) Imposition of tax.
(2) De minimis exception.
(c) Stock repurchase excise tax base.
(1) In general.
(2) Taxable year determination.
(3) Repurchases before January 1, 2023.
(d) Duration of covered corporation status.
(1) Initiation date.
(2) Cessation date.
(3) Inbound and outbound F reorganizations.
(e) Repurchase.
(1) Overview.
(2) Scope of repurchase.
(3) Certain section 317(b) redemptions that are not repurchases.
(4) Economically similar transactions.
(5) Transactions that are not repurchases.
(f) Specified affiliates.
(1) Acquisitions of stock of a covered corporation by a
specified affiliate treated as a repurchase.
(2) Determination of specified affiliate status.
(g) Date of repurchase.
(1) General rule.
(2) Regular-way sale.
(h) Fair market value of repurchased stock.
(1) In general.
(2) Stock traded on an established securities market.
(3) Stock not traded on an established securities market.
(4) Market price of stock denominated in non-U.S. currency.
Sec. 58.4501-3 Exceptions.
(a) Scope.
(b) Reduction of covered corporation's stock repurchase excise
tax base.
(1) In general.
(2) Coordination of exceptions.
(c) Reorganization exception.
(d) Stock contributions to an employer-sponsored retirement
plan.
(1) Reductions in computing covered corporation's stock
repurchase excise tax base.
(2) Classes of stock contributed to an employer-sponsored
retirement plan.
(3) Same class of stock repurchased and contributed.
(4) Different class of stock repurchased and contributed.
(5) Timing of contributions.
(6) Contributions before January 1, 2023.
(e) Repurchases or acquisitions by a dealer in securities in the
ordinary course of business.
(1) In general.
(2) Applicability.
(f) Repurchases by a RIC or a REIT.
(g) Repurchase treated as a dividend.
(1) In general.
(2) Rebuttable presumption of no dividend equivalence.
(3) Sufficient evidence requirement.
(4) Documentation of sufficient evidence.
(h) Repurchases by a non-RIC '40 Act fund.
Sec. 58.4501-4 Application of netting rule.
(a) Scope.
(b) Issuances and provisions of stock that are a reduction in
computing the stock repurchase excise tax base.
(1) General rule.
(2) Stock issued or provided outside period of covered
corporation status.
(3) Issuances or provisions before January 1, 2023.
(c) Stock issued or provided in connection with the performance
of services.
(1) In general.
(2) Sale of shares to cover exercise price and withholding.
(d) Date of issuance.
(1) In general.
(2) Stock issued or provided in connection with the performance
of services.
(e) Fair market value of issued or provided stock.
(1) In general.
(2) Stock traded on an established securities market.
(3) Stock not traded on an established securities market.
(4) Market price of stock denominated in non-U.S. currency.
(5) Stock issued or provided in connection with the performance
of services.
(f) Issuances that are disregarded for purposes of applying the
netting rule.
(1) Distributions by a covered corporation of its own stock.
(2) Issuances to a specified affiliate.
(3) Issuances in an E reorganization or an F reorganization.
(4) Deemed issuances under section 304(a)(1).
(5) Deemed issuance of a fractional share.
(6) Issuance by a covered corporation that is a dealer in
securities.
(7) Issuance by the target corporation in a reverse triangular
merger.
(8) Issuance as part of a section 1036(a) exchange.
(9) Issuance as part of a distribution under section 355.
(10) Stock contributions to an employer-sponsored retirement
plan.
(11) Net exercises and share withholding.
(12) Settlement other than in stock.
(13) Instrument not in the legal form of stock.
Sec. 58.4501-5 Examples.
(a) Scope.
(b) In general.
(1) Example 1: Redemption of preferred stock not subject to an
exception.
(2) Example 2: Debt-for-debt exchange.
(3) Example 3: Valuation of repurchase.
(4) Example 4: Acquisition partially funded by the target
corporation.
(5) Example 5: Pro rata stock split.
(6) Example 6: Acquisition of a target corporation in an
acquisitive reorganization.
(7) Example 7: E reorganization.
(8) Example 8: E reorganization with non-qualifying property.
(9) Example 9: Cash paid in lieu of fractional shares.
(10) Example 10: F reorganization.
(11) Example 11: Section 355 split-off.
(12) Example 12: Section 355 split-off as part of a D
reorganization.
(13) Example 13: Section 355 spin-off.
(14) Example 14: Section 355 spin-off as part of a D
reorganization.
(15) Example 15: Repurchase pursuant to an accelerated share
repurchase agreement.
(16) Example 16: Distribution in complete liquidation of a
covered corporation.
(17) Example 17: Complete liquidation of a covered corporation
to which sections 331 and 332(a) both apply.
(18) Example 18: Acquisition by disregarded entity.
(19) Example 19: Multiple repurchases and contributions of same
class of stock.
(20) Example 20: Multiple repurchases and contributions of
different classes of stock.
(21) Example 21: Treatment of contributions after the taxable
year.
(22) Example 22: Becoming a covered corporation.
(23) Example 23: Actual pro rata redemption in partial
liquidation.
(24) Example 24: Constructive redemption in partial liquidation.
(25) Example 25: Non-pro rata redemption in partial liquidation.
(26) Example 26: Physical settlement of call option contract.
(27) Example 27: Net cash settlement of call option contract.
(28) Example 28: Physical settlement of put option contract.
(29) Example 29: Net cash settlement of put option contract.
(30) Example 30: Indirect ownership.
(31) Example 31: Restricted stock provided to a service
provider.
(32) Example 32: Restricted stock provided to a service provider
with section 83(b) election.
(33) Example 33: Forfeiture of restricted stock provided to a
service provider with section 83(b) election.
[[Page 53161]]
(34) Example 34: Vested stock provided to a service provider
with share withholding.
(35) Example 35: Stock option net exercise.
(36) Example 36: Net share settlement not in connection with
performance of services.
(37) Example 37: Broker-assisted net exercise.
(38) Example 38: Stock provided by a specified affiliate to an
employee.
(39) Example 39: Stock provided by a specified affiliate to a
non-employee.
(40) Example 40: Corporation treated as a domestic corporation
under section 7874(b).
Sec. 58.4501-6 Applicability dates.
(a) In general.
(b) Exceptions.
(1) Applicability date for certain rules.
(2) Early application.
(c) Special rules for acquisitions or repurchases of stock of
certain foreign corporations.
Sec. 58.4501-7 Special rules for acquisitions or repurchases of
stock of certain foreign corporations.
(a) Scope.
(b) Definitions.
(1) Application of definitions in Sec. 58.4501-1(b).
(2) Section 4501(d) definitions.
(c) Computation of section 4501(d) excise tax liability for a
section 4501(d) covered corporation.
(1) Imposition of tax.
(2) Section 4501(d) de minimis exception.
(3) Section 4501(d) excise tax base.
(4) Section 4501(d)(1) repurchases or section 4501(d)(2)
repurchases before January 1, 2023.
(d) Section 4501(d)(2) coordination rules.
(1) Coordination rule for section 4501(d)(1) repurchases and
section 4501(d)(2) repurchases.
(2) Coordination rule for multiple section 4501(d) covered
corporations.
(e) Status as applicable foreign corporation or covered
surrogate foreign corporation.
(1) Initiation date.
(2) Cessation date.
(3) Rules regarding F reorganizations.
(f) Status as an applicable specified affiliate or a specified
affiliate of a covered surrogate foreign corporation.
(1) Timing of determination.
(2) Determination of indirect ownership.
(g) Foreign partnerships that are applicable specified
affiliates.
(1) In general.
(2) Direct or indirect partner.
(3) Control of a foreign corporation.
(4) Indirect interests held through applicable foreign
corporations.
(5) De minimis domestic entity (direct or indirect) partner.
(h) CSFC repurchase.
(1) Overview.
(2) Scope of CSFC repurchases.
(3) Certain section 317(b) redemptions that are not CSFC
repurchases.
(4) Section 4501(d) economically similar transactions.
(5) Transactions that are not CSFC repurchases.
(i) [Reserved]
(j) Date of section 4501(d)(1) repurchase or section 4501(d)(2)
repurchase.
(1) General rule.
(2) Regular-way sale.
