The Rise of the Excise Tax

In August 2022, Public Law No. 117-169—commonly called the Inflation Reduction Act of 2022—enacted Section 4501 of the Internal Revenue Code.¹ The statute generally imposes a nondeductible one percent excise tax (the “excise tax”) on the net value of share repurchases by publicly traded domestic corporations in a given tax year. The excise tax applies to stock repurchases made on or after January 1, 2023.² The tax also applies to US subsidiaries of foreign publicly traded corporations that purchase the stock of their foreign parents from unrelated sellers.

Initially, the US Treasury Department and the Internal Revenue Service released Notice 2023-2 to provide interim, nonbinding guidance on the excise tax and Announcement 2023-18 to confirm that the excise tax, while imposed under law, was not required to be paid until after regulations were issued.³ Subsequently, Treasury released two sets of proposed regulations, REG-118499-23 and REG-11571022, regarding the excise tax.⁴ The first set contained proposed administrative and procedural regulations addressing reporting and payment requirements and ancillary matters. These administrative and procedural regulations have now been finalized.⁵ The second set contained proposed substantive regulations, which largely follow the rules foreshadowed in Notice 2023-2 with some changes and additions and address how the excise tax would apply to US subsidiaries of foreign publicly traded corporations in ways that differ from those previously announced in Notice 2023-2.⁶

Notably, applicable taxpayers with one or more taxable years ending after December 31, 2022, and on or before June 28, 2024, are required to file and pay the excise tax for such taxable years by October 31, 2024.⁷

This article discusses the background of the excise tax and how the final administrative and procedural regulations and the proposed substantive regulations (if finalized in their current form) will affect the excise tax.

Background

Section 4501

Under Section 4501, the excise tax applies primarily to repurchases of the stock of “covered corporations” (generally, US corporations the stock of which is publicly traded) by those same covered corporations and by certain directly or indirectly controlled subsidiaries or partnerships.⁸

In the context of a group headed by a publicly traded foreign corporation, Section 4501(d)(1) provides that the excise tax applies to the foreign parent corporation’s subsidiaries that are either US corporations or partnerships, or foreign partnerships with a direct or indirect partner that is a US entity, if such subsidiary purchases stock of its foreign parent from an unrelated seller.⁹ Although the statute clearly applies to 1) purchases of the stock of a domestic publicly traded corporation by its subsidiaries and 2) purchases of the stock of a foreign publicly traded corporation by its US subsidiaries, in practice these are uncommon transactions (at least outside the context of stock-based compensation).

The excise tax can also apply to the purchase of stock of a surrogate foreign corporation (generally, an “inverted” corporation, as defined under Section 7874) by the surrogate foreign corporation or its subsidiaries, but this too is fairly rare.¹⁰

Section 4501(e) provides certain exceptions to the excise tax, including exceptions for 1) reorganizations under Section 368(a) where the shareholder recognizes no gain or loss on the repurchase, 2) any case where the repurchased stock is contributed
to an employer-sponsored retirement plan, and
3) repurchases treated as dividends.¹¹

Section 4501 also contains a “netting rule” that for purposes of computing the excise tax reduces the value of stock repurchased by a covered corporation in a tax year by the value of stock issued, including stock issued or provided to an employee of the covered corporation or its subsidiaries.¹² However, if a US subsidiary purchases stock of its foreign publicly traded parent corporation, the statute provides that only the stock of the foreign publicly traded corporation issued or provided by the US subsidiary to its employees can be netted against that purchase.¹³

Notice 2023-2

As noted above, Treasury and the IRS released Notice 2023-2 in December 2022 to provide interim, nonbinding guidance on the application and scope of the excise tax. The notice, among other things, addressed: 1) the expected procedures and timelines for reporting and paying the excise tax, 2) operating rules for applying and calculating it, 3) which stock transactions constitute, or do not constitute, a repurchase or issuance, and 4) how the exceptions in Section 4501(e) apply.¹⁴

More surprisingly, Notice 2023-2 also introduced a funding rule that would significantly expand the scope of the excise tax with respect to the US subsidiaries of foreign publicly traded corporations. In addition to the situation provided in Section 4501(d)(1) and discussed above where a US subsidiary acquires stock of its foreign publicly traded corporation, the funding rule would subject a US subsidiary¹⁵ of a foreign publicly traded corporation to the excise tax to the extent the US subsidiary funds “by any means” an acquisition of the stock of that foreign publicly traded corporation with a principal purpose to avoid the excise tax.¹⁶

On its own, this part of the Notice 2023-2 funding rule seems to contemplate a situation where a US subsidiary planned to buy stock of the foreign publicly traded corporation but, to avoid the excise tax, the US subsidiary instead funds a foreign affiliate or the foreign publicly traded corporation itself to allow that other entity to purchase the stock instead. If so, this rule at first glance seems likely to have limited reach, due to how infrequently US subsidiaries of a foreign publicly traded corporation purchase their parent’s stock in contexts other than stock-based employee compensation arrangements.

