[Federal Register Volume 89, Number 72 (Friday, April 12, 2024)]
[Proposed Rules]
[Pages 25980-26067]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-07117]
[[Page 25979]]
Vol. 89
Friday,
No. 72
April 12, 2024
Part III
Department of the Treasury
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Internal Revenue Service
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26 CFR Parts 1 and 58
Excise Tax on Repurchase of Corporate Stock; Proposed Rule
Federal Register / Vol. 89 , No. 72 / Friday, April 12, 2024 /
Proposed Rules
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 58
[REG-115710-22]
RIN 1545-BQ59
Excise Tax on Repurchase of Corporate Stock
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations that would provide
guidance regarding the application of the new excise tax on repurchases
of corporate stock made after December 31, 2022. The proposed
regulations would affect certain publicly traded corporations that
repurchase their stock or whose stock is acquired by certain specified
affiliates. Another notice of proposed rulemaking (REG-118499-23) on
this topic is published in the Proposed Rules section of this issue of
the Federal Register to propose rules on procedure and administration
applicable to this new excise tax.
DATES: Written or electronic comments and requests for a public hearing
must be received by June 11, 2024.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at https://www.regulations.gov (indicate IRS and
REG-115710-22) by following the online instructions for submitting
comments. Requests for a public hearing must be submitted as prescribed
in the ``Comments and Requests for a Public Hearing'' section. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The Department of the Treasury (Treasury Department) and
the IRS will publish for public availability any comment submitted
electronically or on paper to its public docket.
Send paper submissions to: CC:PA:01:PR (REG-115710-22), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning proposed Sec. Sec.
58.4501-1 through 58.4501-6, Samuel G. Trammell at (202) 317-6975;
concerning proposed Sec. 58.4501-7, Brittany N. Dobi at (202) 317-
5469; concerning proposed Sec. 1.1275-6(f)(12)(iii), Jonathan A.
LaPlante at (202) 317-3900; concerning submissions of comments and
requests for a public hearing, Vivian Hayes at (202) 317-6901 (not
toll-free numbers) or by email at [email protected] (preferred).
SUPPLEMENTARY INFORMATION:
Background
This notice of proposed rulemaking proposes regulations under
section 4501 of the Internal Revenue Code (Code) that would implement
the new excise tax on repurchases of corporate stock (stock repurchase
excise tax) imposed by section 4501 for repurchases made after December
31, 2022. As proposed in this notice of proposed rulemaking, the
regulations are proposed to be added as proposed subpart A of new 26
CFR part 58 (Stock Repurchase Excise Tax Regulations), which is
proposed to be added to subchapter D of 26 CFR chapter I (Miscellaneous
Excise Taxes). This notice of proposed rulemaking also proposes to
amend regulations under section 1275 of the Code in 26 CFR part 1
(Income Tax Regulations) to implement the provisions of section 4501.
Another notice of proposed rulemaking published in the Proposed Rules
section of this issue of the Federal Register relating to the stock
repurchase excise tax proposes rules on procedure and administration
applicable to the reporting and payment of the stock repurchase excise
tax that would be added as proposed subpart B of 26 CFR part 58.
I. Overview of Section 4501
A. In General
Section 4501 was added to a new chapter 37 of the Code by the
enactment of section 10201 of Public Law 117-169, 136 Stat. 1818
(August 16, 2022), commonly referred to as the Inflation Reduction Act
of 2022 (IRA). Section 4501 imposes the stock repurchase excise tax on
each covered corporation for repurchases made after December 31, 2022.
The stock repurchase excise tax is equal to one percent of the fair
market value of any stock of the corporation that is repurchased by the
corporation during the taxable year. Section 4501(a). For purposes of
the stock repurchase excise tax, the term ``covered corporation'' means
any domestic corporation the stock of which is traded on an established
securities market (within the meaning of section 7704(b)(1) of the
Code). Section 4501(b).
Section 4501(c)(1) provides that repurchases of covered corporation
stock to which the stock repurchase excise tax may apply include the
following two types of transactions. First, the term ``repurchase''
means a redemption within the meaning of section 317(b) of the Code
with regard to the stock of a covered corporation (section 317(b)
redemption). Section 4501(c)(1)(A). Second, the term ``repurchase''
also means any transaction determined by the Secretary of the Treasury
or her delegate (Secretary) to be economically similar to a section
317(b) redemption (economically similar transaction). Section
4501(c)(1)(B).
B. Specified Affiliates
For purposes of the stock repurchase excise tax, section
4501(c)(2)(A) provides a special rule that treats the acquisition of
stock of a covered corporation by a specified affiliate of the covered
corporation, from a person who is not the covered corporation or a
specified affiliate of the covered corporation, as a repurchase of the
stock of the covered corporation by the covered corporation. For this
purpose, the term ``specified affiliate'' means, with regard to any
corporation, (i) any corporation more than 50 percent of the stock of
which is owned (by vote or by value), directly or indirectly, by the
corporation, and (ii) any partnership more than 50 percent of the
capital interests or profits interests of which is held, directly or
indirectly, by the corporation. Section 4501(c)(2)(B).
C. Adjustment to Amount Taken Into Account Under Section 4501(a)
The stock repurchase excise tax is applied to the fair market value
of any stock of the covered corporation repurchased by the covered
corporation during its taxable year. However, the amount of these
repurchases is reduced by the fair market value of any issuances of the
covered corporation's stock during the covered corporation's taxable
year (netting rule).
Specifically, the netting rule provides that the amount taken into
account under section 4501(a) with respect to any stock repurchased by
a covered corporation is reduced by the fair market value of any stock
issued by the covered corporation during the taxable year, including
the fair market value of any stock issued or provided to employees of
the covered corporation or employees of a specified affiliate of the
covered corporation during the taxable year (whether or not the stock
is issued or provided in response to the exercise of an option to
purchase the stock). Section 4501(c)(3).
D. Special Rules for Certain Acquisitions and Repurchases of Stock of
Certain Foreign Corporations
Section 4501(d) provides special rules for the imposition of the
stock repurchase excise tax on acquisitions of
[[Page 25981]]
stock of applicable foreign corporations and covered surrogate foreign
corporations. For purposes of section 4501(d), the term ``applicable
foreign corporation'' means any foreign corporation the stock of which
is traded on an established securities market. Section 4501(d)(3)(A).
The term ``covered surrogate foreign corporation'' means any surrogate
foreign corporation (as determined under section 7874(a)(2)(B) of the
Code by substituting ``September 20, 2021'' for ``March 4, 2003'' each
place it appears) the stock of which is traded on an established
securities market, but only with respect to taxable years that include
any portion of the applicable period with respect to that corporation
under section 7874(d)(1). Section 4501(d)(3)(B).
Section 4501(d)(1) applies in the case of an acquisition of stock
of an applicable foreign corporation by a specified affiliate of the
corporation (other than a foreign corporation or a foreign partnership
(unless the partnership has a domestic entity as a direct or indirect
partner)) from a person that is not the applicable foreign corporation
or a specified affiliate of the applicable foreign corporation. If
section 4501(d)(1) applies, then for purposes of determining the stock
repurchase excise tax: (i) the specified affiliate is treated as a
covered corporation with respect to the acquisition; (ii) the
acquisition is treated as a repurchase of stock of a covered
corporation by the covered corporation; and (iii) the adjustment under
section 4501(c)(3) (that is, the netting rule) is determined only with
respect to stock issued or provided by the specified affiliate to
employees of the specified affiliate.
Section 4501(d)(2) applies in the case of either a repurchase of
stock of a covered surrogate foreign corporation by the covered
surrogate foreign corporation, or an acquisition of stock of a covered
surrogate foreign corporation by a specified affiliate of such
corporation. If section 4501(d)(2) applies, then for purposes of
determining the stock repurchase excise tax: (i) the expatriated entity
(within the meaning of section 7874(a)(2)(A)) with respect to the
covered surrogate foreign corporation is treated as a covered
corporation with respect to the repurchase or acquisition; (ii) the
repurchase or acquisition is treated as a repurchase of stock of a
covered corporation by the covered corporation; and (iii) the
adjustment under section 4501(c)(3) is determined only with respect to
stock issued or provided by the expatriated entity to employees of the
expatriated entity.
E. Statutory Exceptions to the Application of Section 4501(a)
Section 4501(e) lists transactions that are statutorily excepted,
in whole or in part, from the application of section 4501(a), each
referred to as a ``statutory exception'' in this preamble. As a result
of the statutory exceptions, section 4501(a) does not apply to a
repurchase of a covered corporation's stock:
(1) To the extent that the repurchase is part of a reorganization
(within the meaning of section 368(a) of the Code) and no gain or loss
is recognized on the repurchase by the shareholder under chapter 1 of
the Code (chapter 1) by reason of the reorganization (section
4501(e)(1));
(2) In any case in which the stock repurchased is, or an amount of
stock equal to the value of the stock repurchased is, contributed to an
employer-sponsored retirement plan, employee stock ownership plan
(ESOP), or similar plan (section 4501(e)(2));
(3) In any case in which the total value of the stock repurchased
during the taxable year does not exceed $1,000,000 (section
4501(e)(3));
(4) Under regulations prescribed by the Secretary, in cases in
which the repurchase is by a dealer in securities in the ordinary
course of business (section 4501(e)(4));
(5) By a regulated investment company (RIC), as defined in section
851 of the Code, or by a real estate investment trust (REIT), as
defined in section 856(a) of the Code (section 4501(e)(5)); or
(6) To the extent that the repurchase is treated as a dividend for
purposes of the Code (section 4501(e)(6)).
F. Regulations and Other Guidance
Under section 4501(f), the Secretary is authorized to prescribe
such regulations and other guidance as are necessary or appropriate to
carry out, and to prevent the avoidance of, the purposes of the stock
repurchase excise tax. Regulations or other guidance described in
section 4501(f) may include guidance: (i) to prevent the abuse of the
statutory exceptions; (ii) to address special classes of stock and
preferred stock; and (iii) for the application of the special rules for
acquisitions of stock of certain foreign corporations under section
4501(d).
G. Applicability of Stock Repurchase Excise Tax Provisions
Except to the extent that a statutory exception applies, the stock
repurchase excise tax applies to repurchases after December 31, 2022,
subject to the netting rule. See section 10201(d) of the IRA.
In contrast to the December 31, 2022, effective date expressly
provided by section 10201(d) of the IRA with regard to repurchases, the
netting rule expressly takes into account any issuances by a covered
corporation during the entirety of its taxable year. See generally
section 4501(c)(3). Specifically, under the netting rule, the amount
taken into account under section 4501(a) with respect to any
repurchases is ``reduced by the fair market value of any stock issued
by the covered corporation during the taxable year. ''Section
4501(c)(3) (emphasis added). Therefore, a covered corporation with a
taxable year that both began before January 1, 2023, and ended after
December 31, 2022, may apply the netting rule to reduce the fair market
value of the covered corporation's repurchases of stock during the
portion of that taxable year beginning on January 1, 2023, by the fair
market value of all issuances of its stock during the entirety of that
taxable year.
H. No Deduction for Payment of Stock Repurchase Excise Tax
No deduction is allowed for the payment of the stock repurchase
excise tax. See section 275(a)(6) of the Code (as amended by section
10201(b) of the IRA to add a reference to chapter 37, which contains
section 4501).
II. Notice 2023-2
On January 17, 2023, the Treasury Department and the IRS published
Notice 2023-2, 2023-3 I.R.B. 374, to provide initial guidance regarding
the application of the stock repurchase excise tax. Specifically, the
Treasury Department and the IRS published Notice 2023-2 to facilitate
administration of the stock repurchase excise tax by describing rules
expected to be provided in forthcoming proposed regulations for
determining the amount of stock repurchase excise tax owed, along with
anticipated rules for reporting and paying any liability for the tax.
Under those rules, the amount of stock repurchase excise tax
imposed on a covered corporation equals the product obtained by
multiplying one percent by the stock repurchase excise tax base of the
covered corporation. The ``stock repurchase excise tax base'' is the
amount (not less than zero) obtained by: (i) determining the aggregate
fair market value of all repurchases of the covered corporation's stock
by the covered corporation during its taxable year; (ii) reducing that
amount by the fair market value of stock of the covered corporation
repurchased during its taxable year to the extent any statutory
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exceptions apply; and then (iii) further reducing that amount by the
aggregate fair market value of stock of the covered corporation issued
or provided by the covered corporation during its taxable year under
the netting rule.
The Treasury Department and the IRS have received feedback on the
stock repurchase excise tax, including in response to Notice 2023-2.
Based on the feedback received, and based on further consideration of
section 4501 and Notice 2023-2, the Treasury Department and the IRS are
proposing these regulations under section 4501 to be added as a new
part 58 under the Miscellaneous Excise Taxes, as well as adding new
Sec. 1.1275-6(f)(12)(iii) to 26 CFR part 1.
The issues related to section 4501 and Notice 2023-2 with respect
to which stakeholders have provided feedback, as well as issues that
the Treasury Department and the IRS have considered after the
publication of Notice 2023-2, are discussed in the following
Explanation of Provisions.
Explanation of Provisions
Subpart A of new part 58 would provide operative rules under
section 4501. Proposed Sec. 58.4501-1 would provide an overview of the
stock repurchase excise tax, generally applicable definitions, the
scope of the regulations implementing that tax, and certain operating
rules applicable to those regulations. Proposed Sec. 58.4501-2 would
provide general rules regarding the application and computation of the
stock repurchase excise tax and proposed Sec. 58.4501-7 would provide
rules specifically relating to the application of section 4501(d).
Except as provided in proposed Sec. 58.4501-7, proposed Sec. 58.4501-
3 would provide rules regarding the application of the exceptions in
section 4501(e) (other than the de minimis exception described in
section 4501(e)(3) and to which proposed Sec. 58.4501-2(b)(2)
applies), and proposed Sec. 58.4501-4 would provide rules regarding
the application of section 4501(c)(3). Proposed Sec. 58.4501-5 would
provide examples that illustrate the application of section 4501, other
than the provisions of proposed Sec. 58.4501-7 (which are illustrated
by examples in Sec. 58.4501-7(p) and (q)), and proposed Sec. 58.4501-
6 would provide applicability dates (other than for the rules in Sec.
58.4501-7).
I. Statutory Effective Date; Transition Relief
A. Repurchases by a Fiscal-Year Taxpayer Prior to the Statutory
Effective Date
A covered corporation is not subject to the stock repurchase excise
tax with regard to a taxable year if, during that taxable year, the
aggregate fair market value of the covered corporation's repurchases of
its stock does not exceed $1,000,000 (de minimis exception). See
section 4501(e)(3); see also section 3.03(2)(a) of Notice 2023-2.
One stakeholder requested that the proposed regulations make clear
that repurchases of stock by a fiscal-year taxpayer prior to the
January 1, 2023, effective date of section 4501 are not taken into
account for purposes of applying the de minimis exception. According to
the stakeholder, the plain language of the statute requires that
repurchases by a fiscal-year taxpayer prior to January 1, 2023, not be
taken into account for any purpose under section 4501, including for
purposes of applying the de minimis exception.
The Treasury Department and the IRS have interpreted section 4501
in the same manner. The rule described in section 3.03(3)(b) of Notice
2023-2 provides that repurchases by a covered corporation before
January 1, 2023, are not included in the covered corporation's stock
repurchase excise tax base. The proposed regulations would clarify that
repurchases before January 1, 2023, are not taken into account for
purposes of applying the de minimis exception. See proposed Sec.
58.4501-2(c)(3).
B. Issuances by a Fiscal-Year Taxpayer Prior to the Effective Date
One stakeholder recommended that stock issued by a fiscal-year
taxpayer prior to January 1, 2023, should not be taken into account for
purposes of the netting rule, because such an approach would create a
mismatch between the treatment of issuances for purposes of the netting
rule and the treatment of repurchases for purposes of the de minimis
exception. See part I.A of this Explanation of Provisions. Another
stakeholder recommended that fiscal-year taxpayers be permitted to use
only net issuances (that is, issuances net of repurchases) from the
portion of their taxable year prior to January 1, 2023, because,
according to the stakeholder, taxpayers arguably should not be
permitted to offset gross issuances during the portion of a fiscal year
before January 1, 2023, against repurchases during the portion of a
fiscal year beginning on January 1, 2023.
The Treasury Department and the IRS disagree with the stakeholders'
recommendations. Section 4501(c)(3) expressly provides that the amount
taken into account under section 4501(a) with respect to any stock
repurchased by a covered corporation is reduced by the fair market
value of any stock issued by the covered corporation ``during the
taxable year.'' Moreover, although section 10201(d) of the IRA
expressly provides that the stock repurchase excise tax applies to
repurchases after December 31, 2022, it does not contain similar
language for issuances. Therefore, the Treasury Department and the IRS
are of the view that, in the case of a covered corporation that has a
taxable year that both begins before January 1, 2023, and ends after
December 31, 2022, that covered corporation may apply the netting rule
to reduce the fair market value of the covered corporation's
repurchases during that taxable year by the fair market value of all
issuances of its stock during the entirety of that taxable year. See
proposed Sec. 58.4501-4(b)(3). Thus, the proposed regulations would
not adopt these recommendations.
C. Contributions by Fiscal-Year Taxpayer to Employer-Sponsored
Retirement Plan Prior to Effective Date
A stakeholder also recommended that stock contributed by a fiscal-
year taxpayer to an employer-sponsored retirement plan prior to the
January 1, 2023, effective date of section 4501, should not be taken
into account for purposes of the statutory exception in section
4501(e)(2) because, according to the stakeholder, such an approach
would create a mismatch between this exception and the de minimis
exception. However, as discussed in part I.B of this Explanation of
Provisions, the effective date in section 10201(d) of the IRA expressly
applies to repurchases (and not to issuances or contributions).
Therefore, the Treasury Department and the IRS are of the view that
contributions to an employer-sponsored retirement plan during the 2022
portion of a taxable year beginning before January 1, 2023, and ending
after December 31, 2022, should be taken into account for purposes of
section 4501(e)(2). See proposed Sec. 58.4501-3(d)(5).
D. Trade Date or Settlement Date
A stakeholder asked whether the date of repurchase of stock occurs
on (i) the trade date for the sale or purchase of that stock (that is,
the date a broker executes the trade), or (ii) the settlement date with
regard to that stock (that is, the date the shares are delivered). The
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stakeholder asked this question for purposes of determining whether a
repurchase occurs after the effective date of section 4501. The
stakeholder requested that the proposed regulations clarify that the
trade date for the sale or purchase of that stock constitutes the date
of repurchase.
The proposed regulations would clarify that the date of repurchase
for a regular-way sale of stock on an established securities market
(that 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) is the trade date. See proposed Sec. 58.4501-2(g)(2). For rules
regarding the date of repurchase generally, see part III.B.1 of this
Explanation of Provisions.
E. Transition Relief for Certain Transactions Entered Into Prior to
Enactment Date
Several stakeholders requested transition relief (that is, an
exemption from the stock repurchase excise tax) for certain repurchases
that occur after the January 1, 2023, effective date of section 4501,
pursuant to a binding commitment entered into before the August 16,
2022, enactment date of section 4501. For example, one stakeholder
requested an exemption for redemptions of stock issued before the
enactment date and redeemed pursuant to the terms of the stock after
the effective date, on the grounds that the stock repurchase excise tax
did not exist when the terms of that stock were negotiated. Another
stakeholder suggested that candidates for transition relief could
include: (i) redemptions by, and liquidations of, a special purpose
acquisition company (SPAC) formed prior to the enactment date (to the
extent the SPAC is contractually obligated to offer redemption rights
to its shareholders as agreed prior to the enactment date); (ii)
payments in connection with merger and acquisition (M&A) transactions
pursuant to a binding commitment entered into prior to the enactment
date; (iii) redemptions of non-participating, non-convertible preferred
stock, and complete redemptions of tracking stock, issued prior to the
enactment date; (iv) repurchases pursuant to accelerated share
repurchase agreements if completed pursuant to a binding commitment
entered into prior to the enactment date; and (v) liquidating
distributions subject to section 331 of the Code pursuant to a plan of
liquidation adopted prior to the enactment date.
The plain language of section 10201(d) of the IRA provides that the
amendments made by section 10201 of the IRA apply to repurchases of
stock after December 31, 2022. That section contains no reference to
repurchases that occur pursuant to a binding commitment entered into
prior to the enactment date. As a result, the Treasury Department and
the IRS are of the view that transition relief would not be
appropriate. The proposed regulations accordingly would not adopt the
stakeholders' recommendation.
II. Application of the Stock Repurchase Excise Tax to Various Types of
Financial Instruments
A. Definition of ``Stock''
For purposes of Notice 2023-2, ``stock'' would be defined as any
instrument issued by a corporation that is stock or that is treated as
stock for Federal tax purposes at the time of issuance, regardless of
whether the instrument is traded on an established securities market.
See section 3.02(25) of Notice 2023-2.
The proposed regulations generally would maintain this definition
of ``stock.'' See proposed Sec. 58.4501-1(b)(29). However, the
proposed definition of ``stock'' would not include ``additional tier 1
preferred stock,'' which the proposed regulations would define to mean
preferred stock that qualifies as additional tier 1 capital (within the
meaning of 12 CFR 3.20(c), 217.20(c), or 324.20(c)) and does not
qualify as common equity tier 1 capital (within the meaning of 12 CFR
3.20(b), 217.20(b), or 324.20(b)). See proposed Sec. 58.4501-
1(b)(29)(ii). Therefore, unless the limited-scope exception regarding
additional tier 1 preferred stock applies, the stock repurchase excise
tax would apply to preferred stock in the same manner as to common
stock. Likewise, the stock repurchase excise tax would apply to
repurchases of instruments that are not in the legal form of stock but
that are treated as stock for Federal tax purposes at the time of
issuance. In contrast, the stock repurchase excise tax would not apply
to repurchases of instruments treated as debt for Federal tax purposes.
The proposed regulations would include the foregoing definition of
``stock'' for the following reasons. First, the plain language of
section 4501 repeatedly refers to ``stock'' and does not, for example,
refer solely to ``common stock.'' See, for example, section 4501(a)
(imposing an excise tax ``equal to 1 percent of the fair market value
of any stock of the corporation''); section 4501(b) (defining the term
covered corporation to mean ``any domestic corporation the stock of
which is traded on an established securities market''); section
4501(c)(1)(A) (defining the term repurchase to mean a redemption within
the meaning of section 317(b) ``with regard to the stock of a covered
corporation''). Second, if the stock repurchase excise tax were
implemented to be applicable solely to common stock, then taxpayers
could avoid the tax simply by repurchasing other classes of stock (or
other instruments treated as stock for Federal tax purposes).
Section 4501(f)(2) authorizes the Secretary to issue such
regulations and other guidance as are necessary or appropriate to carry
out, and to prevent the avoidance of, the purposes of the stock
repurchase excise tax, including guidance ``to address special classes
of stock and preferred stock.'' Accordingly, in section 6.01(1) of
Notice 2023-2, the Treasury Department and the IRS requested comments
on whether there are circumstances under which special rules should be
provided for redeemable preferred stock or other special classes of
stock or debt (including debt with features that allow the debt to be
converted into stock) and, if so, what objectively verifiable criteria
should be incorporated into such special rules to provide certainty for
taxpayers and the IRS.
1. Straight Preferred Stock; Mandatorily Redeemable Stock
Stakeholders recommended that the stock repurchase excise tax
should not apply to redemptions of preferred stock. Although two
stakeholders recommended an exception for redemptions of any type of
preferred stock, other stakeholders generally recommended an exception
only for redemptions of so-called ``straight preferred stock'' (that
is, preferred stock that is limited and preferred as to dividends, does
not participate in corporate growth to any significant extent, and is
not convertible into another class of stock). See section 1504(a)(4)(B)
and (D) of the Code. One stakeholder also argued against providing an
exception for redemptions of preferred stock other than straight
preferred stock. See part II.A.2 of this Explanation of Provisions.
The stakeholders uniformly contended that, although straight
preferred stock is treated as ``stock'' for Federal tax purposes,
repayments of such stock are akin to repaying debt and do not implicate
the policy concerns underlying the stock repurchase excise tax. The
stakeholders further contended that, if redemptions of straight
preferred
[[Page 25984]]
stock were subject to the stock repurchase excise tax, publicly traded
corporations might be incentivized to increase their leverage by
issuing debt in lieu of straight preferred stock.
One stakeholder also recommended a rule under which actual or
deemed issuances of straight preferred stock would not be taken into
account for purposes of the netting rule. The stakeholder further
recommended that exchanges of straight preferred stock for other stock
(that is, for stock to which the stock repurchase excise tax applies)
should be treated as economically similar transactions.
Alternatively, stakeholders recommended an exception to the stock
repurchase excise tax for the redemption of stock pursuant to a
mandatory redemption provision or a unilateral put option of the
shareholder. In the stakeholders' view, this exception would be
appropriate because such a redemption would not be within the control
of (and would not be susceptible to any timing manipulation by) the
issuing corporation.
As described in part II.A of this Explanation of Provisions, the
plain language of section 4501 consistently refers to ``stock'' without
providing any exceptions for particular types of stock. In addition,
the Treasury Department and the IRS are of the view that Treasury
regulations that utilize the broadly applicable term ``stock'' would
facilitate the IRS's ability to administer and enforce the stock
repurchase excise tax. Consequently, the Treasury Department and the
IRS also are of the view that adoption of the stakeholders' numerous
suggested exceptions would significantly hamper the IRS's ability to
administer and enforce that tax, as well as reduce taxpayer certainty
regarding its application. Therefore, except with regard to additional
tier 1 preferred stock, the proposed regulations would not incorporate
the stakeholders' suggested exceptions. See proposed Sec. Sec.
58.4501-1(b)(29), 58.4501-2(e)(2), and 58.4501-4(b)(1); see also
proposed Sec. 58.4501-1(b)(29)(ii) and part II.A.3 of this Explanation
of Provisions (discussion of additional tier 1 preferred stock).
2. Convertible Preferred Stock and Participating Preferred Stock
One stakeholder recommended that, even if straight preferred stock
is excluded from the stock repurchase excise tax, preferred stock that
is convertible into the issuer's common stock at the holder's option
(convertible preferred stock), and preferred stock with certain
dividend or liquidation participation rights that enable the holder to
participate in corporate growth to a significant extent (participating
preferred stock), should continue to be subject to the stock repurchase
excise tax. In the stakeholder's view, a redemption of such stock
generally is more akin to a redemption of common stock than to a
repayment of debt or a redemption of straight preferred stock (for
example, there are fewer outstanding shares of stock participating in
future corporate growth after such a redemption).
For the reasons stated in part II.A.1 of this Explanation of
Provisions, the Treasury Department and the IRS agree with the
stakeholder's recommendation. Accordingly, under the proposed
regulations, the repurchase of convertible or participating preferred
stock would be subject to the stock repurchase excise tax, and the
issuance of such stock would be taken into account for purposes of the
netting rule. See proposed Sec. Sec. 58.4501-1(b)(29), 58.4501-
2(e)(2), and 58.4501-4(b)(1).
3. Additional Tier 1 Preferred Stock
Several stakeholders noted that the issuance and redemption of
preferred stock is used routinely in certain industries as a way to
manage risk. One stakeholder recommended an exception to the stock
repurchase excise tax and the netting rule for redemptions or issuances
of preferred stock that qualifies as additional tier 1 capital for
purposes of regulatory requirements for regulated financial
institutions (additional tier 1 preferred stock).
According to the stakeholder, the issuing corporation may not
redeem or repurchase additional tier 1 preferred stock without prior
approval from regulators. Moreover, if such an instrument is callable
by its terms, (i) it may not be called for at least five years; (ii)
the issuing corporation must receive prior approval from regulators to
exercise the call option; and (iii) the issuing corporation must either
replace the instrument with other tier 1 capital or demonstrate to
regulators that it will continue to hold capital commensurate with
risk.
Based on the feedback received, the Treasury Department and the IRS
are of the view that the stock repurchase excise tax regulations should
not apply to additional tier 1 preferred stock. See proposed Sec.
58.4501-1(b)(29)(ii). Consequently, under the proposed regulations,
additional tier 1 preferred stock would not be subject to the stock
repurchase excise tax, and the issuance of additional tier 1 preferred
stock would not be taken into account for purposes of the netting rule.
4. Convertible Debt
Stakeholders have requested confirmation that redemptions of
convertible debt instruments are not subject to the stock repurchase
excise tax. One stakeholder contended that such transactions should not
be treated as ``economically similar'' to a section 317(b) redemption
because the definition of ``redemption'' in section 317(b) encompasses
only redemptions of stock, and because a redemption of a convertible
debt instrument does not reduce the number of a corporation's
outstanding shares. Another stakeholder contended that the
determination of whether an instrument constitutes debt or equity
should be made at the time of issuance. Therefore, if the convertible
debt instrument is characterized as ``debt'' at the time of issuance,
the subsequent redemption or cash settlement of that instrument should
not be treated as a repurchase. Likewise, the issuance of a convertible
debt instrument by a covered corporation should not be treated as an
issuance for purposes of the netting rule.
The Treasury Department and the IRS agree with these stakeholders.
Although Notice 2023-2 does not expressly address convertible debt
instruments, the Treasury Department and the IRS continue to be of the
view that, for purposes of the stock repurchase excise tax, whether an
instrument is debt or equity should be determined at the time of
issuance under Federal income tax principles, and that this
characterization should not be retested while the debt instrument is
outstanding. See proposed Sec. 58.4501-1(b)(29); see also part II.B of
this Explanation of Provisions. Such an approach would better
facilitate the IRS's ability to administer and enforce the stock
repurchase excise tax and enable taxpayers to apply the tax with
greater certainty. Moreover, the term ``repurchase'' includes only
section 317(b) redemptions with regard to ``stock'' of a covered
corporation as well as transactions that are ``economically similar''
to such redemptions. See section 4501(c)(1). Accordingly, the Treasury
Department and the IRS are of the view that no special rules are needed
for convertible debt. However, for a discussion of the application of
the netting rule to an instrument not in the legal form of stock, see
part XI.C.9 of this Explanation of Provisions.
5. Tracking Stock
Tracking stock is an instrument that tracks the performance of a
division of the parent corporation or a subsidiary (for example, by
providing dividend rights that are determined by reference
[[Page 25985]]
to the earnings of the tracked division or subsidiary). Because
tracking stock participates in corporate growth, a stakeholder
recommended treating the redemption of less than all shares of a class
of tracking stock in the same manner as the redemption of other common
stock--that is, as subject to the stock repurchase excise tax.
However, the stakeholder also suggested that an exemption may be
warranted for the redemption of an entire class of tracking stock in
connection with the disposition of the underlying tracked business,
because such a redemption (i) does not accrete to the interests of the
corporation's remaining shareholders in the corporation's remaining
assets, and (ii) may be equivalent to a distribution in partial
liquidation. (As discussed in part VI.B of this Explanation of
Provisions, the stakeholder recommended treating partial liquidations
as generally outside the scope of the stock repurchase excise tax.)
The Treasury Department and the IRS are of the view that the
treatment of tracking stock for purposes of the stock repurchase excise
tax should follow the general Federal tax treatment of tracking stock.
Accordingly, no special guidance regarding the proper treatment of
tracking stock is included in these proposed regulations.
B. Characterization of Instruments as Stock or Debt
One stakeholder requested confirmation that the determination of
whether an instrument is stock or debt for purposes of the stock
repurchase excise tax is made at the time of issuance under Federal tax
principles, and that this characterization is not retested subsequently
while the instrument is outstanding. The Treasury Department and the
IRS agree with this recommendation, because, as previously stated, such
an approach under which an instrument is tested only once would better
facilitate the IRS's ability to administer and enforce the stock
repurchase excise tax and enable taxpayers to apply the tax with
greater certainty. See proposed Sec. 58.4501-1(b)(29).
C. Options and Similar Financial Instruments
1. Overview
As discussed previously, Notice 2023-2 would define ``stock'' to
mean any instrument issued by a corporation that is stock or that is
treated as stock for Federal tax purposes at the time of issuance. See
section 3.02(25) of Notice 2023-2. This definition of ``stock''
generally excludes options other than options that are treated as stock
for Federal tax purposes at the time of issuance.
To the extent option contracts are not treated as stock at the time
of issuance, the acquisition of such contracts is not a repurchase
under Notice 2023-2 because such acquisition is neither a section
317(b) redemption nor included in the exclusive list of economically
similar transactions in section 3.04(4)(a) of Notice 2023-2.
Consequently, under Notice 2023-2, there is a repurchase or an issuance
of stock only at the time of exercise of a physically settled option
(when a covered corporation repurchases or issues the actual underlying
stock). In turn, the amount of such repurchase or issuance is equal to
the market price of the stock on the date the stock is repurchased or
issued. See sections 3.06(1)(a), 3.06(2), 3.08(2), and 3.08(5) of
Notice 2023-2; see also part III of this Explanation of Provisions
(discussion of valuation and timing).
Several questions have arisen regarding the application of the
stock repurchase excise tax to options and similar financial
instruments. In section 6.02(4) of Notice 2023-2, the Treasury
Department and the IRS requested comments on: (i) whether any
additional rules with regard to financial arrangements, such as options
or other similar financial instruments, should be added to prevent
avoidance of the stock repurchase excise tax; and (ii) how such
additional rules should apply consistently for purposes of determining
a covered corporation's repurchases and issuances.
2. Physical Settlement of Option Contracts
Stakeholders recommended that the fair market value of shares
acquired or issued (as appropriate) by a covered corporation upon
physical settlement of an option contract should be the fair market
value of the shares on the date of exercise, rather than the strike
price (that is, the price at which the option can be exercised). For
example (Example 1), assume that corporation X issues a call option to
individual A that entitles A to buy 100 shares of X stock for $100
($1.00 per share) from X for a limited time. The terms of the option
require physical settlement. On the date the option is issued, X stock
is trading at $1.00 per share. On the date the option is exercised, X
stock is trading at $1.30 per share. Upon settlement of the option, A
pays $100 to X, which issues 100 shares of X stock (worth $130) to A.
Alternatively (Example 2), assume the same facts as in Example 1,
except that X issues a put option to A that entitles A to sell 100
shares of X stock for $100 ($1.00 per share) to X, and that X stock is
trading at $0.70 per share on the date the option is exercised. To
settle the option, X purchases 100 shares of X stock (worth $70) for
$100 from A.
