New regs. reshape 1% stock buyback tax, drop funding rule

The IRS finalized regulations for the 1% excise tax on corporate stock repurchases under Sec. 4501 — and one heavily criticized proposed provision is gone.

The final rules (T.D. 10037), released Nov. 21, eliminate the so-called “funding rule,” which could have triggered the tax when a U.S. subsidiary helps its foreign parent finance a buyback. Commenters argued the rule was vague and could apply to routine transactions, making compliance costly and uncertain.

The regulations also tighten other areas. They remove a proposed “no double benefit” item that would have disregarded certain reorganization and distribution transactions for purposes of the netting rule under Sec. 4501(c)(3). They also clarify the treatment of certain preferred stock, such as excluding “plain vanilla” stock described in Sec. 1504(a)(4) from the definition of stock subject to the tax, treating it as more akin to debt.

Background

The Inflation Reduction Act of 2022, P.L. 117-169, included a 1% excise tax on stock repurchases by publicly traded corporations under Sec. 4501.

The final regulations cover the fair market value (FMV) of a corporation’s stock that certain corporations repurchase during a tax year (the stock repurchase excise tax). The IRS issued the proposed regulations in April 2024. Then, in July 2024, it issued final regulations that provided rules on the procedure and administration applicable to the reporting and payment of the excise tax.

Relief for M&A transactions

The IRS scaled back the tax’s application to mergers and acquisitions, excluding “take-private transactions” and leveraged buyouts and liquidations under Secs. 331 and 332.

Application

The excise tax applies to repurchases made after Dec. 31, 2022, and is based on the FMV of stock bought back during the tax year. The final regulations were effective Nov. 24.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.