However, Notice 2023-2 also included what is sometimes referred to as the per se prong of the funding rule, which generally established that a principal purpose to avoid the excise tax would be deemed to exist if the US subsidiary funded, by any means other than a distribution, its foreign publicly traded corporate parent or a foreign subsidiary of that parent, and then either entity purchased the stock of the foreign publicly traded corporate parent within the two years before or after the funding.¹⁷ Thus, if for example a US subsidiary lent money to the foreign publicly traded corporation, and a year later that foreign corporation repurchased its own shares on the public market, the excise tax would apply to the amount that the US subsidiary funded, despite the US subsidiary not intending or desiring to acquire shares of the foreign corporation (or having any control over the foreign corporation’s use of the funds).

There were (and are) numerous uncertainties regarding how the Notice 2023-2 funding rule would operate in practice, but it was clear that it would dramatically expand the application of the excise tax with respect to the US subsidiaries of foreign publicly traded corporations. Many commenters criticized the funding rule as overbroad given the statute’s limited application to foreign publicly traded corporations and the lack of exceptions to the funding rule.

Announcement 2023-18

In June 2023, the IRS released Announcement 2023-18,¹⁸ which stated that, before the time specified in regulations, taxpayers 1) are not required to report or to pay the excise tax and 2) will not be subject to penalties for failure to file or pay the excise tax. As discussed below, final regulations that prescribe the due dates have now been issued.

Stock Repurchase Excise Tax: Regulations

Procedural Points

Filing, Payment, and Recordkeeping

The proposed administrative and procedural regulations set forth rules to spell out the reporting and payment procedures for the excise tax. This set of proposed regulations was recently finalized, largely without change.

Under the final administrative and procedural regulations, any covered corporation¹⁹ that makes a stock repurchase after December 31, 2022, is required to file an excise tax return.²⁰ There is no de minimis exception for this filing;²¹ all covered corporations that make a stock repurchase (or whose subsidiaries make a purchase) in a taxable year would be required to file a return, even if each repurchase is eligible for a statutory exception under Section 4501(e) or is fully offset by issuances under the netting rule. The excise tax liability is to be reported once a year on a line of Form 720 (Quarterly Federal Excise Tax Return), and the excise tax is calculated on Form 7208 (Excise Tax on Repurchase of Corporate Stock), which must be attached to Form 720.²² Contemporaneously with the release of the proposed regulations, the IRS released a draft Form 7208 and related instructions.

For transitioning to the first filing of the excise tax return, for taxable years ending on or before June 28, 2024 (the date the final administrative and procedural regulations were filed with the Federal Register), the regulations require a covered corporation to file the stock repurchase excise tax return by the due date of the Form 720 for the first full calendar quarter after June 28, 2024, whose due date is October 31, 2024.²³ For instance, if a covered corporation’s taxable year ends on December 31, 2023, and during the 2023 tax year the corporation makes a stock repurchase, the corporation must file the excise tax return for its 2023 taxable year by October 31, 2024 (the due date for a third-quarter Form 720).²⁴ If the covered corporation has multiple tax years ending after December 31, 2022, on or before June 28, 2024, the corporation would file a single Form 720 with a separate Form 7208 for each relevant tax year with its initial stock repurchase excise tax return.²⁵

For tax years ending after June 28, 2024, the due date for the stock repurchase excise tax return would be the due date of the Form 720 for the first full calendar quarter after the covered corporation’s tax year ends.²⁶ For example, if a covered corporation’s tax year ends on December 31, 2024 and during the 2024 tax year the corporation makes a stock repurchase, the corporation is required to file its stock repurchase excise tax return for its 2024 tax year by April 30, 2025 (the due date for a first-quarter Form 720).²⁷

The final administrative and procedural regulations provide that the due date for paying the excise tax is the same as the due date for filing the excise tax return.²⁸

The final administrative and procedural regulations also require covered corporations to maintain “such complete and detailed records as are sufficient to establish accurately the amount of the repurchases, adjustments, or exceptions required” to be reported on the stock repurchase excise tax return.²⁹ These records must be available for IRS inspection and retained as long as their contents may become material to the administration of any internal revenue law.³⁰

Proposed Substantive Regulations

As stated above, both 1) administrative and procedural and 2) substantive proposed regulations were released in April, 2024. While the administrative and procedural regulations have been finalized, to date Treasury and the IRS have not finalized the proposed substantive regulations.