(k) Fair market value of stock of an applicable foreign
corporation or a covered surrogate foreign corporation that is
repurchased or acquired.
(1) In general.
(2) Stock traded on an established securities market.
(3) Stock not traded on an established securities market.
(4) Market price of stock denominated in non-U.S. currency.
(l) Section 4501(d) exceptions.
(1) In general.
(2) Section 4501(d) reorganization exception.
(3) Stock contributions to an employer-sponsored retirement
plan.
(4) Repurchases or acquisitions by a dealer in securities in the
ordinary course of business.
(5) Repurchases by a RIC or REIT.
(6) CSFC repurchase treated as a dividend.
(7) Repurchases by a non-RIC '40 Act fund.
(m) Application of section 4501(d) netting rule.
(1) In general.
(2) Stock issued or provided outside period of applicable
foreign corporation or covered surrogate foreign corporation status.
(3) Issuances or provisions before January 1, 2023.
(4) Stock Issued or provided in connection with the performance
of services.
(5) Date of issuance or provision for section 4501(d) netting
rule.
(6) Fair market value of stock of an applicable foreign
corporation or a covered surrogate foreign corporation that is
issued or provided to employees.
(7) Issuances that are disregarded for purposes of applying the
section 4501(d) netting rule.
(n) Section 4501(d)(1) examples.
(1) Example 1: Section 4501(d) netting rule with respect to a
single applicable specified affiliate.
(2) Example 2: Section 4501(d) netting rule with respect to
multiple applicable specified affiliates.
(3) Example 3: Foreign partnership that is an applicable
specified affiliate.
(4) Example 4: Foreign partnership that is not an applicable
specified affiliate.
(5) Example 5: Foreign partnership that is directly owned by
foreign corporations and is an applicable specified affiliate.
(o) Section 4501(d)(2) examples.
(1) Example 1: Section 4501(d) netting rule with respect to an
expatriated entity.
(2) Example 2: Section 4501(d)(2) repurchase from the covered
surrogate foreign corporation or another specified affiliate of the
covered surrogate foreign corporation.
(3) Example 3: Liability with respect to multiple expatriated
entities.
(p) Applicability dates.
(1) In general.
(2) Transition rule for foreign partnership de minimis rule.
(3) Early application.
Sec. 58.4501-1 Excise tax on stock repurchases.
(a) Excise tax imposed. Section 4501(a) of the Code imposes a stock
repurchase excise tax on each covered corporation equal to the
applicable percentage of the fair market value of any stock of the
corporation that is repurchased by the corporation during the taxable
year. This section and Sec. 58.4501-2 provide generally applicable
definitions and operating rules regarding the application of the stock
repurchase excise tax and the computation of the stock repurchase
excise tax liability of a covered corporation. Section 58.4501-3
provides rules regarding the application of the exceptions in section
4501(e) (other than the de minimis exception described in section
4501(e)(3), which is addressed in Sec. 58.4501-2(b)(2)) and related
exceptions. Section 58.4501-4 provides rules regarding the application
of section 4501(c)(3). Section 58.4501-5 provides examples that
illustrate the application of section 4501 and the stock repurchase
excise tax regulations. Section 58.4501-6 provides applicability dates
for the stock repurchase excise tax regulations (other than Sec.
58.4501-7). For special rules and examples regarding the application of
section 4501(d) to acquisitions or repurchases of stock of certain
foreign corporations, see Sec. 58.4501-7.
(b) Definitions. The following definitions apply for purposes of
this section and Sec. Sec. 58.4501-2 through 58.4501-6, and, to the
extent provided in Sec. 58.4501-7(b), for purposes of Sec. 58.4501-7:
(1) Acquisitive reorganization. The term acquisitive reorganization
means a transaction that qualifies as a reorganization under--
(i) Section 368(a)(1)(A) of the Code, including by reason of
section 368(a)(2)(D) or (a)(2)(E);
(ii) Section 368(a)(1)(C);
(iii) Section 368(a)(1)(D), if the reorganization satisfies the
requirements of section 354(b)(1) of the Code; or
(iv) Section 368(a)(1)(G), if the reorganization satisfies the
requirements of section 354(b)(1).
(2) Applicable percentage. The term applicable percentage means the
percentage provided in section 4501(a).
(3) Cessation date. The term cessation date means the date on which
all stock of a covered corporation ceases to be traded on an
established securities market.
(4) Clawback. The term clawback means a surrender of stock pursuant
to a contractual provision that requires an employee to return vested
stock.
[[Page 53162]]
(5) Code. The term Code means the Internal Revenue Code.
(6) Controlled corporation. The term controlled corporation has the
meaning given the term in section 355(a)(1)(A) of the Code.
(7) Covered corporation. The term covered corporation means any
domestic corporation (including within the meaning of paragraph (d) of
this section) the stock of which is traded on an established securities
market.
(8) Covered holder. The term covered holder has the meaning given
the term in Sec. 58.4501-4(f)(13)(ii)(C).
(9) Covered non-stock instrument. The term covered non-stock
instrument has the meaning given the term in Sec. 58.4501-
4(f)(13)(ii)(B).
(10) De minimis exception. The term de minimis exception has the
meaning given the term in Sec. 58.4501-2(b)(2)(i).
(11) Distributing corporation. The term distributing corporation
has the meaning given the term in section 355(a)(1)(A).
(12) E reorganization. The term E reorganization means a
transaction that qualifies as a reorganization under section
368(a)(1)(E).
(13) Economically similar transaction. The term economically
similar transaction means a transaction described in Sec. 58.4501-
2(e)(4).
(14) Employee. The term employee means an employee as defined in
section 3401(c) of the Code and Sec. 31.3401(c)-1 of this chapter, or
a former employee, of a covered corporation or a specified affiliate of
the covered corporation (as appropriate).
(15) Employer-sponsored retirement plan--(i) In general. The term
employer-sponsored retirement plan means a plan that includes a trust
that is qualified under section 401(a) of the Code and maintained by a
covered corporation or a specified affiliate of the covered
corporation.
(ii) ESOPs included. For the purposes of these regulations, the
term employer-sponsored retirement plan includes an employee stock
ownership plan defined in section 4975(e)(7) of the Code (ESOP) that is
maintained by a covered corporation or a specified affiliate of the
covered corporation.
(16) Established securities market. The term established securities
market has the meaning given the term in Sec. 1.7704-1(b) of this
chapter.
(17) F reorganization. The term F reorganization means a
transaction that qualifies as a reorganization under section
368(a)(1)(F).
(18) Forfeiture. The term forfeiture means a surrender of stock to
the issuing corporation for no consideration.
(19) Gross repurchase amount. The term gross repurchase amount has
the meaning given the term in Sec. 58.4501-2(c)(1)(i).
(20) Initiation date. The term initiation date means the date on
which stock of a corporation begins to be traded on an established
securities market.
(21) IRS. The term IRS means the Internal Revenue Service.
(22) Netting rule. The term netting rule has the meaning given the
term in Sec. 58.4501-4(a).
(23) Non-RIC '40 Act fund. The term non-RIC '40 Act fund has the
meaning given the term in Sec. 58.4501-3(h).
(24) Non-stock instrument. The term non-stock instrument has the
meaning given the term in Sec. 58.4501-4(f)(13)(ii)(A).
(25) Recapitalizing corporation. The term recapitalizing
corporation means the corporation recapitalizing its stock in an E
reorganization.
(26) REIT. The term REIT has the meaning given the term real estate
investment trust in section 856(a) of the Code.
(27) Reorganization exception. The term reorganization exception
means the exception provided in Sec. 58.4501-3(c).
(28) Repurchase. The term repurchase has the meaning given the term
in Sec. 58.4501-2(e)(2).
(29) RIC. The term RIC has the meaning given the term regulated
investment company in section 851 of the Code.
(30) SEC. The term SEC means the U.S. Securities and Exchange
Commission.
(31) Section 317(b) redemption. The term section 317(b) redemption
means a redemption within the meaning of section 317(b) of the Code
with regard to the stock of a covered corporation.
(32) Specified affiliate. 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.
