IRS, Treasury Issue Proposed Regulations on Stock Repurchase Excise Tax

The Treasury Department and the IRS on April 9 released two sets of proposed regulations containing guidance on the application and reporting of the corporate excise tax on stock repurchases by some publicly traded corporations. The 1% excise tax, introduced by the Inflation Reduction Act of 2022, generally applies to stock repurchases made after December 31, 2022.

General Framework

In general, the stock buyback excise tax applies to the fair market value of any stock of a covered corporation that the corporation repurchases during its taxable year, minus the aggregate fair market value of stock issued by the corporation during that year.

The proposed regulations --  REG-115710-22, Excise Tax on Repurchase of Corporate Stock and REG-118499-23, Excise Tax on Repurchase of Corporate Stock – Procedure and Administration -- are generally consistent with the IRS’s previous interim guidance, released as Notice 2023-2 in December 2022. For prior coverage, see IRS, Treasury Issue Interim Guidance on Stock Repurchase Excise Tax.

In a departure from the interim guidance, the proposed regulations significantly loosen the “per se” funding rule the notice introduced for publicly traded non-U.S. corporations. Under the per se rule, the excise tax would have applied to a repurchase (or acquisition) of applicable foreign corporation stock by the applicable foreign corporation (or a specified affiliate that is not an applicable specified affiliate) funded by a U.S. subsidiary within two years of the repurchase (or acquisition)—i.e., such a funding would have been per se undertaken with a principal purpose of avoiding the excise tax.

The proposed regulations replace the per se funding rule with a rebuttable presumption that applies only to “downstream” fundings. Under the rebuttable presumption, a U.S. subsidiary that enters into a “downstream” funding transaction within two years of a covered purchase is presumed to have done so with the principal purpose of avoiding the excise tax. The presumption can be rebutted if the facts and circumstances clearly establish that there was not a principal purpose to circumvent the tax. 

The proposed regulations also clarify and elaborate on other aspects of the excise tax that were addressed by the interim guidance, including:

  • Transition rules for fiscal-year taxpayers with issuances or repurchases prior to January 1, 2023.
  • Issuances and repurchases pursuant to reorganizations, spin-offs, split-offs, and split-ups.
  • Treatment of stock options, preferred stock, and other financial instruments.
  • Application to liquidations, dividend-equivalent redemptions, and Section 304 transactions.
  • Issuances of stock to service providers, including independent contractors.

Delayed Reporting Requirements

Under the proposed regulations, the excise tax will be reported on two forms: Form 720, Quarterly Federal Excise Tax Return and Form 7208, Excise Tax on Repurchase of Corporate Stock. More specifically, the excise tax liability will be reported on Form 720, and the calculation of the excise tax will be reported on Form 7208, which will be attached to and filed with Form 720. 

The initial excise tax returns and initial payments for tax years ending prior to the date the regulations are published as final in the federal register must be filed by the due date for Form 720 for the first full calendar quarter after the publication date. Such returns are generally due on the last day of the month following the quarter end. For example, the preamble to the proposed regulations explains that if the final regulations are published in the Federal Register on September 16, 2024, a calendar year corporation that is subject to the excise tax would be required to file its Forms 720 and 7208 for its 2023 taxable year by January 31, 2025, the due date of Form 720 for the calendar quarter ending December 31, 2024.

According to a Treasury press release, a draft version of Form 7208 is currently accessible, and the final version of the form will be released prior to the first due date on which the excise tax must be reported and paid.

The proposed regulations render the interim guidance obsolete and are generally effective for transactions that occur after April 12, 2024, the date the proposed regulations were published in the Federal Register. Comments on the procedure and administration of the proposed regulations must be submitted by May 13, and comments on the proposed regulations that address the application of the excise tax must be submitted by June 11.