As another example (Example 3), assume that A issues a call option
to unrelated individual B that entitles B to buy 100 shares of X stock
for $100 ($1.00 per share) from A for a limited time. The terms of the
option require physical settlement. Subsequently, X purchases the
option contract from B. On the date the option is exercised, X stock is
trading at $1.30 per share. To settle the option, X pays $100 to A, who
delivers 100 shares of X stock (worth $130) to X.
The netting rule requires the stock repurchase excise tax base to
be reduced by ``the fair market value of any stock issued by the
covered corporation during the taxable year.'' See section 4501(c)(3).
Thus, according to stakeholders, the amount of the issuance in Example
1 should be $130 (the fair market value of the stock at the time of
issuance) even though A pays only $100 to excise the option.
Similarly, the stock repurchase excise tax applies to ``the fair
market value of any stock of the corporation which is repurchased by
such corporation during the taxable year.'' See section 4501(a).
Consequently, stakeholders suggested that the amount of the repurchase
in Example 2 should be $70, and that the $30 premium paid by X
represents the amount paid for a property right separate from the stock
being repurchased. Cf. Rev. Rul. 70-108, 1970-1 C.B. 78 (holding that
the right to purchase additional shares constitutes separate property
from the underlying shares). Consistent with this approach,
stakeholders also suggested that the amount of the repurchase in
Example 3 should be $130 (the fair market value of the stock on the
exercise date).
The Treasury Department and the IRS agree with the stakeholders
that the amount of the issuance in Example 1 should be $130 (the fair
market value of the issued stock on the exercise date) rather than $100
(the strike price paid by A). Similarly, the Treasury Department and
the IRS agree that the amount of the repurchase in Example 2 should be
$70 rather than $100, and that the amount of the repurchase in Example
3 should be $130 rather than $100.
The foregoing approach, which is consistent with Notice 2023-2, is
embedded in the proposed rules regarding the fair market value of
repurchased or issued stock. See proposed Sec. Sec. 58.4501-2(h)(1)
and
[[Page 25986]]
58.4501-4(e)(1), respectively. Thus, the Treasury Department and the
IRS are of the view that special rules are not needed with respect to
the fair market value of stock repurchased or issued upon the physical
settlement of an option. However, the proposed regulations would
include several examples to illustrate the proposed approach. See
proposed Sec. 58.4501-5(b)(26) and (28). For special rules for valuing
stock issued or provided to an employee or other service provider in
connection with the performance of services, see proposed Sec.
58.4501-4(e)(5) and part XI.G.7 of this Explanation of Provisions.
3. Cash Settlement of Option Contracts
As previously discussed in part II.C.2 of this Explanation of
Provisions, stakeholders recommended treating the physical settlement
of an option as a repurchase or an issuance (as appropriate) based on
the fair market value of the stock repurchased or issued on the date of
exercise. In contrast, a stakeholder recommended that the cash
settlement of a put option issued by a covered corporation should not
be treated as a repurchase by the covered corporation, because any
excess of the strike price over the fair market value of the underlying
stock should be viewed as payment for property that is separate from
the underlying stock. Cf. Rev. Rul. 70-108.
For example, assume that corporation X issues a put option to
individual A that entitles A to sell 100 shares of X stock for $100
($1.00 per share) to X, and that X stock is trading at $0.70 per share
on the date the option is exercised. The terms of the option require
net cash settlement; thus, X pays $30 to A to settle the option. The
stakeholder recommended not treating the net cash settlement as a
repurchase, even though the settlement could be construed as a purchase
by X of the 100 X shares from A for $100, immediately followed by an
issuance by X of 100 shares to A for $70.
For the cash settlement of a call option, the stakeholder generally
recommended either (i) treating the net cash settlement as a deemed
issuance of stock immediately followed by a repurchase of the same
stock (resulting in no net adjustment to the stock repurchase excise
tax base), or (ii) simply disregarding the cash settlement altogether
for purposes of the stock repurchase excise tax. For example, assume
that X issues a call option to A that entitles A to buy 100 shares of X
stock for $100 ($1.00 per share) from X, and that X stock is trading at
$1.30 per share on the date the option is exercised. The terms of the
option require net cash settlement; thus, X pays $30 to A to settle the
option.
The net cash payment in the foregoing example is the economic
equivalent of (i) A paying $100 to exercise the option, (ii) X issuing
100 shares (worth $130) to A, and then (iii) X immediately redeeming
those shares for $130 in cash. Thus, X could be deemed to have issued
and repurchased $130 of its shares in a transaction that fully offsets
for purposes of the stock repurchase excise tax. Alternatively, X's net
cash settlement could be disregarded altogether and simply treated as
the sale or exchange of an option. See section 1234(c)(2); Rev. Rul.
88-31, 1988-1 C.B. 302 (providing that the net cash settlement of a
price-protection contingent value right is treated as a cash settlement
of a put option subject to section 1234(c)(2)).
The Treasury Department and the IRS are of the view that, for
purposes of the stock repurchase excise tax, the net cash settlement of
an option should not be treated as involving a deemed issuance and
repurchase of shares in the interest of simplicity and
administrability. Accordingly, under the proposed regulations, the net
cash settlement of an option contract would result in neither the
repurchase nor the issuance of stock other than as discussed in part
II.C.4 of this Explanation of Provisions. This rule would apply to the
net cash settlement of an embedded option (for example, if the issuer
pays the investor solely in cash on exercise of the conversion right in
a convertible bond). See proposed Sec. Sec. 58.4501-2(e)(5)(v) and
58.4501-4(f)(12).
4. Deep-in-the-Money Options
Several stakeholders recommended that options that are treated as
constructively exercised at the time of their grant under Federal
income tax principles (commonly referred to as ``deep-in-the-money''
options) should be treated similarly for purposes of the stock
repurchase excise tax. For example, according to the stakeholders, if
the grant of an option is treated as the issuance of the underlying
stock as of the date of the grant for Federal income tax purposes, the
grant of the option should be treated as an issuance of stock for
purposes of the netting rule, and the cash settlement of the option
should be treated as a repurchase of stock in the year of the
settlement.
The stakeholders further recommended that the determination of
whether an option is deep in the money should be made only at the time
of grant and generally should not be revisited. Thus, if a corporation
grants a call option that is exercisable or convertible into the
corporation's stock and that is not constructively exercised at the
time of grant, the stock should not be treated as issued until the
option is exercised or converted into stock.
The Treasury Department and the IRS are of the view that, if a
deep-in-the-money option is determined to be constructively exercised
at the time of grant under Federal income tax principles, the cash
settlement of such an option would be a repurchase of the underlying
stock on the date of settlement under the proposed regulations. See
proposed Sec. 58.4501-2(e)(5)(v). However, for a discussion of the
application of the netting rule to deep-in-the-money options or other
instruments not in the legal form of stock, see part XI.C.9 of this
Explanation of Provisions.
5. Section 305(a) Warrants
A stakeholder recommended that, if an option to acquire a covered
corporation's stock is distributed in a distribution under section
305(a) of the Code (section 305(a) warrant), the adjustment to the
stock repurchase excise tax base upon settlement of the section 305(a)
warrant should be determined by reference to the strike price (and not
the value of the underlying stock) because the section 305(a)
distribution should be disregarded.
The Treasury Department and the IRS are of the view that the
treatment of warrants distributed in a section 305 distribution should
not deviate from the treatment of other types of financial instruments
under the proposed regulations. The Treasury Department and the IRS
view this approach as facilitating the IRS's ability to administer and
enforce the stock repurchase excise tax and enable taxpayers to apply
the tax with greater certainty. Accordingly, the proposed regulations
would not provide special rules for warrants distributed in a section
305 distribution. See proposed Sec. Sec. 58.4501-2(e)(5)(v) and
58.4501-4(f)(12); see also part II.C.3 of this Explanation of
Provisions (discussion of cash settlement of option contracts).
6. Integration of Qualifying Debt Instruments Under Sec. 1.1275-6
A stakeholder requested clarification on how section 4501 applies
to a synthetic debt instrument resulting from an integrated transaction
under Sec. 1.1275-6. In general, Sec. 1.1275-6 provides for the
integration of a qualifying debt instrument (as defined in Sec.
1.1275-6(b)(1)) with a Sec. 1.1275-6 hedge or combination of Sec.
1.1275-6
[[Page 25987]]
hedges in certain circumstances. The circumstances in which Sec.
1.1275-6 may apply involve a convertible debt instrument as well as one
or more options or other financial instruments involving underlying
stock, provided that the combined cash flows of the financial
instrument and the debt instrument permit the calculation of a yield to
maturity under section 1272 of the Code or the right to the combined
cash flows would qualify as a specified type of variable rate debt
instrument, and other conditions are satisfied.
Under Sec. 1.1275-6(f), except as otherwise provided in published
guidance, the synthetic debt instrument resulting from an integrated
transaction is recognized as a single debt instrument for Federal
income tax purposes for the period that the transaction qualifies as an
integrated transaction and is not subject to the Federal income tax
rules that would apply on a separate basis to the instruments
comprising the integrated transaction if the transaction were not
integrated.
Because an integrated transaction does not change the amount of
stock actually repurchased or issued, the Treasury Department and the
IRS are of the view that the determination of whether and when stock is
repurchased or issued for purposes of the stock repurchase excise tax
should be determined without regard to the integration of a qualifying
debt instrument with a Sec. 1.1275-6 hedge or combination of Sec.
1.1275-6 hedges under Sec. 1.1275-6. See proposed Sec. 1.1275-
6(f)(12)(iii).
D. Forfeiture or Clawback of Restricted Stock
One stakeholder recommended that the forfeiture of restricted stock
(that is, stock transferred to a service provider that is subject to a
substantial risk of forfeiture at grant) that was transferred to a
service provider in connection with the performance of services should
not be treated as a repurchase for purposes of the stock repurchase
excise tax to the extent no payment is made to the service provider in
connection with the forfeiture. Instead, the stakeholder recommended
treating the stock as repurchased only to the extent of any payment
received in connection with the forfeiture, with any excess of the
value of the stock over the amount paid treated as a forfeiture. In
other words, the stakeholder recommended using the amount paid rather
than market price to compute the amount of the repurchase in this
situation.
The stakeholder cited to Sec. 1.83-6(c) in support of its
recommendation. Section 1.83-6(c) provides that, if (under section
83(h) of the Code and Sec. 1.83-6(a)) a deduction, an increase in
basis, or a reduction of gross income was allowable to an employer in
respect of a transfer of property, and if such property subsequently is
forfeited, then the amount of such deduction, increase in basis, or
reduction of gross income is included in the employer's gross income
for the taxable year in which the forfeiture occurs. According to the
stakeholder, the fact that the employer does not recognize additional
income or gain suggests that the property forfeited, to the extent it
exceeds any amount paid by the employer to the forfeiting service
provider, is treated as a capital contribution to the employer under
section 118(a) rather than as a redemption.
Notice 2023-2 does not expressly address the forfeiture of
restricted stock. Under section 3.06(2) of Notice 2023-2, if property
is paid for the forfeited stock, the stock is treated as repurchased
for an amount equal to the market price on the date of repurchase
(regardless of the amount actually paid) because there is a section
317(b) redemption. If no property is paid in exchange for the forfeited
shares, the forfeiture is not treated as a repurchase, because the
forfeiture is neither a section 317(b) redemption nor treated as an
economically similar transaction. However, under both Notice 2023-2 and
these proposed regulations, there would be an issuance for purposes of
the netting rule when the ownership of the restricted stock transfers
to the recipient for Federal income tax purposes. See proposed Sec.
58.4501-4(d)(2).
The Treasury Department and the IRS are of the view that, if a
covered corporation takes into account an issuance of restricted stock
for purposes of the netting rule because a section 83(b) election has
been made, a forfeiture of such stock likewise should be treated as a
repurchase. Conversely, if a covered corporation does not take into
account an issuance of restricted stock for purposes of the netting
rule, a forfeiture of such stock should not be treated as a repurchase.
This approach is necessary to preserve consistency in the treatment of
issuances and repurchases. Moreover, the economic effect of a
forfeiture is similar to that of a repurchase, insofar as the shares
are retired (or held as treasury stock) in both cases.
Accordingly, the proposed regulations would treat a forfeiture of
restricted stock as a repurchase on the date of forfeiture (in an
amount equal to the fair market value of such stock on the date of
forfeiture) if such forfeited stock was treated as issued or provided
under the netting rule. See proposed Sec. 58.4501-2(e)(4)(vi); see
also part XII.D of this Explanation of Provisions (discussion of a
proposal to provide similar treatment with regard to forfeitures of
stock issued as part of an earnout or to satisfy an indemnification
obligation).
It is the view of the Treasury Department and the IRS that stock
received by a covered corporation or specified affiliate pursuant to a
clawback agreement (that is, a contractual provision that requires an
employee to return vested stock) is economically similar to restricted
stock forfeited to the covered corporation after failure to vest.
Accordingly, these proposed regulations also would provide that, if the
stock were treated as issued or provided under the netting rule, then
the clawed back stock would be treated as repurchased on the date of
clawback (in an amount equal to the fair market value of such stock on
such date). See proposed Sec. 58.4501-2(e)(4)(vi).
III. Valuation and Timing
A. Valuation
1. Overview
Under sections 3.06(2) and 3.08(5) of Notice 2023-2, the fair
market value of stock repurchased or issued (other than stock issued or
provided to an employee) is the market price of the stock on the date
the stock is repurchased or issued, respectively. Thus, if the price at
which the repurchased stock is purchased differs from the market price
of the stock on the date the stock is repurchased, the fair market
value of the stock is the market price on the date the stock is
repurchased.
The Treasury Department and the IRS continue to be of the view that
this approach is more consistent with the plain language of the
statute, and simpler for the IRS to administer and for taxpayers to
apply, than an approach that defines fair market value by reference to
the amount paid to repurchase stock. For example, under Notice 2023-2,
adjustments are not required for transaction costs or non-arm's-length
transactions, and special rules are not needed for situations in which
stock is redeemed for consideration other than cash (such as a non-
publicly traded note).
Section 3.08(3)(c) of Notice 2023-2 describes a special rule for
valuing stock issued or provided to employees. The fair market value of
such stock is the fair market value of the stock, as determined under
section 83, as of the date the stock is issued or provided to the
employee, as determined under section 3.08(3)(b)
[[Page 25988]]
of Notice 2023-2. See part XI.G.7 of this Explanation of Provisions
(discussion of valuing stock issued or provided to an employee or other
service provider).
In section 6.01(2) of Notice 2023-2, the Treasury Department and
the IRS requested comments on whether the fair market value of stock
repurchased or issued should be an amount other than the market price
of such stock. In section 6.01(6) of Notice 2023-2, the Treasury
Department and the IRS also requested comments on whether a method
should be provided for determining the market price of stock that is
traded on multiple established securities markets and, if so, what
modifications to the rules described in sections 3.06(2)(a)(i) and
3.08(5)(a)(i) of Notice 2023-2 (concerning acceptable methods for
determining the market price of repurchased or issued stock that is
traded on an established securities market) would be required.
2. Valuation in Arm's-Length Transactions
Consistent with the approach described in Notice 2023-2,
stakeholders generally recommended that the fair market value of stock
repurchased or issued should be the market price of the stock on the
day of the repurchase or issuance, respectively. However, one
stakeholder also recommended that covered corporations be required to
determine fair market value based on the actual price the covered
corporation pays or receives, if the repurchase or issuance is (i) from
or to an unrelated party, (ii) for cash or cash-equivalents, (iii)
negotiated at arm's length, and (iv) not pursuant to a pre-existing
option contract or other arrangement (for example, an accelerated share
repurchase agreement) that involves the delivery of stock at a price
other than the stock's market price at delivery.
Similarly, another stakeholder recommended an exception to the
general fair market value rule for repurchases that result from a
tender offer or other, similarly negotiated transaction that sets a
transaction price prior to the closing date. According to the
stakeholder, it is common for the transaction price and the market
price on the closing date to differ, and it is not clear why the value
of a repurchase should be determined based on the market price rather
than the transaction price.
The Treasury Department and the IRS continue to be of the view that
an approach that references the market price of stock on the date the
stock is repurchased or issued, respectively, is more consistent with
the plain language of the statute, and would be simpler to administer,
than an approach that references the amount paid to repurchase the
stock. Moreover, the Treasury Department and the IRS are of the view
that the two approaches likely would result in approximately similar
values for most repurchases of publicly traded stock. Consequently, the
proposed regulations would provide that the fair market value of stock
repurchased or issued is the market price of the stock on the date the
stock is repurchased or issued, respectively. See proposed Sec. Sec.
58.4501-2(h)(1) and 58.4501-4(e)(1).
3. Valuation in Bankruptcy or Insolvency Workouts
Another stakeholder recommended that, in the case of a bankruptcy
or insolvency workout, the fair market value of repurchased stock
should equal the value of the recovery shareholders are entitled or
permitted to receive under the bankruptcy or insolvency workout, rather
than the market price of the stock. The stakeholder recommended this
approach because the market price of the stock will take the debt
restructuring into account and, thus, may be much higher than the
recovery value.
However, the Treasury Department and the IRS are of the view that
the proposed regulations should not adopt special valuation rules for
financially troubled companies. As discussed in part XIII of this
Explanation of Provisions, the Treasury Department and the IRS are of
the view that distributions of cash or other non-qualifying property
(that is, property that is not permitted to be received under section
354 or 355 of the Code without the recognition of gain or loss) by
troubled companies to their shareholders in exchange for their stock
should be subject to the stock repurchase excise tax. Moreover, section
4501 contains no indication that special valuation rules for
financially troubled companies would be necessary or appropriate to
carry out the purposes of the stock repurchase excise tax. The Treasury
Department and the IRS are of this view because the exchange would be a
section 317(b) redemption and providing a special rule would not be
necessary or appropriate to carry out the purposes of section 4501.
4. Valuation of Publicly Traded Stock
a. In General
One stakeholder recommended that taxpayers be permitted (but not
required) to determine the market price of publicly traded stock based
on one or more commonly accepted valuation methods, such as daily
volume-weighted average price (VWAP), daily average high-low price, or
daily closing price. Under the stakeholder's recommendation, a taxpayer
would be required to consistently apply the taxpayer's chosen method to
all its repurchases and issuances throughout the taxpayer's taxable
year. According to the stakeholder, this approach would be consistent
with established Federal tax valuation standards for the fair market
value of publicly traded securities.
Sections 3.06(2)(a)(i) and 3.08(5)(a)(i) of Notice 2023-2 describe
an approach that would require taxpayers to determine the market price
of repurchased or issued stock, respectively, that is traded on an
established securities market by applying one of four methods: (i) the
daily volume-weighted average price as determined on the date the stock
is repurchased or issued; (ii) the closing price on the date the stock
is repurchased or issued; (iii) the average of the high and low prices
on the date the stock is repurchased or issued; and (iv) the trading
price at the time the stock is repurchased or issued. Sections
3.06(2)(a)(iii) and 3.08(5)(a)(iii) of Notice 2023-2 describe an
approach that would require the market price of such stock to be
determined by consistently applying one of the foregoing methods to all
repurchases and issuances throughout the covered corporation's taxable
year (other than stock issued to employees). Another stakeholder
expressed appreciation for the flexibility provided under the approach
described in sections 3.06(2)(a) and 3.08(5)(a) of Notice 2023-2.
The Treasury Department and the IRS agree that commonly accepted
valuation methods are an appropriate means of determining the fair
market value of publicly traded stock for purposes of repurchases and
issuances under section 4501. Accordingly, consistent with Notice 2023-
2, the proposed regulations would include four such methods: (i) daily
VWAP; (ii) daily closing price; (iii) daily average high-low price; and
(iv) trading price when stock is repurchased or issued. Consistent with
Notice 2023-2, to facilitate the IRS's ability to administer and
enforce the stock repurchase excise tax, the Treasury Department and
the IRS are of the view that taxpayers should be required (rather than
merely permitted) to use one of these methods. See proposed Sec. Sec.
58.4501-2(h)(2)(ii) and 58.4501-4(e)(2)(ii).
As reflected in sections 3.06(2)(a)(iii) and 3.08(5)(a)(iii) of
Notice 2023-2, the
[[Page 25989]]
Treasury Department and the IRS also agree with the stakeholder that
taxpayers should be required to consistently apply the chosen method to
all repurchases and issuances throughout the taxable year. See proposed
Sec. Sec. 58.4501-2(h)(2)(iv) and 58.4501-4(e)(2)(iv). For special
rules for valuing stock issued or provided to an employee or other
service provider in connection with the performance of services, see
proposed Sec. 58.4501-4(e)(5) and part XI.G.7 of this Explanation of
Provisions.
b. Stock Traded on Multiple Established Securities Markets
One stakeholder recommended that a covered corporation with a class
of stock that trades on multiple established securities markets should
be permitted to select both the valuation method and the exchange to be
used in determining the fair market value of the covered corporation's
stock. The stakeholder had considered an alternative approach based on
the market price of the shares on the exchange with the highest trading
volume on the applicable date, but the stakeholder did not recommend
such an approach due to the additional complexity it would create.
The Treasury Department and the IRS are of the view that a covered
corporation whose stock is traded on multiple exchanges should
determine the fair market value of the covered corporation's stock by
reference to trading on the exchange in the country in which the
covered corporation is organized, including a regional established
securities market that trades in that country. If the covered
corporation's stock trades on multiple exchanges in the country in
which the covered corporation is organized, fair market value is
determined by reference to trading on the exchange in that country with
the highest trading volume in that stock in the prior taxable year. See
proposed Sec. Sec. 58.4501-2(h)(2)(v) and 58.4501-4(e)(2)(v). It is
the view of the Treasury Department and the IRS that this approach
would better facilitate the IRS's ability to administer and enforce the
stock repurchase excise tax and enable taxpayers to apply the tax with
greater certainty.
5. Valuation of Privately Owned Stock
One stakeholder recommended that the market price of privately
owned stock should be determined under general valuation principles for
privately owned securities. Another stakeholder recommended that the
market price of privately owned stock should equal the amount paid for
such stock. According to this second stakeholder, valuation experts
often disagree, and the transaction price typically is viewed as the
best evidence of the value of privately owned stock. Further, allowing
corporations to use the amount paid in valuing privately traded stock
would relieve corporations from the need to evaluate whether there is a
difference between the amount paid and the market price of such shares
on the date on which ownership transfers for Federal income tax
purposes.
Under the approach described in sections 3.06(2)(b) and 3.08(5)(b)
of Notice 2023-2, stock that is not traded on an established securities
market would be valued on the date of repurchase or issuance under the
principles of Sec. 1.409A-1(b)(5)(iv)(B)(1). Section 1.409A-
1(b)(5)(iv)(B)(1) provides, in part, that the fair market value of
stock as of a valuation date means a value determined by the reasonable
application of a reasonable valuation method, and that the
determination of whether a valuation method is reasonable (or whether
an application of a valuation method is reasonable) is made based on
the facts and circumstances as of the valuation date. Section 1.409A-
1(b)(5)(iv)(B)(1) further provides that the amount paid is one factor
to be considered under a reasonable valuation method. The Treasury
Department and the IRS are of the view that the proposed regulations
should implement the approach described in Notice 2023-2 and should not
provide a separate rule that would permit taxpayers to use the amount
paid, in and of itself, in determining the value of privately traded
stock. See proposed Sec. Sec. 58.4501-2(h)(3) and 58.4501-4(e)(3). For
special rules for valuing stock issued or provided to an employee or
other service provider in connection with the performance of services,
see proposed Sec. 58.4501-4(e)(5) and part XI.G.7 of this Explanation
of Provisions.
As with publicly traded stock, the Treasury Department and the IRS
are of the view that repurchases and issuances of privately traded
stock should be valued consistently. Specifically, the proposed
regulations would provide that the same valuation method must be used
for all repurchases and issuances of privately owned stock belonging to
the same class throughout the covered corporation's taxable year,
unless the application of that method to a particular repurchase or
issuance would be unreasonable under the facts and circumstances as of
the valuation date. See proposed Sec. Sec. 58.4501-2(h)(3)(ii) and
58.4501-4(e)(3)(ii). For special rules for valuing stock issued or
provided to an employee or other service provider in connection with
the performance of services, see proposed Sec. 58.4501-4(e)(5) and
part XI.G.7 of this Explanation of Provisions.
6. Annual Valuation Convention
A stakeholder also questioned whether covered corporations should
be permitted to use an annual valuation convention to determine a
single, uniform value for all repurchases and issuances during a
taxable year. According to the stakeholder, an annual valuation
convention would eliminate the distortive effects of stock price
volatility. In addition, such approach would simplify netting because
the use of the same price for all repurchases and issuances in the
taxable year would allow netting to be computed based on the number of
shares repurchased versus issued.
However, the stakeholder also acknowledged that converting the
netting rule into such a ``share count'' rule would be in tension with
the statutory requirement to value shares based on fair market value.
The stakeholder also noted that volatility later in the year could
cause a covered corporation's stock repurchase excise tax liability to
rise or fall dramatically after issuances or repurchases earlier in the
year, and that other Code provisions typically do not allow values to
be averaged over such a long period.
The Treasury Department and the IRS agree with the stakeholder that
adoption of an annual valuation convention in the proposed regulations
would be inconsistent with the statutory requirement under section
4501(c)(3) to value shares based on fair market value. Accordingly, the
proposed regulations would not adopt the stakeholder's annual valuation
convention.
B. Timing of Issuances and Repurchases
1. In General
The approach described in sections 3.06(1)(a) and 3.08(2) of Notice
2023-2 generally provides that stock is treated as repurchased or as
issued or provided, respectively, at the time at which ownership of the
stock transfers for Federal income tax purposes. In turn, the approach
described in sections 3.06(2) and 3.08(5) of Notice 2023-2 provides
that the fair market value of stock repurchased or issued is the market
price of the stock on the date the stock is repurchased or issued,
respectively.
One stakeholder recommended that, consistent with the approach
described in section 3.08(2) of Notice 2023-2, stock generally should
be treated as issued for purposes of the netting rule
[[Page 25990]]
when tax ownership of the stock transfers to the recipient of the
stock, rather than when the stock is issued for corporate law or
financial statement purposes.
The Treasury Department and the IRS agree with the stakeholder's
general recommendation and continue to be of the view that stock
generally should be treated as repurchased when tax ownership of the
stock transfers to the covered corporation or to the specified
affiliate (as appropriate). Therefore, the proposed regulations
generally would retain this approach. See proposed Sec. Sec. 58.4501-
2(g)(1) and 58.4501-4(d)(1). For specific timing rules applicable in
particular situations, see proposed Sec. 58.4501-2(g)(2), (3), and
(4), and for special timing rules for stock issued or provided to an
employee or other service provider in connection with the performance
of services, see proposed Sec. 58.4501-4(d)(2) and part XI.G.6 of this
Explanation of Provisions.
2. Repurchase Pursuant to an Economically Similar Transaction
Under the rule described in section 3.06(1)(b) of Notice 2023-2,
stock repurchased in an economically similar transaction is treated as
repurchased when the shareholders of the covered corporation exchange
their stock in the covered corporation. Consistent with part III.B.1 of
this Explanation of Provisions and section 3.06(1)(b) of Notice 2023-2,
the proposed regulations would provide that stock repurchased in an
economically similar transaction described in proposed Sec. 58.4501-
2(e)(4) is treated as repurchased on the date the shareholders of the
covered corporation exchange their stock in such corporation. See
proposed Sec. 58.4501-2(g)(2).
3. Repurchase Pursuant to a Constructive Specified Affiliate
Acquisition
For a discussion of the timing rule for repurchases pursuant to a
constructive specified affiliate acquisition, see part XIV.D of this
Explanation of Provisions.
4. Accelerated Share Repurchase Agreements
Although Notice 2023-2 does not describe special rules for
accelerated share repurchase (ASR) agreements, section 3.09(15),
Example 15, of Notice 2023-2 illustrates the application of the timing
rules summarized in part III.B.1 of this Explanation of Provisions in
the context of an ASR agreement. That example explicitly is limited to
situations in which, based on the terms of the agreement and the facts
and circumstances, the date on which shares are delivered by the bank
to the covered corporation is the date on which tax ownership of the
shares is transferred for Federal income tax purposes. As a result, the
delivery date in the example is the repurchase date. The example
illustrates the general principle that the date on which tax ownership
of the shares is transferred for Federal income tax purposes, which is
generally based on the particular ASR agreement and the facts and
circumstances of a transaction, is the repurchase date.
Several stakeholders requested guidance regarding the treatment of
ASR agreements for purposes of the stock repurchase excise tax. In an
ASR agreement, a corporation that wants to repurchase its outstanding
shares from the market will make an initial cash payment to an
investment bank in exchange for a certain number of shares. To deliver
the shares to the corporation, (i) the investment bank first will
borrow shares from stock lenders, and then (ii) over the term of the
ASR agreement, the bank will purchase shares from the market and use
such shares to gradually return the stock owed to the stock lenders.
The price the corporation ultimately pays for its shares under the
ASR agreement generally is based on an averaging of the VWAP of the
shares on specified days over the term of the agreement. Upon final
settlement of the agreement, the bank may be required to deliver
additional shares or cash to the corporation, or the corporation may
owe additional purchase price to the bank, depending on the VWAP of the
shares over the term of the agreement.
Several stakeholders recommended treating the initial delivery of
shares by the bank to a covered corporation under an ASR agreement as a
repurchase at the time of delivery, rather than at the time the bank
purchases the shares from the market. Based on the plain language of
section 4501(a), one stakeholder also recommended determining the
amount of the repurchase by reference to the fair market value of the
shares delivered on the date of delivery, rather than by reference to
the initial payment amount under the ASR agreement. If the bank
delivers additional shares to the covered corporation (or the covered
corporation issues shares to the bank) upon final settlement of the ASR
agreement, the stakeholder recommended that such delivery (or issuance)
also should be considered as a repurchase (or an issuance) of shares
for purposes of the stock repurchase excise tax, with the fair market
value of the repurchase (or issuance) determined on that date.
The stakeholders' recommendations are consistent with Notice 2023-
2, including section 3.09(15), Example 15, to the extent that the ASR
agreement involved is one in which the date the shares are delivered by
the bank to the covered corporation is the date on which tax ownership
of shares is transferred for Federal income tax purposes. In such a
situation, the date the shares are delivered would be the repurchase
date. However, because the determination of the date on which tax
ownership of shares is transferred is an inherently factual question,
the Treasury Department and the IRS are of the view that no special
rule should be included in the proposed regulations to determine the
repurchase date for ASR agreements, and the proposed regulations would
retain the approach described in Notice 2023-2. See proposed Sec. Sec.
58.4501-2(h)(1), 58.4501-4(e)(1), and 58.4501-5(b)(15) (Example 15).
5. Other Forward Contracts
A stakeholder also requested guidance on how the stock repurchase
excise tax applies to other forward transactions (either variable or
fixed price) in which a corporation agrees to acquire or issue its
stock for delivery in a future trade. The stakeholder recommended that
the stock repurchase excise tax and the netting rule generally should
be applied based on the fair market value of the shares at the time of
their actual acquisition or issuance by the corporation. However, if
the stock underlying the transaction is treated as immediately acquired
or issued under Federal income tax principles (for example, if the
corporation effectively acquires the benefits and burdens of stock
ownership upon entering into the forward contract), the timing rules
for purposes of the stock repurchase excise tax (for example, the date
used for determining fair market value) should follow those Federal
income tax principles.
The Treasury Department and the IRS agree with these
recommendations as they relate to the determination of the date stock
is treated as repurchased and the fair market value of that stock. As
previously discussed, the proposed regulations generally would use
Federal income tax principles to determine the date on which stock is
treated as repurchased or issued. Additionally, under the proposed
regulations, the fair market value of stock repurchased or issued
generally would equal the market price of the stock on the date the
stock is repurchased or issued. See proposed Sec. Sec. 58.4501-2(h)(1)
and 58.4501-4(e)(1). For a discussion of the application of the netting
rule to forward contracts or other instruments not in the legal form
[[Page 25991]]
of stock, see part XI.C.9 of this Explanation of Provisions.
6. Stock Issued or Provided to an Employee or Other Service Provider
For a discussion of the timing rules for stock issued or provided
to an employee or other service provider, see part XI.G.6 of this
Explanation of Provisions.
IV. Definitions of ``Covered Corporation,'' ``Established Securities
Market,'' and ``Specified Affiliate''
A. Becoming or Ceasing To Be a Covered Corporation
1. Overview
In section 6.02(2) of Notice 2023-2, the Treasury Department and
the IRS requested comments on when a corporation should be treated as
becoming or ceasing to be a covered corporation, and how repurchases
and issuances by a corporation during a taxable year that are prior to
the date the corporation becomes a covered corporation or after the
date the corporation ceases to be a covered corporation should be
treated. For example, the Treasury Department and the IRS have
considered the extent to which the term ``covered corporation'' should
apply to a privately held corporation that goes public, or to a
publicly traded corporation that goes private, during a taxable year.
One stakeholder recommended that the stock repurchase excise tax
base of a corporation that becomes a covered corporation during its
taxable year (for example, because of an initial public offering (IPO))
should be increased only for section 317(b) redemptions and
economically similar transactions occurring on or after the date the
corporation becomes a covered corporation. The stakeholder further
recommended that only stock issued by a corporation on or after the
date it becomes a covered corporation should be taken into account for
purposes of the netting rule.
Similarly, another stakeholder recommended that a corporation's
status as a covered corporation should be determined immediately prior
to a repurchase transaction. Thus, for example, a public corporation
that becomes a private corporation in a repurchase would be a covered
corporation with respect to that transaction.
In contrast, another stakeholder recommended that any redemption
that occurs as part of a transaction should be exempt from the
definition of ``repurchase'' if the corporation's stock no longer is
traded on an established securities market immediately after the
transaction. Alternatively, the stakeholder recommended that a
corporation's status as a covered corporation be determined at the end
of the repurchase transaction.
