Last month, the Department of the Treasury published final regulations under section 4501, the stock buyback excise tax enacted by the Inflation Reduction Act (IRA) in 2022. The final regulations (with corrections) reflect comments received from stakeholders and generally narrow the reach of this tax to stock buybacks by public domestic corporations as provided in the statute and consistent with congressional intent.

The IRA added section 4501 to the Code, implementing an excise tax on publicly traded domestic corporations of one percent of the fair market value of any stock the corporation repurchases, in addition to "economically similar" transactions. In December 2022, Treasury issued initial guidance on section 4501 in Notice 2023-2, and in April 2024, Treasury released proposed regulations regarding the tax. We previously covered the Notice and proposed regulations. This prior guidance would have broadened the reach of section 4501 by extending its application to foreign corporations and through a broad definition of stock repurchases subject to the excise tax.

A particularly controversial aspect of the prior guidance was the so-called "funding rule," which extended the tax to apply to stock repurchases by publicly traded foreign corporations in cases where the stock repurchase was deemed to be funded "by any means" by a domestic subsidiary. The proposed funding rule was a notable deviation from the statute, which by its plain text applies only to "domestic corporation[s]" and certain surrogate foreign corporations. Had this rule remained in the final regulations, it likely would have been subject to challenge under the new Loper Bright standard as an interpretation that was not the best reading of the statute. The removal of the "funding rule" in the final regulations brings the regulations in line with the statute and is a welcome development for foreign-parented U.S. corporations.

The final regulations also reflect responses to stakeholder comments on areas beyond the funding rule, including by narrowing the scope of stock repurchases covered by the excise tax. Under the proposed regulations, a redemption of preferred stock was subject to the excise tax generally in the same way as a redemption of common stock, but the final regulations exclude redemptions of section 1504(a)(4) preferred stock (so-called "plain vanilla" preferred stock) from the excise tax. The final regulations also exclude section 302 redemptions that occur as part of certain merger and acquisition (M&A) transactions from the excise tax, on the basis that although these transactions are considered redemptions within the meaning of section 302, they are not the type of stock repurchases that Congress intended to tax under section 4501. The preamble to the final regulations observes 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." The final regulations implement this policy by providing that redemptions that occur as part of a transaction in which the covered corporation ceases to be a covered corporation are not considered repurchases for purposes of the excise tax. 

Overall, the changes show a responsiveness to stakeholder comments, with the result that the final regulations limit the application of the stock repurchase excise tax to transactions specifically identified in the statute and to stock buybacks outside the context of M&A. These final regulations generally apply to repurchases of stock occurring after December 31, 2022, and to issuances and provisions of stock occurring in tax years ending after December 31, 2022. However, certain rules that were not described in Notice 2023-2 apply only to repurchases, issuances, and provisions occurring after April 12, 2024 (the date the proposed regulations were issued). The preamble to the final regulations directs corporate taxpayers who previously filed an excise tax return applying Notice 2023-2 and/or the proposed computational regulations and wish to seek a refund to file an amended excise tax return (Form 720-X).

For more information, please contact:

Layla J. Asali, lasali@milchev.com, 202-626-5866

Rocco V. Femia, rfemia@milchev.com, 202-626-5823

James R. Gadwood, jgadwood@milchev.com, 202-626-1574

Tyler C. Jackson, tjackson@milchev.com, 202-626-5820

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