(33) Split-off. The term split-off means a distribution qualifying
under section 355 (or so much of section 356 of the Code as relates to
section 355) by a distributing corporation pursuant to which the
shareholders of the distributing corporation exchange stock of the
distributing corporation for stock of the controlled corporation and,
if applicable, other property (including securities of the controlled
corporation) or money.
(34) Stock--(i) In general. Except as provided in paragraph
(b)(34)(ii) or (iii) of this section, the term stock means any
instrument issued by a corporation that is stock (including treasury
stock) or that is treated as stock for Federal tax purposes at the time
of issuance, regardless of whether the instrument is traded on an
established securities market.
(ii) Additional tier 1 capital. The term stock does not include
preferred stock that--
(A) Qualifies as additional tier 1 capital (within the meaning of
12 CFR 3.20(c), 217.20(c), 217.608(a)(2), 324.20(c), or 628.20(c)); and
(B) Does not qualify as common equity tier 1 capital (within the
meaning of 12 CFR 3.20(b), 217.20(b), 217.608(a)(3), 324.20(b), or
628.20(b)).
(iii) Section 1504(a)(4) stock. The term stock does not include
preferred stock described in section 1504(a)(4) of the Code.
(35) Stock repurchase excise tax. The term stock repurchase excise
tax means the excise tax imposed by section 4501(a) on each covered
corporation equal to the applicable percentage of the fair market value
of any stock of the corporation that is repurchased by the corporation
during the taxable year.
(36) Stock repurchase excise tax base. The term stock repurchase
excise tax base has the meaning given the term in Sec. 58.4501-
2(c)(1).
(37) Stock repurchase excise tax regulations. The term stock
repurchase excise tax regulations means--
(i) Subparts A and B of this part; and
(ii) Section 1.1275-6(f)(12)(iii) of this chapter (providing that
the integration of a qualifying debt instrument with a hedge pursuant
to Sec. 1.1275-6 of this chapter is not taken into account in
determining whether and when stock is repurchased or issued).
(38) Taxable year. The term taxable year has the meaning given the
term in section 7701(a)(23) of the Code.
(39) Treasury stock. The term treasury stock means treasury stock
within the meaning of section 317(b).
(c) No application for any purposes of chapter 1 of the Code. The
rules of this part have no application for purposes of chapter 1 of the
Code.
(d) Status as a domestic or foreign corporation. If a corporation
is, or is treated as, a domestic corporation for purposes of the Code
or for purposes that include chapter 37 of the Code, then the
corporation is a domestic corporation for purposes of the stock
repurchase excise tax regulations. A corporation that is not a domestic
[[Page 53163]]
corporation for purposes of the stock repurchase excise tax regulations
is a foreign corporation for such purposes.
(e) F reorganizations. For purposes of the stock repurchase excise
tax regulations, the transferor corporation and the resulting
corporation (each as defined in Sec. 1.368-2(m)(1) of this chapter) in
an F reorganization are treated as the same corporation.
Sec. 58.4501-2 General rules regarding excise tax on stock
repurchases.
(a) Scope. This section provides general rules regarding the
application of the stock repurchase excise tax and the computation of
the stock repurchase excise tax liability of a covered corporation.
Paragraphs (b) and (c) of this section provide rules for computing a
covered corporation's stock repurchase excise tax liability. Paragraph
(d) of this section provides rules for determining whether a
corporation is a covered corporation. Paragraph (e) of this section
provides rules for determining whether a transaction is a repurchase.
Paragraph (f) of this section provides rules for acquisitions of stock
of a covered corporation by a specified affiliate of the covered
corporation. Paragraph (g) of this section provides rules for
determining when stock is repurchased. Paragraph (h) of this section
provides rules for determining the fair market value of repurchased
stock.
(b) Computation of excise tax liability--(1) Imposition of tax.
Except as provided in paragraph (b)(2) of this section (regarding the
de minimis exception), the amount of stock repurchase excise tax
imposed by section 4501(a) on a covered corporation for a taxable year
equals the product obtained by multiplying--
(i) The applicable percentage; by
(ii) The stock repurchase excise tax base of the covered
corporation for the taxable year determined in accordance with
paragraph (c)(1) of this section.
(2) De minimis exception--(i) In general. A covered corporation is
not subject to the stock repurchase excise tax with regard to a taxable
year if, during that taxable year, the aggregate fair market value of
the stock described in paragraphs (b)(2)(i)(A) and (B) of this section
does not exceed $1,000,000 (de minimis exception):
(A) The stock of the covered corporation that is repurchased by the
covered corporation (as determined under paragraph (e) of this
section).
(B) The stock of the covered corporation that is acquired by a
specified affiliate of the covered corporation (as determined under
paragraph (f) of this section).
(ii) Determination. A determination of whether the de minimis
exception applies with regard to a taxable year is made before
applying--
(A) Any exception under Sec. 58.4501-3; and
(B) Any adjustments pursuant to the netting rule under Sec.
58.4501-4.
(c) Stock repurchase excise tax base--(1) In general. With regard
to a covered corporation, the term stock repurchase excise tax base
means the dollar amount (not less than zero) that is obtained by--
(i) Determining (in accordance with paragraphs (e) through (h) of
this section) the aggregate fair market value of the stock of the
covered corporation that is repurchased by the covered corporation or
acquired by a specified affiliate of the covered corporation during the
covered corporation's taxable year (gross repurchase amount);
(ii) Reducing the gross repurchase amount by the fair market value
of the stock of the covered corporation repurchased by the covered
corporation or acquired by a specified affiliate of the covered
corporation during the covered corporation's taxable year to the extent
the repurchase or acquisition qualifies for an exception in accordance
with Sec. 58.4501-3; and then
(iii) Further reducing the gross repurchase amount by the aggregate
fair market value of stock of the covered corporation issued by the
covered corporation or provided by a specified affiliate of the covered
corporation during the covered corporation's taxable year under the
netting rule in accordance with Sec. 58.4501-4.
(2) Taxable year determination--(i) In general. The determinations
under paragraph (c)(1)(i) of this section are made separately for each
covered corporation and for each taxable year of the covered
corporation.
(ii) No carrybacks or carryforwards. Reductions under paragraphs
(c)(1)(ii) and (iii) of this section in excess of the gross repurchase
amount may not be carried forward or backward to preceding or
succeeding taxable years of the covered corporation.
(3) Repurchases before January 1, 2023. Stock of a covered
corporation repurchased by the covered corporation or acquired by a
specified affiliate of the covered corporation before January 1, 2023
(as determined under paragraphs (e) through (g) of this section) is
neither--
(i) Included in the stock repurchase excise tax base of the covered
corporation; nor
(ii) Taken into account in determining the applicability of the de
minimis exception.
(d) Duration of covered corporation status--(1) Initiation date. A
corporation becomes a covered corporation at the beginning of the
corporation's initiation date (that is, the date on which stock of the
corporation begins to be traded on an established securities market).
(2) Cessation date. A corporation ceases to be a covered
corporation at the end of the corporation's cessation date (that is,
the date on which all stock of the corporation ceases to be traded on
an established securities market).
(3) Inbound and outbound F reorganizations--(i) Inbound F
reorganization. In the case of a foreign corporation that transfers its
assets or that is treated as transferring its assets to a domestic
corporation in an F reorganization (as described in Sec. 1.367(b)-2(f)
of this chapter), the corporation is not treated as a domestic
corporation until the day after the reorganization.
(ii) Outbound F reorganization. In the case of a domestic
corporation that transfers its assets or that is treated as
transferring its assets to a foreign corporation in an F reorganization
(as described in Sec. 1.367(a)-1(e) of this chapter), the corporation
is not treated as a foreign corporation until the day after the
reorganization.
(e) Repurchase--(1) Overview. This paragraph (e) provides rules for
determining whether a transaction is a repurchase. Paragraph (e)(2) of
this section provides a general rule regarding the scope of the term
repurchase for purposes of the stock repurchase excise tax. Paragraph
(e)(3) of this section provides an exclusive list of transactions that
are section 317(b) redemptions but are not repurchases. Paragraph
(e)(4) of this section provides an exclusive list of transactions that
are economically similar transactions. Paragraph (e)(5) of this section
provides a non-exclusive list of transactions that are not repurchases.