In general, the proposed substantive regulations would apply to any transactions occurring in tax years ending after December 31, 2022.³¹ However, certain rules that Notice 2023-2 did not outline but were included with the proposed regulations would apply only to transactions after April 12, 2024 (the publication date of the proposed regulations).³² In addition, certain provisions relevant to groups parented by a foreign publicly traded corporation have separate effective date rules.³³

Foreign Publicly Traded Corporations and Their US Subsidiaries

In general, with respect to a foreign publicly traded corporation, by statute the excise tax is imposed on the entity’s US subsidiaries to the extent a US subsidiary acquires the foreign corporation’s stock from an unrelated seller.³⁴

As stated above, the Notice 2023-2 funding rule would significantly expand the scope of the excise tax by imposing it not just on stock purchases by US subsidiaries but also on certain purchases “funded” by US subsidiaries. The proposed substantive regulations would modify the Notice’s funding rule and expand it to include indirect funding through certain lower-tier foreign entities—what this article calls the “new funding rule.” More specifically, in the new funding rule the proposed substantive regulations provide that a US subsidiary is treated as acquiring stock of a foreign publicly traded corporation to the extent it funds “by any means (including through distributions, debt, or capital contributions), directly or indirectly” a “covered purchase”³⁵ of the stock of that foreign publicly traded corporation whose principal purpose is avoiding the excise tax.³⁶ The main difference between the first part of the Notice 2023-2 funding rule and this part of the new funding rule is the inclusion of “directly or indirectly.”³⁷

Under the new funding rule, the funding by any means, directly or indirectly, by a US subsidiary of its foreign publicly traded corporation with a principal purpose to fund (directly or indirectly) a repurchase of stock by the foreign publicly traded corporation is treated as excise tax avoidance and therefore would result in the application of the excise tax to the US subsidiary. This represents a shift in focus from the funding rule in the Notice—the Notice’s per se prong would deem a principal purpose to exist if the US subsidiary funded by any means (other than a distribution) the foreign parent’s purchase and the purchase occurred within two years before or after the funding. In contrast, under the funding rule in the proposed substantive regulations, a US subsidiary’s funding of its foreign parent is problematic if the foreign parent’s purchase of its stock was directly or indirectly funded by the US subsidiary, and the US subsidiary is unable to prove the negative—that a principal purpose of its funding its foreign parent was not to directly or indirectly fund the foreign parent’s stock repurchase. In this regard, note that the Treasury and the IRS specifically rejected an approach that traces specific sources of funds, which was viewed as too easy to manipulate and thereby avoid the excise tax, and specifically included various ordering rules in the proposed substantive regulations that would tend to deem a foreign parent’s stock repurchases to have been directly or indirectly funded by its US subsidiaries.

The expansive language of the funding rule in the proposed substantive regulations potentially covers an extraordinarily broad range of situations. In addition, the new funding rule provides no exception for ordinary course transactions. This raises the issue of whether various ordinary course transactions (for example, cash-pooling arrangements or payments for goods, intellectual property use, or services by a US subsidiary) could be considered to have “a principal purpose” of directly or indirectly funding a stock repurchase by the foreign publicly traded corporation.³⁸ In addition, the new funding rule is not time-limited and provides no exclusion for distributions.³⁹ Thus, the new funding rule might capture a situation where a foreign publicly traded corporation uses cash from a reserve account to repurchase its shares and later uses cash distributed by a US subsidiary to replenish the reserve account—a situation that shows just how broad the new funding rule’s reach could be.

The proposed substantive regulations also provide special rules, including a rebuttable presumption, for certain “downstream” funding transactions.⁴⁰ Specifically, the proposed substantive regulations provide that a principal purpose of avoiding the excise tax is presumed to exist if a US subsidiary funds by any means, directly or indirectly, a “downstream relevant entity,”⁴¹ and the funding occurs within the two years before or after a covered purchase by or on behalf of the downstream relevant entity.⁴² This presumption may be rebutted only if facts and circumstances clearly establish that the principal purpose was not to avoid the stock repurchase excise tax.⁴³ This special rule and rebuttable presumption for downstream funding seems unlikely to have much relevance because it is uncommon for, for example, a controlled foreign corporation of a US subsidiary to purchase stock of its foreign publicly traded parent corporation.

In general, the proposed substantive regulations provisions addressing “fundings” by a US subsidiary would apply to transactions that occur after April 12, 2024.⁴⁴ Under a transition rule, rules similar to the Notice 2023-2 funding rule generally would apply to a situation where both a funding and a covered purchase occur between January 1, 2023, and April 12, 2024.⁴⁵ However, the proposed substantive regulations would allow taxpayers to choose to apply the rules of the proposed substantive regulations (including the new funding rule) in lieu of the rules in Notice 2023-2 (including the funding rule) to transactions occurring after December 31, 2022, subject to certain consistency requirements.⁴⁶

Rules Generally Consistent With Notice 2023-2

Other than the modifications to the rules discussed above, the proposed substantive regulations largely adopt the rules outlined in Notice 2023-2, with most additions elaborating on the application of the rules outlined in the notice. For instance, the proposed substantive regulations substantially follow Notice 2023-2 with regard to 1) applying and calculating the excise tax, 2) determining which transactions are subject to the excise tax, 3) exceptions to the excise tax listed in Section 4501(e), and 4) transactions that the netting rule disregards.