2. General Rules
The Treasury Department and the IRS are of the view that, as a
general rule, a corporation should be treated as a covered corporation
starting at the beginning of the corporation's ``initiation date,''
which is the date on which stock of the corporation begins to be traded
on an established securities market. Based on the statutory language,
the Treasury Department and the IRS are of the view that the traded
instrument must be stock of the corporation (as opposed to, for
example, ``when-issued'' trading of interests in to-be-issued shares of
stock of the corporation). See, for example, section 4501(b) (defining
a covered corporation as a domestic corporation the stock of which is
traded on an established securities market). A covered corporation
generally would cease being treated as a covered corporation at the end
of the covered corporation's ``cessation date,'' which is the date on
which stock of the covered corporation ceases to be traded on an
established securities market.
The Treasury Department and the IRS are of the view that these
general rules would be consistent with the statutory language in
section 4501 and would facilitate the IRS's ability to administer and
enforce the stock repurchase excise tax. Accordingly, the proposed
regulations would incorporate these general rules. See proposed Sec.
58.4501-2(d)(1) and (d)(2)(i).
Under the proposed regulations, in the case of a privately held
domestic corporation that goes public, shares issued on or after the
initiation date would be counted for purposes of the netting rule under
the proposed regulations. In addition, the proposed regulations would
provide that any repurchases, issuances, or contributions to an
employer-sponsored retirement plan on or after that date would be taken
into account in computing the corporation's stock repurchase excise tax
base for that taxable year. In contrast, shares issued before the
initiation date would not be counted for purposes of the netting rule,
and any repurchases, issuances, or contributions to an employer-
sponsored retirement plan before that date would not be taken into
account in computing the corporation's stock repurchase excise tax base
for that taxable year. See proposed Sec. 58.4501-4(b)(2).
In the case of a publicly traded domestic corporation that goes
private, repurchases of stock on the cessation date would be subject to
the stock repurchase excise tax under the proposed regulations, unless
one of the statutory exceptions applies. However, any repurchases,
issuances, or contributions to an employer-sponsored retirement plan of
the corporation's stock after that date generally would not be taken
into account under the proposed regulations in computing the
corporation's stock repurchase excise tax base for that year.
3. Exception Regarding Cessation Transactions That Include Repurchases
Pursuant to the Transaction's Plan
The proposed regulations would contain an exception to the general
rule that a corporation should be treated as a covered corporation
starting at the beginning of its ``initiation date'' and ending at the
end of its ``cessation date.'' Under the proposed regulations, if a
corporation ceases to be a covered corporation pursuant to a plan that
includes a repurchase, and if the corporation's cessation date precedes
the date on which any repurchase undertaken pursuant to the plan
occurs, then the corporation would continue to be a covered corporation
until the end of the date on which the repurchase occurs. See proposed
Sec. 58.4501-2(d)(2)(ii). For example, under the proposed regulations,
all repurchases of stock of a target covered corporation in an
acquisitive reorganization would be subject to the stock repurchase
excise tax (if no exception applied), even if the target covered
corporation's stock ceased to be traded on an established securities
market prior to the repurchase of the target covered corporation's
stock in the acquisitive reorganization. Under this exception, a
covered corporation's final repurchase transaction pursuant to the plan
of reorganization would be included in the stock repurchase excise tax
base.
4. Inbound and Outbound F Reorganizations
A stakeholder requested clarification that, consistent with the
Federal income tax treatment of a foreign corporation that domesticates
in an F reorganization, such a corporation is not a domestic
corporation for purposes of the stock repurchase excise tax until the
day after that reorganization occurs. See Sec. 1.367(b)-2(f)(4)
(providing that, in the case of an F reorganization in which the
transferor corporation is a foreign corporation, the taxable year of
such corporation ends with the close of the date of the transfer).
According to the
[[Page 25992]]
stakeholder, this clarification is important for foreign special
acquisition holding companies, which typically domesticate when
combining with a domestic business.
The Treasury Department and the IRS agree with the stakeholder.
Accordingly, these proposed regulations would clarify that, for
purposes of the stock repurchase excise tax, a foreign corporation that
transfers its assets to a domestic corporation in an F reorganization
(as described in Sec. 1.367(b)-2(f)) is not treated as a domestic
corporation until the day after the reorganization. Similarly, the
proposed regulations would clarify that, for purposes of the stock
repurchase excise tax, a domestic corporation that transfers its assets
to a foreign corporation in an F reorganization (as described in Sec.
1.367(a)-1(e)) is not treated as a foreign corporation until the day
after the reorganization. See proposed Sec. 58.4501-2(d)(3).
5. Determination of Timing of Events or Transactions
The Treasury Department and the IRS have considered rules to
address uncertainty that could arise from the application of the stock
repurchase excise tax regulations to a series of transactions or events
that occurs across multiple time zones.
The Treasury Department and the IRS request comments on this issue,
including specific proposals to address the application of the stock
repurchase excise tax regulations to a series of transactions or events
that occurs across multiple time zones. The Treasury Department and the
IRS encourage comments regarding the extent to which a proposed
approach would facilitate taxpayer certainty and the IRS's ability to
administer and enforce the stock repurchase excise tax regulations.
B. Determining Specified Affiliate Status
If a specified affiliate of a covered corporation acquires stock of
the covered corporation from a person that is not the covered
corporation or another specified affiliate of the covered corporation,
the acquisition is treated as a repurchase of the stock of the covered
corporation by the covered corporation. See section 4501(c)(2)(A); see
also section 3.05(1) of Notice 2023-2.
Stakeholders have asked when specified affiliate status should be
determined. More specifically, stakeholders have asked when valuations
should be undertaken for purposes of the 50-percent vote-or-value test
in section 4501(c)(2)(B), and whether fluctuations in the value of the
(potential) specified affiliate's stock or partnership interests should
be ignored.
The Treasury Department and the IRS are of the view that the
determination of whether a corporation or partnership is a specified
affiliate should be made whenever such determination is relevant for
purposes of section 4501. For example, such a determination would be
relevant when the potential specified affiliate acquires stock of a
covered corporation or provides stock of the covered corporation to
employees of the potential specified affiliate. See proposed Sec.
58.4501-2(f)(2)(i).
C. Involvement Safe Harbor
As defined in section 4501(b), the term ``covered corporation''
means any domestic corporation the stock of which is traded on an
established securities market (within the meaning of section
7704(b)(1)). The rule described in section 3.02(13) of Notice 2023-2
further provides that the term ``established securities'' market has
the meaning provided in Sec. 1.7704-1(b).
Section 1.7704-1(b) provides, in part, that the term ``established
securities market'' includes ``[a]n interdealer quotation system that
regularly disseminates firm buy or sell quotations by identified
brokers or dealers by electronic means or otherwise'' (interdealer
system). See Sec. 1.7704-1(b)(5). However, Sec. 1.7704-1(d) provides
a safe harbor (involvement safe harbor) under which interests in a
partnership are not treated as traded on an established securities
market within the meaning of Sec. 1.7704-1(b)(5) (that is, a
partnership will not be a publicly traded partnership solely due to an
interdealer system), unless the partnership either (1) ``participates
in the establishment of the market or the inclusion of its interests
thereon,'' or (2) ``recognizes any transfers made on the market'' by
redeeming the transferor or admitting the transferee as a partner or
otherwise recognizing any rights of the transferee.
A stakeholder noted that shares of corporations may trade over the
counter (OTC) or on similar markets, even without the corporation's
involvement, and that certain of those OTC or similar markets may
qualify as an interdealer system. As a result, a corporation could be a
covered corporation due to independent shareholder actions without the
corporation engaging in an affirmative listing on an exchange. The
stakeholder requested confirmation that the involvement safe harbor in
Sec. 1.7704-1(d) applies for purposes of determining whether a
corporation is a covered corporation due to an interdealer system, with
adjustments as needed for application of this safe harbor to
corporations rather than partnerships.
The Treasury Department and the IRS are of the view that the
involvement safe harbor should not apply for purposes of the stock
repurchase excise tax. The Treasury Department and the IRS view the
relationship between a partnership and its partners (a contractual
relationship that allows a partnership to set the terms under which
interests in the partnership may be validly transferred) as different
from the relationship between a corporation and its shareholders (which
is determined by the corporate law governing the stock). Accordingly,
the proposed regulations would not incorporate the involvement safe
harbor.
D. Indirect Ownership of Specified Affiliates
As noted in part I.B of the Background section of this preamble,
section 4501(c)(2)(B) defines the term ``specified affiliate'' to mean,
with regard to any corporation, ``(i) any corporation more than 50
percent of the stock of which is owned (by vote or by value), directly
or indirectly, by such corporation, and (ii) any partnership more than
50 percent of the capital interests or profits interests of which is
held, directly or indirectly, by such corporation'' (emphasis added).
The proposed regulations would provide that, for purposes of
section 4501(c)(2)(B), ``indirect'' ownership means a corporation's
proportionate ownership in equity interests through other entities. See
proposed Sec. 58.4501-2(f)(2)(ii). For example, if P owns 60 percent
of the stock of Sub 1, which owns 60 percent of the stock of Sub 2,
then P indirectly owns 36 percent (0.6 x 0.6 = 0.36) of the stock of
Sub 2.
E. Foreign Securities Markets
In section 6.02(9) of Notice 2023-2, the Treasury Department and
the IRS requested comments on whether the definition of ``established
securities market'' should be revised to clarify the regulatory
requirements under the Securities Exchange Act of 1934 that are most
relevant to the determination of whether a foreign securities market is
treated as an established securities market and, if so, what type of
U.S. securities exchange (including which tier of a securities exchange
with multiple tiers) should be the baseline for comparison.
One stakeholder recommended including an exclusive list of foreign
securities markets that are treated as established securities markets,
on the grounds that tax advisors should not be required to determine
whether foreign securities markets have regulatory
[[Page 25993]]
requirements analogous to those under the Securities Exchange Act of
1934. See Sec. 1.7704-1(b).
The Treasury Department and the IRS appreciate the stakeholder's
recommendation. However, the Treasury Department and the IRS are of the
view that the development and maintenance of an exclusive list of
foreign securities markets that are treated as established securities
markets would be outside the scope of the proposed regulations. As a
result, the proposed regulations would not include such a list.
F. Depository Receipts
In section 6.02(10) of Notice 2023-2, the Treasury Department and
the IRS requested comments on how the trading of stock through
depository receipts should be treated for purposes of determining
whether a corporation is a covered corporation or whether repurchased
stock is traded on an established securities market. In response, one
stakeholder noted that some applicable foreign corporations with
domestic specified affiliates have American depository receipts (ADRs)
listed in the United States. The stakeholder requested guidance to
clarify that the foreign parent's ADRs would not cause the domestic
specified affiliate to be treated as if the domestic specified
affiliate's stock were traded on an established securities market in
the United States.
The Treasury Department and the IRS are of the view that no special
rules are needed in response to this request. Section 4501(b)
specifically defines the term ``covered corporation'' to mean ``any
domestic corporation the stock of which is traded on an established
securities market'' (emphasis added). Moreover, although Notice 2023-2
does not expressly address ADRs, the definition of ``stock'' is defined
with respect to an instrument issued by the corporation. See section
3.02(25) of Notice 2023-2. The proposed regulations would maintain this
definition of ``stock.'' See proposed Sec. 58.4501-1(b)(29).
ADRs that provide full voting rights with respect to the underlying
corporate stock, entitle ADR holders to receive any dividends paid on
the stock, and permit an ADR holder to surrender an ADR at any time in
exchange for the underlying stock, may be treated as direct ownership
of the underlying stock. See Rev. Rul. 65-218, 1965-2 C.B. 566. If an
ADR is not treated as direct ownership of the underlying stock, it
would be characterized in accordance with its substance. In either
case, because ADRs are not issued by a domestic specified affiliate,
they would not be treated as stock of the domestic specified affiliate.
Publicly available information indicates that many foreign issuers
treat ADRs for Federal income tax purposes as direct ownership of their
stock. On that basis, under the definition of ``stock'' in these
proposed regulations, ADRs would be treated as stock of the issuer and
would be relevant to determining whether the issuer has stock that is
traded on an established securities market. Similarly, global
depositary receipts (GDRs) for the stock of domestic corporations that
are traded on foreign exchanges may be relevant in determining whether
the issuer has stock that is traded on an established securities
market. Because the ADRs and GDRs are not issued by a domestic
specified affiliate, they would not be treated as stock of the domestic
specified affiliate.
Additionally, Congress specifically wrote rules to address
situations involving a publicly traded foreign corporation with a
domestic specified affiliate, and those rules do not include any
provisions treating the domestic specified affiliate as publicly traded
as a result of the foreign corporation's stock trading on an
established securities market in the United States. See section
4501(d); see also part XVI of this Explanation of Provisions
(discussion of feedback relating to section 4501(d)).
V. Section 301 Distributions
Section 301(a) of the Code generally provides that a distribution
of property (as defined in section 317(a)) made by a corporation to a
shareholder with respect to its stock is treated in the manner provided
in section 301(c). Section 301(c)(1) provides that the portion of the
distribution that is a dividend (as defined in section 316) is included
in gross income. Section 301(c)(2) provides that the portion of the
distribution that is not a dividend is applied against and reduces the
adjusted basis of the stock. Section 301(c)(3) generally provides that
the portion of the distribution that is not a dividend is treated as
gain from the sale or exchange of property to the extent that it
exceeds the adjusted basis of the stock.
For purposes of this discussion, an actual distribution subject to
section 301(c)(2) or (3) refers to a distribution of property to a
shareholder with respect to the corporation's stock that does not
include an exchange of such stock. In contrast, an ``in-form''
redemption treated as a distribution subject to section 301(c)(2) or
(3) refers to a distribution of property to a shareholder in exchange
for the corporation's stock.
A. Actual Distributions Subject to Section 301(c)(2) or (3)
Stakeholders asked whether an actual distribution (that is, a
distribution that does not involve a redemption in form) to which
section 301(c)(2) or (3) applies is subject to the stock repurchase
excise tax. Stakeholders contended that the stock repurchase excise tax
should not apply to such a distribution, because (i) it is not a
section 317(b) redemption, and (ii) it is not economically similar to a
section 317(b) redemption (for example, it does not decrease the number
of shares outstanding). Instead, such a distribution more closely
resembles a dividend, which is excluded from the stock repurchase
excise tax (see section 4501(e)(6)).
The Treasury Department and the IRS agree that an actual
distribution subject to section 301(c)(2) or (3) is not a repurchase
(and, therefore, is not subject to the stock repurchase excise tax)
because such a distribution is neither a section 317(b) redemption nor
economically similar to such a redemption. Accordingly, and consistent
with section 3.04(4)(a) of Notice 2023-2 (which does not include such
distributions in the list of economically similar transactions), the
proposed regulations would provide that an actual distribution subject
to section 301(c)(2) or (3) is not subject to the stock repurchase
excise tax. See proposed Sec. 58.4501-2(e)(5)(iv).
B. Redemptions Treated as Distributions Subject to Section 301(c)(2) or
(3)
Stakeholders also asked whether the stock repurchase excise tax
applies to an in-form redemption that is treated as a distribution to
which section 301(c)(2) or (3) applies. See section 302(d). One
stakeholder recommended applying the stock repurchase excise tax to a
non-pro rata, in-form redemption that is treated as a distribution to
which section 301(c)(2) or (3) applies. However, the stakeholder
contended that the stock repurchase excise tax should not apply to a
pro rata, in-form redemption that is treated as a distribution to which
section 301(c)(2) or (3) applies, because such a redemption is more
akin to an actual section 301 distribution than a typical section
317(b) redemption. In contrast, another stakeholder recommended that
the stock repurchase excise tax should apply to such a transaction
because it is a redemption within the meaning of section 317(b) (for
example, such a redemption decreases the number of outstanding
[[Page 25994]]
shares even though the redemption is pro rata).
The Treasury Department and the IRS agree that an in-form section
317(b) redemption treated as a distribution to which section 301(c)(2)
or (3) applies is a repurchase based on the plain language of the
statute, regardless of whether the redemption is pro rata. Accordingly,
and consistent with section 3.04(3) of Notice 2023-2 (which does not
include such transactions in the list of section 317(b) redemptions
that are not repurchases), an in-form section 317(b) redemption treated
as a distribution to which section 301(c)(2) or (3) applies would be
subject to the stock repurchase excise tax under the proposed
regulations. See proposed Sec. 58.4501-2(e)(3) (providing an exclusive
list of section 317(b) redemptions that are not repurchases).
C. Exclusion for Pro Rata Distributions
One stakeholder recommended a general exclusion from the stock
repurchase excise tax for distributions made to all shareholders of a
covered corporation on a wholly pro rata basis (100 percent pro rata
distribution), regardless of whether such distributions involve a
redemption in form. According to the stakeholder, such distributions do
not implicate most of the policy considerations underlying the tax.
However, the stakeholder noted that adopting this recommendation
would require the Treasury Department and the IRS to consider (i) how
to determine whether a distribution is 100 percent pro rata if the
covered corporation has multiple classes of stock, and (ii) the impact
of such distributions on options or convertible debt instruments (to
the extent such instruments thereby accrete their proportionate
interests in the covered corporation).
The Treasury Department and the IRS disagree with the stakeholder's
recommendation. A redemptive 100 percent pro rata distribution is a
repurchase because the distribution (i) constitutes a section 317(b)
redemption or (ii) is an economically similar transaction. Accordingly,
the proposed regulations would not provide an exclusion for 100 percent
pro rata distributions, except in the case of pro rata distributions in
a complete liquidation to which section 331 or 332 (but not both)
applies.
VI. Complete and Partial Liquidations
A. Complete Liquidations
Section 331(a) of the Code provides that amounts received by a
shareholder in a distribution in complete liquidation of a corporation
are treated as in full payment in exchange for the stock. Section 332
of the Code provides an exception to the general rule in section
331(a). If the requirements of section 332 are met, no gain or loss is
recognized upon the receipt by one corporation of property distributed
in complete liquidation of another corporation.
Section 332 applies only if the corporation receiving property in
the liquidation satisfies the requirements of section 332(b), including
the requirement that the corporation own stock in the liquidating
corporation meeting the 80-percent voting and value requirements of
section 1504(a)(2) of the Code (80-percent distributee). See section
332(b)(1).
1. Application of Stock Repurchase Excise Tax
Several stakeholders recommended that a complete liquidation by a
covered corporation should not be subject to the stock repurchase
excise tax because the complete liquidation terminates the covered
corporation's existence. For support, these stakeholders contended that
a complete liquidation provides no opportunity for the liquidating
corporation to reinvest cash in the corporation's enterprise, which
stakeholders stated Congress may have intended to encourage through the
enactment of section 4501. In addition, these stakeholders emphasized
that a complete liquidation provides no opportunity for a covered
corporation to manipulate the corporation's earnings per share (EPS) or
other similar metrics, which these stakeholders stated Congress may
have intended to discourage through the enactment of section 4501.
As reflected in section 3.04(4)(b)(i)(A) of Notice 2023-2, the
Treasury Department and the IRS are of the view that a distribution in
complete liquidation of a covered corporation to which either section
331 or 332 (but not both) applies is not a repurchase. Accordingly, the
Treasury Department and the IRS are of the view that such distributions
should not be subject to the stock repurchase excise tax. See proposed
Sec. 58.4501-2(e)(5).
2. Determination of Complete Liquidation or Dissolution
Stakeholders also asked whether a distribution is in ``complete
liquidation'' of a corporation for purposes of section 331 if some
classes of the liquidating corporation's stock do not receive a
distribution. Section 331 does not define the term ``complete
liquidation.'' Instead, this term is defined in section 346(a) of the
Code, which provides that, for purposes of subchapter C of chapter 1,
``a distribution shall be treated as in complete liquidation of a
corporation if the distribution is one of a series of distributions in
redemption of all of the stock of the corporation pursuant to a plan''
(emphasis added).
Stakeholders have questioned whether the definition of ``complete
liquidation'' in section 346(a) requires a distribution on all classes
of stock in order for a dissolution of a corporation to qualify as a
distribution in complete liquidation to which section 331 applies.
These stakeholders based their question on the language of section
332(b)(2), which provides that a distribution is considered in
``complete liquidation'' within the meaning of section 332 only if
``the distribution is by [the liquidating corporation] in complete
cancellation or redemption of all its stock.'' In addition, these
stakeholders referenced Treasury regulations and judicial opinions. See
Sec. 1.332-2(b) (``Section 332 applies only to those cases in which
the recipient corporation receives at least partial payment for the
stock which it owns in the liquidating corporation.''); Spaulding
Bakeries Inc. v. Comm'r, 252 F.2d 693, 697 (2d Cir. 1958) (emphasizing
that ``[s]ection 112(b)(6)(C) [of the Internal Revenue Code of 1939
(the predecessor statute to section 332)] requires for its application
a distribution in complete cancellation or redemption of all stock of
the dissolved corporation''), aff'g 27 T.C. 684 (1957); H.K. Porter Co.
v. Comm'r, 87 T.C. 689 (1986) (agreeing with the rationale of the
Second Circuit's decision in H.K. Porter and holding that section 332
did not apply to a dissolution because a distribution was made on the
dissolving corporation's preferred stock but not its common stock).
As stated previously, the Treasury Department and the IRS are of
the view that a distribution in complete liquidation of a covered
corporation to which section 331 or 332(a) applies should not be
treated as a repurchase. In addition, the Treasury Department and the
IRS are of the view that a redemption by a covered corporation pursuant
to a corporate dissolution of the covered corporation should not be
treated as a repurchase. To clarify the intent of Notice 2023-2, the
proposed regulations would provide that a distribution in complete
liquidation of a covered corporation to which either section 331 or
332(a) (but not both) applies, a distribution pursuant to a plan of
dissolution of a covered
[[Page 25995]]
corporation that is reported on the original (but not a supplemented or
an amended) IRS Form 966, Corporate Dissolution or Liquidation (or any
successor form), or a distribution pursuant to a deemed dissolution of
the covered corporation (for instance, pursuant to a deemed liquidation
under Sec. 301.7701-3), is not a repurchase and, therefore, is not
subject to the stock repurchase excise tax. See proposed Sec. 58.4501-
2(e)(5)(i). For the treatment of liquidations to which both sections
331 and 332 apply, see proposed Sec. 58.4501-2(e)(4)(v)(A) and the
discussion in part VI.A.3 of this Explanation of Provisions.
3. Liquidations to Which Both Sections 331 and 332 Apply
The rules described in section 3.04(4)(a)(v) of Notice 2023-2
provide that, if sections 331 and 332 both apply to a complete
liquidation, then (i) the distribution to the 80-percent distributee is
not subject to the stock repurchase excise tax, but (ii) each
distribution to which section 331 applies (that is, the surrender of
covered corporation stock by each minority shareholder) is subject to
the stock repurchase excise tax. The Treasury Department and the IRS
have arrived at this view because the 80-percent distributee is the
successor to the transferor corporation (that is, the liquidating
subsidiary) following the complete liquidation to which section 332
applies. See section 381(a)(2). In contrast to the 80-percent
distributee, minority shareholders that receive liquidating
distributions to which section 331 applies terminate their investment
in the transferor corporation's business (that is, are not successors
to the transferor corporation).
Moreover, a complete liquidation to which sections 331 and 332 both
apply is substantively similar to an upstream reorganization of the
liquidating subsidiary into the 80-percent distributee in which the
minority shareholders receive only non-qualifying property in exchange
for their stock in the liquidating subsidiary. Because such an exchange
in an upstream reorganization would constitute a ``repurchase'' under
the proposed regulations, the Treasury Department and the IRS are of
the view that the same treatment should apply to liquidating
distributions to minority shareholders subject to section 331. See
proposed Sec. 58.4501-2(e)(4)(v)(A).
4. Distributions During Taxable Year of Complete Liquidation or
Dissolution
The rule described in section 3.04(4)(b)(i)(B) of Notice 2023-2
provides that, if a covered corporation or a covered surrogate foreign
corporation (as appropriate) completely liquidates and dissolves
(within the meaning of Sec. 1.331-1(d)(1)(ii)) during a taxable year,
no distribution by that corporation during that taxable year is a
repurchase. See also proposed Sec. 58.4501-2(e)(5)(ii) (incorporating
this provision into the proposed regulations). Stakeholders have
requested clarification regarding how this provision interacts with the
rule described in section 3.04(4)(a)(v) of Notice 2023-2, which (as
previously discussed in part VI.A.3 of this Explanation of Provisions)
provides that, in a complete liquidation to which sections 331 and 332
both apply, each distribution to which section 331 applies is subject
to the stock repurchase excise tax. The proposed regulations would
clarify the intent of Notice 2023-2 by providing that the rule in
proposed Sec. 58.4501-2(e)(5)(ii) does not apply if the complete
liquidation or dissolution is a transaction to which sections 331 and
332 both apply.
B. Partial Liquidations
Section 302(b)(4) of the Code provides that a distribution in
redemption of stock held by a shareholder who is not a corporation and
in partial liquidation of the distributing corporation receives
exchange treatment under section 302(a). For purposes of section
302(b)(4), a distribution will be treated as in partial liquidation of
a corporation if the distribution (i) is not essentially equivalent to
a dividend (determined at the corporate level rather than at the
shareholder level), and (ii) is pursuant to a plan and occurs within
the taxable year in which the plan was adopted or within the succeeding
taxable year. See section 302(e)(1). A partial liquidation may involve
a redemption of stock under section 317(b) in which the shareholder
actually, in-form surrenders stock of the corporation in exchange for
property (redemptive partial liquidation). A partial liquidation also
may involve a constructive redemption of stock in which the shareholder
is deemed to surrender stock of the corporation in exchange for
property, and that deemed surrender satisfies the redemption
requirement of sections 302 and 317(b) (constructive partial
liquidation). See H.R. Conf. Rep. No. 760, 97th Cong., 2nd Sess. 530
(1982) (``Under present law, a distribution in partial liquidation may
take place without an actual surrender of stock by the shareholders . .
. [and a] constructive redemption of stock is deemed to occur in such
transactions. . . . The conferees intend that the treatment of partial
liquidations under present law section 346(a)(2) and (b) is to continue
for such transactions under new section 302(e).'').
1. Partial Liquidations Involving an Actual Redemption of Stock
Several stakeholders requested guidance on whether a redemptive
partial liquidation is treated as a repurchase. One stakeholder
recommended that a redemptive partial liquidation by a covered
corporation should be subject to the stock repurchase excise tax
because a non-pro rata redemptive partial liquidation could achieve
consequences similar to those that the stakeholder hypothesized section
4501 was intended to counteract. For example, the stakeholder observed
that, if a corporation distributes proceeds from the sale of one of its
businesses to its shareholders, the corporation has chosen to make that
distribution rather than reinvest the proceeds in its business. Another
stakeholder agreed that non-pro rata redemptive partial liquidations
should be treated as repurchases but contended that 100-percent pro
rata redemptive partial liquidations should not be so treated.
The Treasury Department and the IRS are of the view that redemptive
partial liquidations should be treated as repurchases because those
transactions qualify as section 317(b) redemptions. Moreover, as
discussed in part V.C of this Explanation of Provisions, the Treasury
Department and the IRS are of the view that no special exception should
be provided for 100-percent pro rata redemptions, particularly because
section 4501 does not provide such an exception. In addition, such an
exception would complicate the IRS's ability to administer and enforce
the stock repurchase excise tax. Accordingly, the proposed regulations
would not incorporate these stakeholder recommendations.
2. Partial Liquidations Involving a Constructive Redemption of Stock
Several stakeholders requested guidance on whether a constructive
partial liquidation is treated as a repurchase. The stakeholders
recommended that constructive partial liquidations should not be
treated as repurchases because such transactions neither have the form
of an actual redemption nor affect shareholders' proportionate
interests. In addition, those stakeholders asserted that the treatment
of constructive partial liquidations as constructive redemptions is
imputed in revenue rulings to provide beneficial tax treatment to
individual shareholders.
[[Page 25996]]
The stakeholders further contended that such redemptions are not
motivated by, and do not produce, the economic effects that they
contend the stock repurchase excise tax was designed to discourage.
The Treasury Department and the IRS decline to adopt the
stakeholders' recommendation in the proposed regulations. Section
302(b)(4) applies to a distribution ``in redemption of stock,'' and
section 317(b) defines a ``redemption'' for purposes of section 302.
Regardless of whether a redemption is constructive rather than actual,
the redemption comprises a section 317(b) redemption to which section
302(b)(4) may apply. Therefore, the Treasury Department and the IRS are
of the view that a constructive partial liquidation is a repurchase
subject to the stock repurchase excise tax, and the proposed
regulations would not provide any special exceptions for such
transactions.
3. Dividend Exception and Partial Liquidation Look-Through Rule
For a discussion of the dividend exception and the partial
liquidation look-through rule in section 302(e)(5), see part X.F.3 of
this Explanation of Provisions.
VII. Taxable Transactions
A. LBOs and Other Taxable ``Take Private'' Transactions
Under the approach described in Notice 2023-2, unless a statutory
exception applies, the target-corporation-funded portion of the
consideration in an LBO or other taxable acquisition of the stock of a
target corporation would be treated as a repurchase for purposes of
computing the target corporation's stock repurchase excise tax base.
See section 3.09(3) and (4) of Notice 2023-2. This approach tracks
longstanding Federal income tax treatment by the IRS of such
transactions, particularly that cash received by the minority
shareholders in such transactions is subject to the provisions and
limitations of section 302. See, for example, Rev. Rul. 78-250, 1978-1
C.B. 83 (elimination of minority shareholders' interest in target
corporation through the merger of a transitory subsidiary into target
corporation treated as a redemption because target corporation was the
source of the cash consideration).
Several stakeholders recommended that payments funded (or deemed
funded) by the target corporation in a taxable acquisition of target
corporation stock should not be treated as a repurchase. Another
stakeholder recommended that any redemption that occurs as part of a
transaction should be exempt from the definition of ``repurchase'' if,
immediately after the transaction, the target corporation's stock no
longer is traded on an established securities market. See part IV.A of
this Explanation of Provisions (discussing the stakeholder's
recommendation). Alternatively, the stakeholder recommended that a
target corporation's status as a covered corporation be determined at
the end of the repurchase transaction. Similarly, another stakeholder
recommended that an exemption be created for redemptions undertaken in
connection with fully taxable stock dispositions in which target
corporation shareholders completely terminate their interest under
section 302(b)(3), and as described in Zenz v. Quinlivan, 213 F.2d 914
(6th Cir. 1954).
According to the stakeholders, deemed redemptions by a target
corporation that is a covered corporation in an LBO or other taxable
``take private'' transaction do not implicate their view of the
congressional policies underlying the stock repurchase excise tax
because the purpose of such a transaction is to cash out completely the
target corporation's existing shareholders. For support, these
stakeholders highlighted that taxable ``take private'' transactions do
not present an opportunity to manipulate EPS or other financial
metrics, which (i) become irrelevant after the target corporation
ceases to be a publicly traded entity, and (ii) the stakeholders viewed
as a practice that Congress intended to discourage through enactment of
the stock repurchase excise tax.
Moreover, in the stakeholders' view, imposing the stock repurchase
excise tax on a fully taxable stock acquisition based solely on the
source of the consideration received by the target corporation's
shareholders would create arbitrary distinctions driven by factors that
may be commercially focused, such as the target corporation's desired
capital structure and its ability to obtain third-party financing. The
stakeholders further noted that, if the application of the stock
repurchase excise tax to fully taxable stock acquisitions hinges solely
on the actual or deemed source of consideration, then parties easily
may avoid the tax by borrowing at the acquiring-entity level, buying
the target corporation's shares, and then having the target corporation
assume or satisfy the debt after the acquisition.
The Treasury Department and the IRS disagree with the stakeholders'
recommendations. The treatment of such target corporation-funded
payments as a redemption within the meaning of section 317(b) follows
longstanding Federal income tax principles and guidance. The Treasury
Department and the IRS are of the view that there is no compelling
reason to deviate from such long-standing principles and guidance or
from the express language of section 4501(c)(1), which defines a
repurchase, in part, as ``a redemption within the meaning of section
317(b) with regard to the stock of a covered corporation.'' The
Treasury Department and the IRS are of the view that integrating long-
standing Federal income tax principles and guidance into the proposed
regulations would facilitate taxpayer compliance, as well as the
ability of the IRS to administer and enforce the stock repurchase
excise tax. Accordingly, the proposed regulations would not adopt the
stakeholders' recommendations regarding taxable stock acquisitions.
Several stakeholders offered alternative recommendations in the
event the proposed regulations do not exclude taxable stock
acquisitions from the stock repurchase excise tax. One stakeholder
agreed with the approach described in Notice 2023-2, under which a
taxable stock acquisition is treated as a section 317(b) redemption
only to the extent of the consideration sourced from the target
corporation. The stakeholder recommended that, for purposes of the
stock repurchase excise tax, sourcing should be guided by the same
principles that apply to determine the identity of the borrower for
Federal income tax purposes. The proposed regulations would retain the
approach described in Notice 2023-2.
Another stakeholder recommended that issuances by the target
corporation in the same taxable year as the ``take private''
transaction, including issuances that occur after the ``take private''
transaction, should be taken into account for purposes of the netting
rule. The Treasury Department and the IRS disagree with this
recommendation. As previously discussed, the Treasury Department and
the IRS are of the view that, to be consistent with the statutory
language in section 4501, stock issued by a corporation after it ceases
to be a covered corporation should not be taken into account under the
netting rule. See part IV.A of this Explanation of Provisions.
Accordingly, the proposed regulations would take into account stock
issued by the target corporation in the same taxable year as the ``take
private'' transaction only if that stock was issued during the period
in which the target corporation was a covered corporation, as
determined under these
[[Page 25997]]
proposed regulations. See proposed Sec. Sec. 58.4501-2(d)(1) and
58.4501-4(b)(2).
B. Section 304 Transactions
1. Section 304(a)(1) Transactions
Section 304(a)(1) of the Code applies if one corporation purchases
stock of another corporation from a shareholder or shareholders in
control of both corporations in exchange for cash or other property
(section 304(a)(1) transaction). If section 304(a)(1) applies, the cash
or other property paid to the controlling shareholder or shareholders
is treated as a distribution in redemption of the stock of the
acquiring corporation. To the extent that the distribution is treated
as a distribution to which section 301 applies, (i) the selling
shareholder or shareholders are treated in the same manner as if they
had transferred the acquired stock to the acquiring corporation in a
transaction to which section 351(a) of the Code applies, and then (ii)
the acquiring corporation is treated in the same manner as if it had
redeemed the stock it was treated as issuing in the transaction.