(2) Scope of repurchase. A repurchase means solely--
(i) A section 317(b) redemption, except as provided in paragraph
(e)(3) of this section; or
(ii) An economically similar transaction described in paragraph
(e)(4) of this section.
(3) Certain section 317(b) redemptions that are not repurchases.
This paragraph (e)(3) provides an exclusive list of section 317(b)
redemptions that are not repurchases for purposes of the stock
repurchase excise tax regulations.
(i) Section 304(a)(1) transactions--(A) Rule regarding deemed
distributions. The deemed distribution by an acquiring corporation
(within the
[[Page 53164]]
meaning of section 304(a)(1) of the Code) that is a covered corporation
in redemption of stock of the acquiring corporation (resulting from the
application of section 304(a)(1) to an acquisition of stock by such
acquiring corporation), regardless of whether section 302(a) or (d) of
the Code applies to the acquiring corporation's deemed distribution in
redemption of its stock.
(B) Rule regarding deemed issuances. For the rule addressing the
treatment of any stock deemed to be issued by the acquiring corporation
as a result of the application of section 304(a)(1), see Sec. 58.4501-
4(f)(4).
(ii) Leveraged buyouts and take-private transactions. A redemption
by a covered corporation that occurs as part of a transaction in which
the covered corporation ceases to be a covered corporation.
(iii) Stock issued prior to August 16, 2022. A redemption by a
covered corporation of stock of the covered corporation issued prior to
August 16, 2022, if, at the time such stock was issued and continuing
until the time of the redemption, the stock was subject to--
(A) Mandatory redemption by the covered corporation; or
(B) A unilateral put option by the holder of such stock.
(iv) Payment by a covered corporation of cash in lieu of fractional
shares. A payment by a covered corporation of cash in lieu of a
fractional share of the covered corporation's stock, if--
(A) The payment is carried out as part of a transaction that
qualifies as a reorganization under section 368(a) of the Code or a
distribution to which section 355 of the Code applies, or pursuant to
the settlement of an option or a similar financial instrument (for
example, a convertible debt instrument or convertible preferred share);
(B) The cash received by the shareholder entitled to the fractional
share is not separately bargained-for consideration (that is, the cash
paid by the covered corporation in lieu of the fractional share
represents a mere rounding off of the shares issued in the exchange or
settlement);
(C) The payment is carried out solely for administrative
convenience (and, therefore, solely for non-tax reasons); and
(D) The amount of cash paid to the shareholder in lieu of a
fractional share does not exceed the fair market value of one full
share of the class of stock of the covered corporation with respect to
which the payment of cash in lieu of a fractional share is made.
(4) Economically similar transactions. This paragraph (e)(4)
provides an exclusive list of transactions that are economically
similar to section 317(b) redemptions solely for purposes of the stock
repurchase excise tax (that is, economically similar transactions) and,
therefore, are taken into account as repurchases for purposes of the
stock repurchase excise tax regulations.
(i) E reorganizations--(A) In general. Except as provided in
paragraph (e)(4)(i)(B) of this section, in the case of an E
reorganization in which the recapitalizing corporation is a covered
corporation, solely the recapitalizing corporation's acquisition of its
stock pursuant to the plan of reorganization in exchange for property
that is not permitted to be received by the recapitalizing
corporation's shareholders under section 354 of the Code without the
recognition of gain.
(B) Exception. Paragraph (e)(4)(i)(A) of this section does not
apply to the extent that--
(1) The distribution of such property is treated as a distribution
with respect to the recapitalizing corporation's stock under Sec.
1.301-1(j) of this chapter; or
(2) The exchange is with respect to preferred stock with dividends
in arrears that is treated under Sec. 1.305-7(c)(2) or 1.368-2(e)(5)
of this chapter as a deemed distribution to which sections 301 and
305(b)(4) of the Code apply.
(ii) Split-offs. In the case of a split-off by a distributing
corporation that is a covered corporation, the acquisition by the
distributing corporation of its stock in exchange for property.
(iii) Certain forfeitures and clawbacks of stock--(A) In general.
In the case of a forfeiture or clawback of stock of a covered
corporation pursuant to a legal or contractual obligation, the
forfeiture to or clawback by the covered corporation or a specified
affiliate of the covered corporation (as appropriate) on the date of
forfeiture or clawback (as appropriate) if the stock was treated as
issued or provided under Sec. 58.4501-4(b) and the forfeiture or
clawback of the stock (as appropriate) is described in paragraph
(e)(4)(iii)(B), (C), or (D) of this section.
(B) Stock subject to post-closing price adjustments. The stock was
issued pursuant to an acquisition of a target entity or its business,
and the forfeiture of the stock was in accordance with the terms of the
documents governing the transaction (for example, to compensate the
acquiring corporation for breaches of representations or warranties
made by the target entity, or because the business of the target entity
did not achieve certain performance benchmarks agreed upon in the
transaction documents).
(C) Stock for which a section 83(b) election was made. The stock
was subject to a substantial risk of forfeiture within the meaning of
section 83(a) of the Code on the date the stock was issued or provided,
the service provider made a valid election under section 83(b) with
regard to the stock, and the forfeiture resulted from the service
provider failing to meet the vesting condition.
(D) Clawbacks. On the date the stock was issued or provided, the
stock was subject to a clawback agreement, and a clawback of the stock
resulted from the occurrence of an event specified in the clawback
agreement.
(5) Transactions that are not repurchases. This paragraph (e)(5)
provides a non-exclusive list of transactions each of which is not a
repurchase for purposes of the stock repurchase excise tax regulations.
(i) Complete liquidations. A distribution by a covered
corporation--
(A) In complete liquidation of the covered corporation to which
section 331 or 332(a) (or both) applies;
(B) Pursuant to a resolution or plan of dissolution of the covered
corporation that is reported on an original (but not a supplemented or
an amended) IRS Form 966, Corporate Dissolution or Liquidation (or any
successor form); or
(C) Pursuant to a deemed dissolution of the covered corporation
(for instance, pursuant to a deemed liquidation under Sec. 301.7701-3
of this chapter).
(ii) Distributions during taxable year of complete liquidation or
dissolution. A distribution by a covered corporation during a taxable
year of the covered corporation, if the covered corporation--
(A) Completely liquidates during the taxable year (that is, has a
final distribution during the taxable year in a complete liquidation to
which section 331 or 332(a) (or both) applies);
(B) Dissolves during the taxable year pursuant to a resolution or
plan of dissolution as reported on an original (but not a supplemented
or an amended) IRS Form 966, Corporate Dissolution or Liquidation (or
any successor form); or
(C) Is deemed to dissolve during the taxable year (for instance,
pursuant to a deemed liquidation under Sec. 301.7701-3 of this
chapter).
(iii) Divisive transactions under section 355 other than split-
offs--(A) In general. Subject to paragraph (e)(5)(iii)(B) of this
section, a distribution by a distributing corporation that is a covered
corporation of stock of a controlled corporation qualifying under
section 355 that is not a split-off.
(B) Exception regarding non-qualifying property in spin-offs. A
distribution by a distributing
[[Page 53165]]
corporation that is a covered corporation of other property or money in
exchange for stock of the distributing corporation is a repurchase by
the distributing corporation if it occurs in pursuance of a transaction
qualifying under section 355 in which the distribution by the
distributing corporation of stock of the controlled corporation is with
respect to stock of the distributing corporation.
(iv) Non-redemptive distributions subject to section 301(c)(2) or
(3). A distribution to which section 301 applies by a covered
corporation to a distributee, if the distribution--
(A) Is subject to section 301(c)(2) or (3); and
(B) The distributee does not exchange stock of the covered
corporation (and is not treated as exchanging stock of the covered
corporation for Federal income tax purposes).
(v) Acquisitive reorganizations. In the case of an acquisitive
reorganization in which the target corporation is a covered
corporation, the acquisition by the target corporation of its stock
pursuant to the plan of reorganization in exchange for property that is
permitted to be received by the target corporation's shareholders under
section 354 or 356 of the Code.
(vi) Net cash settlement of an option contract or other derivative
financial instrument--(A) In general. Subject to paragraph
(e)(5)(vi)(B) of this section, the net cash settlement of an option
contract or other derivative financial instrument with respect to stock
of a covered corporation.
