IRS Adopts Final Rules on Stock Repurchase Excise Tax With Substantive Changes

On November 21, the Department of the Treasury released final regulations (TD 10037) on the application of the excise tax on repurchases of corporate stock by some publicly traded corporations (the Excise Tax). The final regulations generally aligned with the proposed regulations but included some significant changes to the treatment of corporate transactions, including removing the funding rule and adding a carveout for take-private transactions.

The Excise Tax, introduced by the Inflation Reduction Act of 2022 (IRA), generally applies a 1% tax on net stock repurchases for a tax year by a “covered corporation” (generally, a publicly traded domestic corporation). The Excise Tax base is equal to the aggregate fair market value of stock repurchases during its tax year minus the aggregate fair market value of stock issued by the corporation during that year. In April 2024, Treasury issued two sets of proposed regulations on the Excise Tax addressing separately the substantive and procedural considerations. Treasury separately finalized the procedural regulations in June 2024. 

Removal of the Funding Rule

Notice 2023-2 and the proposed regulations included a “funding rule” whereby a domestic affiliate of a publicly traded foreign corporation could be treated as repurchasing stock of the foreign corporation if it “funded” another affiliate’s purchase. The funding rule was heavily criticized as being overly broad and burdensome, and, in response to these comments, Treasury removed the funding rule from the final regulations.

Exception for Take-Private Transactions

Under the final regulations, Treasury added an exception for redemptions by a covered corporation as part of a leveraged buyout or other “take private” transaction. Such transactions are not treated as repurchases for purposes of the Excise Tax if the corporation ceases to be a covered corporation. This reflects Treasury’s agreement with public comments that Congress did not intend the Excise Tax to apply to transactions fundamentally restructuring corporate ownership or control, such as combinations of separate business entities.

Preferred Stock Exceptions

In response to comments, Treasury included a new exception for repurchases of preferred stock described in Section 1504(a)(4) on the basis that such stock is more similar to debt and does not raise the policy concerns underlying the tax. Additionally, Treasury acknowledged the need for transition relief for certain stock issued before the IRA’s enactment date. The final regulations provide relief for mandatorily redeemable stock and stock subject to a unilateral put option if such stock was outstanding prior to August 16, 2022, and the corporation no longer has discretion over its repurchase.

Exemption for Reorganizations and Upstream Liquidations

Under the proposed regulations, liquidations under either Section 331 or 332 (but not both) were not treated as economically equivalent to a repurchase. In addition, the proposed regulations required a multistep calculation for determining the Excise Tax base impact of a Section 368 reorganization. The final regulations adopt a simplified approach that exempts all liquidations and upstream reorganizations, reorganizations for which the only property received by the target shareholders is property permitted to be received under Section 354 or 356, and divisive transactions under Section 355 other than split-offs. 

Applicability Dates and Allowance for Amended Refund Claims

The final regulations are effective on November 24, 2025, and generally 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 tax years ending after December 31, 2022. However, certain rules that were not described in the interim guidance (Notice 2023-2) generally apply to (i) repurchases of stock of a covered corporation occurring after April 12, 2024 (the date of publication of the proposed regulations), and (ii) issuances and provisions of stock of a covered corporation occurring after April 12, 2024. 

A covered corporation that previously filed a Form 7208, Excise Tax on Repurchase of Corporate Stock, applying Notice 2023-2 or the proposed regulations may file a refund claim after the effective date of the final regulations. To do so, the covered corporation should file a Form 720-X, Amended Quarterly Federal Excise Tax Return, for the quarter 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). A taxpayer other than the original filer that would like to file a refund claim may file a claim on Form 8849, Claim for Refund of Excise Taxes, and attach Schedule 6, Other Claims, and a corrected Form 7208.