Operating Rules

The proposed substantive regulations set forth certain general ordering and operating rules for computing excise tax liability. Consistent with Notice 2023-2, the proposed substantive regulations determine how these rules are ordered.⁴⁷ First, the fair market value of stock repurchased during the taxable year is computed. Then, the exceptions listed in Section 4501(e) are applied to reduce this amount by the fair market value of stock that qualifies for one of these exceptions. Last, the netting rule is applied to reduce this amount by the fair market value of stock issued.⁴⁸

The proposed substantive regulations, like Notice 2023-2, provide that determining whether an instrument is stock for excise tax purposes is based on the general classification of the instrument for US federal income tax purposes as of the date of issuance.⁴⁹ Whereas Section 4501 specifically grants authority to Treasury to provide rules to address special classes of stock and preferred stock,⁵⁰ the proposed regulations generally do not exempt particular types of equity instruments from the excise tax.⁵¹ The preamble to the proposed regulations notes that multiple comments recommended exclusions for all preferred stock or alternatively for “straight” preferred stock.⁵² However, other than a limited exception for “additional tier 1 preferred stock” issued by certain financial institutions,⁵³ the proposed substantive regulations treat preferred stock as stock for excise tax purposes.⁵⁴ The proposed substantive regulations also clarify that “stock” includes treasury stock.⁵⁵

The proposed substantive regulations do contain an anti-abuse rule (not included in the Notice) that provides that the issuance of an instrument that is not in the legal form of stock but is treated as stock for US federal tax purposes (a “nonstock instrument”) is, at least as an initial matter, disregarded for purposes of the netting rule.⁵⁶ However, if a nonstock instrument is repurchased and certain reporting requirements are satisfied,⁵⁷ the issuer is allowed to take the lesser of the fair market value of the nonstock instrument as of its issuance or its repurchase into account for purposes of the netting rule at the time of that repurchase.⁵⁸ Given the limited potential for companies to engage in the type of “abuse” this new provision apparently targets, if retained in the final regulations this provision is likely to function primarily as a trap for the unwary.

The proposed substantive regulations provide stock valuation rules consistent with Notice 2023-2. Under these rules, the fair market value of stock repurchased or issued generally may be calculated based on any one of the following methods on the date of the repurchase or issuance: 1) the daily volume-weighted average price; 2) the closing price; 3) the average of the high and low prices on the issuing or repurchase date; or 4) the trading price at the time of the issuance or repurchase.⁵⁹ Except in the case of certain issuances of stock to employees or employer-sponsored retirement plans, stock is generally treated as repurchased or issued on the date ownership of the stock is transferred.⁶⁰

Generally, the method used to value stock must be consistently applied to determine the market price of all stock repurchased or issued under the netting rule throughout the covered corporation’s taxable year.⁶¹ However, the fair market value of stock issued or provided to an employee is determined under Section 83 as of the date the stock is issued or provided to the employee⁶² (the proposed substantive regulations also contain rules addressing the timing of when shares are treated as issued for purposes of the netting rule).⁶³ Additionally, the proposed substantive regulations clarify that for a regular repurchase of stock on an exchange,⁶⁴ the trade date (rather than the settlement date) is the date of the repurchase.⁶⁵

The proposed substantive regulations, unlike Notice 2023-2, provide guidance on the timing and mechanics of becoming and ceasing to be a covered corporation.⁶⁶ A corporation becomes a covered corporation at the beginning of the day on which stock of the corporation begins to be traded on an established securities market.⁶⁷ On the other hand, a corporation ceases to be a covered corporation at the end of the day on which all stock of the covered corporation ceases to be traded on an established securities market.⁶⁸ Notwithstanding the general cessation rule, if a corporation ceases to be a covered corporation pursuant to a plan that includes a repurchase, and if the cessation date precedes the date on which any repurchase undertaken pursuant to the plan occurs, then the corporation will continue to be a covered corporation with regard to each repurchase pursuant to the plan until the end of the date on which the last repurchase pursuant to the plan occurs.⁶⁹

Transactions Subject (or Not) to the Excise Tax

Section 4501(c)(1) defines a “repurchase” as a redemption within the meaning of Section 317(b) or any transaction determined by the Secretary of the Treasury to be economically similar to a Section 317(b) redemption. The proposed substantive regulations and Notice 2023-2 set forth an exclusive list of certain Section 317(b) redemptions that are not treated as repurchases subject to the excise tax and an exclusive list of economically similar transactions that are treated as repurchases subject to the excise tax.