(B) Exception regarding net cash settlement of an option contract
or other derivative financial instrument treated as stock. The net cash
settlement of an instrument in the legal form of an option contract or
other derivative financial instrument that is treated as stock of a
covered corporation for Federal tax purposes at the time of issuance is
a repurchase.
(vii) Repurchases from a specified affiliate. The acquisition by a
covered corporation of its stock from a specified affiliate of the
covered corporation if the specified affiliate's acquisition of such
stock of the covered corporation was treated as a repurchase under
paragraph (f)(1) of this section.
(f) Specified affiliates--(1) Acquisitions of stock of a covered
corporation by a specified affiliate treated as a repurchase. If a
specified affiliate of a covered corporation acquires stock of the
covered corporation from a person that is not the covered corporation
or another specified affiliate of the covered corporation, the
acquisition is treated as a repurchase of the stock of the covered
corporation by the covered corporation.
(2) Determination of specified affiliate status--(i) Timing of
determination. A covered corporation must determine whether another
corporation or partnership is a specified affiliate of the covered
corporation at the time the stock of the covered corporation is
acquired or provided by the other corporation or partnership for
purposes of computing the stock repurchase excise tax with regard to
the covered corporation.
(ii) Indirect ownership. For purposes of determining whether a
corporation or a partnership is a specified affiliate of a covered
corporation, the covered corporation is treated as indirectly owning
stock in the corporation or holding capital or profits interests in the
partnership in the percentage equal to the covered corporation's
proportionate percentage of stock owned, or capital or profits
interests held, through other entities.
(g) Date of repurchase--(1) General rule. In general, stock of a
covered corporation is treated as repurchased by the covered
corporation or acquired by a specified affiliate of the covered
corporation on the date on which ownership of the stock transfers to
the covered corporation or specified affiliate (as appropriate) for
Federal income tax purposes.
(2) Regular-way sale. A regular-way sale of stock of a covered
corporation (that is, a transaction in which a trade order is placed on
the trade date, and settlement of the transaction, including payment
and delivery of the stock, occurs a standardized period of time, as set
by a regulator, after the trade date) is treated as a repurchase by the
covered corporation or an acquisition by a specified affiliate of the
covered corporation on the trade date.
(h) Fair market value of repurchased stock--(1) In general. The
fair market value of stock of a covered corporation that is repurchased
by the covered corporation or acquired by a specified affiliate of the
covered corporation is the market price of the stock on the date the
stock is repurchased or acquired (as determined under paragraph (g) of
this section). That is, if the price at which the repurchased or
acquired stock is purchased differs from the market price of the stock
on the date the stock is repurchased or acquired, the fair market value
of the stock is the market price on the date the stock is repurchased
or acquired.
(2) Stock traded on an established securities market--(i) In
general. If stock of a covered corporation that is repurchased by the
covered corporation or acquired by a specified affiliate of the covered
corporation is traded on an established securities market, the covered
corporation must determine the market price of the repurchased or
acquired stock by applying one of the methods provided in paragraph
(h)(2)(ii) of this section. For purposes of this paragraph (h)(2),
repurchased or acquired stock of a covered corporation is treated as
traded on an established securities market if any stock of the same
class and issue of stock is so traded, regardless of whether the shares
repurchased or acquired are so traded.
(ii) Acceptable methods. The following are acceptable methods for
determining the market price of repurchased or acquired stock of a
covered corporation traded on an established securities market:
(A) The daily volume-weighted average price as determined on the
date the stock is repurchased by the covered corporation or acquired by
a specified affiliate of the covered corporation.
(B) The closing price on the date the stock is repurchased by the
covered corporation or acquired by a specified affiliate of the covered
corporation.
(C) The average of the high and low prices on the date the stock is
repurchased by the covered corporation or acquired by a specified
affiliate of the covered corporation.
(D) The trading price at the time the stock is repurchased by the
covered corporation or acquired by a specified affiliate of the covered
corporation.
(iii) Date of repurchase not a trading day. For purposes of each
method provided in paragraph (h)(2)(ii) of this section, if the date
the stock of a covered corporation is repurchased by the covered
corporation or acquired by a specified affiliate of the covered
corporation is not a trading day, the date on which the market price is
determined is the immediately preceding trading day.
(iv) Consistency requirement--(A) Solely one method permitted for
determining market price of repurchased or acquired stock. The market
price of repurchased or acquired stock of a covered corporation that is
traded on an established securities market must be determined by
consistently applying one (but not more than one) of the methods
provided in paragraph (h)(2)(ii) of this section to all stock of the
covered corporation repurchased by the covered corporation or acquired
by a specified affiliate of the covered corporation throughout the
covered corporation's taxable year.
(B) Application to netting rule. The method used by the covered
corporation under paragraph (h)(2)(iv)(A) of this
[[Page 53166]]
section must be consistently applied to determine the market price of
all stock of the covered corporation issued or provided throughout the
covered corporation's taxable year for purposes of the netting rule
under Sec. 58.4501-4 except with respect to the determination of the
fair market value of stock of a covered corporation that the covered
corporation issues, or that a specified affiliate of the covered
corporation provides, in connection with the performance of services.
See Sec. 58.4501-4(e).
(v) Stock traded on multiple exchanges--(A) In general. A covered
corporation the stock of which is traded on multiple established
securities markets must determine the market price of the stock of the
covered corporation by reference to trading on the established
securities market in the country in which the covered corporation is
organized, including a regional established securities market that
trades in that country.
(B) Stock traded on multiple exchanges in country where covered
corporation is organized. If a covered corporation's stock is traded on
multiple established securities markets in the country in which the
covered corporation is organized, the covered corporation must
determine the market price of the stock by reference to trading on the
established securities market in that country with the highest trading
volume in that stock in the prior taxable year.
(C) Other cases in which stock is traded on multiple exchanges. If
stock of a covered corporation is traded on multiple established
securities markets and neither paragraph (h)(2)(v)(A) nor (B) of this
section applies, the covered corporation must determine the market
price of the stock in a manner that is reasonable and consistent under
the facts and circumstances.
(3) Stock not traded on an established securities market--(i)
General rule. If repurchased or acquired stock of a covered corporation
is not traded on an established securities market, the market price of
the stock is determined as of the date the stock is repurchased by the
covered corporation or acquired by a specified affiliate of the covered
corporation under the principles of Sec. 1.409A-1(b)(5)(iv)(B)(1) of
this chapter.
(ii) Consistency requirement--(A) Solely one method permitted for
determining market price of repurchased or acquired stock. The
valuation method for determining the market price of repurchased or
acquired stock of a covered corporation that is not traded on an
established securities market must be used for all repurchases of stock
of the covered corporation or acquisitions by a specified affiliate of
the covered corporation of the same class throughout the covered
corporation's taxable year, unless the application of that method to a
particular repurchase or acquisition would be unreasonable under the
facts and circumstances as of the valuation date within the meaning of
Sec. 1.409A-1(b)(5)(iv)(B)(1) of this chapter.
(B) Application to netting rule. The method used by the covered
corporation under paragraph (h)(3)(ii)(A) of this section must be
consistently applied to determine the market price of all stock of the
covered corporation of the same class issued throughout the covered
corporation's taxable year for purposes of the netting rule under Sec.
58.4501-4 except with respect to the determination of the market price
of stock of the covered corporation that is issued or provided in
connection with the performance of services or if the application of
that method to a particular issuance in connection with the performance
of services would be unreasonable under the facts and circumstances as
of the valuation date.
(4) Market price of stock denominated in non-U.S. currency. The
market price of any stock of a covered corporation that is denominated
in a currency other than the U.S. dollar is converted into U.S. dollars
at the spot rate (as defined in Sec. 1.988-1(d)(1) of this chapter) on
the date the stock is repurchased by the covered corporation or
acquired by a specified affiliate of the covered corporation.
Sec. 58.4501-3 Exceptions.
(a) Scope. This section provides rules regarding the application of
each exception set forth in section 4501(e) of the Code, other than the
de minimis exception described in section 4501(e)(3) and subject to
Sec. 58.4501-2(b)(2), to a repurchase of stock of a covered
corporation by the covered corporation or an acquisition of stock of a
covered corporation by a specified affiliate of the covered corporation
(as appropriate). This section also provides rules regarding an
additional exception to the stock repurchase excise tax applicable to
non-RIC '40 Act funds. For rules regarding the application of these
exceptions in the context of section 4501(d), see Sec. 58.4501-7(l).