The approach described in sections 3.04(3)(a) and 3.08(4)(e) of
Notice 2023-2, respectively, provides that a deemed redemption
resulting from the application of section 304(a)(1) is neither a
repurchase nor an issuance for purposes of the stock repurchase excise
tax. Stakeholders generally agreed with this approach, for several
reasons.
First, stakeholders noted that section 304(a)(1) transactions
involve no actual contraction in the number of shares of acquiring
corporation stock. Second, stakeholders observed that, to the extent
the deemed redemption is treated as a distribution to which section 301
applies, the section 304(a)(1) transaction would consist of an
offsetting issuance and repurchase of acquiring corporation stock.
However, those stakeholders correctly noted that the deemed redemption
would be statutorily excluded from the computation of the acquiring
corporation's stock repurchase excise tax base under section 4501(e)(6)
to the extent that the deemed redemption is treated as a dividend under
section 301(c)(1). As a result, the Federal income tax treatment
mandated by section 304(a)(1), combined with the statutory exclusion
for dividends under section 4501(e)(6), would manufacture an automatic
net issuance.
Finally, one stakeholder claimed that it could be difficult for
taxpayers to determine whether section 304(a)(1) applies to public
company M&A transactions because publicly traded corporations do not
know the identity of their shareholders. For that reason, the
stakeholder also contended that it could be difficult for the IRS to
administer and enforce the stock repurchase excise tax with respect to
section 304(a)(1) transactions.
However, several stakeholders expressed concern that an exemption
for all section 304(a)(1) transactions may exclude transactions that
(i) satisfy the statutory requirements for section 304 qualification,
and (ii) are economically similar to a conventional stock repurchase.
As an illustration, the stakeholders presented the following fact
pattern. Individual A owns 50 percent of the stock of two public
corporations. Individual A sells a portion of its stock in one
corporation (that is, the target corporation) to the other corporation
(that is, the acquiring corporation). The stakeholders explained that
section 304(a)(1) would apply to the sale, but individual A may qualify
for sale or exchange treatment under section 302(a) depending on
individual A's actual and constructive ownership of the target
corporation following the transaction. According to the stakeholder,
applying the stock repurchase excise tax may be appropriate in this
situation and in other situations in which control of the target and
acquiring corporations is not widely dispersed and both corporations
remain publicly traded after the transaction.
The Treasury Department and the IRS are of the view that the
complexity of regulations applying the stock repurchase excise tax with
regard to section 304(a)(1) transactions would outweigh significantly
any benefit of applying this tax to those transactions. In addition,
the Treasury Department and the IRS are of the view that applying the
stock repurchase excise tax to section 304(a)(1) transactions would
create significant difficulty for the IRS to administer and enforce the
tax, as well as for taxpayers to calculate and report their tax with
certainty. Accordingly, the Treasury Department and the IRS are of the
view that the stock repurchase excise tax should not apply to a
redemption that is deemed to occur by virtue of section 304(a)(1). See
proposed Sec. Sec. 58.4501-2(e)(3)(i) and 58.4501-4(f)(4).
2. Section 304(a)(2) Transactions
Section 304(a)(2) applies if one corporation (that is, the
acquiring corporation) purchases stock of another corporation (that is,
the target corporation) from a shareholder of the target corporation in
exchange for cash or other property and that target corporation
controls the acquiring corporation (section 304(a)(2) transaction). If
section 304(a)(2) applies, that property is treated as a distribution
in redemption of the stock of the target corporation. The approach
described in Notice 2023-2 does not exempt section 304(a)(2)
transactions from the application of the stock repurchase excise tax.
See generally section 3.04(3) of Notice 2023-2 (excepting solely
section 304(a)(1) transactions).
One stakeholder noted that the application of the stock repurchase
excise tax to section 304(a)(2) transactions generally is clear and is
analogous to the rule treating an acquisition of stock of a covered
corporation by a specified affiliate as a repurchase to which the stock
repurchase excise tax applies. The Treasury Department and the IRS
agree with the stakeholder. Accordingly, the proposed regulations would
not exempt section 304(a)(2) transactions from the application of the
stock repurchase excise tax.
VIII. Reorganizations
A. Acquisitive Reorganizations
1. Overview
The approach described in Notice 2023-2 treats an exchange of
target corporation stock by the target corporation's shareholders in an
acquisitive reorganization as an economically similar transaction. See
section 3.04(4)(a)(i) of Notice 2023-2. The notice defines an
``acquisitive reorganization'' as a transaction that qualifies as a
reorganization under section 368(a)(1)(A) of the Code (including by
reason of section 368(a)(2)(D) or (E)), section 368(a)(1)(C), or
section 368(a)(1)(D) (D reorganization) (if the reorganization
satisfies the requirements of section 354(b)(1) of the Code). See
section 3.02(1) of Notice 2023-2.
Under the approach described in Notice 2023-2, the effect of an
acquisitive reorganization on a target corporation's stock repurchase
excise tax base is computed by first including in that tax base the
fair market value of all target corporation stock exchanged in the
transaction, regardless of the type of consideration for which the
stock is exchanged. The stock repurchase excise tax base then is
reduced under the statutory exception in section 4501(e)(1)
(reorganization exception) by the fair market value of the target
corporation stock exchanged for property permitted to be received by
the target corporation shareholders without recognition of gain or loss
under section 354 (that is, qualifying property). Thus, under the
approach described in Notice 2023-2,
[[Page 25998]]
the target corporation generally is subject to the stock repurchase
excise tax only to the extent of the fair market value of target
corporation stock exchanged for property that is non-qualifying
property.
For purposes of this preamble, the term ``acquisitive
reorganization'' includes each transaction described as an acquisitive
reorganization in Notice 2023-2 as well as a transaction that qualifies
as a reorganization under section 368(a)(1)(G) (if the reorganization
satisfies the requirements of section 354(b)(1)).
Under Federal income tax principles, acquisitive reorganizations
involve the following two elements. First, the target corporation
transfers all or a portion of its assets to the acquiring corporation
in exchange for consideration from the acquiring corporation. Second,
the target corporation distributes the consideration received from the
acquiring corporation to the target corporation's shareholders in
exchange for their target corporation stock in an actual or deemed
liquidation of the target corporation (target redemptive distribution).
See, for example, section 361(a) and (c) of the Code (providing for
nonrecognition of gain or loss for the target corporation's transfer of
assets in exchange for stock or securities of a party to the
reorganization and the target corporation's distribution of that stock
or securities pursuant to a plan of reorganization); section
368(a)(1)(C) and (a)(2)(G) (to similar effect).
2. Feedback Received
a. In General
Several stakeholders recommended that acquisitive reorganizations
should not be subject to the stock repurchase excise tax, to any
extent. These stakeholders contended that, although a target redemptive
distribution in an acquisitive reorganization resembles a section
317(b) redemption, such a transaction should not be subject to the
stock repurchase excise tax even if non-qualifying property is
provided. See parts VIII.A.2.b and c of this Explanation of Provisions.
b. Stakeholders Contend Acquisitive Reorganizations Are Not
Economically Similar Transactions
Some stakeholders asserted that acquisitive reorganizations are
economically distinguishable from a section 317(b) redemption and
therefore should not be treated as economically similar transactions.
According to these stakeholders, the basic economic nature of an
acquisitive reorganization (at least in situations in which the parties
to the transaction are unrelated) is a two-company acquisitive
transaction in which the target corporation shareholders sell the
target corporation to the acquiring corporation. In contrast, a section
317(b) redemption is a transaction in which a single corporation
acquires its own stock from its shareholders.
Several stakeholders stated that an acquisitive reorganization
between unrelated parties is motivated primarily by bona fide
investment and strategic business purposes and does not give rise to
any abuse that the stakeholders hypothesized Congress may have intended
to discourage through enactment of the stock repurchase excise tax.
These stakeholders acknowledged that the exchange of target corporation
stock for non-qualifying property in a target redemptive distribution
either constitutes or resembles a section 317(b) redemption. However,
the stakeholders questioned whether this exchange under Federal income
tax principles provides an adequate basis for designating the
transaction as ``economically similar.'' The stakeholders further
questioned why a distribution in complete liquidation as part of a
reorganization (that is, the target redemptive distribution) should
give rise to an economically similar transaction under the approach
described in Notice 2023-2 even though a distribution in complete
liquidation subject to either section 331 or 332 (but not both) would
not.
With regard to the latter point, several stakeholders noted that
the exchange between the target corporation and its shareholders in a
forward merger that failed to qualify as a reorganization would not be
subject to the stock repurchase excise tax. See Rev. Rul. 69-6, 1969-1
C.B. 104 (treating such an exchange as a distribution in complete
liquidation to which section 331 applies). One stakeholder suggested
that the application of this tax should be based upon the substantive
Federal income tax characterization of the steps of the transaction,
rather than upon the overall Federal income tax characterization of the
transaction as a reorganization. For support, the stakeholder contended
that their recommendation would mitigate the potential for a more
onerous result under the stock repurchase excise tax if the components
of such a transaction qualify for reorganization treatment.
Several stakeholders also recommended that transactions that
qualify as a reorganization described in either section 368(a)(1)(B) (B
reorganization) or 368(a)(1)(A) by reason of section 368(a)(2)(E)
(reverse triangular merger) should not be subject to the stock
repurchase excise tax. The stakeholders contended that those types of
reorganizations should not be subject to the stock repurchase excise
tax based on their view that such transactions, both in substance and
in form, involve an acquisition of stock by a third party rather than a
repurchase or redemption of target corporation stock.
c. Effect of the Statutory Exception in Section 4501(e)(1)
Stakeholders acknowledged that the inclusion of the statutory
exception in section 4501(e)(1) (that is, the reorganization exception)
is subject to several interpretations. Several stakeholders
acknowledged that the inclusion of this exception in section 4501 could
be construed as reflecting congressional intent that all stock
exchanged for non-qualifying property in a reorganization should be
treated as economically similar to a section 317(b) redemption.
However, the stakeholders recommended that the Treasury Department and
the IRS not adopt that interpretation.
In contrast, one stakeholder contended that the inclusion of the
reorganization exception does not necessarily indicate that Congress
intended all non-qualifying property received in any acquisitive
reorganization to be subject to the stock repurchase excise tax.
Rather, the stakeholder asserted that the application of this statutory
exception requires (i) identifying a transaction as a section 317(b)
redemption or an economically similar transaction that occurs as part
of a reorganization, (ii) applying this statutory exception to exempt
the target corporation stock exchanged for qualifying property, and
then (iii) subjecting the target corporation stock exchanged for non-
qualifying property to the stock repurchase excise tax to the extent
gain or loss is recognized. Similarly, several stakeholders contended
that the reorganization exception could be given effect by applying
this exception only to reorganizations that most closely resemble
section 317(b) redemptions, such as split-offs (as defined in part IX
of this Explanation of Provisions) with non-qualifying property, or E
reorganizations involving an exchange of the recapitalizing
corporation's stock for newly issued stock and non-qualifying property.
d. Response to Stakeholder Feedback
The Treasury Department and the IRS are of the view that the
recommendations of the stakeholders
[[Page 25999]]
would be contrary to the statutory language of section 4501. The
reorganization exception provides that section 4501(a) does not apply
``to the extent that the repurchase is part of a reorganization (within
the meaning of section 368(a)) and no gain or loss is recognized on
such repurchase by the shareholder under chapter 1 by reason of such
reorganization.'' Section 4501(e)(1). The Treasury Department and the
IRS are of the view that the presence of the reorganization exception
in section 4501(e)(1) indicates that exchanges of target corporation
stock occurring as part of an acquisitive reorganization are subject to
the stock repurchase excise tax. Indeed, this statutory exception would
have no effect if the exchange of target corporation stock for non-
qualifying property in reorganizations were exempt from the stock
repurchase excise tax. Moreover, the Treasury Department and the IRS
are of the view that the proposed regulations should not reduce the
statutorily mandated scope of the reorganization exception, but rather
should give full effect to its language mandating that the
reorganization exception applies to all reorganizations ``within the
meaning of section 368(a).''
The Treasury Department and the IRS also are of the view that
implementation of the reorganization exception by reliance on sections
354 and 356 of the Code would provide bright-line rules that taxpayers
could apply and the IRS could administer and enforce with certainty.
Specifically, every acquisitive reorganization involves a target
redemptive distribution to a target corporation shareholder to which
section 354 or 356 is applied.
Accordingly, the proposed regulations would treat acquisitive
reorganizations as economically similar transactions. See proposed
Sec. 58.4501-2(e)(4)(i); see also proposed Sec. 58.4501-3(c)
(reorganization exception); part X.A of this Explanation of Provisions
(discussion of reorganization exception). However, the proposed
regulations would not subject B reorganizations to the stock repurchase
excise tax. See proposed Sec. Sec. 58.4501-1(b)(1) and 58.4501-
2(e)(4)(i).
Lastly, the Treasury Department and the IRS view the distinction
between taxable forward mergers and forward mergers qualifying as
reorganizations as appropriate because there is a successor to the
target corporation in an acquisitive asset reorganization (see section
381(a)). In contrast, the target corporation in a complete liquidation
subject to section 331 ceases to exist for Federal income tax purposes.
B. Sourcing Approach to Acquisitive Reorganizations
Several stakeholders recommended that, if the proposed regulations
do not wholly exempt acquisitive reorganizations from the stock
repurchase excise tax, this tax should apply to acquisitive
transactions solely to the extent that any non-qualifying property is
sourced from the target corporation (sourcing approach). According to
the stakeholders, to the extent that the consideration used to
repurchase target corporation stock is attributable to the acquiring
corporation or another third party, the transaction does not represent
the target corporation's redemption of its own stock and therefore
should not be subject to the stock repurchase excise tax.
However, another stakeholder contended that the approach in Notice
2023-2 arguably facilitates the administration of the stock repurchase
excise tax by treating all exchanges of target corporation stock in a
reorganization as a repurchase, irrespective of the type of
reorganization, and regardless of the source of consideration.
Nonetheless, for the reasons previously discussed in this part VIII.B,
the stakeholder contended that a sourcing approach strikes a better
balance with the statutory language and with the stakeholder's opinion
that Congress enacted the stock repurchase excise tax to curtail
single-entity corporate contractions.
Another stakeholder acknowledged that a sourcing approach could
raise issues of administrability, particularly due to the fungible
nature of cash and the fact that the operations of the target
corporation and the acquiring corporation often are integrated
following an acquisition. The stakeholder noted that these difficulties
arguably would be compounded in situations in which a target operating
corporation is merged directly into an acquiring operating corporation,
although other forms of post-merger integration could present similar
challenges.
Notwithstanding these administrative difficulties, these
stakeholders contended that a sourcing approach could be administered
effectively. One stakeholder stated that the challenges presented by a
sourcing approach are not meaningfully different from other issues that
have been addressed by longstanding authorities concerning
reorganizations. For instance, a sourcing approach is used to determine
whether funds distributed to the target corporation's shareholders
prior to a B reorganization are properly treated as non-qualifying
property. See, for example, Rev. Rul. 70-172, 1970-1 C.B. 77 (dividend
distribution of property sourced from the target corporation treated as
separate and distinct from an immediately subsequent B reorganization).
With regard to reverse triangular mergers, these stakeholders noted
that funds sourced from the target corporation are taken into account
for purposes of the ``substantially all'' test in section
368(a)(2)(E)(i), but not for purposes of measuring the acquisition of
``control'' under section 368(a)(2)(E)(ii). See Sec. 1.368-2(j)(3)(i)
and (iii).
The stakeholders also questioned the different treatment under
Notice 2023-2 of acquisitive reorganizations and taxable stock
acquisitions. These stakeholders observed that, under Notice 2023-2,
the stock repurchase excise tax would apply to all consideration
consisting of non-qualifying property in an acquisitive reorganization.
In contrast, the rules described in Notice 2023-2 provides that the
stock repurchase excise tax is imposed in a taxable stock acquisition
only to the extent of the consideration sourced from the target
corporation. In the stakeholders' view, this inconsistent treatment is
difficult to justify as a policy matter because taxable and tax-free
transactions may be economically similar.
The Treasury Department and the IRS are of the view that the
stakeholders' recommendation is not supported by the statutory language
of the reorganization exception. The plain language of the
reorganization exception contains no reference to the source of the
consideration for which the target corporation shareholders exchange
their stock in a target redemptive distribution. Instead, the
application of the reorganization exception to a target redemptive
distribution in an acquisitive reorganization depends only on whether
``gain or loss is recognized on such repurchase by the shareholder
under chapter 1 by reason of such reorganization.'' In other words,
under the reorganization exception, the source of the consideration for
which the target corporation shareholders exchange their stock in a
target redemptive distribution is irrelevant in determining the
application of the stock repurchase excise tax to acquisitive
reorganizations. Lastly, the Treasury Department and the IRS are of the
view that an extra-statutory sourcing rule recommended by the
stakeholders would be neither necessary nor appropriate to carry out
the purposes of the stock repurchase excise tax.
[[Page 26000]]
For the foregoing reasons, the proposed regulations would not
incorporate a sourcing approach to determine the application of the
stock repurchase excise tax to acquisitive reorganizations. Rather,
under the proposed regulations, the stock repurchase excise tax would
apply to a repurchase that is part of a reorganization to the extent a
shareholder exchanges their stock for non-qualifying property.
C. Commissioner v. Clark
One stakeholder recommended that the stock repurchase excise tax
should not apply to any hypothetical deemed issuance and redemption
under Clark v. Commissioner, 489 U.S. 726 (1989), because such a
transaction either (i) is a fictional transaction that is not within
the scope of the tax, or (ii) results in a net zero adjustment pursuant
to the netting rule in the case of domestic covered corporations.
Another stakeholder also noted that the deemed issuance under Clark
would offset the deemed redemption.
The Treasury Department and the IRS are of the view that Clark
should not apply in determining the applicability of the stock
repurchase excise tax to non-qualifying property furnished in a
reorganization, other than to determine the applicability of the
dividend exception (see the discussion in part VIII.F of this
Explanation of Provisions). This view was incorporated into Notice
2023-2, and the proposed regulations likewise would not provide any
special rules based on an analogical application of Clark.
D. E Reorganizations
1. Treatment of E Reorganizations Under Notice 2023-2
Under the approach described in Notice 2023-2, E reorganizations
are treated as economically similar transactions in the same manner as
other reorganizations for purposes of the stock repurchase excise tax.
Accordingly, a recapitalizing corporation has a repurchase to the
extent of the fair market value of the shares exchanged by its
shareholders in the transaction. See section 3.04(4)(a)(ii) of Notice
2023-2. However, the fair market value of the repurchased shares that
are exchanged for qualifying property reduces the corporation's stock
repurchase excise tax base. See section 3.07(2)(b) of Notice 2023-2
(applying the statutory exception in section 4501(e)(1) to E
reorganizations). As a result, the recapitalizing corporation is
subject to the stock repurchase excise tax only to the extent of the
fair market value of its shares that are repurchased with non-
qualifying property (if any).
Additionally, the stock issued by the recapitalizing corporation in
the transaction is disregarded for purposes of the netting rule under
the ``no double benefit rule.'' See section 3.08(4)(d) of Notice 2023-
2; see also part XI.C.2 of this Explanation of Provisions for a
discussion of the no double benefit rule.
2. Feedback Received
Several stakeholders recommended that an exchange of stock for
qualifying property in an E reorganization should not be subject to the
stock repurchase excise tax. However, the stakeholders recommended that
shares that are repurchased with non-qualifying property in an E
reorganization should be subject to the stock repurchase excise tax
because the exchange is substantially similar to the redemption of
stock for cash, unless the receipt of non-qualifying property is
treated as a separate transaction under Sec. 1.301-1(j).
3. Exchange of Stock for Qualifying Property in an E Reorganization
The Treasury Department and the IRS disagree with the stakeholders'
recommendation that an exchange of stock for qualifying property in an
E reorganization should not be included in the recapitalizing
corporation's stock repurchase excise tax base. As discussed in part
VIII.A.2.d of this Explanation of Provisions, the Treasury Department
and the IRS are of the view that the reorganization exception would be
most appropriately implemented by (i) treating all exchanges of stock
between a corporation and its shareholders occurring as part of a
reorganization as an economically similar transaction, and then (ii)
removing from the corporation's stock repurchase excise tax base the
amount of target corporation stock for which the target corporation
shareholders receive qualifying property. The Treasury Department and
the IRS also are of the view that adopting uniform treatment for
reorganizations would implement the reorganization exception in a
manner most consistent with its statutory language (as set forth in
section 4501(e)(1)). Lastly, the Treasury Department and the IRS are of
the view that this approach would facilitate the IRS's ability to
administer and enforce the stock repurchase excise tax and enable
taxpayers to apply the tax with greater certainty.
Accordingly, the proposed regulations would include the stock-for-
qualifying property portion of an exchange occurring as part of an E
reorganization in the stock repurchase excise tax base, and then
exclude that portion in a later step of the stock repurchase excise tax
base computation. See proposed Sec. Sec. 58.4501-2(e)(4)(ii) and
58.4501-3(c). The Treasury Department and the IRS request comments on
the proposed treatment of E reorganizations.
E. F Reorganizations
1. Treatment of F Reorganizations Under Notice 2023-2
Under the approach described in Notice 2023-2, F reorganizations
are treated as economically similar transactions in the same manner as
other reorganizations for purposes of the stock repurchase excise tax.
Accordingly, the transferor corporation has a repurchase to the extent
of the fair market value of the shares exchanged by its shareholders in
the transaction. See section 3.04(4)(a)(iii) of Notice 2023-2. However,
the fair market value of the repurchased shares that are exchanged for
qualifying property reduces the corporation's stock repurchase excise
tax base. See section 3.07(2)(c) of Notice 2023-2 (applying the
statutory exception in section 4501(e)(1) to F reorganizations). As a
result, the transferor corporation is subject to the stock repurchase
excise tax only to the extent of the fair market value of its shares
that are repurchased with non-qualifying property (if any).
A distribution of non-qualifying property by the transferor
corporation in an F reorganization is treated as a separate transaction
(for example, under section 302). See Sec. 1.368-2(m)(1)(iii)
(providing that any distribution of money or other property from either
the transferor corporation or the resulting corporation, including any
money or other property exchanged for shares, in an F reorganization is
treated as an unrelated, separate transaction from the reorganization).
2. Feedback Received
Several stakeholders recommended that F reorganizations should not
be subject to the stock repurchase excise tax because the stock issued
in an F reorganization does not qualify as ``property'' within the
meaning of section 317(a). These stakeholders contended that no
``redemption'' could occur within the meaning of section 317(b), and
therefore the stock repurchase excise tax should not apply.
For the same rationale as other reorganizations, the Treasury
Department and the IRS continue to be of the view that F
reorganizations should be treated as economically similar transactions
for purposes of the stock repurchase excise tax. See parts
[[Page 26001]]
VIII.A and D of this Explanation of Provisions (discussing acquisitive
reorganizations and E reorganizations). Moreover, the Treasury
Department and the IRS are of the view that adopting uniform treatment
for reorganizations would reduce complexity for taxpayers and
facilitate the IRS's ability to administer and enforce the stock
repurchase excise tax. The proposed regulations reflect this view. See
proposed Sec. Sec. 58.4501-2(e)(4)(iii) and 58.4501-3(c). The Treasury
Department and the IRS request comments on the proposed treatment of F
reorganizations.
F. Downstream Reorganizations and Other Related-Party Reorganizations
Several stakeholders recommended that, if reorganizations generally
are not subject to the stock repurchase excise tax under the proposed
regulations, related-party reorganizations (such as an acquisition of a
publicly traded parent corporation's stock by a specified affiliate, or
a reorganization between two covered corporations under common control)
nonetheless should be subject to the stock repurchase excise tax to the
extent of the non-qualifying property received by shareholders. One
stakeholder suggested that the receipt of non-qualifying property in
such transactions is economically identical to a conventional stock
repurchase.
The Treasury Department and the IRS agree with stakeholders that
such transactions should be subject to the stock repurchase excise tax.
However, because reorganizations generally would be subject to the
stock repurchase excise tax under the proposed regulations, no special
rules are needed to address related-party reorganizations. Accordingly,
the proposed regulations would not adopt the stakeholders'
recommendation.
G. Reverse Acquisitions Involving Investment Companies
One stakeholder suggested that, if the proposed regulations
generally do not apply the stock repurchase excise tax to acquisitive
reorganizations, the proposed regulations should apply this tax to
certain reverse acquisitions involving a publicly traded acquiring
corporation. According to the stakeholder, if the historical business
of a publicly traded acquiring corporation has declined in value to the
point that the corporation's stock is trading based on the net value of
its cash and other investment assets, and if the target corporation
shareholders as a group will obtain more than 50 percent of the fair
market value of the acquiring corporation's stock in an acquisitive
reorganization, then any non-qualifying property received by the target
corporation shareholders in the reorganization may resemble a
repurchase. Although the stakeholder noted that such transactions are
rare, the stakeholder recommended that the Treasury Department and the
IRS consider designating such transactions as economically similar.
The Treasury Department and the IRS are of the view that no special
rules are required to address these types of transactions because the
proposed regulations would not exclude acquisitive reorganizations from
the stock repurchase excise tax. Accordingly, the proposed regulations
do not incorporate the stakeholder's suggested provision.
IX. Section 355 Transactions
Under the approach described in Notice 2023-2, a section 355
transaction in which a distributing corporation (within the meaning of
section 355(a)(1)(A) of the Code) distributes stock of a controlled
corporation (within the meaning of section 355(a)(1)(A)) and, if
applicable, other property or money to the distributing corporation's
shareholders in exchange for a portion of the shareholders' stock in
the distributing corporation (split-off) is treated as an economically
similar transaction. Accordingly, the distributing corporation has made
a repurchase to the extent of the fair market value of the distributing
corporation shares exchanged by its shareholders in the transaction.
See section 3.04(4)(a)(iv) of Notice 2023-2.
However, the fair market value of the repurchased shares that are
exchanged for qualifying property reduces the distributing
corporation's stock repurchase excise tax base, regardless of whether
the distribution was carried out as part of a D reorganization. See
section 3.07(2) of Notice 2023-2. As a result, the distributing
corporation is subject to the stock repurchase excise tax only to the
extent of the fair market value of its shares that are repurchased with
non-qualifying property (if any). A distribution by a distributing
corporation of stock of a controlled corporation qualifying under
section 355 that is not a split-off is not a repurchase subject to the
stock repurchase excise tax. See section 3.04(4)(b)(ii) of Notice 2023-
2.
A. In General
Several stakeholders recommended that a spin-off (that is, a
distribution of stock of a controlled corporation (Controlled) by the
distributing corporation (Distributing) to Distributing's shareholders)
to which section 355 applies should not be treated as a repurchase
because spin-offs do not involve an exchange of Controlled stock for
Distributing stock. The stakeholders also recommended that a split-up
(that is, a liquidating distribution in which Distributing distributes
the stock of more than one Controlled) or split-off to which section
355 applies, and in which only Controlled stock (and no non-qualifying
property) is distributed, should not be treated as a repurchase. For
example, one stakeholder found it significant that a split-off without
non-qualifying property generally would not reduce the number of shares
outstanding or enhance the EPS of Distributing.
In contrast, stakeholders recommended that any non-qualifying
property distributed in a split-off to which section 355 applies should
be treated as a repurchase to the same extent as if that non-qualifying
property were distributed in a redemption under section 302(a), because
the source of the cash and the form of the transaction frequently are
the same as in a conventional stock buyback. One stakeholder also
recommended treating a split-up with non-qualifying property as a
repurchase in the same manner.
The Treasury Department and the IRS are of the view that spin-offs
and split-ups should not be subject to the stock repurchase excise tax.
See proposed Sec. 58.4501-2(e)(5)(iii)(A). With regard to a spin-off,
the Treasury Department and the IRS are of this view because
Distributing does not provide consideration to Distributing's
shareholders in exchange for their Distributing stock (that is, no
repurchase could be treated as having occurred). With regard to a
split-up, the Treasury Department and the IRS are of this view because
Distributing completely liquidates as a result of Distributing's
distribution of consideration to its shareholders in exchange for their
Distributing stock. The proposed treatment of spin-offs and split-ups
is consistent with the proposed treatment of non-redemptive
distributions under section 301 and distributions in complete
liquidation, which are analogous to spin-offs and split-ups,
respectively. Cf. proposed Sec. Sec. 58.4501-2(e)(5)(iv) (exempting
certain non-redemptive distributions under section 301 from the stock
repurchase excise tax); 58.4501-2(e)(5)(i) (exempting distributions in
complete liquidation that are exclusively under section 331 or 332 from
the stock repurchase excise tax).
However, the proposed regulations would clarify that a distribution
by Distributing of non-qualifying property
[[Page 26002]]
in exchange for Distributing stock in pursuance of a spin-off or a
split-up would be a repurchase. See proposed Sec. 58.4501-
2(e)(5)(iii)(B).
The Treasury Department and the IRS also continue to be of the view
that split-offs should be subject to the stock repurchase excise tax.
See proposed Sec. 58.4501-2(e)(4)(iv). Accordingly, Distributing would
have a repurchase to the extent of the fair market value of the
Distributing stock exchanged by Distributing's shareholders in the
transaction. However, the fair market value of the repurchased
Distributing stock that is exchanged for qualifying property would be
subject to the reorganization exception, regardless of whether the
split-off occurred as part of a D reorganization. See proposed Sec.
58.4501-3(c). As a result, Distributing would be subject to the stock
repurchase excise tax only to the extent of the fair market value of
its stock that is repurchased with non-qualifying property (if any).
B. Exchange of Controlled Securities in a Split-Off to Which Section
355 Applies
Notice 2023-2 does not explicitly address whether a distribution by
Distributing of Controlled securities to Distributing shareholders in
exchange for their Distributing stock in a split-off is treated as a
repurchase. However, Controlled securities that are exchanged for
Distributing stock would not constitute qualifying property under the
rules described in Notice 2023-2. As a result, the exchange of
Controlled securities for Distributing stock in a split-off would be
subject to the stock repurchase excise tax under the rules described in
Notice 2023-2.
A stakeholder recommended that, to the extent the Treasury
Department and the IRS view a distribution of Controlled securities as
a substitute for cash, the distribution of Controlled securities in
exchange for Distributing stock in a split-off to which section 355
applies should be treated as a repurchase.
The Treasury Department and the IRS continue to be of the view that
Controlled securities that are exchanged for Distributing stock should
not constitute qualifying property for purposes of the stock repurchase
excise tax. The Treasury Department and the IRS have reached this
position based on the rationale that, unlike an exchange of
Distributing stock for Controlled stock, an exchange of Distributing
stock for Controlled securities generally would achieve an outcome more
analogous to an exchange of Distributing stock for non-qualifying
property. Accordingly, the Treasury Department and the IRS are of the
view that no special rules are needed to address this issue.
C. Clarification of Examples 13 and 14 in Notice 2023-2
Section 3.09 of Notice 2023-2 contains Examples 13 and 14. These
examples are based on Example 11 of Notice 2023-2, in which
Distributing distributes Controlled stock and cash to Distributing's
shareholders in exchange for their Distributing stock. The facts in
Example 13 are the same as in Example 11, except that Example 13
provides that ``Distributing distributes the Controlled stock to its
shareholders pro rata without the shareholders exchanging any
Distributing stock (Spin-Off).'' The facts in Example 14 are the same
as in Example 13, except that the ``Spin-Off is carried out as part of
a transaction qualifying as a D reorganization.''
A stakeholder recommended that the proposed regulations incorporate
revisions to Examples 13 and 14 to clarify whether the cash
distribution described in those examples constitutes a distribution in
exchange for Distributing stock. The stakeholder interpreted Examples
13 and 14 to provide clearly that no Distributing stock is surrendered
by Distributing's shareholders in the ``Spin-Off'' in both examples,
but nonetheless questioned whether any Distributing stock could have
been surrendered for the cash distributed by Distributing with the
Controlled stock. Therefore, the stakeholder recommended that Examples
13 and 14 explicitly state whether or not Distributing stock is
surrendered in exchange for the cash distributed as well as the stock
distributed.
The Treasury Department and the IRS have revised Example 13 to
explicitly state that no stock of Distributing is exchanged in the
``Spin-Off'' for distributed cash or distributed Controlled stock. This
clarification would confirm the interpretation of stakeholders and the
intent of the Treasury Department and the IRS. See proposed Sec.
58.4501-5(b)(13).
Additionally, the Treasury Department and the IRS have modified the
facts of Example 14 to clarify the treatment of an exchange of
Distributing stock for non-qualifying property in pursuance of a spin-
off. See proposed Sec. 58.4501-5(b)(14). For the treatment of the
exchange of Distributing stock in pursuance of a spin-off, see proposed
Sec. 58.4501-2(e)(5)(iii)(B) and the discussion in part IX.A of this
Explanation of Provisions.
X. Statutory Exceptions
A. Repurchase as Part of a Reorganization
1. In General
Section 4501(e)(1) provides an exception (that is, the
reorganization exception) to the application of the stock repurchase
excise tax ``to the extent that the repurchase is part of a
reorganization (within the meaning of section 368(a)) and no gain or
loss is recognized on such repurchase by the shareholder . . . by
reason of such reorganization.'' To facilitate the IRS's ability to
administer and enforce the stock repurchase excise tax, and to enable
taxpayers to apply the tax with greater certainty, Notice 2023-2 adopts
a consideration-based approach to the reorganization exception. As
described in section 3.07(2) of Notice 2023-2, the fair market value of
stock repurchased by a covered corporation in transactions listed in
that section is a reduction for purposes of computing the covered
corporation's stock repurchase excise tax base, to the extent that the
repurchase is in exchange for property permitted by section 354 or 355
to be received without the recognition of gain or loss (that is,
qualifying property). These transactions consist of a repurchase by:
(i) a target corporation as part of an acquisitive reorganization; (ii)
a recapitalizing corporation as part of an E reorganization; (iii) a
transferor corporation as part of an F reorganization; and (iv) a
distributing corporation as part of a split-off (whether or not part of
a D reorganization).