Like Notice 2023-2, the proposed substantive regulations provide that, although they can be Section 317(b) redemptions, 1) deemed distributions under Section 304(a)(1) and 2) certain payments of cash in lieu of fractional shares in Section 368 reorganizations, in Section 355 distributions, or pursuant to the settlement of options or similar financial instruments are not treated as repurchases.⁷⁰ Of note, similar to Notice 2023-2 Section 3.09, Examples 3 and 4, transactions that can be subject to the excise tax include, for example, acquisitions (including leveraged buyouts) to the extent that the target corporation furnishes consideration (for example, due to its having incurred or assumed debt).⁷¹

Notice 2023-2 and the proposed substantive regulations provide the following exclusive list of transactions that are economically similar to a Section 317(b) redemption and thus are treated as repurchases (although, as noted below, some of these repurchases may qualify for exceptions):

the exchange by target shareholders of target stock as part of an acquisitive reorganization;⁷²
an exchange by recapitalizing shareholders of stock in a recapitalization under Section 368(a)(1)(E) (an “E reorganization”);⁷³
an exchange of transferor corporation stock as part of a mere change in identity, form, or place of organization under Section 368(a)(1)(F) (an “F reorganization”);⁷⁴
an exchange of distributing corporation stock as part of a split-off in a distribution to which Section 355 applies;⁷⁵ and
any distributions made under Section 331 to minority shareholders in the case of a complete liquidation to which both Section 331 and Section 332 apply.⁷⁶

Additionally, the proposed substantive regulations provide that certain forfeitures and clawbacks of stock are economically similar to a Section 317(b) redemption and thus are treated as repurchases, a point Notice 2023-2 did not address.⁷⁷

The proposed substantive regulations and the notice also provide a nonexclusive list of transactions that are not economically similar
to a repurchase and therefore are not subject to the excise tax. Those transactions are: 1) distributions in complete liquidation to which either Section 331 or Section 332 (but not both) applies,⁷⁸ and 2) Section 355 distributions other than a split-off (that is, a spin-off or split-up).⁷⁹ The proposed regulations further provide that net cash settlements of an option contract or other derivative financial instrument⁸⁰are also not economically similar to a repurchase and therefore are not subject to the excise tax.

Section 4501(3) Exceptions to the Excise Tax

The proposed substantive regulations provide that the exception for reorganizations under Section 4501(e)(1) applies to the extent that the relevant corporation’s stock is exchanged for property permitted to be received under Section 354 or 355 without recognition of gain or loss in a repurchase by 1) a target corporation in an acquisitive reorganization,⁸¹ 2) a recapitalizing corporation in an E reorganization,⁸² 3) a transferor corporation in an F reorganization,⁸³ or 4) a distributing corporation in a split-off.⁸⁴ Thus, other property or money (that is, “boot”) received by a shareholder in exchange for stock of a covered corporation in connection with a reorganization is generally subject to the excise tax.

The exception for transfers of stock to an employer-sponsored retirement or similar plan under Section 4501(e)(2) generally applies to reduce the amount of repurchases subject to the excise tax by the amount of stock contributed to the plan during the same tax year.⁸⁵ However, stock contributed to the plan prior to the deadline for filing the stock repurchase excise tax return for a taxable year may be treated as contributed to the plan during that prior tax year.⁸⁶

There is a rebuttable presumption that the dividend exception under Section 4501(e)(6) does not apply to repurchases.⁸⁷ This presumption may be rebutted in the proposed regulations by showing that the relevant corporation:

obtained certification from the shareholder that the repurchase was treated as a distribution under Section 301 by reason of Section 302(d) or had the effect of a dividend under Section 356(a)(2);
treated the repurchase consistent with the shareholder certification;⁸⁸
had no knowledge of facts contrary to such shareholder certification; and
had sufficient earnings and profits to treat the repurchase as a dividend.⁸⁹

Issuances the Netting Rule Excludes

Both the proposed substantive regulations and Notice 2023-2 provide a list of issuances that are not subject to the netting rule. They are:

distributions by a covered corporation of its own stock;⁹⁰
issuances to a specified affiliate;⁹¹
certain issuances that are part of a transaction to which the reorganization exception applies;⁹²
deemed issuances under Section 304(a)(1);⁹³
deemed issuances of fractional shares;⁹⁴
issuances by a covered corporation that is a dealer in securities;⁹⁵ and
issuances by the target corporation in a reverse triangular merger.⁹⁶

Furthermore, the proposed substantive regulations add the following transactions to the list of issuances disregarded for netting rule purposes:

issuances as part of a Section 1036(a) exchange;⁹⁷
issuances as part of a distribution under Section 355 that is not a split-off;⁹⁸
stock contributions to an employer-sponsored retirement plan (since these are already eligible for a statutory exception);⁹⁹
net exercises of a stock option issued in connection with the performance of services or share withholding;¹⁰⁰
settlements of an option contract with consideration other than stock;¹⁰¹ and
instruments not in the legal form of stock (as discussed above).¹⁰²

Conclusion

For the most part, the proposed substantive regulations, like Notice 2023-2, would provide rules that hew closely to the statutory text. For instance, although the statute authorizes Treasury to promulgate rules “to address special classes of stock and preferred stock,”¹⁰³ the proposed substantive regulations would provide only one limited rule addressing certain preferred stock issued by financial institutions.

However, the new funding rule, like the Notice 2023-2 funding rule, represents a dramatic exception to this more literalist approach, creating complex and potentially far-reaching rules that would subject certain “fundings” by US subsidiaries to the excise tax despite the absence of any reference to “funding” in the statutory language of Section 4501. Commentators have strongly criticized the new funding rule, as they have the Notice 2023-2 funding rule. For now, US subsidiaries of foreign publicly traded corporations face considerable uncertainty about interpreting the new funding rule and how it may be altered prior to final regulations.

