On the day before Thanksgiving, the Treasury and IRS issued final regulations for the Section 4501 excise tax on stock repurchases. Enacted as part of the Inflation Reduction Act in 2022, Section 4501 imposes a 1% excise tax on repurchases of stock by public U.S. companies, as well as purchases of the stock of foreign publicly traded corporations by their U.S. affiliates.
As previously discussed in Brass Tax, proposed regulations for Section 4501 issued in 2024 intentionally omitted exceptions for several types of transactions that many commentators believed should not be subject to the excise tax. In the final regulations, the Treasury and IRS have backtracked on those omissions, and have included a number of exceptions for transactions that are in form redemptions of stock (or so treated for federal income tax purposes), but are generally not seen as the sort of repurchases that Congress intended the excise tax to target, including:
- repurchases of "plain vanilla" or "debt-like" preferred stock
- payment of consideration funded by the target corporation in take-private transactions (which is generally treated as a redemption for U.S. federal income tax purposes)
- redemptions of additional forms of "tier 1 capital," such as that issued by cooperative banks and agricultural credit associations
- acquisitions and cancellations of stock in certain liquidations and acquisitive reorganizations
- exchanges of stock in single-party reorganizations (that is, recapitalizations that qualify as "E" reorganizations and changes in identity, form or place of organization that qualify as "F" reorganizations)
- certain repurchases by investment companies that do not qualify as RICs for federal income tax purposes (repurchases by companies that qualify as RICs or REITs were already exempt)
In addition, the final regulations do not include the controversial "funding rule" that appeared in prior IRS guidance, under which a foreign corporation's repurchase of its own stock would have been subject to the excise tax to the extent the repurchase was funded by a U.S. affiliate. The funding rule contained in the 2024 proposed regulations, under which repurchases funded by a U.S. affiliate would have been taxable only if done "with a principal purpose of avoiding" the excise tax, already represented a retreat from an earlier, more mechanical version in Notice 2023-2. That more limited funding rule nevertheless attracted significant criticism, including that compliance with the rule would be administratively burdensome and its "principal purpose" test could be vague and indeterminate in many cases. The final regulations omit the rule altogether.
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