Stakeholders have suggested three general approaches to implement
the reorganization exception. Under the stakeholders' first approach,
the reorganization exception would apply only if no gain or loss is
recognized by a shareholder on a repurchase that occurs as part of a
reorganization under section 368(a). As a result, if a shareholder
receives both qualifying property and non-qualifying property in an
actual or deemed redemption that occurs as part of a reorganization,
the reorganization exception would not apply to any of the
consideration received if the shareholder recognized any built-in gain
or loss in the target corporation stock exchanged for that
consideration.
Under the stakeholders' second approach, the reorganization
exception would exclude an actual or deemed redemption that occurs as
part of a reorganization under section 368(a) to the extent a
shareholder does not recognize gain or loss. At least one
[[Page 26003]]
stakeholder recommended this approach because the stakeholder found it
significant that a target corporation shareholder's non-taxable receipt
of acquiring corporation stock (that is, qualifying property) does not
result in the termination or ``cashing out'' of the target corporation
shareholder's proprietary interest in the target corporation.
Another stakeholder provided a variation to this second approach
that would incorporate a rebuttable presumption. Under this variation,
the reorganization exception would apply to a repurchase solely to the
extent that stock of the target corporation is exchanged by target
corporation shareholders for qualifying property. In other words, all
shareholders of the target corporation that receive non-qualifying
property in exchange for target corporation stock would be presumed to
recognize gain or loss to the full extent of the non-qualifying
property received. The stakeholder recommended allowing a target
corporation to rebut this presumption to the extent the target
corporation could demonstrate that its shareholders did not recognize
gain or loss in the reorganization. However, the stakeholder found it
questionable as a policy matter that, under this variation of the
second approach, a target corporation that provides solely non-
qualifying property to the target corporation shareholders in exchange
for target corporation stock would not be treated as repurchasing the
target corporation shareholders' stock if the target corporation rebuts
the presumption of gain or loss recognition.
Under the stakeholders' third approach, the reorganization
exception would apply to a repurchase solely to the extent that stock
of the target corporation is exchanged by target corporation
shareholders for qualifying property, regardless of whether the target
corporation shareholder recognizes any gain or loss. One stakeholder
recommended this third approach based on the stakeholder's rationale
that shareholder-level gain should not be taken into account for
determining whether a repurchase occurred for purposes of the stock
repurchase excise tax. In addition, the stakeholder contended that any
approach that requires computation of each shareholder's gain or loss
would be difficult for the IRS to administer, and for taxpayers to
apply with certainty, because the shareholder-level data necessary to
determine such gain or loss would be difficult to obtain.
The Treasury Department and the IRS continue to be of the view that
the third approach recommended by stakeholders would strike the most
appropriate balance between implementing the plain language of the
reorganization exception and providing a rule that facilitates the
ability of the IRS to administer and enforce the stock repurchase
excise tax. Under this approach, the touchstone consideration of
whether a target corporation shareholder receives qualifying or non-
qualifying property in exchange for target corporation stock will
enable target corporations to readily determine the extent to which the
reorganization exception applies to the exchange. Moreover, the
Treasury Department and the IRS are of the view that only in rare
instances would such a shareholder not recognize gain or loss if the
shareholder received non-qualifying property in exchange for target
corporation stock. Accordingly, the proposed regulations would retain
the approach described in Notice 2023-2. See proposed Sec. 58.4501-
3(c).
2. Section 355 Transactions That are Not Part of a D Reorganization
Stakeholders recommended applying the reorganization exception to
split-offs and split-ups without regard to whether the section 355
transaction occurs as part of a D reorganization. According to the
stakeholders, Congress intended to convey through the reorganization
exception that transactions that qualify for non-recognition treatment
should not be subject to the stock repurchase excise tax, and that the
same treatment should extend to all section 355 transactions--
regardless of whether carried out as part of a D reorganization.
The Treasury Department and the IRS continue to be of the view that
the exception in section 4501(e)(1) should apply to split-offs to which
section 355 applies without regard to whether such transactions occur
as part of a D reorganization. See proposed Sec. 58.4501-3(c). As
previously discussed in part IX.A of this Explanation of Provisions,
split-ups are not treated as repurchases. Consequently, the exception
in section 4501(e)(1) is not relevant to split-ups.
B. Contributions to Employer-Sponsored Retirement Plans
In general, under section 3.07(3)(a) of Notice 2023-2, the fair
market value of stock repurchased by a covered corporation is a
reduction for purposes of computing the covered corporation's stock
repurchase excise tax base if the stock that is repurchased, or an
amount of stock equal to the fair market value of the stock
repurchased, is contributed to an employer-sponsored retirement plan.
1. Timing of Contributions Under Section 4501(e)(2)
Section 4501(e)(2) provides that the stock repurchase excise tax
does not apply in any case in which the stock repurchased, or an amount
of stock equal to the value of the stock repurchased, is contributed to
an employer-sponsored retirement plan, ESOP, or similar plan (stock
contribution exception).
Under section 3.07(3)(d) of Notice 2023-2, a covered corporation
may treat stock contributions to an employer-sponsored retirement plan
under the stock contribution exception as having been made in the prior
taxable year if the stock is contributed by the filing deadline for the
IRS Form 720, Quarterly Federal Excise Tax Return, that is due for the
first full quarter after the close of the taxpayer's taxable year and
on account of that taxable year within the meaning of section 404(a)(6)
of the Code. The rule described in section 3.07(3)(d) of Notice 2023-2
also provides stock contributions that are treated as having been
contributed in the taxable year to which the Form 720 applies may not
be treated as having been contributed for any other taxable year.
One stakeholder indicated that the reference to the stock
contribution being ``on account of'' the taxable year within the
meaning of section 404(a)(6) raises questions about the timing of the
offset for the stock repurchase excise tax and the income tax deduction
under section 404(a). Specifically, the stakeholder requested
clarification as to whether a covered corporation is required to deduct
a stock contribution to a plan under section 404(a) in the same taxable
year for which the contribution is taken into account for purposes of
the stock contribution exception.
The Treasury Department and the IRS are of the view that a stock
contribution is not required to be treated as ``on account of'' the
preceding taxable year within the meaning of section 404(a)(6). Thus,
for example, a covered corporation may claim the income tax deduction
in the taxable year in which the stock is contributed to the employer-
sponsored retirement plan but claim an offset for the stock
contribution to the plan for purposes of the stock repurchase excise
tax in the preceding taxable year (provided that the rules in these
proposed regulations are satisfied).
Accordingly, these proposed regulations would provide that, for
purposes of the reduction in the stock repurchase excise tax base, a
covered corporation may treat stock
[[Page 26004]]
contributions to an employer-sponsored retirement plan made after the
close of the covered corporation's taxable year as having been
contributed during that taxable year if two conditions are satisfied.
First, the stock must be contributed to the employer-sponsored
retirement plan by the filing deadline for the form on which the stock
repurchase excise tax must be reported that is due for the first full
quarter after the close of the taxpayer's taxable year. Second, the
stock must be treated by the employer-sponsored retirement plan in the
same manner that the plan would treat a contribution received on the
last day of the preceding taxable year. See proposed Sec. 58.4501-
3(d)(4)(ii).
2. Definition of ``Employer-Sponsored Retirement Plan''
For purposes of Notice 2023-2, the term ``employer-sponsored
retirement plan'' means a retirement plan maintained by a covered
corporation that is qualified under section 401(a) of the Code,
including an ESOP (as defined in section 4975(e)(7) of the Code). See
section 3.02(12) of Notice 2023-2. In section 6.01(4) of Notice 2023-2,
the Treasury Department and the IRS requested comments regarding
whether the definition of an ``employer-sponsored retirement plan''
should include plans other than plans that are qualified under section
401(a). In response, one stakeholder recommended expanding this
definition to include foreign-based plans and plans funded through a
secular trust. The stakeholder reasoned that the statutory language of
section 4501(e)(2), along with the underlying policy considerations,
support expanding the definition to these types of plans. However, the
stakeholder did not specify which types of foreign-based plans or plans
funded through a secular trust should be included in the definition of
an ``employer-sponsored retirement plan.''
The Treasury Department and the IRS are of the view that certain
broad-based foreign plans that are funded through a secular trust or
another type of funded arrangement may be considered ``similar plans,''
and thus may be included in the definition of an ``employer-sponsored
retirement plan'' for purposes of the stock contribution exception.
However, the Treasury Department and the IRS have not yet determined
which types of broad-based foreign plans should be included in this
definition. Accordingly, the Treasury Department and the IRS request
comments regarding the types of foreign-based plans that should be
included in the definition of an ``employer-sponsored retirement
plan.''
Another stakeholder expressed concern that the stock contribution
exception could be used to encourage excessive executive compensation
and requested that the definition of ``similar plan'' be defined to
specifically exclude executive compensation arrangements. The Treasury
Department and the IRS agree that the stock contribution exception
should not be used to encourage executive compensation arrangements.
The definition of an ``employer-sponsored retirement plan'' described
in Notice 2023-2 is limited to plans that are qualified under section
401(a) (including ESOPs). The Treasury Department and IRS are of the
view that this definition is sufficient to exclude executive
compensation arrangements from the stock contribution exception. Thus,
these proposed regulations similarly would limit the definition of
``employer-sponsored retirement plan'' to plans that are qualified
under section 401(a).
However, these proposed regulations would expand the definition of
``employer-sponsored retirement plan'' described in Notice 2023-2 to
include qualified plans under section 401(a) that are maintained by
specified affiliates of covered corporations. Section 3.02(12) of
Notice 2023-2 defined ``employer-sponsored retirement plan'' with
regard to qualified plans maintained by covered corporations. These
proposed regulations would provide that the definition of ``employer-
sponsored retirement plan'' includes not only qualified plans
maintained by covered corporations, but also qualified plans maintained
by a specified affiliate of a covered corporation. See proposed Sec.
58.4501-1(b)(11).
3. Valuation of Stock Contributions
As noted previously, the stock contribution exception in section
4501(e)(2) provides that the stock repurchase excise tax will not apply
in any case in which (i) the stock repurchased (first clause), or (ii)
an amount of stock equal to the value of the stock repurchased (second
clause), is contributed to an employer-sponsored retirement plan, ESOP,
or similar plan.
Section 3.07(3)(c)(i) of Notice 2023-2 addressed the first clause
by providing that, if a covered corporation repurchases stock and
contributes to an employer-sponsored retirement plan stock of the same
class, then the amount of the reduction under the stock contribution
exception is equal to the aggregate fair market value of the stock
repurchased during the taxable year, divided by the number of shares
repurchased, and multiplied by the number of shares contributed.
However, the amount of the reduction may not exceed the aggregate fair
market value of stock of the same class repurchased during the taxable
year.
Section 3.07(3)(c)(ii) of Notice 2023-2 addressed the second clause
by providing that, if a covered corporation contributes to an employer-
sponsored retirement plan stock of a different class than the class of
stock that was repurchased, then the amount of the reduction under the
stock contribution exception is equal to the fair market value of the
stock at the time the stock is contributed to the employer-sponsored
retirement plan. However, the amount of the reduction may not exceed
the aggregate fair market value of stock of a different class
repurchased during the taxable year.
One stakeholder requested that the value of stock for purposes of
the stock contribution exception be based on the greater of the value
at the time of repurchase or at the time of contribution to an
employer-sponsored retirement plan. The stakeholder stated that the
word ``or'' between the first clause and the second clause offers
statutory support for allowing covered corporations to choose between
using the first clause or the second clause for any given year.
The Treasury Department and the IRS disagree with the stakeholder.
With regard to the first clause, the focus of the language is on the
stock repurchased. Because the stock repurchase excise tax does not
apply to the repurchase of the stock that is contributed, the amount of
the offset is the fair market value of the shares of stock at the time
of the repurchase. Any change in value after the date of repurchase is
irrelevant for purposes of determining the amount of the repurchase
under section 4501(a) and, thus, the offset amount under the stock
contribution exception.
Moreover, if covered corporations contribute stock of a different
class than the stock repurchased, the contribution will not reflect a
contribution of the stock repurchased. For this reason, it is
inconsistent with the statutory language of section 4501(e)(2) to allow
covered corporations to apply the first clause if contributing a
different class of stock to an employer-sponsored retirement plan.
With regard to the second clause, because the statutory language
focuses on an amount of stock equal to the value of the stock
repurchased, and not on the shares of stock themselves, the value of
the offset amount is determined by the value of the stock contributed
to the retirement plan, instead of the value of the stock at the time
of the repurchase.
Accordingly, these proposed regulations would incorporate the
[[Page 26005]]
valuation provisions described in section 3.07(3)(c) of Notice 2023-2,
including the rule that the reduction cannot exceed the aggregate fair
market value of the stock repurchased. Additionally, these proposed
regulations would add language to coordinate the application of the
stock contribution exception with the application of other statutory
exceptions. See proposed Sec. 58.4501-3(d)(3).
4. Special Rule for Leveraged ESOPs
As defined in section 4975(e)(7), an ESOP is a type of defined
contribution plan that is qualified under section 401(a) and is
designed to invest primarily in qualifying employer securities (within
the meaning of section 409(l) of the Code). An ESOP also must meet
other applicable requirements described in section 409.
An ESOP may be leveraged or non-leveraged. Leveraged ESOPs use the
proceeds of an exempt loan (as defined in section 4975(d)(3)) from the
sponsoring employer or another party (typically with the employer's
guarantee) to purchase qualifying employer securities from the
sponsoring employer or shareholders or on a securities market. The
purchased securities are held in a suspense account (within the trust
that forms a part of the plan) as collateral for the loan. The
sponsoring employer makes cash contributions to the ESOP, which in turn
uses the cash to make loan repayments. Dividends paid on shares held as
collateral in the ESOP loan suspense account and on shares allocated to
participants' accounts also may be used to repay an exempt loan. As
loan repayments are made, securities are released from the suspense
account and allocated to ESOP participants' accounts in accordance with
the terms of the plan, which must comply with plan qualification and
fiduciary requirements.
Non-leveraged ESOPs do not have a loan and, thus, do not have a
suspense account that releases securities to ESOP participants'
accounts as contributions of cash are used to repay a loan. Rather,
employers contribute employer securities directly to the non-leveraged
ESOP, and the contributed shares are allocated to ESOP participants'
accounts as of the plan year to which the contribution applies.
Employer contributions to a non-leveraged ESOP fit squarely within
the stock contribution exception because employer contributions to a
non-leveraged ESOP are made in shares of stock. Although employer
contributions of cash to a leveraged ESOP are not described in section
4501(e)(2), such contributions result in the allocation of shares of
stock from a suspense account to ESOP participants' accounts. In other
words, contributions of stock to a non-leveraged ESOP and contributions
of cash to a leveraged ESOP that is used to repay an exempt loan
produce a comparable result--namely, the allocation of employer stock
to participants' accounts. Accordingly, the Treasury Department and the
IRS are of the view that leveraged ESOPs and non-leveraged ESOPs should
be treated similarly for purposes of the stock contribution exception.
Thus, these proposed regulations would provide that, if a covered
corporation maintains a leveraged ESOP, stock that is released from a
suspense account (as a result of cash contributions by the employer
maintaining the plan) and allocated to ESOP participants' accounts is
treated as a stock contribution for purposes of the stock contribution
exception as of the date stock attributable to repayment of the exempt
loan is released from the suspense account and allocated to
participants' accounts. Because dividends on employer stock held in the
ESOP and used to repay an exempt loan are not employer contributions,
stock released from the suspense account that is attributable to
repayment of the loan with dividends would not be treated as a stock
contribution for purposes of the stock contribution exception. See
proposed Sec. 58.4501-3(d)(1)(ii).
C. De Minimis Exception
Section 4501(e)(3) provides an exception (that is, the de minimis
exception) to the application of the stock repurchase excise tax with
regard to a taxable year ``in any case in which the total value of the
stock repurchased during the taxable year does not exceed $1,000,000.''
See section 4501(e)(3); see also section 3.03(2)(a) of Notice 2023-2.
Under section 3.03(2)(b) of Notice 2023-2, the determination of whether
the de minimis exception applies with regard to a taxable year is made
before applying any other statutory exception or any adjustments under
the netting rule. As discussed in part XIV.A.3 of this Explanation of
Provisions, the Treasury Department and the IRS are of the view that
applying the de minimis exception before the other statutory exceptions
is consistent with the statutory language and structure of section
4501.
The proposed regulations would retain the approach described in
Notice 2023-2. See proposed Sec. 58.4501-2(c)(3). Additionally, for
the same rationale underlying the approach described in Notice 2023-2,
the proposed regulations would clarify that repurchases prior to
January 1, 2023, are not taken into account for purposes of the stock
repurchase excise tax (including for purposes of applying the de
minimis exception). See proposed Sec. 58.4501-2(c)(4); see also part
I.A of this Explanation of Provisions (discussion of repurchases by a
fiscal-year taxpayer prior to the effective date).
D. Repurchases by Dealers in Securities
Section 4501(e)(4) provides an exception to the application of the
stock repurchase excise tax ``under regulations prescribed by the
Secretary, in cases in which the repurchase is by a dealer in
securities in the ordinary course of business.'' Pursuant to the
authority granted in section 4501(e)(4), section 3.07(4) of Notice
2023-2 describes an exception to the application of the stock
repurchase excise tax for certain repurchases by a dealer in securities
in the ordinary course of the dealer's business of dealing in
securities.
More specifically, section 3.07(4)(a) of Notice 2023-2 describes,
in part, that the fair market value of stock repurchased by a covered
corporation that is a dealer in securities (within the meaning of
section 475(c)(1) of the Code) is a reduction for purposes of computing
the covered corporation's stock repurchase excise tax base to the
extent the stock is acquired in the ordinary course of the dealer's
business of dealing in securities. However, under section 3.07(4)(b) of
Notice 2023-2, this reduction applies solely to the extent that: (i)
the dealer accounts for the stock as securities held primarily for sale
to customers in the dealer's ordinary course of business; (ii) the
dealer disposes of the stock within a period of time that is consistent
with the holding of the stock for sale to customers in the dealer's
ordinary course of business, taking into account the terms of the stock
and the conditions and practices prevailing in the markets for similar
stock during the period in which the stock is held; and (iii) the
dealer does not sell or otherwise transfer the stock to certain
specified persons other than in a sale or transfer to a dealer that
also satisfies the requirements of section 3.07(4) of Notice 2023-2.
No feedback was received on this exception in Notice 2023-2. The
proposed regulations would retain the approach described in Notice
2023-2. See proposed Sec. 58.4501-3(e).
E. Repurchases by RICs and REITs
Section 4501(e)(5) provides an exception to the application of the
stock
[[Page 26006]]
repurchase excise tax for ``repurchases by a regulated investment
company (as defined in section 851) or a real estate investment
trust.'' Under section 3.07(5) of Notice 2023-2, a repurchase by a
covered corporation that is a RIC or a REIT is a reduction for purposes
of computing the covered corporation's stock repurchase excise tax
base. The proposed regulations would retain the approach described in
Notice 2023-2.
A stakeholder recommended that the exception for RICs be extended
to all funds registered under the Investment Company Act of 1940, even
if those funds do not qualify as RICs for tax purposes. The stakeholder
suggested that the organizational structure, operations, applicable
securities laws, and accounting standards are the same for those funds
as for funds that are RICs for tax purposes.
The Treasury Department and the IRS disagree with the stakeholder's
recommendation. Section 4501(e)(5) provides a specific and limited
exception for RICs as defined in section 851, and nothing in the
statutory language of section 4501 suggests that entities that do not
qualify as RICs are intended to be exempt from the stock repurchase
excise tax. Accordingly, the proposed regulations would not adopt this
recommendation.
F. Dividend Exception
Section 4501(e)(6) provides an exception (dividend exception) to
the application of the stock repurchase excise tax ``to the extent that
the repurchase is treated as a dividend for purposes of [the Code].''
To implement section 4501(e)(6), the rule described in section
3.07(6)(a) of Notice 2023-2 generally provides that the fair market
value of stock repurchased by a covered corporation is a reduction for
purposes of computing the covered corporation's stock repurchase excise
tax base to the extent the repurchase is treated as a distribution of a
dividend under section 301(c)(1) or 356(a)(2). Under the notice, there
is a rebuttable presumption that a repurchase to which section 302 or
356(a) applies is subject to section 302(a) or 356(a)(1), respectively
(and, therefore, is ineligible for the foregoing exception). See
section 3.07(6)(b)(i) of Notice 2023-2. A covered corporation may rebut
this presumption with regard to a specific shareholder solely by
establishing with sufficient evidence that the shareholder treats the
repurchase as a dividend on the shareholder's Federal income tax
return. See section 3.07(6)(b)(ii) of Notice 2023-2.
1. Substantiation for Dividend Exception
Stakeholders provided several recommendations regarding
substantiation for the dividend exception in section 4501(e)(6).
a. Reliance on Filings With the U.S. Securities and Exchange Commission
One stakeholder requested guidance as to how corporations should
apply the constructive ownership rules of section 318(a) of the Code in
determining the extent to which redemptions are treated as in part or
full payment in exchange for stock under section 302(a) or as
distributions to which section 301 applies. The stakeholder recommended
that such guidance: (i) should permit corporations to rely on filings
with the U.S. Securities and Exchange Commission (SEC) and similar
filings to determine ownership (as in the case of determining whether
an ownership change has occurred for purposes of section 382 of the
Code (see Sec. 1.382-2T(k)(1)(i))); (ii) should clarify the requisite
level of due diligence to determine the constructive ownership of any
shareholders not required to report their ownership in SEC filings; and
(iii) should address whether any safe harbors or presumptions are
available.
The Treasury Department and the IRS are of the view that the
rebuttable presumption approach described in Notice 2023-2 would
provide a more accurate determination of whether a covered corporation
qualifies for the dividend exception. In addition, the Treasury
Department and the IRS are of the view that the rebuttable presumption
approach would better facilitate the IRS's ability to administer and
enforce the stock repurchase excise tax and enable taxpayers to apply
the tax with greater certainty. Therefore, the proposed regulations
would not permit covered corporations to rely on filings with the SEC
and similar filings to determine the extent to which redemptions may be
treated as qualifying for the dividend exception.
b. Rebuttable Presumption and Substantiation Requirements
Another stakeholder contended that a covered corporation generally
would not have access to information to determine with certainty
whether a section 317(b) redemption should be treated as a dividend
with respect to a particular shareholder. For support, the stakeholder
asserted that a covered corporation may not possess information
specifying the identity of its shareholders, which complicates the
ability of the covered corporation to determine whether a repurchase is
properly treated as a sale or exchange under section 302(a) or as a
section 301 distribution under section 302(d) (which depends on
shareholder-specific facts). As a result, the stakeholder recommended a
safe harbor under which the dividend exception would apply if the
covered corporation: (i) provides information reporting to the redeemed
shareholder providing that the repurchase constitutes a dividend; (ii)
obtains certification from the shareholder that the repurchase
constitutes a section 302(d) redemption; (iii) has no knowledge of
facts that would indicate that the certification is incorrect; and (iv)
demonstrates that the corporation has sufficient earnings and profits
(E&P) to treat the deemed section 301 distribution as a dividend.
As reflected in section 3.07(6) of Notice 2023-2, the Treasury
Department and the IRS are of the view that repurchases should be
presumed not to be dividend-equivalent (that is, the dividend exception
is presumed to be inapplicable), but that taxpayers should be permitted
to rebut this presumption by providing sufficient evidence. The
substantiation requirements described in section 3.07(6)(b)(iii) of
Notice 2023-2 are substantially similar to the stakeholder's
recommended safe harbor, with the additional requirement that the
shareholder must provide evidence that applicable withholding occurred,
if required.
Coupled with the shareholder certification requirement, the
Treasury Department and the IRS provided the information reporting
requirement to ensure that covered corporations and their shareholders
treat repurchases consistently for purposes of the dividend exception.
However, it is the understanding of the Treasury Department and the IRS
that publicly traded stock typically is held by shareholders through a
broker, and the broker (rather than the issuer of the stock) provides
any information reporting to the shareholder. Under current law,
brokers are not required to inform the issuer of the stock what
information reporting the brokers have provided to shareholders, and
the Treasury Department and the IRS understand that brokers generally
do not provide such information to issuers. Consequently, in such
cases, there is no assurance that the information reporting provided to
the shareholder would be consistent with the covered corporation's
treatment of a repurchase. Therefore, the proposed regulations would
replace the information reporting requirement with a requirement that
the covered corporation treat the repurchase
[[Page 26007]]
consistent with the shareholder certification.
c. Coordination With Withholding Tax Rules
In section 6.01(7) of Notice 2023-2, the Treasury Department and
the IRS requested comments on whether there should be modifications to
the method described in section 3.07(6) of Notice 2023-2, or whether
additional methods to rebut the presumption should be permitted.
In response, one stakeholder observed that, although Notice 2023-2
includes a rebuttable presumption that a share repurchase by a covered
corporation constitutes a sale or exchange, the withholding tax rules
generally presume that such share repurchases from foreign persons are
dividends subject to withholding tax. See Sec. 1.1441-3(c)(1). In the
absence of coordination, the stakeholder contended that each of these
presumptions might apply to the same transaction, and therefore would
require (i) the repurchasing corporation to pay the stock repurchase
excise tax as if the payment gave rise to a sale or exchange, and (ii)
a withholding agent to withhold as if the payment gave rise to a
dividend. Accordingly, the stakeholder requested that the proposed
regulations provide rules to coordinate these differing presumptions.
The Treasury Department and the IRS are of the view that no special
rules are needed to coordinate the foregoing presumptions, particularly
because these presumptions serve different purposes. In addition, if
the proposed regulations were to provide rules to coordinate these
presumptions, then the following would result: (i) covered corporations
making repurchases would not have any stock repurchase excise tax
liability (if the presumption were that all repurchases are dividends);
or (ii) corporations making section 302 distributions to foreign
persons would not have any withholding tax liability (if the
presumption were that all repurchases are sales or exchanges).
However, the proposed regulations would include rules to coordinate
the proposed shareholder certification requirements under the dividend
exception with the proposed section 302 payment certification
requirements under proposed Sec. 1.1441-3(c)(5)(iii)(D). See proposed
Sec. 58.4501-3(g)(3).
d. Certification From Foreign Shareholders
Another stakeholder contended that the requirement that U.S.
companies obtain certification from a foreign shareholder who does not
file a U.S. tax return, and who does not otherwise have a U.S. tax
connection, is excessively burdensome. The stakeholder recommended
replacing the certification requirement with the requirement that a
U.S. company provide a Form 1042-S showing payment of a dividend.
The Treasury Department and the IRS are of the view that reliance
solely on the Form 1042-S is not an appropriate replacement for the
shareholder certification requirement, because the Form 1042-S is based
on the presumption that share repurchases are dividends subject to
withholding tax. Consequently, reliance solely on the Form 1042-S for
purposes of substantiating the dividend exception could overstate the
amount of repurchases that qualify for this exception. Accordingly, the
proposed regulations would not adopt this recommendation.
2. Substantiation of Dividend Exception for E Reorganizations
As discussed in part VIII.D of this Explanation of Provisions, the
proposed regulations would provide that a covered corporation's
acquisition of its stock as part of an E reorganization would
constitute a repurchase, subject to the reorganization exception.
Stakeholders have asked whether a covered corporation may establish its
eligibility for the dividend exception by demonstrating that (i) Sec.
1.301-1(j) applies to the non-qualifying property in the transaction,
and (ii) the corporation has sufficient E&P for dividend treatment.
Section 1.301-1(j) provides, in relevant part, that a distribution
to shareholders with respect to their stock is a section 301
distribution, even if the distribution occurs at the same time as
another transaction, if the distribution is in substance a separate
transaction (whether or not connected in a formal sense). Section
1.301-1(j) further provides that this situation is most likely to occur
in the case of a recapitalization and certain other corporate
reorganizations. For example, if a corporation with only common stock
outstanding exchanges one share of newly issued common stock and one
bond for each share of outstanding common stock, the distribution of
the bond is a distribution of property (to the extent of its fair
market value) to which section 301 applies even if the stock-for-stock
exchange is pursuant to an E reorganization.
Notice 2023-2 does not expressly address the interaction of Sec.
1.301-1(j) and the dividend exception. However, the presumption that a
repurchase by a covered corporation constitutes a sale or exchange
applies only to a repurchase to which section 302 or 356(a) applies.
See section 3.07(6)(b)(i) of Notice 2023-2.
The Treasury Department and the IRS are of the view that no special
rules are needed in response to the stakeholders' query. In other
words, because a distribution of non-qualifying property that is
treated as a section 301 distribution pursuant to Sec. 1.301-1(j) is
not subject to section 302 or 356(a), the Treasury Department and the
IRS are of the view that such a distribution should qualify for the
dividend exception (if the covered corporation has sufficient E&P)
without the need for the covered corporation to rebut the presumption
that the repurchase is a sale or exchange. The proposed regulations
would reflect this position. See proposed Sec. 58.4501-3(g)(2).
3. Dividend Exception and Partial Liquidation Look-Through Rule
A stakeholder requested that the proposed regulations provide the
manner in which covered corporations should apply the look-through rule
of section 302(e)(5) in determining the extent to which redemptions in
partial liquidation are made to corporate shareholders (and, therefore,
are potentially eligible for the dividend exception). Under section
302(b)(4), a redemption in partial liquidation to noncorporate
shareholders is treated as a sale or exchange rather than as a section
301 distribution. However, section 302(b)(4) does not apply to
shareholders that are not corporations. As a result, such shareholders
potentially are eligible for exclusion under the dividend exception.
Section 302(e)(5) provides that, for purposes of determining under
section 302(b)(4) whether any stock is held by a shareholder that is
not a corporation, any stock held by a partnership, estate, or trust is
treated as if it were held proportionately by its partners or
beneficiaries. For purposes of applying this rule, the stakeholder
recommended that the proposed regulations permit covered corporations
to rely on SEC filings and similar filings. For support, the
stakeholder contended that covered corporations generally cannot
ascertain the identity of their shareholders unless the shareholders
are required to disclose their ownership under applicable securities
law.
For the reasons previously discussed in part X.F.1 of this
Explanation of Provisions, the Treasury Department and the IRS are of
the view that corporations should not be permitted to rely solely on
SEC filings or similar filings for purposes of determining whether the
dividend exception in
[[Page 26008]]
section 4501(e)(6) applies. Accordingly, the proposed regulations would
not adopt this recommendation. Instead, the proposed regulations would
provide that covered corporations must obtain certifications from their
shareholders, which must take section 302(e)(5) into account for
purposes of making the certification. See proposed Sec. 58.4501-
3(g)(2)(ii).
XI. Netting Rule
A. Overview
Section 4501(c)(3) allows an adjustment for stock issued by a
covered corporation, including stock issued or provided to employees of
a covered corporation or its specified affiliate. Section 3.08 of
Notice 2023-2 describes rules regarding the adjustment under section
4501(c)(3) (that is, the netting rule).
In general, under section 3.08(1) of Notice 2023-2, the stock
repurchase excise tax base with regard to a taxable year of a covered
corporation is reduced by the aggregate fair market value of stock of
the covered corporation (i) issued or provided to employees of the
covered corporation or employees of a specified affiliate during the
covered corporation's taxable year, and (ii) issued by the covered
corporation to other persons during the covered corporation's taxable
year. For these purposes, stock is treated as issued or provided by a
covered corporation at the time at which, for Federal income tax
purposes, ownership of the stock transfers to the recipient. See
section 3.08(2) of Notice 2023-2.
Section 3.08(3) of Notice 2023-2 describes additional rules
regarding stock issued or provided to an employee of a covered
corporation or specified affiliate as compensation for services
performed as an employee. Such arrangements include transfers of stock
in connection with the performance of services described in section 83,
including pursuant to a nonqualified stock option, or pursuant to a
stock option described in section 421 of the Code.
B. Treasury Stock
A stakeholder requested confirmation that the transfer of treasury
stock is treated as an issuance for purposes of the netting rule to the
same extent as the transfer of newly issued stock. The stakeholder
contended that treasury stock generally is treated in the same manner
as the issuance of new stock for Federal income tax purposes, and that
there is no countervailing policy reason for treating treasury stock
differently than newly issued stock for purposes of the netting rule.
Notice 2023-2 does not expressly address the treatment of treasury
stock because the Treasury Department and the IRS are of the view that
treasury stock constitutes stock for Federal income tax purposes.
The Treasury Department and the IRS continue to be of the view that
treasury stock constitutes stock for Federal income tax purposes. For
the avoidance of doubt, the proposed regulations would provide
explicitly that transfers of treasury stock (within the meaning of
section 317(b)) are taken into account for purposes of the netting rule
to the same extent as transfers of newly issued stock. See proposed
Sec. 58.4501-1(b)(29).
C. Transactions Not Treated as Issuances for Purposes of the Netting
Rule
Under section 3.08(4) of Notice 2023-2, the following stock is not
treated as issued for purposes of the netting rule: (i) stock of a
covered corporation distributed by the covered corporation to its
shareholders with respect to its stock; (ii) stock issued by a covered
corporation to a specified affiliate of the covered corporation; (iii)
stock treated as issued by the acquiring corporation by reason of the
application of section 304(a)(1) to a transaction; (iv) certain
fractional shares (see the discussion in part XIV.B of this Explanation
of Provisions); (v) stock issued by a covered corporation that is a
dealer in securities (to the extent the stock is issued, or otherwise
is used to satisfy obligations to customers arising, in the ordinary
course of the dealer's (or an applicable acquiror's) business of
dealing in securities); and (vi) stock issued by the target corporation
to the merged corporation in exchange for consideration that includes
the stock of the controlling corporation in a reverse triangular
merger. See sections 3.08(4)(b), (c), (e), (f), (g), and (h),
respectively, of Notice 2023-2.
Additionally, under section 3.08(4)(d) of Notice 2023-2, stock
issued as part of a transaction qualifying as a reorganization under
section 368(a) or a distribution under section 355 is not treated as
issued by the issuing corporation if (i) the stock constitutes
qualifying property, (ii) the stock is used by a covered corporation to
repurchase its stock in a transaction that is a repurchase under
section 3.04(4)(a)(i), (ii), (iii), or (iv) of Notice 2023-2 (see the
discussion in parts VIII.A, D, and E and IX of this Explanation of
Provisions), and (iii) the repurchase is not included in the covered
corporation's stock repurchase excise tax base because that repurchase
is a qualifying property repurchase (within the meaning of section
3.07(2) of Notice 2023-2).