(b) Reduction of covered corporation's stock repurchase excise tax
base--(1) In general. For purposes of determining a covered
corporation's stock repurchase excise tax base under Sec. 58.4501-
2(c)(1), the covered corporation reduces its gross repurchase amount by
an amount equal to the aggregate fair market value of its repurchased
stock that qualifies for an exception described in paragraphs (c)
through (h) of this section. See Sec. 58.4501-2(c)(1)(ii).
(2) Coordination of exceptions. If a repurchase of stock qualifies
for more than one exception described in paragraphs (c) through (h) of
this section, the covered corporation may reduce its gross repurchase
amount under solely a single exception, as determined by the covered
corporation.
(c) Reorganization exception. A covered corporation reduces its
gross repurchase amount under Sec. 58.4501-2(c)(1)(ii) by an amount
equal to the aggregate fair market value of its stock repurchased from
a shareholder in a transaction described in Sec. 58.4501-2(e)(4)(ii)
to the extent that the repurchase is for property permitted by section
355 to be received without the recognition of gain or loss.
(d) Stock contributions to an employer-sponsored retirement plan--
(1) Reductions in computing covered corporation's stock repurchase
excise tax base--(i) General rule. A covered corporation reduces its
gross repurchase amount under Sec. 58.4501-2(c)(1)(ii) if the stock of
the covered corporation that is repurchased by the covered corporation
or acquired by a specified affiliate of the covered corporation, or an
amount of stock equal to the fair market value of the stock repurchased
or acquired, is contributed to an employer-sponsored retirement plan.
The amount of the reduction under this paragraph (d)(1) is determined
as provided in paragraph (d)(3) or (4) of this section.
(ii) Special rule for leveraged ESOPs. If a covered corporation or
a specified affiliate of the covered corporation maintains an ESOP with
an exempt loan (as described in section 4975(d)(3) of the Code),
allocations of qualifying employer securities from the ESOP suspense
account to ESOP participants' accounts that are attributable to
employer contributions (and not to dividends) are treated as
contributions of stock under this paragraph (d) as of the date stock
attributable to repayment of the exempt loan is released from the
suspense account and allocated to ESOP participants' accounts.
(2) Classes of stock contributed to an employer-sponsored
retirement plan. This paragraph (d) applies to contributions of any
class of covered corporation stock to an employer-sponsored retirement
plan, regardless of the class of stock that was repurchased or
acquired.
(3) Same class of stock repurchased and contributed. If stock of a
covered corporation is repurchased by the
[[Page 53167]]
covered corporation or acquired by a specified affiliate of the covered
corporation, and stock of the covered corporation of the same class is
contributed to an employer-sponsored retirement plan, the amount of the
reduction under paragraph (d)(1) of this section is equal to the lesser
of--
(i) The aggregate fair market value of the stock of the same class
that was repurchased or acquired (as determined under Sec. 58.4501-
2(h)) during the covered corporation's taxable year; or
(ii) The amount obtained by--
(A) Determining the aggregate fair market value of all stock of
that class repurchased or acquired (as determined under Sec. 58.4501-
2(h)) during the covered corporation's taxable year, reduced by the
fair market value of shares of that class of stock that is a reduction
to the stock repurchase excise tax base for the taxable year under an
exception in this section other than the exception in this paragraph
(d);
(B) Dividing the amount determined under paragraph (d)(3)(ii)(A) of
this section by the number of shares of that class repurchased or
acquired, reduced by the number of shares of that class of stock the
fair market value of which is a reduction to the stock repurchase
excise tax base for the taxable year under an exception in this section
other than the exception in this paragraph (d); and
(C) Multiplying the amount determined under paragraph (d)(3)(ii)(B)
of this section by the number of shares of that class contributed to an
employer-sponsored retirement plan for the taxable year.
(4) Different class of stock repurchased and contributed. If stock
of a covered corporation is repurchased by the covered corporation or
acquired by a specified affiliate of the covered corporation, and stock
of the covered corporation of a different class is contributed to an
employer-sponsored retirement plan, then the amount of the reduction
under paragraph (d)(1) of this section is equal to the fair market
value of the contributed stock at the time the stock is contributed to
the employer-sponsored retirement plan.
(5) Timing of contributions--(i) In general. The reduction under
paragraph (d)(1) of this section (that is, the reduction in computing
the stock repurchase excise tax base), for a taxable year applies to
contributions of covered corporation stock to an employer-sponsored
retirement plan during the covered corporation's taxable year.
(ii) Treatment of contributions after close of taxable year. For
purposes of paragraph (d)(5)(i) of this section, a covered corporation
may treat stock contributions to an employer-sponsored retirement plan
made after the close of the covered corporation's taxable year as
having been contributed during that taxable year if the following two
requirements are satisfied:
(A) The stock must be contributed to the employer-sponsored
retirement plan by the filing deadline for the form on which the stock
repurchase excise tax must be reported (applicable form) for that
taxable year of the covered corporation.
(B) The stock must be treated by the employer-sponsored retirement
plan in the same manner that the plan would treat a contribution
received on the last day of that taxable year of the covered
corporation.
(iii) No duplicate reductions. Stock contributions that are treated
under paragraph (d)(5)(ii) of this section as having been contributed
in the taxable year to which the applicable form applies may not be
treated as having been contributed for any other taxable year for
purposes of the stock repurchase excise tax.
(6) Contributions before January 1, 2023. A covered corporation
with a taxable year that both begins before January 1, 2023, and ends
after December 31, 2022, may include for that taxable year the fair
market value of all contributions of its stock to an employer-sponsored
retirement plan during the entirety of that taxable year for purposes
of applying this paragraph (d).
(e) Repurchases or acquisitions by a dealer in securities in the
ordinary course of business--(1) In general. Subject to paragraph
(e)(2) of this section, a covered corporation reduces its gross
repurchase amount under Sec. 58.4501-2(c)(1)(ii) by an amount equal to
the aggregate fair market value of its stock repurchased by the covered
corporation or acquired by a specified affiliate of the covered
corporation (as appropriate) that is a dealer in securities (within the
meaning of section 475(c)(1) of the Code) to the extent the stock is
acquired in the ordinary course of the dealer's business of dealing in
securities.
(2) Applicability. The reduction described in paragraph (e)(1) of
this section applies solely to the extent that--
(i) The dealer accounts for the stock as securities held primarily
for sale to customers in the dealer's ordinary course of business;
(ii) The dealer disposes of the stock within a period of time that
is consistent with the holding of the stock for sale to customers in
the dealer's ordinary course of business, taking into account the terms
of the stock and the conditions and practices prevailing in the markets
for similar stock during the period in which the stock is held; and
(iii) The dealer (if it is a covered corporation) does not sell or
otherwise transfer the stock to a specified affiliate of the covered
corporation, or the dealer (if it is a specified affiliate of the
covered corporation) does not sell or otherwise transfer the stock to
the covered corporation or to another specified affiliate of the
covered corporation, in each case other than in a sale or transfer to a
dealer that also satisfies the requirements of this paragraph (e)(2).
(f) Repurchases by a RIC or REIT. A covered corporation that is a
RIC or a REIT reduces its gross repurchase amount under Sec. 58.4501-
2(c)(1)(ii) by an amount equal to the aggregate fair market value of
any shares of its stock repurchased by the covered corporation or
acquired by a specified affiliate of the covered corporation.
(g) Repurchase treated as a dividend--(1) In general. A covered
corporation reduces its gross repurchase amount under Sec. 58.4501-
2(c)(1)(ii) by an amount equal to the aggregate fair market value of
the covered corporation's stock that the covered corporation
repurchases (excluding stock treated as repurchased under Sec.
58.4501-2(f)(1)) to the extent the repurchase is treated as a
distribution of a dividend under section 301(c)(1) or 356(a)(2) of the
Code.
