Stock buyback tax: IRS issues proposed regulations

Executive summary

On April 9, 2024, the IRS released two sets of proposed regulations under section 4501’s non-deductible 1% excise tax relating to certain repurchases of public company stock (the stock buyback tax). Tax practitioners have been waiting for these proposed regulations as the excise tax applies to stock buybacks beginning in 2023. The proposed regulations largely continue the broad path outlined in Notice 2023-2, yet provide some relief by narrowing the scope of deemed tax avoidance transactions within a foreign-parented group that result in an imposition of the stock buyback tax.

Stock buyback tax background

The stock buyback tax was enacted as part of the Inflation Reduction Act of 2022. Section 4501 applies to stock repurchases that take place after Dec. 31, 2022. Under section 4501, every “covered corporation” is subject to a 1% excise tax on the fair market value (FMV) of stock repurchases made after Dec. 31, 2022, during such covered corporation’s taxable year. A “netting rule” may apply which works to reduce the excise tax base by the FMV of certain issuances of stock made during the taxable year. In addition to the netting rule, there are several other statutory exceptions to the stock buyback tax.

The term “covered corporation” refers to any domestic corporation whose stock is traded on an established securities market (e.g., NYSE, certain foreign securities markets). The term “repurchase” means a section 317(b) redemption or economically similar transaction, which includes buybacks in connection with certain mergers, separations and M&A transactions involving affiliates.

In December 2022, the IRS issued Notice 2023-2 which provided guidance specifying the types of transactions that are considered repurchases that can trigger the stock buyback tax, describing transactions that are excepted from the stock buyback tax and outlining rules for determining the FMV of repurchased stock. We posted a Tax Alert on Notice 2023-2 that provides more insight, here.

Proposed regulations released

Following the enactment of section 4501 and the issuance of Notice 2023-2, the Treasury and IRS received numerous comments from interested parties. On April 9, 2024, the Treasury and IRS issued two sets of proposed regulations that provide guidance regarding the application of the stock buyback tax.