Although the excise tax does not need to be reported or paid until October 31, 2024, at the earliest, taxpayers would be well advised to consider their exposure now so they are prepared to report and pay the excise tax when due. Particularly for US covered corporations, it may be helpful to review Form 7208 and its instructions and to obtain the information needed to calculate their potential excise tax liability. In addition, US subsidiaries of publicly traded foreign corporations should consider how to respond to the proposed funding rule, in the event that the October 31, 2024, filing date arrives before Treasury and the IRS have issued final substantive regulations.

Stephen Haltom is a senior manager in KPMG’s M&A tax practice. Tim Nichols is a senior manager, and Maury Passman is a managing director in KPMG’s Washington national tax corporate tax practice.

Endnotes

See Section 10201(d) of Public Law No. 117-169, 136 Stat. 1818, 1828-1831 (2022).
Section 4501(a), (b); Proposed Regulations Section 58.4501-2(c)(3).
Notice 2023-2, 2023-3 IRB 374; Announcement 2023-18, 2023-30 IRB 366.
See REG-118499-23, “Excise Tax on Repurchase of Corporate Stock—Procedure and Administration,” 89 Federal Register 25829 (April 12, 2024) and REG-11571022, “Excise Tax on Repurchase of Corporate Stock,” 89 Federal Register 25980 (April 12, 2024).
See TD 10002, “Excise Tax on Repurchase of Corporate Stock—Procedure and Administration,” 89 Federal Register 55045 (July 3, 2024).
See Proposed Regulations Section 58.4501-7; Notice 2023-2, 2023-3 IRB 374.
See Treasury Regulations Section 58.6071-1(c)-(d).
Section 4501(c)(2). Such subsidiaries, termed “specified affiliates,” are defined, with respect to any corporation, as
1) any corporation more than fifty percent of the stock of which is owned (by vote or by value), directly or indirectly, by such corporation, and 2) any partnership more than fifty percent of the capital interests or profits interests of which is held, directly or indirectly, by such corporation.
Section 4501(d)(1).
Section 4501(d)(2). Because this provision applies to a limited number of taxpayers, it is not discussed further in this article.
These exceptions are delineated in, respectively, Section 4501(e)(1), Section 4501(e)(2), and Section 4501(e)(6).
Section 4501(c)(3).
Section 4501(d)(1)(C).
Notice 2023-2 spells out these specifics in Section 4, Section 3.08(3)-(4), and Section 3.07.
Notice 2023-2 Section 3.02(4) defines this entity as an “applicable specified affiliate.” The notice defines the term “applicable specified affiliate” to mean a specified affiliate of an applicable foreign corporation, other than a foreign corporation or a foreign partnership (unless the partnership has a domestic entity as a direct or indirect partner).
Notice 2023-2 Section 3.05(2)(a)(ii)(A).
Notice 2023-2 Section 3.05(2)(a)(ii)(B).
2023-30 IRB 366.
References to any covered corporation include any person treated as a covered corporation for purposes of the excise tax.
Treasury Regulations Section 58.6011-1(a).
Id.
Treasury Regulations Section 58.6011-1(b).
Treasury Regulations Section 58.6071-1(c).
See Treasury Regulations Section 58.6071-1(d); preamble to REG-118499-23, “Excise Tax on Repurchase of Corporate Stock—Procedure and Administration,” 89 Federal Register 25829 (April 12, 2024), Part II.
Treasury Regulations Section 58.6071-1(c). Thus, for example, a covered corporation with a taxable year ending on March 31 is required to file its initial stock repurchase excise tax return on a single Form 720 on or before October 31, 2024, and to attach to its Form 720 separate Forms 7208 for its taxable years ending March 31, 2023, and March 31, 2024.
Treasury Regulations Section 58.6071-1(a).
Treasury Regulations Section 58.6071-1(b).
Treasury Regulations Section 58.6151-1(a).
Treasury Regulations Section 58.6001-1(a).
Treasury Regulations Section 58.6001-1(c).
Proposed Regulations Section 58.4501-6(a).
Proposed Regulations Section 58.4501-6(b)(1).
Proposed Regulations Section 58.4501-6(b)(2).
Section 4501(d)(1).
The term “covered purchase” means an “AFC repurchase” or an acquisition of stock of an applicable foreign corporation by a relevant entity. Proposed Regulations Section 58.4501-7(b)(2)(vii). The term “AFC repurchase” means solely 1) a Section 317(b) redemption with respect to stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, except as provided in Proposed Regulations Section 58.4501-7(j)(3); or 2) a Section 4501(d) economically similar transaction described in Proposed Regulations Section 58.4501-7(j)(4). Proposed Regulations Section 58.4501-7(b)(2)(i). The term “relevant entity” means a specified affiliate of an applicable foreign corporation that is not an applicable specified affiliate of the applicable foreign corporation. Proposed Regulations Section 58.4501-7(b)(2)(xiv).