Under section 3.07(3)(e) of Notice 2023-2, stock contributions to
an employer-sponsored retirement plan under the stock contribution
exception are not treated as issued or provided to employees of the
covered corporation or a specified affiliate under the netting rule.
1. Issuances to Specified Affiliates
Stakeholders generally recommended that issuances of stock to a
specified affiliate should not be taken into account for purposes of
the netting rule, for several reasons. First, respecting such issuances
might lead to double counting if the stock is treated as ``issued'' to
a specified affiliate and subsequently ``provided'' to that specified
affiliate's employees. See section 4501(c)(3). Second, because section
4501(c)(2) treats the acquisition of stock of a covered corporation by
a specified affiliate (from a person who is not the covered corporation
or a specified affiliate of such covered corporation) as a repurchase
of stock of the covered corporation, allowing such a repurchase to be
offset by acquisitions of the covered corporation's stock by the
specified affiliate from the covered corporation itself would be
incongruous. Third, issuances of stock to a specified affiliate do not
promote what the stakeholder considered to be the congressional
policies underlying section 4501 (for example, promoting investment in
productive capital or labor).
Under section 3.08(4)(c) of Notice 2023-2, stock issued by a
covered corporation to a specified affiliate is not treated as issued.
Stakeholders found this exception to the netting rule to be sensible
insofar as it prevents covered corporations from eroding their stock
repurchase excise tax base by creating ``hook stock'' (that is, issuing
corporation stock held by an entity that is owned, directly or
indirectly, by the issuing corporation).
However, stakeholders also suggested that the scope of this
exception is overbroad. Under a strict reading, this exception would
permanently prevent the issued stock from being taken into account
under the netting rule (for example, if provided to an employee of the
specified affiliate), because any subsequent transfer by the specified
affiliate would not technically constitute an ``issuance.''
Stakeholders recommended that issuances of stock by a covered
corporation to its specified affiliate be disregarded only to the
extent the covered corporation stock is not subsequently transferred to
a party
[[Page 26009]]
other than the covered corporation or another specified affiliate.
The Treasury Department and the IRS agree with the stakeholders.
Accordingly, the proposed regulations would clarify that stock issued
by a covered corporation to a specified affiliate is treated as issued
for purposes of the netting rule if and when that stock is transferred
by the specified affiliate during the same taxable year to a person who
is not the covered corporation or a specified affiliate of that
corporation, so long as (1) the covered corporation does not otherwise
reduce its stock repurchase excise tax base for the issuing year with
respect to the stock, and (2) the subsequent transfer by the specified
affiliate is not in connection with the performance of services
provided to the specified affiliate. See proposed Sec. 58.4501-
4(f)(2). The first requirement is intended to ensure that the stock is
not double counted if, for example, the stock is ``issued'' to the
specified affiliate and subsequently ``provided'' to the specified
affiliate's employees. The second requirement is intended to ensure
that stock transferred to a non-employee service provider of a
specified affiliate would not qualify under this rule. See part XI.G of
this Explanation of Provisions (explaining the interpretation in the
proposed regulations of section 4501(c)(3)'s ``issued or provided''
language). Unless specifically identified, the shares of stock of the
covered corporation treated as subsequently transferred by the
specified affiliate are the earliest shares issued by the covered
corporation to the specified affiliate. See proposed Sec. 58.4501-
4(f)(2)(iii).
Under the proposed regulations, stock issued by a covered
corporation in connection with the performance of services for a
specified affiliate would not be treated as ``issued'' for purposes of
the netting rule. However, a transfer of stock of a covered corporation
described in Sec. 1.83-6(d) by a specified affiliate to an employee
(but not a non-employee service provider) of the specified affiliate
would be treated as ``provided'' by the specified affiliate. See
proposed Sec. 58.4501-4(f)(2)(iv).
Thus, under the proposed regulations, stock issued by a covered
corporation to its specified affiliate (or stock that is treated as so
issued under Sec. 1.83-6(d)) would be counted for purposes of the
netting rule under two different provisions depending on whether the
subsequent transfer by the specified affiliate is in connection with
the performance of services. First, if the subsequent transfer is not
in connection with the performance of services, then the stock
transferred would be counted as stock ``issued'' by the covered
corporation if and when the stock is transferred, during the same
taxable year as the original issuance, to a person who is not the
covered corporation or a specified affiliate of the corporation.
Second, if the subsequent transfer (or deemed transfer under Sec.
1.83-6(d)) is in connection with the performance of services, then the
stock transferred would be counted as stock ``provided'' by the
specified affiliate, but only if the stock is transferred to an
employee of the specified affiliate. Stock transferred to a non-
employee service provider of a specified affiliate would not be counted
for purposes of the netting rule. See part XI.G.2 of this Explanation
of Provisions.
2. Issuances in Acquisitive Reorganizations and Split-Offs (No Double
Benefit Rule)
The Treasury Department and the IRS are of the view that stock
issued by the acquiring corporation to the target corporation as part
of an acquisitive reorganization should not be treated as an issuance
for purposes of the netting rule. See section 3.08(4)(d) of Notice
2023-2. It is the position of the Treasury Department and the IRS that
allowing such an issuance to be taken into account for purposes of the
netting rule would create a ``double benefit'' (that is, two reductions
to the stock repurchase excise tax base with respect to the same
stock). In other words, (i) one reduction would be provided to the
target corporation under the reorganization exception (see section
3.07(2) of Notice 2023-2) for the use of acquiring corporation stock to
repurchase target corporation stock, and (ii) a second reduction would
be provided to the acquiring corporation for the issuance of that
acquiring corporation stock under the netting rule. The Treasury
Department and the IRS observe that the identical concern arises with
regard to stock issued by Controlled to Distributing in a D
reorganization occurring as part of a split-off under section 355.
One stakeholder asserted that, if the proposed regulations adopt
the stakeholders' recommendation to exclude acquisitive reorganizations
from the stock repurchase excise tax, no ``double benefit'' would occur
because the issuance of qualifying property by the acquiring
corporation would not be offset against the target corporation's stock
repurchase excise tax base. However, the proposed regulations would not
adopt the recommendation to exclude acquisitive reorganizations from
the stock repurchase excise tax. See part VIII.A.2 of this Explanation
of Provisions.
Based on the foregoing, the proposed regulations would provide that
stock issued as part of a transaction qualifying as a reorganization
under section 368(a) or as a distribution under section 355 is
disregarded for purposes of the netting rule if (i) the stock
constitutes qualifying property, (ii) the stock is used by a covered
corporation to repurchase its stock in a transaction qualifying as a
reorganization under section 368(a) or a split-off under section 355
(whether or not the split-off is part of a D reorganization), and (iii)
that repurchase is not included in that corporation's stock repurchase
excise tax base because the repurchase is a qualifying property
repurchase. See proposed Sec. 58.4501-4(f)(3).
3. Issuances in Spin-Offs and Split-Ups
A stakeholder also recommended that issuances by Controlled to
Distributing in a D reorganization occurring as part of a section 355
distribution should not be treated as issuances for purposes of the
netting rule if the section 355 distribution is either a split-off or a
spin-off. The stakeholder noted that, under Notice 2023-2, the no
double benefit rule does not disregard the Controlled stock issued to
Distributing in a D reorganization occurring as part of a spin-off
because, unlike in a split-off, Distributing does not use the
Controlled stock to repurchase its own stock. However, the stakeholder
found no policy justification for the disparate treatment of spin-offs
and split-offs that qualify under section 355 with respect to the
netting rule. The stakeholder also questioned the propriety of allowing
a recently distributed Controlled to begin its life as a covered
corporation with a positive ``reserve'' of issuances equal to its net
value for purposes of the netting rule.
The Treasury Department and the IRS agree with the stakeholder and
are of the view that Controlled stock issued to Distributing in a
section 355 transaction should be disregarded for purposes of the
netting rule. Thus, the proposed regulations would provide that any
stock issued by Controlled in a distribution qualifying under section
355 (or so much of section 356 as relates to section 355) is not
treated as an issuance for purposes of the netting rule. See proposed
Sec. 58.4501-4(f)(9).
4. Section 305 Distributions
Under section 3.08(4)(b) of Notice 2023-2, stock of a covered
corporation distributed by the covered corporation to its shareholders
with respect to its stock is not treated as issued for
[[Page 26010]]
purposes of the netting rule. Several stakeholders recommended that
stock issued by a covered corporation in a distribution to which
section 305(a) of the Code applies (for example, a pro rata stock
distribution) should not be taken into account for purposes of the
netting rule. These stakeholders reasoned that, if their recommendation
were not adopted, a covered corporation could avoid the stock
repurchase excise tax by engaging in transactions that create share
issuances for the netting rule but have no meaningful dilutive effect
on the covered corporation's equity capital. In support of this
recommendation, one stakeholder analogized a section 305(a)
distribution to a circular flow of cash (that is, the distribution of
cash by a corporation to its shareholders, followed by the reinvestment
of all the distributed cash in the corporation) that is disregarded for
Federal income tax purposes. The stakeholder contended that such a
transaction should not be treated as creating a stock issuance for
purposes of the netting rule.
With regard to distributions by a covered corporation that are
described in section 305(b), stakeholders recommended that issuances of
stock by the covered corporation should be taken into account for
purposes of the netting rule if the receipt of that stock is taxable to
the shareholder under section 305(b). As one example, stakeholders
suggested that such distributions should be treated as share issuances
for purposes of the netting rule if any distributee shareholder can
elect to be paid either in stock or in property under section
305(b)(1). The stakeholders asserted that the ability of distributee
shareholders to elect to receive stock or cash (or other property) in a
section 305(b)(1) distribution should be viewed as economically
equivalent to (i) the distribution of cash or other property to the
distributee shareholders, followed by (ii) the use of that cash or
other property by some distributee shareholders to purchase stock from
the covered corporation.
According to the stakeholders, the use of cash or other property by
some distributee shareholders to purchase stock from the covered
corporation in a section 305(b)(1) distribution presumably would be
treated as an issuance for purposes of the netting rule. Therefore, the
stakeholders concluded that stock issued in a section 305(b)(1)
distribution should not be disregarded solely because the covered
corporation does not receive money or services in exchange for that
stock.
As reflected in section 3.08(4)(b) of Notice 2023-2, the Treasury
Department and the IRS are of the view that distributions by a covered
corporation of its own stock should not be taken into account for
purposes of the netting rule, regardless of whether the distributions
are taxable to the covered corporation's shareholders under section
305(b). Although the recipients of stock distributions under section
305(a) and (b) are subject to different Federal income tax
consequences, the Treasury Department and the IRS are of the view that
this distinction should not affect the application of the stock
repurchase excise tax because the statutory language of section
4501(c)(3) does not focus on treatment of shareholders. Therefore, the
Treasury Department and IRS are of the view that disparate treatment
should not be provided under the netting rule for different types of
section 305 distributions.
For the foregoing reasons, and to facilitate the ability for the
IRS to administer and enforce the stock repurchase excise tax, the
proposed regulations would not accept the stakeholders' recommendation.
Instead, distributions by a covered corporation of its own stock would
not be taken into account for purposes of the netting rule. See
proposed Sec. 58.4501-4(f)(1).
5. Stock-for-Stock Exchanges
A stakeholder recommended that stock issued in an E reorganization
should not be treated as an issuance for purposes of the netting rule.
For support, the stakeholder contended that the proposed regulations
should preclude covered corporations from avoiding the stock repurchase
excise tax by engaging in transactions with no meaningful dilutive
effect on the corporation's equity capital. In other words, the
stakeholder presented the same rationale as the stakeholder's rationale
for recommending that stock issued in a distribution to which section
305(a) applies should not be treated as an issuance for purposes of the
netting rule. For similar reasons, the stakeholder also recommended
that stock issued in an exchange under section 1036 of the Code should
not be treated as an issuance for purposes of the netting rule.
The Treasury Department and the IRS continue to be of the view that
stock issued in an E reorganization should not be treated as an
issuance for purposes of the netting rule because such stock already is
taken into account under the reorganization exception. Under that
exception (see section 3.07(2) of Notice 2023-2 and the discussion in
part X.A of this Explanation of Provisions), the fair market value of
stock repurchased by the covered corporation in an E reorganization
using qualifying property is a reduction for purposes of computing the
covered corporation's stock repurchase excise tax base. Therefore, if
the issuance of such qualifying property were treated as an issuance
for purposes of the netting rule, the covered corporation's stock
repurchase excise tax base would be reduced twice as a result of a
single stock issuance. The proposed regulations reflect this view. See
proposed Sec. 58.4501-4(f)(3); see also part XI.C.2 of this
Explanation of Provisions (discussion of no double benefit rule).
Similarly, the Treasury Department and the IRS agree with the
stakeholder that stock issued in a section 1036 exchange should not be
treated as an issuance for purposes of the netting rule. Accordingly,
the proposed regulations would provide that stock issued in a section
1036 exchange is not treated as an issuance for purposes of the netting
rule. See proposed Sec. 58.4501-4(f)(8).
6. Issuances in F Reorganizations
A stakeholder recommended that stock issued in an F reorganization
should not be treated as an issuance for purposes of the netting rule.
The Treasury Department and the IRS continue to be of the view that
stock issued in an F reorganization should not be treated as an
issuance for purposes of the netting rule because that stock already is
taken into account to reduce the covered corporation's stock repurchase
excise tax base under the reorganization exception. Therefore, if the
issuance of such qualifying property were treated as an issuance for
purposes of the netting rule, the covered corporation's stock
repurchase excise tax base would be reduced twice as a result of a
single stock issuance. The proposed regulations reflect this view. See
proposed Sec. 58.4501-4(f)(3); see also part XI.C.2 of this
Explanation of Provisions (discussion of no double benefit rule).
In addition, the proposed regulations would articulate explicitly
the view of the Treasury Department and the IRS that F reorganizations
should be treated for stock repurchase excise tax purposes in the same
manner in which they are treated under the Code and Treasury
regulations. In particular, the proposed regulations would reflect the
view of the Treasury Department and the IRS that, for purposes of the
netting rule, the transferor corporation and the resulting corporation
in an F reorganization should be treated as the same corporation. See
Sec. 1.381(b)-1(a)(2) (providing that, in the case of a transaction
qualifying as an F reorganization, the acquiring
[[Page 26011]]
corporation is treated just as the transferor corporation would have
been treated had there been no reorganization). As a result, the
transferor corporation's issuances in the portion of the taxable year
preceding an F reorganization may offset the resulting corporation's
repurchases in the portion of the taxable year following the F
reorganization. Likewise, the resulting corporation's issuances in the
portion of the taxable year following an F reorganization may offset
the transferor corporation's repurchases in the portion of the taxable
year preceding the F reorganization. See proposed Sec. 58.4501-
4(b)(4).
7. Issuances by a Dealer in Securities
Under section 3.08(4)(g) of Notice 2023-2, any stock issued by a
covered corporation that is a dealer in securities is not treated as
issued to the extent the stock is issued, or otherwise is used to
satisfy obligations to customers arising, in the ordinary course of the
dealer's business of dealing in securities. No feedback was received on
the treatment described in Notice 2023-2 of issuances by a dealer in
securities, and the proposed regulations would retain the approach
described in Notice 2023-2. See proposed Sec. 58.4501-4(f)(6).
8. Amounts Excluded Under the Stock Contribution Exception
Covered corporation stock contributed to or purchased by an
employer-sponsored retirement plan is not treated as issued or provided
for purposes of the netting rule. See part XI.G.3 of this Explanation
of Provisions for further discussion.
9. Instruments Not in the Legal Form of Stock
Because taxpayers generally can choose the form of the instruments
that they issue, the Treasury Department and the IRS are concerned that
allowing taxpayers to immediately offset their current repurchases by
issuing instruments not in the legal form of stock that are treated as
stock for Federal income tax purposes at issuance (non-stock
instruments) may create the potential for abuse. For example, a
taxpayer seeking to avoid the application of the stock repurchase
excise tax might issue deep-in-the-money call options, which the
taxpayer takes the position are treated as stock for Federal income tax
purposes, to accommodation parties with the mutual understanding that
such options would never be exercised. While a taxpayer could in
principle similarly issue stock to an accommodation party in order to
reduce its stock repurchase excise tax base, the issuance of stock by a
publicly traded corporation is subject to legal, regulatory, and
practical restrictions that do not or may not apply to an instrument
that is not in the legal form of stock. In such a case, respecting the
issuance of the option as an issuance of stock at the time of issuance
for purposes of the netting rule could allow taxpayers to unduly reduce
their stock repurchase excise tax liability.
Accordingly, pursuant to section 4501(f), the proposed regulations
provide an anti-avoidance rule to address this concern. Under proposed
Sec. 58.4501-4(f)(13), the issuance of a non-stock instrument,
including certain deep-in-the money options, would not be treated as an
issuance of stock for purposes of the netting rule until the instrument
is repurchased, and that the amount of the issuance under the netting
rule would be limited to the lesser of the fair market value of the
non-stock instrument at the time of its issuance or repurchase. The
taxpayer would be entitled to regard the issuance for purposes of the
netting rule for the repurchased non-stock instrument only if it timely
reports the repurchase as a repurchase of a non-stock instrument. In
order to prevent taxpayers from taking inconsistent positions with
respect to comparable non-stock instruments, a taxpayer that fails to
timely report a repurchase of a non-stock instrument as such will not
be entitled to regard any issuances for purposes of the netting rule
for comparable non-stock instruments repurchased within the five
taxable years ending on the last day of the repurchase year, unless the
failure to timely report the earlier repurchase was due to reasonable
cause. See proposed Sec. 58.4501-4(f)(13)(ii)(D). Under the proposed
regulations, a comparable non-stock instrument is a non-stock
instrument that has substantially similar economic terms as the
repurchased non-stock instrument, regardless of whether the comparable
non-stock instrument and the repurchased non-stock instrument have the
same legal form. See id.
Notwithstanding the rules described above for issuances, the
Treasury Department and IRS are of the view that the repurchase of an
instrument that meets the definition of stock at issuance should be
treated as a repurchase, regardless of the legal form of such
instrument. Given the potential for abuses of the netting rule
involving non-stock instruments, the Treasury Department and the IRS
are of the view that the different treatment for non-stock instruments
under the netting rule as compared to the rule for repurchases is
justified because a taxpayer generally can control whether to issue a
particular instrument in the form of stock.
D. Carryovers and Carrybacks of Issuances of Preferred Stock
Several stakeholders raised concerns regarding regulated financial
institutions that issue additional tier 1 preferred stock to comply
with regulatory requirements. In particular, stakeholders noted that,
although regulated financial institutions often must replace redeemed
additional tier 1 preferred stock with new additional tier 1 preferred
stock, timing considerations and the regulatory approval process often
prevents such issuances from occurring during the same taxable year as
the repurchases. As a result, regulated financial institutions may not
be able to match their redemptions of additional tier 1 preferred stock
with their issuances of replacement additional tier 1 preferred stock
under the netting rule.
The stakeholders recommended that the proposed regulations permit
covered corporations to carry forward or carry back for one taxable
year the aggregate amount of issuances by the covered corporation of
additional tier 1 preferred stock that exceed the aggregate amount of
repurchases of additional tier 1 preferred stock by that covered
corporation for a taxable year. One stakeholder suggested that the
proposed regulations incorporate such a carryforward and carryback rule
for all types of preferred stock.
The Treasury Department and the IRS are of the view that the
stakeholder's recommended carryforward and carryback provision is
inconsistent with the plain language of the statute. Section 4501
provides clearly that the stock repurchase excise tax must be
determined for a covered corporation on a taxable-year-by-taxable-year
basis, and the amount of repurchases for a taxable year may be adjusted
solely to take into account issuances by the covered corporation during
that same taxable year. See section 4501(a) (imposing the stock
repurchase excise tax on ``stock of the corporation which is
repurchased by such corporation during the taxable year''); section
4501(c)(3) (reducing the amount of repurchases for a taxable year ``by
the fair market value of any stock issued by the covered corporation
during the taxable year''). In this regard, under section 3.03(3)(c) of
Notice 2023-2, any reductions in the stock repurchase excise tax base
under the statutory exceptions or the netting rule in excess of the
aggregate fair market value of all repurchases during the taxable year
are not carried forward or backward to preceding or succeeding
[[Page 26012]]
taxable years of the covered corporation. Accordingly, the proposed
regulations would not adopt this recommendation.
E. Fair Market Value of Shares Issued Pursuant to the Conversion of a
Convertible Debt Instrument
A stakeholder recommended that, for purposes of the netting rule,
the fair market value of shares issued pursuant to the conversion of a
convertible debt instrument should be the market price of the shares on
the date of issuance, rather than the consideration actually paid by
the holder to acquire the instrument. The stakeholder recommended this
approach based in part on the plain language of section 4501(c)(3),
which refers to ``the fair market value of any stock issued by the
covered corporation during the taxable year'' (emphasis added).
The Treasury Department and the IRS agree with the stakeholder.
Consistent with section 3.08(5) of Notice 2023-2, the Treasury
Department and the IRS are of the view that, for purposes of the
netting rule, the fair market value of stock issued generally should be
the market price of the stock on the date the stock is issued. See
proposed Sec. 58.4501-4(e)(1). Although the proposed regulations do
not expressly address stock issued upon the conversion of a convertible
debt instrument, such stock would fall within the scope of this general
rule. For special rules for valuing stock issued or provided to an
employee or other service provider in connection with the performance
of services, see proposed Sec. 58.4501-4(e)(5) and part XI.G.7 of this
Explanation of Provisions.
F. Net Share Settlement
A stakeholder noted that, if stock is transferred in connection
with the performance of services, an employer may withhold some of the
stock to cover the exercise price, tax withholding obligations, or
other withholding obligations. The stakeholder noted that the stock
withheld could be viewed either as transferred to the service provider
and then repurchased by the covered corporation, or as never having
been issued.
Under section 3.08(3)(a)(ii) of Notice 2023-2, stock withheld by a
covered corporation or a specified affiliate to satisfy an employer's
income tax withholding obligation described in section 3402 of the
Code, or an employer's employment tax withholding obligation described
in section 3102 of the Code, is not treated as stock issued or provided
to an employee by the covered corporation or specified affiliate. Under
section 3.08(3)(a)(iii) of Notice 2023-2, stock withheld by a covered
corporation or a specified affiliate to satisfy the exercise price of a
stock option also is not treated as stock issued or provided by the
covered corporation or specified affiliate to an employee.
As reflected in section 3.08(3)(a)(ii) and (iii) of Notice 2023-2,
the Treasury Department and IRS are of the view that stock withheld to
satisfy an employer's withholding obligation under section 3102 or
3402, or to satisfy the exercise price of a stock option, is not issued
or provided by the covered corporation or a specified affiliate. This
position is consistent with the section 83 rules.
Stakeholders noted that stock is withheld in other situations (such
as State or foreign tax withholding) and requested clarification on
whether those situations also would not result in the issuance or
provision of stock. To provide greater clarity regarding the treatment
of net share settlements, these proposed regulations would expand
Notice 2023-2 to cover all situations involving net share settlements.
Accordingly, the proposed regulations would provide that stock withheld
by the covered corporation or specified affiliate to satisfy the
exercise price of a stock option or to cover any withholding obligation
is not treated as issued or provided under the netting rule. See
proposed Sec. 58.4501-4(f)(11).
A similar result would apply to the delivery of stock under an
option not issued in connection with the performance of services,
including pursuant to an option embedded in a convertible bond. See
part XIV.B of this Explanation of Provisions (discussion of the
treatment of cash paid in lieu of a fractional share).
G. Special Rules for Stock Issued or Provided to Service Providers
1. Issuances to Service Providers Other Than Employees
Stakeholders requested clarification that the netting rule applies
to a covered corporation's issuances of its stock to service providers
other than employees. The Treasury Department and the IRS agree that
the same rules for determining whether covered corporation stock is
issued, the amount of stock issued, and the timing of an issuance
should apply to both employee and non-employee service providers of a
covered corporation for purposes of the netting rule. The Treasury
Department and the IRS are of the view that applying the same rules to
all compensatory stock transfers by a covered corporation would improve
administrability of the stock repurchase excise tax because the timing
and value of stock issued or provided in connection with the
performance of services is determined under section 83 for both
employee and non-employee service providers.
Accordingly, these proposed regulations would clarify that the
netting rule applies to issuances by a covered corporation to both
employee and non-employee service providers of the covered corporation.
See proposed Sec. 58.4501-4(b)(1)(i). However, as discussed in part
XI.G.2 of this Explanation of Provisions, covered corporation stock
provided by a specified affiliate in connection with the performance of
services by a non-employee of the specified affiliate would not qualify
for the netting rule.
2. Meaning of Stock ``Issued or Provided'' in Section 4501(c)(3)
A stakeholder noted that section 4501 neither defines the term
``provided'' nor explains the distinction between the terms ``issued''
and ``provided'' in section 4501(c)(3). The stakeholder suggested that
one way the distinction between these terms could be explained is by
construing stock ``issued'' to mean a transfer of newly issued stock,
and stock ``provided'' to mean a transfer of treasury shares. However,
the stakeholder recommended against this interpretation because there
is no policy reason for treating newly issued shares and treasury
shares differently. As discussed in part XI.B of this Explanation of
Provisions, the Treasury Department and IRS are of the view that newly
issued shares and treasury shares should be treated the same way for
purposes of the netting rule. See proposed Sec. 58.4501-1(b)(29).
Instead, the stakeholder recommended that stock ``issued'' should
be interpreted to mean covered corporation stock issued directly by the
covered corporation to its employees or other service providers. In
contrast, stock ``provided'' should be interpreted to mean covered
corporation stock transferred by a specified affiliate (which cannot
issue covered corporation stock) to its employees.
The Treasury Department and IRS agree with the foregoing
interpretation. A specified affiliate may provide stock in the covered
corporation, rather than the specified affiliate's own stock, as
compensation for services provided by the specified affiliate's
employees. Thus, this interpretation would not interfere with existing
stock-based compensation arrangements. Moreover, because section
4501(c)(3) applies to transfers by a specified affiliate to its
employees, stock provided by the
[[Page 26013]]
specified affiliate in connection with the performance of services by
its employees (but not by its non-employee service providers) would
qualify for the netting rule under these proposed regulations.
Under Sec. 1.83-6(d), if a covered corporation transfers its stock
in connection with the performance of services for a specified
affiliate, then (i) the covered corporation is treated as having
contributed the stock to the capital of the specified affiliate, and
(ii) the specified affiliate is treated as immediately transferring the
covered corporation stock to the service provider. Thus, under the
proposed regulations, if the transfer is to an employee of the
specified affiliate in connection with the performance of services for
the specified affiliate, the specified affiliate would be treated as
transferring the stock to an employee in connection with the
performance of services for the specified affiliate and the transfer
would be regarded for purposes of the netting rule. See proposed Sec.
58.4501-4(f)(2)(iv).
3. Amounts Excluded Under the Stock Contribution Exception
A stakeholder noted that section 4501 does not explicitly preclude
a covered corporation from reducing the amount of its stock repurchase
excise tax under the netting rule using repurchased stock that was
excluded from the stock repurchase excise tax under the statutory
exception for contributions to employer-sponsored retirement plans. See
section 4501(e)(2) and the discussion in part X.B of this Explanation
of Provisions. The stakeholder requested clarification that stock that
is excluded from the stock repurchase excise tax under the stock
contribution exception may not then be used to reduce the stock
repurchase excise tax base under the netting rule.
The Treasury Department and the IRS agree that permitting an offset
against the stock repurchase excise tax base under both the stock
contribution exception and the netting rule would be inconsistent with
the statute. Further, stock contributed to or purchased by an employer-
sponsored retirement plan is issued or provided to the plan, not a
service provider. Thus, consistent with section 3.07(3)(e) of Notice
2023-2, these proposed regulations would provide that stock contributed
to or purchased by an employer-sponsored retirement plan does not
reduce the stock repurchase excise tax base under the netting rule. See
proposed Sec. 58.4501-4(f)(10).
4. Net Share Settlement of Options Issued in Connection With the
Performance of Services
A stakeholder requested guidance explaining how to determine the
amount of the offset under the netting rule for options settled in
stock. The stakeholder recommended that, if an option is ``in the
money'' (that is, if the exercise price is less than the fair market
value of the stock on the date of exercise), then the stock repurchase
excise tax base should be reduced by the full fair market value of the
stock, and not merely the exercise price.
The Treasury Department and the IRS agree with the stakeholder. The
Treasury Department and the IRS are of the view that, for purposes of
the stock repurchase excise tax, the net share settlement of options
issued in connection with the performance of services should be treated
in the same manner as the settlement of other options issued in
connection with the performance of services. See proposed Sec.
58.4501-4(e)(5) and (f)(11).
5. ``Sell to Cover'' Arrangements
A stakeholder described a ``sell to cover'' arrangement for stock-
based compensation as a transaction in which a third party (usually a
broker) facilitates the issuance of stock-based compensation by
providing amounts necessary to cover a withholding obligation (for
example, to cover Federal income taxes that must be withheld on the
transferred shares). The stakeholder suggested that this transaction
should be treated as an issuance or provision of stock for purposes of
the netting rule.
The Treasury Department and the IRS agree with the stakeholder. In
these arrangements, stock is issued or provided to the service
provider, or to a third party on behalf of the service provider, and
then immediately sold to cover a withholding obligation, and the fair
market value of the amounts necessary to cover the withholding
obligation is included in the service provider's gross income under
section 83. Therefore, as reflected in section 3.08(3)(a)(iv) of Notice
2023-2, these proposed regulations would provide that stock transferred
in these arrangements is treated as issued or provided for purposes of
the netting rule. See proposed Sec. 58.4501-4(c)(2).
6. Time When Stock Is Considered Issued or Provided to an Employee or
Other Service Provider
a. In General
Consistent with section 3.08(3)(b)(i) of Notice 2023-2, these
proposed regulations would provide that stock is treated as issued or
provided to an employee or other service provider when beneficial
ownership transfers for tax purposes. See proposed Sec. 58.4501-
4(d)(2). Beneficial ownership ordinarily transfers when the service
recipient initiates the transfer or when the stock is vested. However,
if the service provider makes a valid election under section 83(b),
beneficial ownership transfers on the date the property was
transferred. See section 83. Stock transferred to a grantor trust (for
example, a Rabbi trust) is not treated as issued or provided until
beneficial ownership transfers to the service provider for tax
purposes.
b. Restricted Stock
Several stakeholders requested clarification as to when restricted
stock is treated as issued for purposes of the netting rule. The
stakeholders recommended treating restricted stock as issued when the
stock is treated as beneficially owned under the section 83 rules.
Thus, such stock would be treated as issued only if and when the shares
become substantially vested, unless the recipient makes a section 83(b)
election with respect to the shares.
The Treasury Department and the IRS agree that restricted stock
should be treated as issued for purposes of the netting rule when the
service provider recipient of the stock is treated as the beneficial
owner for Federal income tax purposes under the section 83 rules. Under
section 3.08(3)(b)(i) of Notice 2023-2, stock is issued or provided by
a covered corporation or a specified affiliate to an employee as of the
date the employee is treated as the beneficial owner of the stock for
Federal income tax purposes, and that an employee generally is treated
as the beneficial owner of the stock when the stock is transferred by
the covered corporation (or the specified affiliate) to the employee
and the stock is substantially vested within the meaning of Sec. 1.83-
1(b). Thus, stock transferred pursuant to a vested stock award or
restricted stock unit is issued or provided when the covered
corporation or specified affiliate initiates payment of the stock. See
section 3.08(3)(b)(i) of Notice 2023-2.
Stock that is not substantially vested within the meaning of Sec.
1.83-3(b) generally is not issued or provided to the employee until the
employee vests in the stock, unless the employee makes a valid election
under section 83(b), in which case the stock is treated as issued or
provided to the employee as of the transfer date. See sections
3.08(3)(b)(i) and (iii) of Notice 2023-2. Stock transferred to an
employee pursuant to an option described in Sec. 1.83-7 or
[[Page 26014]]
section 421 or a stock appreciation right is issued or provided to the
employee as of the date the employee exercises the option or stock
appreciation right. See section 3.08(3)(b)(ii) of Notice 2023-2.
Consistent with section 3.08(3)(b)(i) of Notice 2023-2, the
proposed regulations would provide that stock that is not substantially
vested within the meaning of Sec. 1.83-3(b) generally is not treated
as issued or provided to the employee until the stock vests. See
proposed Sec. 58.4501-4(d)(2)(i). However, if the employee makes a
valid election under section 83(b), the stock would be treated as
issued or provided to the employee as of the transfer date. See
proposed Sec. 58.4501-4(d)(2)(iii).
Alternatively, one stakeholder recommended treating restricted
stock as issued at the time the award is granted (that is, when the
stock is treated as outstanding for securities law purposes). However,
the Treasury Department and the IRS are of the view that applying the
section 83 rules to determine when restricted stock is treated as
issued is appropriate, and that applying the section 83 rules
consistently would decrease the compliance burden on taxpayers and the
administrative burdens on the IRS. Accordingly, the proposed
regulations would not adopt this alternative recommendation.
7. Valuing Stock Issued or Provided to an Employee or Other Service
Provider
A stakeholder requested guidance on how to determine the fair
market value of stock issued or provided to an employee for purposes of
the netting rule. The stakeholder recommended using the market price on
the date of the issuance or provision, with specific rules to determine
fair market value for certain kinds of stock.
The Treasury Department and IRS generally agree with the
stakeholder. Consistent with section 3.08(3)(c) of Notice 2023-2, these
proposed regulations would cross-reference the section 83 rules to
determine the fair market value of stock issued or provided to an
employee or other service provider under the netting rule. See proposed
Sec. 58.4501-4(e)(5). Under the section 83 rules, the fair market
value of the stock is determined as of the date that beneficial
ownership transfers to the service provider.
The Treasury Department and the IRS are of the view that applying
the section 83 valuation rules should reduce the compliance burden on
taxpayers and the administrative burden on the IRS, as taxpayers also
apply the section 83 rules for other tax purposes. Under the proposed
regulations, the section 83 valuation rules also would apply if the
covered corporation or specified affiliate issues or provides stock
pursuant to the service provider exercising an option (including an
option described in section 421) or making a valid section 83(b)
election on restricted stock. See proposed Sec. 58.4501-4(e)(5).