(2) Rebuttable presumption of no dividend equivalence--(i)
Presumption. A repurchase to which section 302 or 356(a) of the Code
applies is presumed to be subject to section 302(a) or 356(a)(1),
respectively (and, therefore, is presumed ineligible for the exception
in paragraph (g)(1) of this section).
(ii) Rebuttal of presumption. A covered corporation may rebut the
presumption described in paragraph (g)(2)(i) of this section with
regard to a specific shareholder solely by establishing with sufficient
evidence that the covered corporation and the shareholder treat the
repurchase as a dividend for Federal income tax purposes.
(3) Sufficient evidence requirement--(i) In general. To provide
sufficient evidence under paragraph (g)(2)(ii) of this section to
establish that the shareholder treats the repurchase as a dividend for
Federal income tax purposes, the covered corporation must--
(A) Establish, based on information known to the covered
corporation (for example, through legal documentation of share
ownership, publicly available
[[Page 53168]]
information, the pro rata nature of the repurchase, or the shareholder
certification safe harbor described in paragraph (g)(3)(ii) of this
section), that--
(1) The repurchase either constitutes a redemption that is treated
as a distribution to which section 301 applies by reason of section
302(d) or has the effect of the distribution of a dividend under
section 356(a)(2); and
(2) The covered corporation has no knowledge of facts that would
indicate that the treatment described in paragraph (g)(3)(i)(A)(1) of
this section is incorrect;
(B) Treat the repurchase consistent with the treatment described in
paragraph (g)(3)(i)(A)(1) of this section, including by withholding the
applicable amounts, if required; and
(C) Demonstrate sufficient earnings and profits to treat as a
dividend either the redemption under section 302 or the receipt of
money or other property under section 356.
(ii) Shareholder certification safe harbor--(A) In general. To
provide sufficient evidence under paragraph (g)(3)(i)(A) of this
section to establish that the shareholder treats the repurchase as a
dividend for Federal income tax purposes, the covered corporation--
(1) May obtain certification from the shareholder, in accordance
with paragraph (g)(3)(ii)(B) of this section, that the repurchase
constitutes a redemption treated as a distribution to which section 301
applies by reason of section 302(d), or that the repurchase has the
effect of the distribution of a dividend under section 356(a)(2); and
(2) Must have no knowledge of facts that would indicate that the
shareholder certification is incorrect.
(B) Content of shareholder certification. The shareholder
certification allowed under paragraph (g)(3)(ii)(A) of this section
must include the following information:
(1) The name of the shareholder.
(2) The name of the covered corporation.
(3) The total number of shares of the covered corporation
outstanding immediately before and immediately after the repurchase.
(4) A statement that the shareholder treated the repurchase as a
dividend for Federal income tax purposes.
(5) The number of shares actually and constructively owned by the
shareholder before and after the repurchase.
(6) The shareholder's percentage ownership before and after the
repurchase.
(7) If the shareholder is not a United States person (within the
meaning of section 7701(a)(30) of the Code) and the shares are held
through a broker (within the meaning of section 6045(c) of the Code), a
statement that a copy of the certification has been provided to the
shareholder's broker.
(8) Any other information described in forms or instructions or in
publications or guidance published in the Internal Revenue Bulletin
(see Sec. Sec. 601.601(d)(2) and 601.602 of this chapter).
(9) A penalties of perjury statement.
(10) The signature of the shareholder and date of signature.
(C) Agreement to shareholder certification. After receiving the
shareholder certification provided under paragraph (g)(3)(ii)(A)(1) of
this section, the covered corporation must include on the shareholder
certification a statement signed by the covered corporation under
penalties of perjury that the covered corporation--
(1) Agrees to treat the repurchase consistent with the shareholder
certification provided under paragraph (g)(3)(ii)(A)(1) of this
section; and
(2) Has no knowledge of facts that would indicate that the
shareholder certification provided under paragraph (g)(3)(ii)(A)(1) of
this section is incorrect.
(4) Documentation of sufficient evidence--(i) Retention and
availability of evidence. A covered corporation must retain the
evidence described in paragraph (g)(3) of this section and make that
evidence available for inspection to the IRS if any of the evidence
becomes material in the administration of any internal revenue law.
(ii) Retention of supporting records. The covered corporation must
retain records of all information necessary to document and
substantiate all content described in paragraph (g)(3) of this section.
(h) Repurchases by a non-RIC '40 Act fund. A covered corporation
that is described in section 851(a)(1)(A) of the Code, but that has not
elected to be a RIC under section 851(b) (non-RIC '40 Act fund),
reduces its gross repurchase amount under Sec. 58.4501-2(c)(1)(ii) by
an amount equal to the aggregate fair market value of any shares of its
stock repurchased by the covered corporation or acquired by a specified
affiliate of the covered corporation if--
(1) The non-RIC '40 Act fund is an open-end company as defined in
section 5(a)(1) of the Investment Company Act of 1940 (15 U.S.C. 80a-
5); or
(2) The non-RIC '40 Act fund is a closed-end company as defined in
section 5(a)(2) of the Investment Company Act of 1940, and the
repurchase occurs as part of a periodic repurchase offer made pursuant
to SEC Rule 23c-3 (17 CFR 270.23c-3).
Sec. 58.4501-4 Application of netting rule.
(a) Scope. This section provides rules regarding the application of
section 4501(c)(3) of the Code. Paragraph (b) of this section provides
general rules regarding the adjustment to a covered corporation's stock
repurchase excise tax base with respect to stock that is issued by the
covered corporation or provided by a specified affiliate of the covered
corporation (netting rule). Paragraph (c) of this section provides
special rules for stock issued or provided in connection with the
performance of services. Paragraph (d) of this section provides rules
for determining the date on which stock is issued or provided.
Paragraph (e) of this section provides rules for determining the fair
market value of stock that is issued or provided. Paragraph (f) of this
section sets forth the only circumstances under which an issuance or
provision of stock is disregarded for purposes of the netting rule. For
rules regarding the application of the netting rule in the context of
section 4501(d), see Sec. 58.4501-7(m).
(b) Issuances and provisions of stock that are a reduction in
computing the stock repurchase excise tax base--(1) General rule. The
aggregate fair market value of stock of a covered corporation that is
issued by the covered corporation or provided by a specified affiliate
of the covered corporation during the covered corporation's taxable
year is a reduction for purposes of computing the covered corporation's
stock repurchase excise tax base for that taxable year in the following
circumstances:
(i) The stock is issued by the covered corporation in connection
with the performance of services for the covered corporation by an
employee or other service provider of the covered corporation.
(ii) The stock is provided by a specified affiliate of the covered
corporation in connection with the performance of services for the
specified affiliate by an employee or other service provider of the
specified affiliate.
(iii) The stock is issued by the covered corporation other than in
connection with the performance of services.
(2) Stock issued or provided outside period of covered corporation
status. Any stock of a covered corporation issued by the covered
corporation or provided by a specified affiliate of the covered
corporation before the initiation date or after the cessation date is
not
[[Page 53169]]
taken into account under paragraph (b)(1) of this section. See Sec.
58.4501-2(d).
(3) Issuances or provisions before January 1, 2023. Except as
provided in paragraph (b)(2) of this section, a covered corporation
with a taxable year that both begins before January 1, 2023, and ends
after December 31, 2022, may include the fair market value of all
issuances or provisions of its stock during the entirety of that
taxable year for purposes of applying paragraph (b)(1) of this section
to that taxable year.
(c) Stock issued or provided in connection with the performance of
services--(1) In general. For purposes of this section, stock of a
covered corporation is issued or provided by the covered corporation or
a specified affiliate of the covered corporation in connection with the
performance of services only if the issuance or provision of stock is a
transfer described in section 83 of the Code, including pursuant to the
exercise of a nonqualified stock option described in Sec. 1.83-7 of
this chapter, pursuant to the exercise of a stock option described in
section 421 of the Code, or pursuant to stock settlement of a
restricted stock unit (RSU). A specified affiliate of the covered
corporation is not a service provider for purposes of this section.
(2) Sale of shares to cover exercise price and withholding--(i)
Payment or advance by third party equal to exercise price. If a third
party pays the exercise price of an option to acquire stock of a
covered corporation on behalf of a service provider or advances to a
service provider an amount equal to the exercise price of a stock
option that the service provider uses to exercise the option, then any
stock transferred by the covered corporation or specified affiliate to
the third party upon exercise of the option in connection with
exercising the option (as well as any stock transferred by the covered
corporation or specified affiliate to the service provider) is treated
as issued or provided in connection with the performance of the
services by the service provider.