Proposed Regulations Section 58.4501-7(e)(1).
Proposed Regulations Section 58.4501-7(e)(1); see Notice 2023-2 Section 3.05(2)(a)(ii)(A)-(B).
Proposed Regulations Section 58.4501-7(e)(1).
Id. In fact, the proposed regulations provide an example of a funding through a distribution that is more than two years before a covered repurchase that is subject to the excise tax. Proposed Regulations Section 58.4501-7(p)(3), Example 3.
Proposed Regulations Section 58.4501-7(e)(2).
A “downstream relevant entity” is defined as a relevant entity twenty-five percent or more of the stock of which is owned (by vote or by value) (or the capital interests or profits interests of which is held), directly or indirectly, by, individually or in aggregate, one or more US subsidiaries of a foreign publicly traded corporation. Proposed Regulations Section 58.4501-7(b)(2)(xi).
Proposed Regulations Section 58.4501-7(e)(2).
Id.
Proposed Regulations Section 58.4501-7(r)(1).
Proposed Regulations Sections 58.4501-7(o), -7(r)(2). It appears that the proposed regulations would apply to a repurchase by the foreign publicly traded corporation between January 1, 2023, and April 12, 2024, that is viewed as having been funded after that date.
Proposed Regulations Section 58.4501-7(r)(3).
Proposed Regulations Section 58.4501-2(c)(1); Notice 2023-2 Section 3.03(3)(a).
In order, these steps are referenced in Proposed Regulations Section 58.4501-2(c)(1)(i); Proposed Regulations Section 58.4501-2(c)(1)(ii), except for the de minimis exception in Section 4501(e)(3); and Proposed Regulations Section 58.4501-2(c)(1)(iii).
Proposed Regulations Section 58.4501-1(b)(29); Notice 2023-2 Section 3.02(25). Note that the determination of whether an instrument is stock for purposes of Section 4501 is made regardless of whether the instrument is traded on an established securities market.
Section 4501(f)(2).
Proposed Regulations Section 58.4501-1(b)(29).
Preamble to REG-11571022, “Excise Tax on Repurchase of Corporate Stock,” 89 Federal Register 25980 (April 12, 2024), Part II.A.1–3.
Proposed Regulations Section 58.4501-1(b)(29)(ii). This exception is not included in Notice 2023-2.
See Proposed Regulations Section 58.4501-1(b)(29).
Proposed Regulations Section 58.4501-1(b)(29).
Proposed Regulations Section 58.4501-4(f)(13)(i).
See Proposed Regulations Section 58.4501-4(f)(13)(ii)(B)-(D).
Proposed Regulations Section 58.4501-4(f)(13)(ii)(A). The delivery of stock pursuant to the terms of a nonstock instrument is treated as a repurchase of the nonstock instrument in exchange for an issuance or provision of the stock that is delivered. The amount of the reduction for purposes of Proposed Regulations Section 58.4501-4(f)(13)(ii)(A) is calculated based on Proposed Regulations Section 58.4501-4(f)(13)(ii)(E).
Proposed Regulations Sections 58.4501-2(h)(2)(ii), -4(e)(2)(ii); Notice 2023-2 Sections 3.06(2)(a)(i) and 3.08(5)(a)(i).
Proposed Regulations Sections 58.4501-2(g)(1), -4(d)(1); Notice 2023-2 Sections 3.06(1)(a) and 3.08(2). In the case of issuances of stock to employees due to the exercise of options or stock acquisition rights, the stock generally is treated as issued on the date of exercise. In the case of issuances of restricted stock to employees under Section 83 (that is, stock that is either nontransferable or subject to substantial risk of forfeiture), the stock is not treated as issued or provided to the employee until it vests, unless the employee makes an election under Section 83(b) with respect to the stock (in which case it is treated as issued on the date it is transferred to the employee). In addition, there is a special timing rule, which provides that transfers of stock to employer-sponsored retirement plans or similar plans (and not treated as repurchases under a statutory exception), during the first quarter following the close of a taxable year, may be treated as transferred to such plan during the preceding taxable year. Notice 2023-2 Section 3.08(3)(b).
Proposed Regulations Sections 58.4501-2(h)(2)(iv)(B), -4(e)(2)(iv)(B); Notice 2023-2 Section 3.06(2)(a)(iii).
Proposed Regulations Section 58.4501-4(e)(5); Notice 2023-2 Section 3.08(3)(c).
Proposed Regulations Section 58.4501-4(d).