A stakeholder also requested clarification on valuing stock that is
not included in United States income, such as stock issued to a non-
resident employee who provides services outside the United States. The
proposed regulations would provide that, under the netting rule, the
fair market value of stock is determined under the section 83 rules,
regardless of whether the income inclusion is governed by section 83.
Thus, for example, the fair market value of stock issued pursuant to a
stock option described in section 421 and stock issued to a non-
resident alien for services performed outside the United States is
determined using the section 83 rules. See proposed Sec. 58.4501-
4(e)(5).
XII. Mergers and Acquisitions With Post-Closing Price Adjustments
A. Overview
A stakeholder provided recommendations regarding post-closing price
adjustments in M&A transactions. This stakeholder explained that
adjustments may include additional payments to the target corporation's
shareholders based on achievement by the target corporation's business
of certain milestones or fluctuations in value of the acquiring
corporation's stock (earnout), or the forfeiture of consideration by
the target corporation's shareholders to compensate the acquiring
corporation for breaches of representations and warranties or for other
indemnification obligations (indemnification payment).
This stakeholder also noted that consideration provided at closing
in a tax-free reorganization may include shares that are issued as part
of an earnout (earnout shares) or that are subject to forfeiture to
satisfy indemnification obligations. Alternatively, the acquiring
corporation may have a right to repurchase certain shares for a price
that is below the stock's fair market value (below-market repurchase).
Despite being subject to forfeiture or a below-market repurchase, the
stakeholder explained that such shares potentially could be treated as
owned by the former target corporation shareholders for Federal income
tax purposes at the time of issuance.
B. When Shares Issued as Part of an Earnout or Potentially Subject to
an Indemnification Payment Are Treated as Issued
The stakeholder recommended that shares issued by an acquiring
corporation should be treated as issued for purposes of the netting
rule regardless of whether those shares are subject to forfeiture or a
below-market repurchase. Essentially, the stakeholder recommended that
the proposed regulations should permit an acquiring corporation to
offset the fair market value of that corporation's repurchases during
the taxable year by the fair market value of all shares issued by that
corporation in an M&A transaction during that taxable year if those
shares are treated as issued for Federal income tax purposes.
The Treasury Department continue to be of the view that stock
should be treated as issued when ownership of the stock transfers to
the recipient for Federal income tax purposes. See section 3.08(2) of
Notice 2023-2. This treatment is consistent with the stakeholder's
recommendation, and therefore the Treasury Department and the IRS have
provided no special rule in the proposed regulations. See proposed
Sec. 58.4501-4(d)(1); see also part III.B.1 of this Explanation of
Provisions (discussion of timing of issuances and repurchases).
C. Fair Market Value of Shares Issued as Part of an Earnout or
Potentially Subject to an Indemnification Payment
A stakeholder recommended that, for purposes of the netting rule,
the fair market value of shares that potentially are subject to
forfeiture or a below-market repurchase should be the trading price of
such shares on the date of issuance (rather than on the date of
forfeiture or repurchase). For support, the stakeholder contended that
(i) the parties generally do not expect the acquiring corporation to
make significant claims for indemnification payments, and (ii)
discounting the fair market value to reflect the likelihood of
forfeiture or a below-market repurchase would be administratively
cumbersome for the IRS and taxpayers.
Although Notice 2023-2 does not expressly address this issue, it
does reflect the stakeholder's recommendation. Under Notice 2023-2, if
the shares were not disregarded under the no double benefit rule, the
fair market value of the shares would be determined using their market
price on the date of issuance, consistent with the stakeholder's
recommendation regarding the treatment of shares
[[Page 26015]]
potentially subject to an indemnification payment. The proposed
regulations would maintain this treatment and would not include special
rules to determine the fair market value of such shares.
In contrast, the stakeholder also recommended that the fair market
value of earnout shares should be discounted to reflect the present
value and likelihood of payment. The Treasury Department and the IRS
are of the view that incorporation of the stakeholder's recommendation
into the proposed regulations would introduce uncertainty and
complexity into stock valuation for purposes of the netting rule.
Furthermore, the stakeholder's recommendation would be inconsistent
with the statutory language of section 4501(c)(3), which simply
references the ``fair market value'' of stock issued or provided. As a
result, the proposed regulations would not include special rules to
determine the fair market value of earnout shares.
D. Forfeiture of Shares Received as Part of an Earnout or Potentially
Subject to an Indemnification Payment
One stakeholder generally recommended that the forfeiture of
earnout shares should not be treated as a repurchase. The stakeholder
asserted that such a forfeiture would not constitute a section 317(b)
redemption because the corporation would have exchanged no property for
the earnout shares. Similarly, the stakeholder also contended that the
forfeiture should not be treated as an economically similar transaction
because no capital would have left the corporation.
In contrast, the stakeholder recommended that the forfeiture of
earnout shares as part of an indemnification payment should be treated
as a repurchase of those shares, because the target corporation's
former shareholders would have economically benefited from the
forfeiture by not needing to use cash or other property to make the
indemnification payment. Therefore, in the stakeholder's view, the
acquiring corporation should be treated as repurchasing the shares in
an amount equal to the value of the indemnification claim, as
determined based on the documents governing the transaction.
Under Notice 2023-2, a forfeiture of shares would not be treated as
a repurchase, because the forfeiture is neither a section 317(b)
redemption nor treated as an economically similar transaction. However,
there would be an issuance for purposes of the netting rule when
ownership of those shares transfers to the recipient for Federal income
tax purposes, even though those shares potentially are still subject to
forfeiture.
For the same reasons discussed in part II.D of this Explanation of
Provisions, the Treasury Department and the IRS are of the view that a
forfeiture of shares should count as a repurchase if an issuance of
such shares would be counted under the netting rule (in other words,
those shares should be treated consistently for purposes of repurchases
and issuances). Consequently, because the issuance of earnout shares or
shares subject to an indemnification payment would be taken into
account for purposes of the netting rule when those shares transfer to
the recipient for Federal income tax purposes, the proposed regulations
would treat the forfeiture of those shares as a repurchase at the time
of forfeiture. See proposed Sec. 58.4501-2(e)(4)(vi). To facilitate
the ability for the IRS to administer and enforce the stock repurchase
excise tax, the amount of the repurchase would equal the market price
of the forfeited stock on the date of forfeiture under the general rule
in proposed Sec. 58.4501-2(h)(1) and would not be determined by the
underlying transaction documents.
E. Below-Market Repurchase of Shares Received as Part of an Earnout or
Potentially Subject to an Indemnification Payment
A stakeholder recommended that, if the acquiring corporation
repurchases earnout shares in a below-market repurchase, only the
amount paid should be reflected in the acquiring corporation's stock
repurchase excise tax base. According to the stakeholder, proposed
regulations adopting that approach would be appropriate because the
negotiated price of the earnout shares would reflect the restrictions
applicable to those shares and the circumstances in which that stock is
repurchased. In contrast, the market price of those earnout shares
would reflect an inaccurate price--that is, the market price would fail
to reflect the same restrictions to which the earnout shares would be
subject.
The Treasury Department and the IRS continue to be of the view that
the fair market value of stock issued by a covered corporation should
be the market price on the date of issuance. See section 3.08(5) of
Notice 2023-2. The Treasury Department and the IRS incorporated this
position in Notice 2023-2 to reduce unnecessary complexity for
taxpayers and facilitate the ability for the IRS to administer and
enforce the stock repurchase excise tax. In addition, the Treasury
Department and the IRS observe that the approach described in Notice
2023-2 ensures that repurchases and issuances would be valued based on
identical methodologies, thereby ensuring symmetrical treatment.
Accordingly, the proposed regulations would adopt the approach
described in Notice 2023-2, including with regard to stock that is
subject to a below-market repurchase.
XIII. Troubled Companies
In section 6.02(3) of Notice 2023-2, the Treasury Department and
the IRS requested comments on whether special rules should be provided
for bankrupt or troubled companies. For example, the Treasury
Department and the IRS asked whether a section 317(b) redemption
occurring as part of a restructuring of a bankrupt or troubled company
should be excluded from the definition of ``repurchase.''
One stakeholder recommended that troubled companies generally
should not be subject to the stock repurchase excise tax. According to
the stakeholder, application of the stock repurchase excise tax would
further burden troubled companies and would provide troubled companies
with an incremental incentive to reject otherwise equitable
restructuring plans to the extent those plans would implicate the stock
repurchase excise tax. The stakeholder recommended that an exemption
apply to exchanges of equity for other property by a corporation that
either is in a title 11 case or is insolvent (within the meaning of
section 108(d)(3) of the Code) immediately prior to the exchange. The
stakeholder further recommended that the proposed regulations confirm
that the stock repurchase excise tax does not apply to acquisitive
reorganizations under section 368(a)(1)(G) (acquisitive G
reorganizations) and exchanges of distressed debt.
In contrast, another stakeholder recommended that no special rules
be provided for troubled companies, other than a modification of the
valuation rule for repurchases occurring as part of a restructuring.
The stakeholder also recommended that the definition of ``acquisitive
reorganization'' include acquisitive G reorganizations. According to
the stakeholder, if a troubled company distributes value to existing
shareholders, there is no reason to exempt such a distribution from the
stock repurchase excise tax if the distribution otherwise is a
repurchase within the scope of the stock repurchase excise tax. The
stakeholder also stated that, in most situations, the value of stock
issued to creditors in exchange for their claims will significantly
exceed
[[Page 26016]]
the value of any recovery received by existing shareholders, such that
the netting rule would prevent any stock repurchase excise tax from
being owed.
With respect to the valuation rule for repurchases, the stakeholder
stated that the general rule for valuing repurchased stock (by
reference to the ``market price'' of repurchased stock) could lead to
inappropriate outcomes for troubled companies undergoing a
restructuring. According to the stakeholder, the recovery amount
received by a shareholder in exchange for its stock may be
significantly less than the market price of the stock determined
immediately after such repurchase. For support, the stakeholder
asserted that the recovery amount will be determined when the stock is
worth very little, but the market price (if determined immediately
after the restructuring) may be much higher.
The Treasury Department and the IRS are of the view that special
rules for troubled companies are neither necessary nor appropriate to
carry out the purposes of the stock repurchase excise tax. In reaching
this view, the Treasury Department and the IRS observe that a troubled
company generally would not be treated as repurchasing its stock in
either a title 11 restructuring or an out-of-court debt restructuring.
In each type of transaction, it is the understanding of the Treasury
Department and the IRS that the troubled company's stock typically
would be cancelled solely as a result of the title 11 restructuring or
the out-of-court debt restructuring, rather than as any redemption or
repurchase. Accordingly, such cancellation would not constitute a
redemption within the meaning of section 317(b). See section 317(b)
(defining a redemption as a corporation's acquisition of its stock from
a shareholder in exchange for ``property'' (within the meaning of
section 317(a))). For the same reason, the Treasury Department and the
IRS are of the view that such a transaction should not constitute an
economically similar transaction under the proposed regulations. See
proposed Sec. 58.4501-2(e)(4).
The Treasury Department and the IRS agree that the definition of an
``acquisitive reorganization'' should include acquisitive G
reorganizations. See part VIII.A of this Explanation of Provisions
(discussion of acquisitive reorganizations). The Treasury Department
and the IRS are of the view that an exchange between a target
corporation and its shareholders pursuant to an acquisitive G
reorganization should be subject to the stock repurchase excise tax to
the same extent as in other acquisitive reorganizations. That is, a
stock repurchase excise tax liability should arise from an exchange in
an acquisitive G reorganization to the extent the target corporation
shareholders exchange their target corporation stock for non-qualifying
property. Accordingly, the proposed regulations would include
acquisitive G reorganizations in the definition of ``acquisitive
reorganization.'' See proposed Sec. 58.4501-1(b)(1).
XIV. Additional Miscellaneous Issues
A. Ordering Rule for Statutory Exceptions and Netting Rule
1. Overview
Stakeholders requested a rule to clarify the order in which
taxpayers should apply the de minimis exception, the other statutory
exceptions, the netting rule, and any other exceptions set forth in
regulations. Under Notice 2023-2, a covered corporation computes its
stock repurchase excise tax base for a taxable year by (i) determining
the aggregate fair market value of all repurchases, (ii) reducing that
amount to the extent any statutory exceptions apply, and then (iii)
reducing that amount under the netting rule. The determination whether
the de minimis exception applies is made before applying any statutory
exceptions or adjustments under the netting rule (that is, after step
(i)).
One stakeholder recommended an approach involving the following
steps. First, a taxpayer should compute its gross repurchases for the
taxable year, taking into account any exclusions from the definitions
of ``stock'' and ``repurchase.'' Second, the taxpayer should determine
whether the de minimis exception applies. (If so, no further
computations would be necessary.) Third, the taxpayer should apply the
other statutory exceptions to reduce the amount computed in the first
step. Finally, the taxpayer should apply the netting rule to the amount
computed in the third step, thereby arriving at the net repurchase
amount subject to the stock repurchase excise tax.
The stakeholder's recommendation generally is consistent with
section 3.03(3)(a) of Notice 2023-2. The proposed regulations would
maintain the ordering rules described in Notice 2023-2. See proposed
Sec. 58.4501-2(c)(1).
2. Section 4501(e)
One stakeholder contended that the plain meaning of the lead-in
language in section 4501(e)--which states that ``Subsection (a) shall
not apply'' in the situations described in section 4501(e)(1) through
(6)--is that an amount excluded under one of these statutory exceptions
should not first be treated as part of a share repurchase. In other
words, the stakeholder interpreted that lead-in language to provide
that taxpayers should not be required to include all repurchases in the
stock repurchase excise tax base and then reduce the amount of that
base by the amount of those repurchases that qualify for a statutory
exception.
The Treasury Department and the IRS are of the view that the lead-
in language in section 4501(e) does not affect the definition of
``repurchase'' under section 4501(c) (in other words, that lead-in
language applies solely to section 4501(a)). The lead-in language in
section 4501(e) states that section 4501(a), which imposes a one
percent excise tax on repurchases, does not apply in certain specified
situations. The lead-in language in section 4501(e) does not state that
those specified situations are not ``repurchases'' within the meaning
of section 4501(c). Indeed, each of the statutory exceptions in section
4501(e) expressly involves a repurchase. See, for example, section
4501(e)(1) (``to the extent that the repurchase is part of a
reorganization. . .'') and (6) (``to the extent that the repurchase is
treated as a dividend. . .'') (emphasis added). Therefore, the Treasury
Department and the IRS are of the view that Notice 2023-2 properly
implements the lead-in language in section 4501(e), and the proposed
regulations would not incorporate the stakeholder's recommendation.
3. De Minimis Rule
Several stakeholders objected to the approach described in Notice
2023-2 that the determination of whether the de minimis exception
applies be made before the application of any other statutory
exceptions or adjustments under the netting rule. One stakeholder
contended that this approach imposes a compliance burden by requiring
taxpayers to consider the application of the stock repurchase excise
tax whenever taxpayers engage in a transaction that may involve a
deemed exchange of stock. Stakeholders also contended that this
approach would have the effect of eliminating the de minimis exception
or rendering its application arbitrary in certain circumstances.
For example, one stakeholder noted that, if a covered corporation
repurchases $2 million of its stock and contributes $1.5 million of
that stock to an ESOP, the incidence of the stock repurchase excise tax
would depend on
[[Page 26017]]
the order in which the statutory exceptions are applied. If the de
minimis exception were to be applied before the stock contribution
exception, the stock repurchase excise tax would be imposed on $0.5
million. Conversely, if the de minimis exception were to be applied
after the stock contribution exception, then the stock repurchase
excise tax would not apply at all because the corporation's $0.5
million of repurchases would not exceed the $1 million de minimis
threshold.
As another example, the stakeholder assumed that a covered
corporation changes the par value of its stock with a fair market value
of $1 billion. For Federal income tax purposes, the change in par value
would be treated as an E reorganization in which the corporation's
shareholders are deemed to exchange their old stock for newly issued
stock. The stakeholder noted that, under the approach described in
Notice 2023-2, (i) this exchange would be included in the stock
repurchase excise tax base computation as a $1 billion repurchase, and
(ii) although this amount wholly would be offset under the
reorganization exception, the inclusion of the transaction in the stock
repurchase excise tax base would completely exhaust the allowance under
the de minimis exception.
The Treasury Department and the IRS are of the view that applying
the de minimis exception before the other statutory exceptions is
consistent with the statutory language and structure of section 4501.
By its terms, the de minimis exception applies ``in any case in which
the total value of the stock repurchased during the taxable year does
not exceed $1,000,000 . . .'' (emphasis added). The determination of
whether a transaction is a repurchase under section 4501(c) is
independent of the statutory exceptions in section 4501(e). Therefore,
the Treasury Department and the IRS are of the view that the de minimis
exception should be measured against a covered corporation's gross
repurchases (that is, a covered corporation's repurchases before
reduction under another statutory exception or the netting rule).
The proposed regulations would provide that a covered corporation
would compute its stock repurchase excise tax base for a taxable year
by (i) determining the aggregate fair market value of all repurchases,
(ii) reducing that amount to the extent any statutory exceptions apply,
and then (iii) reducing that amount under the netting rule. See
proposed Sec. 58.4501-2(c)(1). The determination of whether the de
minimis exception applies would be made before applying any other
statutory exceptions or adjustments under the netting rule (that is,
after step (i)). See proposed Sec. 58.4501-2(b)(2).
4. Reporting Requirements
The Treasury Department and the IRS also are of the view that any
covered corporation that makes a repurchase must comply with the
applicable reporting requirements for the stock repurchase excise tax,
even if all the covered corporation's repurchases are eligible for a
statutory exception or are offset by issuances. See proposed Sec.
58.6011-1 as proposed elsewhere in this issue of the Federal Register;
see also part XVII of this Explanation of Provisions.
B. Fractional Shares
If cash is paid to shareholders in lieu of fractional shares in
connection with a reorganization under section 368(a), the payment of
cash could be treated as an issuance of stock immediately followed by
an offsetting repurchase of a fractional share. See, for example, Rev.
Rul. 66-35, 1966-2 C.B. 116 (applying this ``deemed issuance and
repurchase'' treatment to cash paid in lieu of a fractional share to
conclude that the receipt of such cash does not violate the ``solely
for voting stock'' requirement of section 368(a)(1)(B) and (C)); Rev.
Rul. 69-34, 1969-1 C.B. 105 (applying such treatment to cash paid in
lieu of a fractional share in an E reorganization); Rev. Rul. 74-46,
1974-1 C.B. 85 (same, for an F reorganization).
Under section 3.04(3)(b) of Notice 2023-2, a payment by a covered
corporation of cash in lieu of a fractional share is not a repurchase
if (i) the payment is carried out as part of a transaction that
qualifies as a reorganization under section 368(a) or as a distribution
to which section 355 applies, or pursuant to the settlement of an
option or similar financial instrument (for example, a convertible debt
instrument or convertible preferred share), (ii) the cash is not
separately bargained-for consideration, (iii) the payment is carried
out solely for administrative convenience, and (iv) the amount of cash
paid to the shareholder in lieu of a fractional share does not exceed
the value of one full share of the stock of the covered corporation.
Several stakeholders recommended that the stock repurchase excise
tax should not apply to any such payments, so long as the cash paid
represents solely a mechanical rounding-off of fractional shares that
otherwise would be issued and is not separately bargained-for
consideration.
The Treasury Department and the IRS continue to be of the view that
the deemed issuance and repurchase of fractional shares pursuant to a
section 368(a) reorganization, section 355 distribution, or settlement
of an option or similar financial instrument should be disregarded for
purposes of section 4501, so long as the general criteria described in
Notice 2023-2 are satisfied. Accordingly, the proposed regulations
would retain this rule with the clarification that the value of one
share of stock is determined on a class-by-class basis. See proposed
Sec. 58.4501-2(e)(3)(ii).
C. Cash Paid to Dissenting Shareholders
If a target corporation shareholder exercises dissenters' rights
with respect to a reorganization, the shareholder's shares typically
are cancelled as a matter of corporate law. Upon the ultimate
resolution of the shareholder's claim, those shares typically are
deemed to have been acquired for cash in connection with the
reorganization.
The Federal income tax treatment of payments to dissenting
shareholders generally depends upon the source of the cash. If the cash
is sourced from the target corporation, the acquisition generally is
treated as occurring as part of a redemption separate from the
reorganization. See, for example, Rev. Rul. 68-285 (holding that the
acquisition of target corporation stock for acquiring corporation
voting stock is a B reorganization notwithstanding the creation of an
escrow account to pay dissenting shareholders for their stock). In
contrast, if the cash is sourced from the acquiring corporation, the
acquisition of the dissenting shareholders' stock may be treated as
acquired by the acquiring corporation in connection with the
reorganization. See, for example, Rev. Rul. 73-102, 1973-1 C.B. 186
(holding that the ``solely for voting stock'' requirement of section
368(a)(1)(C) is satisfied even though the acquiring corporation makes
cash payments to dissenting shareholders for their target corporation
stock).
A stakeholder recommended that cash paid to dissenting shareholders
should not be treated as a repurchase, regardless of the source of the
cash, and regardless of whether the dissenting shareholders' rights are
exercised in the context of a taxable or tax-free transaction.
According to the stakeholder, a shareholder's decision to exercise
dissenters' rights is outside the control of the target corporation,
which has no influence over how much cash ultimately may be paid to
dissenters.
Notice 2023-2 does not expressly address the treatment of payments
to dissenting shareholders. Thus, under Notice 2023-2, whether cash
paid to
[[Page 26018]]
dissenting shareholders is treated as a repurchase depends on whether
the transaction is treated as a section 317(b) redemption under Federal
income tax principles (namely, whether the target corporation is
treated as the source of the cash). The Treasury Department and the IRS
continue to be of the view that the determination of whether cash paid
to dissenting shareholders is treated as a repurchase should be made
based upon Federal income tax principles. Accordingly, the proposed
regulations would not adopt the stakeholder's recommendation.
D. Constructive Specified Affiliate Acquisition
The Treasury Department and the IRS have considered whether the
acquisition by a covered corporation of a corporation or partnership
that owns stock in the covered corporation should be treated as a
repurchase. For example, assume that an acquiring corporation (which is
a covered corporation) enters into an agreement to purchase all the
stock of a privately held target corporation. Prior to the acquisition,
the target corporation uses cash on hand to purchase stock of the
acquiring corporation on an established securities market. After the
acquisition, the target corporation becomes a specified affiliate of
the acquiring corporation.
The foregoing transaction is not a section 317(b) redemption by the
acquiring corporation, which does not directly acquire its stock for
``property'' within the meaning of section 317(a). The transaction also
is not an acquisition of the acquiring corporation's stock by an entity
that is a specified affiliate at the time of the acquisition. See part
IV.B of this Explanation of Provisions (discussion of the determination
of specified affiliate status). However, if the target corporation had
purchased the acquiring corporation's stock after becoming a specified
affiliate of the acquiring corporation, that purchase would have been
treated as a repurchase by the acquiring corporation under section
4501(c)(2) (regarding the treatment of purchases by specified
affiliates). Therefore, by purchasing the stock of the target
corporation, the acquiring corporation has gained the economic benefits
of repurchasing its stock without incurring a stock repurchase excise
tax liability.
The Treasury Department and the IRS are of the view that the
foregoing transaction should be treated as a repurchase. Accordingly,
the proposed regulations would provide that a constructive specified
affiliate acquisition of stock by a covered corporation is treated as a
repurchase to the extent that: (i) the target corporation or
partnership becomes a specified affiliate of the covered corporation;
(ii) at the time the target corporation or partnership becomes a
specified affiliate, it owns stock of the covered corporation that
represents more than one percent of the fair market value of the target
corporation or partnership as determined at such time; and (iii) the
target corporation or partnership acquired such stock after December
31, 2022 (constructive specified affiliate acquisition rule). See
proposed Sec. 58.4501-2(f)(3)(i). Stock that is treated as repurchased
in a constructive specified affiliate acquisition is treated as being
repurchased at the time the corporation or partnership becomes a
specified affiliate of the covered corporation. See proposed Sec.
58.4501-2(g)(4).
However, the constructive specified affiliate acquisition rule
would not apply to shares of covered corporation stock identified as
previously having been treated as repurchased by the covered
corporation under the constructive specified affiliate acquisition
rule. See proposed Sec. 58.4501-2(f)(3)(ii).
If the corporation or partnership is unable to specifically
identify which shares of stock of the covered corporation the
corporation or partnership is treated as holding at the time it becomes
a specified affiliate, the covered corporation must treat the
corporation or partnership as holding the most recently acquired shares
of the stock of the covered corporation. See proposed Sec. 58.4501-
2(f)(3)(iii).
The constructive specified affiliate acquisition rule would apply
regardless of whether the acquisition is a taxable transaction or a
tax-free acquisition. Additionally, a transaction in which a target
corporation's redemption of its shares causes the target corporation to
become a specified affiliate of the covered corporation would be
treated as an acquisition of the target corporation by the covered
corporation for purposes of the constructive specified affiliate
acquisition rule.
E. Carryover of Stock Repurchase Excise Tax Base
A stakeholder requested clarification as to whether a positive or
negative balance in a target corporation's stock repurchase excise tax
base (that is, an excess of issuances over repurchases, or vice-versa)
may carry over to the acquiring corporation following an acquisitive
reorganization for purposes of determining the acquiring corporation's
stock repurchase excise tax base for the taxable year that includes the
acquisition. The stakeholder recommended against applying a carryover
approach if the Treasury Department and the IRS exempt acquisitive
reorganizations from the stock repurchase excise tax or limit its
application to non-qualifying property sourced from the target
corporation. See parts VIII.A.2 and VIII.B of this Explanation of
Provisions (discussion of acquisitive reorganizations and the sourcing
approach to such reorganizations). The stakeholder also contended that
a non-carryover approach may be more consistent with the taxable year
determination described in section 3.03(c) of Notice 2023-2.
However, the stakeholder expressed a view that if, under the
proposed regulations, the stock repurchase excise tax continues to
apply to non-qualifying property sourced from the acquiring
corporation, then permitting the balance in a target corporation's
stock repurchase excise tax base to carry over to the acquiring
corporation may be reasonable, at least to the extent of any positive
balance created in connection with the transaction. The stakeholder
also contended that a carryover approach may be appropriate for
complete liquidations to which both sections 331 and 332 apply, if the
subsidiary and parent corporations are both publicly traded at the time
of the liquidation.
For the reasons discussed in part XI.D of this Explanation of
Provisions (discussion of carryovers and carrybacks of issuances of
preferred stock), the Treasury Department and the IRS are of the view
that a carryover approach is not appropriate for purposes of the stock
repurchase excise tax. Accordingly, the proposed regulations would not
adopt a carryover approach.
F. Exclusive List of Economically Similar Transactions
One stakeholder recommended that the Treasury Department and the
IRS incorporate into the proposed regulations the approach described in
Notice 2023-2, which provided an exclusive list of economically similar
transactions. The stakeholder further recommended that any transactions
added to this list in future guidance should be subject to the stock
repurchase excise tax only on a prospective basis. Another stakeholder
also recommended that guidance classifying instruments or transactions
as economically similar should apply prospectively, except for any
transactions deemed abusive that may warrant retroactive application.
[[Page 26019]]
The Treasury Department and the IRS continue to be of the view that
economically similar transactions should be clearly identified in an
exclusive list on which taxpayers may rely. Accordingly, the proposed
regulations would retain the exclusive list described in Notice 2023-2,
as modified to account for other changes in these proposed regulations.
See proposed Sec. 58.4501-2(e)(4).
The Treasury Department and the IRS also are of the view that
additional transactions added to the list of economically similar
transactions should not be required to be apply solely on a prospective
basis. Although the Treasury Department and the IRS anticipate that
most transactions treated as economically similar transactions would be
treated as such only on a prospective basis, there may be transactions
that warrant retroactive application, as noted by the other
stakeholder. Accordingly, the proposed regulations would not adopt this
recommendation.
G. SPACs
1. Overview
SPACs are companies that raise equity in an IPO in order to seek
out and acquire an operating business in a business combination (de-
SPAC transaction). A SPAC typically will issue stock to the public in
the IPO and deposit the cash received in a trust. The stock is
redeemable at the option of the holder, including in connection with a
de-SPAC transaction. If a business combination is not completed within
a specified period of time (typically, two years), the SPAC liquidates
and the cash is returned to the public shareholders.
2. SPAC Redemptions and Economically Similar Transactions
Several stakeholders requested clarification regarding the
application of the stock repurchase excise tax to SPAC-related section
317(b) redemptions and economically similar transactions. For example,
stakeholders recommended that non-liquidating redemptions of stock by a
SPAC should be wholly excepted from the stock repurchase excise tax.
According to one stakeholder, a redemption of stock by a SPAC pursuant
to the terms of the stock differs from a conventional stock buyback, in
that the SPAC redemption effectively amounts to a return of a
shareholder's capital and does not result in either stock price
manipulation or accretion to other shareholders (considerations that
the stakeholder hypothesized to be relevant to Congress in enacting the
stock repurchase excise tax). According to another stakeholder, an
exemption for non-liquidating redemptions by SPACs could be implemented
by either (i) an exception to the stock repurchase excise tax for
redemptions pursuant to a mandatory redemption right or a unilateral
holder put option, or (ii) a broad-based exception for SPAC-related
redemptions.
The Treasury Department and the IRS are of the view that adopting
special rules for SPACs in the proposed regulations would not be
necessary or appropriate to carry out the stock repurchase excise tax.
As discussed in part II.A.1 of this Explanation of Provisions, the
proposed regulations would not exempt redemptions of stock pursuant to
a mandatory redemption right or a unilateral holder put option. These
proposed rules would apply to SPACs as well as other taxpayers.
Several stakeholders also recommended that distributions in
complete liquidation of a SPAC should not be subject to the stock
repurchase excise tax, even if there is not a distribution in
cancellation or redemption of all classes of stock. The stakeholders
stated that this issue arises because a SPAC sponsor typically waives
with respect to their shares any redemption rights in connection with a
de-SPAC transaction and any rights to liquidating distributions.
Consequently, when a SPAC winds up and liquidates, the shares owned by
the SPAC sponsor typically will not receive a liquidating distribution.
As discussed in part VI.A.2 of this Explanation of Provisions, the
proposed regulations would clarify that a distribution pursuant to a
plan of complete liquidation or dissolution of a covered corporation
(or an applicable foreign corporation or a covered surrogate foreign
corporation) generally is not a repurchase and, thus, generally is not
subject to the stock repurchase excise tax. See proposed Sec. 58.4501-
2(e)(5)(i).
3. Netting Rule
In certain de-SPAC transactions, the SPAC is not the acquiring
corporation. Therefore, the SPAC does not issue any stock in the
transaction. Stakeholders recommended that, in such transactions, the
SPAC should be allowed to offset its repurchases against (i) issuances
by the post-combination entity (which could be viewed as a successor to
the SPAC), or (ii) issuances of exchange rights to acquire covered
corporation stock issued to the owners of target partnership interests
(if the de-SPAC transaction is executed through a transaction commonly
referred to as an ``Up-SPAC'' transaction).
According to stakeholders, such issuances are functionally
equivalent to issuances by the SPAC. Stakeholders also recommended
similar expansions of the netting rule for acquisitions other than de-
SPAC transactions. Alternatively, a stakeholder recommended that SPACs
be permitted a one-year carryback or carryforward of excess issuances.
Notice 2023-2 addresses the foregoing issues but does not provide
SPAC-specific rules. For example, if a de-SPAC transaction were to
qualify as a reorganization under section 368(a), the no double benefit
rule would disallow any netting rule offset for stock issued by the
acquiring corporation. See section 3.08(4)(d) of Notice 2023-2.
However, the Treasury Department and the IRS are of the view that the
netting rule should not be expanded in the manner recommended by
stakeholders. By its terms, the netting rule adjusts the amount of a
covered corporation's stock repurchases solely by the fair market value
of covered corporation stock issued or provided during the taxable
year. Accordingly, the proposed regulations would not adopt these
recommendations. See also parts XI.D (regarding a request for a one-
year carryback and carryforward period for issuances of preferred
stock) and XIV.F (discussion of a recommendation for a carryover
approach in the context of acquisitive reorganizations and complete
liquidations) of this Explanation of Provisions.
H. Treatment of Disregarded Entities
Section 301.7701-2(c)(2)(i) provides that, for Federal tax
purposes, a business entity that has a single owner and that is not a
corporation under Sec. 301.7701-2(b) is disregarded as an entity
separate from its owner (disregarded entity). Section 301.7701-
2(c)(2)(v) provides that Sec. 301.7701-2(c)(2)(i) does not apply for
purposes of certain excise taxes set forth in Sec. 301.7701-
2(c)(2)(v)(A). Section 4501 is not included among the excise taxes set
forth in Sec. 301.7701-2(c)(2)(v)(A). Thus, the treatment of an entity
as a disregarded entity under Sec. 301.7701-2(c)(2)(i) is respected
for purposes of section 4501. See proposed Sec. 58.4501-5(b)(18).
I. Form 7208
In connection with the publication of Notice 2023-2, the IRS
released a proposed draft of Form 7208, which it is intended that a
covered corporation would use to calculate the amount of its stock
repurchase excise tax. In
[[Page 26020]]
connection with the publication of these proposed regulations, the IRS
will release an updated draft Form 7208 along with draft instructions
to the Form 7208.
XV. Applicability Dates for Proposed Sec. Sec. 58.4501-1 Through
58.4501-5
Proposed Sec. 58.4501-6(a) generally would provide that proposed
Sec. Sec. 58.4501-1 through 58.4501-5 apply to repurchases of stock of
a covered corporation occurring after December 31, 2022, and during
taxable years ending after December 31, 2022, and to issuances and
provisions of stock of a covered corporation occurring during taxable
years ending after December 31, 2022. See section 7805(b)(1)(C).
However, certain rules in proposed Sec. Sec. 58.4501-1 through
58.4501-5 that were not described in Notice 2023-2 would apply to
repurchases, issuances, or provisions of stock of a covered corporation
occurring after April 12, 2024, and during taxable years ending April
12, 2024 See proposed Sec. 58.4501-6(b)(1).