(ii) Advance by third party equal to withholding obligation. If a
third party advances an amount equal to the withholding obligation of a
service provider, then any stock transferred by the covered corporation
or specified affiliate to the third party in connection with this
arrangement (as well as any stock transferred by the covered
corporation or specified affiliate to the service provider) is treated
as issued or provided in connection with the performance of services by
the service provider.
(d) Date of issuance--(1) In general. Except as provided in
paragraph (d)(2) of this section, stock of a covered corporation is
treated as issued by the covered corporation or provided by a specified
affiliate of the covered corporation on the date on which ownership of
the stock transfers to the recipient for Federal income tax purposes.
(2) Stock issued or provided in connection with the performance of
services--(i) In general. Stock of a covered corporation is issued by
the covered corporation or provided by a specified affiliate of the
covered corporation in connection with the performance of services as
of the date the recipient of the stock is treated as the beneficial
owner of the stock for Federal income tax purposes. In general, a
recipient is treated as the beneficial owner of the stock when the
stock is both transferred by the covered corporation (or a specified
affiliate of the covered corporation) and substantially vested within
the meaning of Sec. 1.83-3(b) of this chapter. Thus, stock transferred
pursuant to a vested stock award or an RSU is issued or provided when
the covered corporation or a specified affiliate of the covered
corporation initiates payment of the stock. Stock transferred that is
not substantially vested within the meaning of Sec. 1.83-3(b) of this
chapter is not issued or provided until it vests, except as provided in
paragraph (d)(2)(iii) of this section.
(ii) Stock options and stock appreciation rights. Stock of a
covered corporation transferred by the covered corporation or a
specified affiliate of the covered corporation pursuant to an option
described in Sec. 1.83-7 of this chapter or section 421 or a stock
appreciation right is issued by the covered corporation or provided by
the specified affiliate of the covered corporation (as applicable) as
of the date the stock is transferred pursuant to the exercise of the
option or stock appreciation right.
(iii) Stock on which a section 83(b) election is made. Stock of a
covered corporation transferred by the covered corporation or a
specified affiliate of the covered corporation when it is not
substantially vested within the meaning of Sec. 1.83-3(b) of this
chapter, but as to which a valid election under section 83(b) is made,
is treated as issued by the covered corporation or provided by the
specified affiliate of the covered corporation (as applicable) as of
the transfer date.
(e) Fair market value of issued or provided stock--(1) In general.
Except as provided in paragraph (e)(5) of this section, the fair market
value of stock of a covered corporation issued by the covered
corporation or provided by a specified affiliate of the covered
corporation is the market price of the stock on the date the stock is
issued or provided.
(2) Stock traded on an established securities market--(i) In
general. If stock of a covered corporation that is issued by the
covered corporation is traded on an established securities market, the
covered corporation must determine the market price of the stock by
applying one of the methods provided in paragraph (e)(2)(ii) of this
section.
(ii) Acceptable methods. The following are the acceptable methods
for determining the market price of stock of a covered corporation
traded on an established securities market:
(A) The daily volume-weighted average price as determined on the
date the stock is issued by the covered corporation.
(B) The closing price on the trading day the stock is issued by the
covered corporation, or the immediately preceding trading day.
(C) The average of the high and low prices on the date the stock is
issued by the covered corporation.
(D) The trading price at the time the stock is issued by the
covered corporation.
(iii) Date of issuance not a trading day. For purposes of each
method provided in paragraph (e)(2)(ii) of this section, if the date
the stock of a covered corporation is issued by the covered corporation
is not a trading day, the date on which the market price is determined
is the immediately preceding trading day.
(iv) Consistency requirement--(A) Solely one method permitted for
determining market price of issued stock. The market price of stock of
a covered corporation that is traded on an established securities
market must be determined by consistently applying solely one of the
methods provided in paragraph (e)(2)(ii) of this section to all stock
of the covered corporation issued by the covered corporation throughout
the covered corporation's taxable year.
(B) Application to repurchased stock. The method used by the
covered corporation under paragraph (e)(2)(ii)(A) of this section must
be consistently applied to determine the market price of all stock of
the covered corporation repurchased by the covered corporation or
acquired by a specified affiliate of the covered corporation throughout
the covered corporation's taxable year. See Sec. 58.4501-2(h)(2)(iv).
(v) Stock traded on multiple exchanges. See Sec. 58.4501-
2(h)(2)(v) for rules regarding the valuation of stock of
[[Page 53170]]
a covered corporation traded on multiple established securities
markets.
(3) Stock not traded on an established securities market--(i)
General rule. If stock of a covered corporation is not traded on an
established securities market, the market price of the stock is
determined as of the date the stock is issued by a covered corporation
under the principles of Sec. 1.409A-1(b)(5)(iv)(B)(1) of this chapter.
(ii) Consistency requirement. In determining the market price of
stock of a covered corporation that is not traded on an established
securities market, the same valuation method must be used for all
issuances of stock of the covered corporation belonging to the same
class throughout the covered corporation's taxable year, unless the
application of that method to a particular issuance would be
unreasonable under the facts and circumstances as of the valuation
date. That same method also must be consistently applied to determine
the market price of all stock of the covered corporation of the same
class repurchased by the covered corporation or acquired by a specified
affiliate of the covered corporation throughout the covered
corporation's taxable year, unless the application of that method to a
particular issuance would be unreasonable under the facts and
circumstances as of the valuation date. See Sec. 58.4501-2(h)(3)(ii).
(4) Market price of stock denominated in non-U.S. currency. The
market price of any stock of a covered corporation that is denominated
in a currency other than the U.S. dollar is converted into U.S. dollars
at the spot rate (as defined in Sec. 1.988-1(d)(1) of this chapter) on
the date the stock is issued by the covered corporation or provided by
a specified affiliate of the covered corporation (as applicable).
(5) Stock issued or provided in connection with the performance of
services. The fair market value of stock of a covered corporation
issued by the covered corporation or provided by a specified affiliate
of the covered corporation (as applicable) in connection with the
performance of services is the fair market value of the stock, as
determined under section 83, as of the date the stock is issued by the
covered corporation or provided by the specified affiliate of the
covered corporation (as applicable). For purposes of this section, the
fair market value of the stock is determined under the rules provided
in section 83 regardless of whether an amount is includible in the
service provider's income under section 83 or otherwise. For example,
the fair market value of stock issued by a covered corporation pursuant
to a stock option described in section 421 and stock issued by a
covered corporation to a nonresident alien for services performed
outside of the United States is determined using the rules provided in
section 83.
(f) Issuances that are disregarded for purposes of applying the
netting rule. This paragraph (f) lists the only circumstances in which
an issuance of stock of a covered corporation is disregarded for
purposes of the netting rule.
(1) Distributions by a covered corporation of its own stock. Stock
of a covered corporation distributed by the covered corporation to its
shareholders with respect to the covered corporation's stock is
disregarded for purposes of the netting rule.
(2) Issuances to a specified affiliate--(i) In general. Subject to
paragraphs (f)(2)(ii) through (iv) of this section, stock of a covered
corporation is disregarded for purposes of the netting rule if that
stock is issued by the covered corporation--
(A) To a specified affiliate of the covered corporation; or
(B) In connection with the performance of services by an employee
of, or other service provider for, a specified affiliate of the covered
corporation (but see paragraph (f)(2)(iv) of this section, allowing
certain compensatory transfers of a specified affiliate to be regarded
in accordance with paragraph (b)(1)(ii) of this section).
(ii) Subsequent transfer by specified affiliate. Stock of a covered
corporation issued by the covered corporation to a specified affiliate
of the covered corporation that is subsequently transferred by the
specified affiliate to a person that is not a specified affiliate of
the covered corporation is regarded for purposes of the netting rule,
and is treated as issued by the covered corporation on the date of the
subsequent transfer, only if--
(A) The subsequent transfer by th
[…truncated; see source link]Indexed from Federal Register on November 24, 2025.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.