Proposed Regulations Section 58.4501-2(g)(2) clarifies that a “regular-way sale of stock” 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 number of days after the trade date that is set by a regulator.
Proposed Regulations Section 58.4501-2(g)(2).
See Proposed Regulations Section 58.4501-2(d)(1)-(2).
Proposed Regulations Section 58.4501-2(d)(1); Proposed Regulations Section 58.4501-1(b)(16).
Proposed Regulations Section 58.4501-2(d)(2)(i); Proposed Regulations Section 58.4501-1(b)(3).
Proposed Regulations Section 58.4501-2(d)(2)(ii).
Proposed Regulations Section 58.4501-2(e)(3); Notice 2023-2 Section 3.04(3).
See Proposed Regulations Section 58.4501-5(b)(3)-(4).
Proposed Regulations Section 58.4501-2(e)(4)(i); Notice 2023-2 Section 3.04(4)(a)(i). “Acquisitive reorganization” is defined as a reorganization under Section 368(a)(1)(A) (including by reason of Section 368(a)(2)(D) or (a)(2)(E)), (C), (D) (that satisfies the requirements of Section 354(b)(1)), or (G) (that satisfies the requirements of Section 354(b)(1)). Proposed Regulations Section 58.4501-1(b)(1). The definition of “acquisitive reorganization” in the notice is the same except it does not include reorganizations under Section 368(a)(1)(G). See Notice 2023-2 Section 3.02(1).
Proposed Regulations Section 58.4501-2(e)(4)(ii); Notice 2023-2 Section 3.04(4)(a)(ii).
Proposed Regulations Section 58.4501-2(e)(4)(iii); Notice 2023-2 Section 3.04(4)(a)(iii). We note that, because E and F reorganizations are treated as repurchases, an E or F reorganization can cause a taxpayer that would otherwise qualify for the de minimis exception to no longer qualify for that exception and can mean that a covered corporation that did not otherwise repurchase its stock can be required to file an excise tax return for the taxable year.
Proposed Regulations Section 58.4501-2(e)(4)(iv); Notice 2023-2 Section 3.04(4)(a)(iv).
Proposed Regulations Section 58.4501-2(e)(4)(v); Notice 2023-2 Section 3.04(4)(a)(v).
See Proposed Regulations Section 58.4501-2(e)(4)(vi); Notice 2023-2 Section 3.04(4)(a).
Proposed Regulations Section 58.4501-2(e)(5)(i)-(ii); Notice 2023-2 Section 3.04(4)(b)(i).
Proposed Regulations Section 58.4501-2(e)(5)(iii); Notice 2023-2 Section 3.04(4)(b)(ii).
Proposed Regulations Section 58.4501-2(e)(5)(v).
Proposed Regulations Section 58.4501-3(c)(1). The repurchase must be pursuant to a plan of reorganization.
Proposed Regulations Section 58.4501-3(c)(2). The repurchase must be pursuant to a plan of reorganization.
Proposed Regulations Section 58.4501-3(c)(3). The repurchase must be pursuant to a plan of reorganization.
Proposed Regulations Section 58.4501-3(c)(4).
Proposed Regulations Section 58.4501-3(d)(5)(i); Notice 2023-2 Section 3.07(3)(d).
Proposed Regulations Section 58.4501-3(d)(5)(ii); Notice 2023-2 Section 3.07(3)(d).
Proposed Regulations Section 58.4501-3(g)(2)(i); Notice 2023-2 Section 3.07(6)(b)(i).
The proposed regulations replace the requirement for the covered corporation to provide information reporting, as applicable, to the redeemed shareholder, providing that the repurchase constitutes a dividend from Notice 2023-2 with this requirement. See Notice 2023-2 Section 3.07(6)(b)(iii)(A); Proposed Regulations Section 58.4501-3(g)(2)(iii)(B).
Proposed Regulations Section 58.4501-3(g)(2)(ii)-(iii).
Proposed Regulations Section 58.4501-4(f)(1); Notice 2023-2 Section 3.08(4)(b).
Proposed Regulations Section 58.4501-4(f)(2)(i); Notice 2023-2 Section 3.08(4)(c). Unlike the notice, the proposed regulations provide an exception such that certain issuances to a specified affiliate that are subsequently transferred to a person that is not a specified affiliate of the covered corporation are treated as issuances under the netting rule. Proposed Regulations Section 58.4501-4(f)(2)(ii)-(iv).
Proposed Regulations Section 58.4501-4(f)(3); Notice 2023-2 Section 3.08(4)(d).
Proposed Regulations Section 58.4501-4(f)(4); Notice 2023-2 Section 3.08(4)(e).
Proposed Regulations Section 58.4501-4(f)(5); Notice 2023-2 Section 3.08(4)(f).
Proposed Regulations Section 58.4501-4(f)(6); Notice 2023-2 Section 3.08(4)(g).
Proposed Regulations Section 58.4501-4(f)(7); Notice 2023-2 Section 3.08(4)(h).
Proposed Regulations Section 58.4501-4(f)(8).
Proposed Regulations Section 58.4501-4(f)(9).
Proposed Regulations Section 58.4501-4(f)(10).
Proposed Regulations Section 58.4501-4(f)(11).
Proposed Regulations Section 58.4501-4(f)(12).
Proposed Regulations Section 58.4501-4(f)(13).
Section 4501(f)(2).

The Rise of the Excise Tax
Final and proposed regulations for the excise tax on stock repurchases