Except as described in the following paragraph, so long as a
covered corporation consistently follows the provisions of proposed
Sec. Sec. 58.4501-1 through 58.4501-5, the covered corporation may
rely on these proposed regulations with respect to (1) repurchases of
stock of the covered corporation occurring after December 31, 2022, and
on or before the date of publication of final regulations in the
Federal Register, and (2) issuances and provisions of stock of the
covered corporation occurring during taxable years ending after
December 31, 2022, and on or before the date of publication of final
regulations in the Federal Register.
In addition, so long as a covered corporation consistently follows
the provisions of Notice 2023-2 corresponding to the rules in proposed
Sec. Sec. 58.4501-1 through 58.4501-5, the covered corporation may
choose to rely on Notice 2023-2 with respect to (1) repurchases of
stock of a covered corporation occurring after December 31, 2022, and
on or before April 12, 2024, and (2) issuances and provisions of stock
of a covered corporation occurring during taxable years ending after
December 31, 2022, and on or before April 12, 2024.
A covered corporation that relies on the provisions of Notice 2023-
2 corresponding to the rules in proposed Sec. Sec. 58.4501-1 through
58.4501-5 with respect to (1) repurchases occurring after December 31,
2022, and on or before April 12, 2024, and (2) issuances and provisions
of stock of a covered corporation occurring during taxable years ending
after December 31, 2022, and on or before April 12, 2024, may also
choose to rely on the provisions of proposed Sec. Sec. 58.4501-1
through 58.4501-5 with respect to (1) repurchases occurring after April
12, 2024, and on or before the date of publication of final regulations
in the Federal Register, and (2) issuances and provisions of stock of a
covered corporation occurring after April 12, 2024, and on or before
the date of publication of final regulations in the Federal Register.
XVI. Section 4501(d)
A. In General
As noted in part I.D of the Background section of this preamble,
section 4501(d) provides rules for the application of the stock
repurchase excise tax to acquisitions of stock of applicable foreign
corporations and repurchases and acquisitions of stock of covered
surrogate foreign corporations (section 4501(d) excise tax). Section
4501(f) authorizes the Secretary to prescribe regulations and other
guidance as are necessary or appropriate to carry out, and to prevent
the avoidance of, the purposes of section 4501, including rules for the
application of section 4501(d).
Proposed Sec. 58.4501-7 would provide rules specifically relating
to the application of section 4501(d) (section 4501(d) proposed
regulations). The section 4501(d) proposed regulations generally follow
related rules in proposed Sec. Sec. 58.4501-2 through 58.4501-4, with
modifications as appropriate solely to reflect differences in the
operation of section 4501(d). See part I.D of the Background section of
this preamble. Among other differences, the section 4501(d) excise tax
is imposed on an applicable specified affiliate treated as a covered
corporation under section 4501(d)(1)(A) or an expatriated entity
treated as a covered corporation under section 4501(d)(2)(A) (each, a
section 4501(d) covered corporation). In addition, the netting rule
applies only to stock issued or provided by the applicable specified
affiliate or expatriated entity, as applicable, to its employees under
section 4501(d)(1)(C) and (d)(2)(C), respectively.
Terms used in the section 4501(d) proposed regulations but not
defined therein have the meaning provided in proposed Sec. 58.4501-1,
except that: (i) references to a ``covered corporation'' are treated as
references to a ``section 4501(d) covered corporation,'' an
``applicable foreign corporation,'' or a ``covered surrogate foreign
corporation,'' as the context may require; and (ii) references to a
``covered corporation'' or ``specified affiliate'' in respect of the
definitions of ``employee'' and ``employer-sponsored retirement plan''
are treated solely as references to a ``section 4501(d) covered
corporation.'' See proposed Sec. 58.4501-7(b)(1).
Terms specifically defined in the section 4501(d) proposed
regulations are solely applicable for purposes of those regulations.
See proposed Sec. 58.4501-7(b)(2). In particular, the section 4501(d)
proposed regulations would provide definitions relevant to the section
4501(d) excise tax computation, the funding rule of proposed Sec.
58.4501-7(e), and the application of the statutory exceptions in
section 4501(e) to section 4501(d) covered corporations. See part XVI.D
of this Explanation of Provisions (discussion of proposed funding
rule).
B. Computation of Section 4501(d) Excise Tax Liability of a Section
4501(d) Covered Corporation
1. Basic Computational Rules
The section 4501(d) excise tax liability of a section 4501(d)
covered corporation would be computed under rules based on the
computational rules for computing the stock repurchase excise tax
liability of a covered corporation, as set forth in proposed Sec.
58.4501-2(c)(1), with certain modifications to reflect the differences
relating to, among other items: (i) the application of the section
4501(d) excise tax at the level of the section 4501(d) covered
corporation; (ii) the application of certain statutory exceptions in
section 4501(e); and (iii) the application of the netting rule solely
to stock of the applicable foreign corporation or covered surrogate
foreign corporation, as applicable, issued or provided by the section
4501(d) covered corporation to its employees.
The section 4501(d) proposed regulations would provide that the
amount of section 4501(d) excise tax imposed on a section 4501(d)
covered corporation equals the product obtained by multiplying the
applicable percentage by the section 4501(d) excise tax base. See
proposed Sec. 58.4501-7(c)(1). The ``section 4501(d) excise tax base''
would be equal to the aggregate fair market value of all section
4501(d)(1) repurchases (as defined in proposed Sec. 58.4501-
7(b)(2)(xxii)) or section 4501(d)(2) repurchases (as defined in
proposed Sec. 58.4501-7(b)(2)(xxiii)), as applicable, during the
section 4501(d) covered corporation's taxable year, reduced by (i) the
fair market value of stock repurchased or
[[Page 26021]]
acquired during the taxable year to the extent any statutory exceptions
in section 4501(e) apply, and (ii) the aggregate fair market value of
stock of the applicable foreign corporation or stock of the covered
surrogate foreign corporation, as applicable, to the extent the netting
rule applies under section 4501(d)(1)(C) or (d)(2)(C), respectively.
See proposed Sec. 58.4501-7(c)(3) (section 4501(d) excise tax base),
(m) (section 4501(d) statutory exceptions), and (n) (section 4501(d)
netting rule).
For purposes of the section 4501(d) excise tax base, the fair
market value of a section 4501(d)(1) repurchase or section 4501(d)(2)
repurchase, as applicable, during the section 4501(d) covered
corporation's taxable year generally would be determined in the same
manner as in proposed Sec. 58.4501-2(h). However, the section 4501(d)
covered corporation, rather than the covered corporation, would be
required to determine the value of the stock of the applicable foreign
corporation or covered surrogate foreign corporation, as applicable, by
applying one of the acceptable methods of valuation set forth in
proposed Sec. 58.4501-7(l)(2)(ii), for stock traded on an established
securities market, or under the principles of Sec. 1.409A-
1(b)(5)(iv)(B)(1), for stock not so traded.
In either case, the section 4501(d) covered corporation must be
consistent in its application of the valuation methodology. For
example, the market price of stock of an applicable foreign corporation
or a covered surrogate foreign corporation, as applicable, that is
traded on an established securities market must be determined by
consistently applying one, but not more than one, of the acceptable
methods to all section 4501(d)(1) repurchases with respect to an
applicable foreign corporation or all section 4501(d)(2) repurchases
with respect to a covered surrogate foreign corporation, in the same
taxable year of the applicable foreign corporation or covered surrogate
foreign corporation, as applicable. See proposed Sec. 58.4501-
7(l)(2)(iv). If an applicable foreign corporation or a covered
surrogate foreign corporation, as applicable, does not have a taxable
year for Federal income tax purposes, the calendar year would be
treated as the taxable year for this purpose.
2. Section 4501(d) De Minimis Exception
The section 4501(d) proposed regulations would provide that a
section 4501(d) covered corporation is not subject to the section
4501(d) excise tax with regard to a taxable year of the section 4501(d)
covered corporation if, during that taxable year, the aggregate fair
market value of all section 4501(d)(1) repurchases with respect to all
applicable specified affiliates or all section 4501(d)(2) repurchases
with respect to an expatriated entity, as applicable, does not exceed
$1,000,000 (section 4501(d) de minimis exception). See proposed Sec.
58.4501-7(c)(2)(i). The determination of whether the section 4501(d) de
minimis exception applies is made before applying any section 4501(d)
statutory exception or the section 4501(d) netting rule, which are
discussed in parts XVI.I and J of this Explanation of Provisions,
respectively.
In applying the section 4501(d) de minimis exception to applicable
specified affiliates of an applicable foreign corporation in cases in
which the applicable specified affiliates have different taxable years,
each applicable specified affiliate (tested affiliate) would be
required to aggregate section 4501(d)(1) repurchases that occur during
its taxable year (tested taxable year), including section 4501(d)(1)
repurchases by other applicable specified affiliates of the same
applicable foreign corporation that occur during the tested affiliate's
taxable year, regardless of the taxable year ends of the other
applicable specified affiliates. In other words, the section 4501(d) de
minimis exception would be applied to the overlapping portion of the
taxable years of all applicable specified affiliates of an applicable
foreign corporation.
The Treasury Department and the IRS are of the view that applying
the section 4501(d) de minimis exception to the overlapping portion of
the taxable years of all applicable specified affiliates is consistent
with the statute, which applies the de minimis exception to the total
value of the stock repurchased during the taxable year without regard
to the identity of the person effecting the repurchase, and also
precludes the use or formation of multiple applicable specified
affiliates for the purpose of improperly manipulating the application
of the de minimis exception.
For example, assume that an applicable foreign corporation, FX, has
a taxable year end of June 30 and owns the stock of two domestic
corporations, US1 and US2, that are applicable specified affiliates.
US1 has a taxable year end of June 30, and US2 has a taxable year end
of December 31. In applying the section 4501(d) de minimis exception to
US1 in its taxable year ending June 30, 2026, the aggregate fair market
value of all section 4501(d)(1) repurchases with respect to all
applicable specified affiliates during its taxable year ending June 30,
2026, is taken into account. Consequently, any acquisition of stock of
FX that occurs from July 1, 2025, through June 30, 2026, whether by US1
or US2, would be included in applying the section 4501(d) de minimis
exception to US1's taxable year ending June 30, 2026.
C. Certain Rules for Section 4501(d)(2) Repurchases
1. Coordination Rules for Section 4501(d)(2) Repurchases
The section 4501(d) proposed regulations would provide certain
coordination rules relating to section 4501(d)(2) repurchases. In
particular, the section 4501(d) proposed regulations would provide a
priority rule for a transaction that is otherwise both a section
4501(d)(1) repurchase and a section 4501(d)(2) repurchase, and a
coordination rule for multiple expatriated entities with respect to a
covered surrogate foreign corporation.
With respect to the priority rule, one stakeholder recommended
that, if both section 4501(d)(1) and (2) could apply to a transaction,
only section 4501(d)(1) should be applied. The Treasury Department and
the IRS recognize that, in certain limited situations, acquisitions of
stock of a covered surrogate foreign corporation could be subject to
the section 4501(d) excise tax under both section 4501(d)(1) and (2).
The Treasury Department and the IRS agree that a coordination rule is
appropriate but are of the view that section 4501(d)(2) should take
priority over section 4501(d)(1). Section 4501(d)(2) is specifically
targeted to the repurchase of stock of a covered surrogate foreign
corporation by the covered surrogate foreign corporation or the
acquisition of the stock of a covered surrogate foreign corporation by
a specified affiliate of such corporation. Accordingly, it is
appropriate to give primacy to section 4501(d)(2) in that context.
Further, the proposed approach accords with the statutory regime
that bifurcates between the operation of section 4501(d)(1) and (2)
because this approach would apply section 4501(d)(2) consistently to
such repurchases or acquisitions instead of applying a mix of section
4501(d)(1) or (d)(2) depending on the circumstances of a particular
acquisition. This mixed application of section 4501(d)(1) and (d)(2)
could also present difficulties from a computational perspective.
Accordingly, to the extent any repurchase or acquisition of stock of a
covered surrogate foreign corporation would be both a section
4501(d)(1) repurchase and a section 4501(d)(2)
[[Page 26022]]
repurchase, the repurchase or acquisition would be only a section
4501(d)(2) repurchase. See proposed Sec. 58.4501-7(d)(1).
With respect to the coordination rule, section 6.02(5) of Notice
2023-2 requested comments on how the section 4501(d) excise tax
liability should be allocated in circumstances in which there are
multiple expatriated entities, each of which is treated as a covered
corporation with respect to a covered surrogate foreign corporation. A
stakeholder recommended that the parties be permitted to contractually
allocate liability for the section 4501(d) excise tax in this
circumstance. The stakeholder stated that permitting the parties to
determine their own allocation of section 4501(d) excise tax liability,
rather than mandating an allocation scheme, would allow taxpayers to
consider a number of ancillary factors relevant to the allocation, such
as the cash flow needs of particular entities. The stakeholder
suggested that the government's interest in the payment and collection
of the section 4501(d) excise tax could be protected through imposing
joint and several liability for the tax liability with respect to each
relevant expatriated entity, notwithstanding the privately contracted
liability allocation, and through coordination of the reporting of the
stock repurchase excise tax on Form 720.
The Treasury Department and the IRS are of the view that, under the
plain language of section 4501(d)(2), if there are multiple expatriated
entities with respect to a covered surrogate foreign corporation, each
expatriated entity is separately liable for the section 4501(d) excise
tax with respect to all section 4501(d)(2) repurchases with respect to
the covered surrogate foreign corporation's stock. In particular, under
the language of the statute, each expatriated entity is liable for the
section 4501(d) excise tax on the full amount of stock repurchases by a
covered surrogate foreign corporation and its specified affiliates, and
the statute does not provide any method of allocation among multiple
expatriated entities. For example, if there are two expatriated
entities with respect to the same covered surrogate foreign
corporation, and the covered surrogate foreign corporation repurchases
$100x of stock during the year, then under the statute's plain
language, both expatriated entities would be liable for any section
4501(d) excise tax with respect to the $100x repurchase.
Accordingly, the section 4501(d) proposed regulations would follow
the statute by providing the default rule that multiple expatriated
entities are each liable for the full amount of section 4501(d) excise
tax with respect to the covered surrogate foreign corporation. However,
the section 4501(d) proposed regulations would provide procedures to
allow one of those multiple expatriated entities to report and pay its
full excise tax obligation and thereby relieve the remaining
expatriated entities of their obligations to report and pay the same
amount of section 4501(d) excise tax with respect to the section
4501(d)(2) repurchases during the paying expatriated entity's taxable
year. See proposed Sec. 58.4501-7(d)(2)(ii); see also proposed Sec.
58.4501-7(q)(3) (Example 3) for an illustration of this rule.
The Treasury Department and the IRS are of the view that allowing
multiple expatriated entities to pay different portions of the section
4501(d) excise tax liability would be too complex and that the most
straightforward and administrable approach would be to require one
expatriated entity to pay its full section 4501(d) excise tax liability
for the taxable year and thereby relieve each other expatriated
entity's liability for the section 4501(d) excise tax. Further, as
relevant to the stakeholders' recommendations, multiple expatriated
entities still could choose the expatriated entity that fully reports
and pays its section 4501(d) excise tax liability, and they could
provide for payments or reimbursements among themselves by private
contract.
2. Example for Entity Subject to Section 7874(b)
One stakeholder requested that the proposed regulations clarify
that an entity described in section 7874(b) is treated as a domestic
corporation for purposes of applying section 4501, and so is subject to
section 4501(a) as a covered corporation (and is not a covered
surrogate foreign corporation under section 4501(d)(2)). The Treasury
Department and the IRS agree with this request because this result
follows from the plain language of sections 4501(d) and 7874. See
proposed Sec. 58.4501-5(b)(40) (Example 40) for an illustration of
this result.
3. Transfers Among the Covered Surrogate Foreign Corporation and Its
Specified Affiliates
One stakeholder requested clarification of whether section
4501(d)(2) applies to transfers of stock of a covered surrogate foreign
corporation among related entities (in particular, among a covered
surrogate foreign corporation and its specified affiliates). Those
transactions are section 4501(d)(2) repurchases because, unlike section
4501(d)(1), section 4501(d)(2) is not limited to repurchases or
acquisitions of stock from persons who are not the covered surrogate
foreign corporation or a specified affiliate of the covered surrogate
foreign corporation. See proposed Sec. 58.4501-7(q)(2) (Example 2) for
an illustration of this result.
D. The Proposed Funding Rule
1. The Notice Funding Rule
Section 3.05(2)(a)(ii) of Notice 2023-2 provides that an applicable
specified affiliate is treated as acquiring stock of an applicable
foreign corporation if (i) the applicable specified affiliate funds by
any means (including through distributions, debt, or capital
contributions) the repurchase or acquisition of stock of the applicable
foreign corporation by the applicable foreign corporation or a
specified affiliate that is not also an applicable specified affiliate,
and (ii) such funding is undertaken with a principal purpose of
avoiding the stock repurchase excise tax (Notice funding rule). The
Notice funding rule also provides that such a principal purpose is
deemed to exist if the funding (other than through distributions)
occurs within two years of the funded entity's repurchase or
acquisition of stock of the applicable foreign corporation (per se
rule).
Numerous stakeholders provided feedback on the Notice funding rule.
Stakeholders generally asserted that the Notice funding rule and, in
particular, the per se rule were overbroad for various reasons. This
feedback was considered in drafting and revising the version of the
funding rule in the section 4501(d) proposed regulations (proposed
funding rule) and is discussed in part XVI.D.2 of this Explanation of
Provisions.
2. The Proposed Funding Rule
a. General Structure and the Rebuttable Presumption
The proposed funding rule would retain the general structure of the
Notice funding rule, but with substantial modifications that include
replacing the per se rule with a rebuttable presumption that applies in
limited circumstances. Under the proposed funding rule, an applicable
specified affiliate of an applicable foreign corporation would be
treated as acquiring stock of the applicable foreign corporation to the
extent the applicable specified affiliate (i) funds by any means
(including through distributions, debt, or capital contributions),
directly or indirectly, an AFC repurchase or an
[[Page 26023]]
acquisition of stock of an applicable foreign corporation by a
specified affiliate of an applicable foreign corporation that is not an
applicable specified affiliate of the applicable foreign corporation
(such entity, a relevant entity, and such repurchase or acquisition, a
covered purchase) (ii) with a principal purpose of avoiding the section
4501(d) excise tax (a funding with such a principal purpose, a covered
funding). If a principal purpose of a funding is to fund, directly or
indirectly, a covered purchase, then with respect to that funding,
there is a principal purpose of avoiding the section 4501(d) excise
tax. See proposed Sec. 58.4501-7(e)(1); see also proposed Sec.
58.4501-7(j) (definition of ``AFC repurchase''). Proposed Sec.
58.4501-7(p)(3) (Example 3), (p)(4) (Example 4), and (p)(7) (Example 7)
would illustrate the application of the proposed funding rule.
The section 4501(d) proposed regulations would not include the per
se rule. Instead, a principal purpose described in proposed Sec.
58.4501-7(e)(1) would be presumed to exist if the applicable specified
affiliate funds by any means, directly or indirectly, a downstream
relevant entity, and the funding occurs within two years of a covered
purchase by or on behalf of the downstream relevant entity (rebuttable
presumption). A covered purchase ``on behalf of'' a downstream relevant
entity would include an acquisition by an agent or nominee of the
downstream relevant entity for the downstream relevant entity's
account. The term ``downstream relevant entity'' would be defined as a
relevant entity (i) 25 percent or more of the stock of which is owned
(by vote or by value), directly or indirectly, by, individually or in
aggregate, one or more applicable specified affiliates of an applicable
foreign corporation, or (ii) 25 percent or more of the capital or
profits interests in which are held, directly or indirectly, by,
individually or in aggregate, one or more applicable specified
affiliates of an applicable foreign corporation. The rebuttable
presumption may be rebutted only if facts and circumstances clearly
establish that there was not a principal purpose described in proposed
Sec. 58.4501-7(e)(1).
Thus, the rebuttable presumption would apply only to ``downstream''
fundings (that is, fundings of, and covered purchases by or on behalf
of, relevant entities in which one or more applicable specified
affiliates have a material direct or indirect ownership interest). The
rebuttable presumption would not otherwise apply. Proposed Sec.
58.4501-7(p)(5) (Example 5) and (p)(6) (Example 6) would illustrate the
application of the rebuttable presumption.
b. Timing and Allocation Rules
The proposed funding rule would provide rules for determining the
date that an applicable specified affiliate is treated, by reason of a
covered funding, as acquiring stock of an applicable foreign
corporation. More specifically, the proposed funding rule would provide
that stock of an applicable foreign corporation that is treated as
acquired by an applicable specified affiliate by reason of a covered
funding is treated as acquired on the later of the date of the covered
funding or the covered purchase to which the covered funding is
allocated.
The proposed funding rule also would provide specific rules
allocating covered fundings to covered purchases to determine the
amount of a deemed acquisition pursuant to the proposed funding rule.
The proposed funding rule would provide that the amount of stock of an
applicable foreign corporation acquired in a covered purchase that is
treated as acquired by an applicable specified affiliate is equal to
the amount of the applicable specified affiliate's covered fundings
that are allocated to a covered purchase. To the extent covered
fundings are allocated to a covered purchase, those fundings would not
be allocated to any other covered purchases.
The proposed funding rule would provide that a covered purchase is
treated as made first from covered fundings such that, to the extent
there is both a covered funding and a covered purchase subject to the
proposed funding rule, such covered purchase is treated as funded by
the covered funding before fundings received from other sources.
The proposed funding rule would further provide that, if there is a
single covered funding, the covered funding is allocated to a covered
purchase to the extent of the lesser of the amount of the covered
funding or the amount of the covered purchase. If there are multiple
covered fundings, and if the aggregate amount of those fundings exceeds
the amount of the covered purchase, then covered fundings would be
allocated to the covered purchase in the order in which the covered
fundings occur (a ``first in, first out'' approach). If multiple
covered fundings occur simultaneously, those covered fundings would be
allocated to the covered purchase on a pro rata basis.
If there are multiple covered purchases, then covered fundings
would be allocated to the covered purchases in the order in which the
covered purchases occur. If multiple covered purchases occur
simultaneously, then covered fundings would be allocated to those
simultaneous covered purchases on a pro rata basis.
3. Response to Feedback on the Notice Funding Rule
a. Authority for the Notice Funding Rule
Stakeholders requested that the Notice funding rule be withdrawn
for various reasons, including that, in the stakeholders' view, the
Notice funding rule is not supported by the statutory language and is
contrary to congressional intent.
Stakeholders asserted that the Notice funding rule is contrary to
the statutory language in section 4501(d)(1) because that language
requires the applicable specified affiliate to acquire the stock of the
applicable foreign corporation, as opposed to merely funding a separate
entity's acquisition of such stock. Several stakeholders also alleged
that section 4501(f) does not provide sufficient authority for the
Notice funding rule because the Notice funding rule does not
appropriately target the avoidance of section 4501(d)(1) and does not
carry out, or prevent the avoidance of, the purposes of section 4501.
Stakeholders also asserted that the Notice funding rule and the per
se rule are otherwise overbroad, particularly given that section
4501(d)(1) only applies to a set of transactions--certain acquisitions
by applicable specified affiliates of stock of an applicable foreign
corporation--that stakeholders alleged occur rarely, if ever (for
example, because foreign law prohibits a subsidiary from owning stock
of its ultimate parent entity).
As a threshold matter, the Treasury Department and the IRS continue
to be of the view that, for several reasons, a version of the funding
rule is necessary to carry out the purposes of, and to prevent
avoidance of, the section 4501(d) excise tax. As acknowledged by
stakeholders, an applicable specified affiliate potentially could avoid
the section 4501(d) excise tax with relative ease absent a funding
rule. Accordingly, the Treasury Department and the IRS are of the view
that a version of the funding rule is necessary to prevent such
avoidance of the section 4501(d) excise tax.
The Treasury Department and the IRS are also of the view that the
proposed funding rule is an appropriate and permissible exercise of the
broad grant of authority in section 4501(f) to prescribe regulations
and other
[[Page 26024]]
guidance as necessary or appropriate to carry out, and to prevent the
avoidance of, the purposes of the stock repurchase excise tax,
including guidance for the application of the rules of section 4501(d).
As one stakeholder noted, statutory grants of regulatory authority like
section 4501(f) generally are understood to be broad. For example, see
H.R. Rep. No. 100-795, at 54 (1988) (stating that the Treasury
Department has, under section 382(m) of the Code, ``broad regulatory
authority to prescribe any regulations necessary or appropriate to
carry out the purposes of the loss limitation provisions''). Further,
longstanding rules in other Treasury regulations provide that, if a
taxpayer funds an acquisition of property by a relevant related party
rather than acquiring the property itself, the taxpayer can be treated
in appropriate circumstances as acquiring the property for certain
Federal income tax purposes if the funding satisfies a principal
purpose requirement. See Sec. Sec. 1.304-4(b)(1); 1.956-1(b)(1)(iii).
The Treasury Department and the IRS therefore are of the view that the
statutory language of section 4501, including section 4501(f),
authorizes the proposed funding rule.
The Treasury Department and the IRS also are of the view that the
alleged rarity of relevant acquisitions by applicable specified
affiliates does not address the concern that an applicable specified
affiliate potentially could, with relative ease, fund another entity's
repurchase or acquisition of the stock of an applicable foreign
corporation. One stakeholder noted survey results indicating that some
respondents do have acquisitions of parent stock by subsidiaries in
their multinational groups. The enactment of section 4501(d)(1)
indicates congressional intent to address acquisitions of stock of an
applicable foreign corporation by applicable specified affiliates. In
addition, other provisions in the Code and Treasury regulations
recognize and address the Federal income tax consequences of a
subsidiary's acquisition of a parent entity's stock. For example,
Treasury regulations specifically address certain transactions
undertaken by taxpayers involving a subsidiary's acquisition of parent
stock. See Sec. 1.367(b)-10 (providing treatment of certain
transactions in which a foreign subsidiary acquires stock of a parent
corporation).
In addition, as discussed in part XVI.D.2.a of this Explanation of
Provisions, the proposed funding rule would not include the per se
rule. Instead, the proposed funding rule would provide a more targeted
rebuttable presumption that applies only with respect to downstream
relevant entities. The rebuttable presumption would apply over the same
timeframe as the per se rule; however, unlike the per se rule, the
rebuttable presumption would apply only to a limited category of
fundings and could be rebutted. This replacement of the per se rule
with the rebuttable presumption would materially narrow the scope of
the proposed funding rule relative to the Notice funding rule. The
Treasury Department and the IRS are of the view that this narrower
scope of the proposed funding rule further addresses concerns raised by
stakeholders related to the Notice funding rule and the per se rule.
b. Principal Purpose Standard
Certain stakeholders questioned how to determine whether a taxpayer
has a principal purpose of avoiding the stock repurchase excise tax
under the Notice funding rule. The proposed funding rule would clarify
that, if a principal purpose of the covered funding is to fund,
directly or indirectly, a covered purchase, then there is a principal
purpose of avoiding the section 4501(d) excise tax.
In addition, one stakeholder recommended that the Notice funding
rule provide specific factors to be considered in determining whether a
taxpayer has a principal purpose of avoiding the stock repurchase
excise tax. The proposed funding rule would not add such specific
factors because the relevant factors may vary depending on the
particular facts and circumstances in each case. The Treasury
Department and the IRS are of the view that this approach is in
accordance with other statutory and regulatory rules involving or
requiring a principal purpose, as those rules typically do not provide
specific factors for determining whether a principal purpose is
present. However, the proposed funding rule would clarify that whether
a covered funding is described in proposed Sec. 58.4501-7(e)(1) is
determined based on all the facts and circumstances.
Further, another stakeholder recommended that the principal purpose
standard be changed from requiring ``a'' principal purpose of avoidance
to requiring ``the'' principal purpose of avoidance (akin to the
standard in section 269 of the Code). The proposed funding rule would
not change its principal purpose standard in this manner. The Treasury
Department and the IRS are of the view that requiring ``a'' principal
purpose is common in existing rules analogous to the proposed funding
rule. The Treasury Department and the IRS are of the view that, if the
other requirements to apply the proposed funding rule are met, then it
would be appropriate for the proposed funding rule to apply if ``a''
principal purpose of the funding is described in proposed Sec.
58.4501-7(e)(1).
c. Limitation to Certain Relevant Entities
Several stakeholders recommended that the per se rule be limited to
acquisitions by certain persons other than the applicable foreign
corporation, such as subsidiaries of an applicable specified affiliate.
Another stakeholder similarly recommended limiting the application of
the Notice funding rule to subsidiaries of the applicable specified
affiliate by interpreting the term ``acquisition'' to include indirect
acquisitions by applicable specified affiliates through domestic
subsidiaries, domestic and foreign partnerships, and controlled foreign
corporations (CFCs) owned (within the meaning of section 958(a) of the
Code) by applicable specified affiliates. (Note that such intermediate
domestic entities also would be applicable specified affiliates, so
their acquisitions would separately be subject to section 4501(d)(1)).
The Treasury Department and the IRS are of the view that the
application of the proposed funding rule should not be limited in this
manner. This type of limitation on the scope of the funding rule
potentially would allow the rule to be avoided with relative ease
through funding to whichever related entities are excluded from the
scope of the proposed funding rule. Accordingly, the proposed funding
rule could apply regardless of whether the funded entity is an
applicable foreign corporation, brother-sister entity, or subsidiary of
the applicable specified affiliate.
However, the Treasury Department and the IRS are of the view that
applying the rebuttable presumption solely to fundings of downstream
relevant entities is appropriate. In line with observations from
certain stakeholders, these ``downstream'' fundings--in which one or
more applicable specified affiliates have a material ownership stake in
the relevant entity that receives a funding and by or on behalf of whom
the covered purchase is made--strongly implicate the anti-avoidance
concerns that motivate the proposed funding rule. Accordingly, the
Treasury Department and the IRS are of the view that the rebuttable
presumption would appropriately be applied in that context.
[[Page 26025]]
d. Recommended Exclusions From the Notice Funding Rule
Stakeholders suggested that, if the Notice funding rule is
retained, then certain ordinary-course fundings should be excluded from
the meaning of a ``funding,'' such as arm's-length payments (including
payments for inventory, services, or treasury functions) or payments of
royalties or interest. In addition, one stakeholder requested that a
``funding'' should not include payments made pursuant to a so-called
``recharge agreement'' in which an applicable specified affiliate
reimburses the applicable foreign corporation for providing stock to
the applicable specified affiliate's employees.
Several stakeholders also requested that certain types of
taxpayers, such as foreign banks or financial institutions, should be
exempt from the Notice funding rule because they frequently engage in
intercompany financing transactions as part of their ordinary course of
business (and such intercompany activity should not be viewed as
abusive or as avoidance of the section 4501(d) excise tax).
The section 4501(d) proposed regulations would not adopt exclusions
from the rebuttable presumption or the proposed funding rule for
specific types of fundings or for taxpayers in specific industries. The
targeted scope of the rebuttable presumption means that only a limited
category of fundings would be subject to the rebuttable presumption.
The Treasury Department and the IRS are of the view that the
elimination of the per se rule and the targeted nature of the
rebuttable presumption appropriately address the concerns reflected in
the feedback requesting these exclusions. Further, the Treasury
Department and the IRS are of the view that exclusions for taxpayers in
specific industries are not appropriate in this context as a general
matter. The Treasury Department and the IRS also are of the view that
the manner in which the exception for repurchases or acquisitions by a
dealer in securities would apply with respect to covered purchases
further addresses these concerns. See proposed Sec. 58.4501-7(m)(4).
e. Treaty and Extraterritoriality Concerns
Stakeholders also asserted that the Notice funding rule, including
the per se rule, overrides arm's-length transfer pricing principles, is
contrary to bilateral income tax treaties and Organisation for Economic
Co-operation and Development (OECD) efforts involving extraterritorial
taxation, and creates the risk of other countries imposing an analogous
rule with respect to fundings provided to a U.S. corporation to
repurchase its own stock.
The Treasury Department and the IRS are of the view that the Notice
funding rule generally does not implicate these concerns. The section
4501(d) excise tax is imposed on an applicable specified affiliate or
expatriated entity, and not the applicable foreign corporation or
covered surrogate foreign corporation, as applicable. The section
4501(d) excise tax is also an excise tax and not an income tax. In any
event, the Treasury Department and the IRS also are of the view that
the tailoring of the proposed funding rule--including the elimination
of the per se rule and the other limits described previously--would
appropriately address the concerns motivating this feedback.
f. Funding From Multiple Sources
Stakeholders also requested guidance on how to apply the funding
rule if a funded entity receives funding from multiple sources. In
those cases, different ordering rules or conventions could result in
differences in the potential section 4501(d) excise tax liability after
application of the funding rule.
The Treasury Department and the IRS agree that guidance on ordering
rules or conventions would be helpful in applying the proposed funding
rule. Accordingly, the proposed fund rule would include the allocation
and timing rules previously described in part XVI.D.2.b of this
Explanation of Provisions.
The Treasury Department and the IRS considered other timing and
allocation rules in developing the proposed funding rule, such as
allocation rules that allocate a specific funding amount to a covered
purchase if the particular funds or assets can be ``traced'' to a
covered purchase, or allocation rules that base the allocation on a
proration of fundings received from all sources. The Treasury
Department and the IRS are of the view that proposed ordering rules
should: (i) recognize the typically fungible nature of liquid assets;
(ii) take into account that transactions subject to the proposed
funding rule have a principal purpose of funding a stock repurchase or
acquisition; and (iii) be administrable.
The Treasury Department and the IRS are of the view that the
allocation method in the proposed funding rule is both reasonable and
administrable. As previously described, the proposed funding rule would
provide that a covered purchase is treated as made first from covered
fundings such that, to the extent there is both a covered funding and a
covered purchase subject to the proposed funding rule, such covered
purchase is treated as funded by the covered funding before fundings
received from other sources. The Treasury Department and the IRS are of
the view that treating a funding made with a relevant principal purpose
as actually being used for that purpose is appropriate.
Further, the proposed allocation rules would be more administrable
than other allocation rules (such as a pure ``tracing'' approach, or a
proration of fundings from all sources) because the proposed rules
would not require taxpayers to track or order fundings other than
covered fundings. Additionally, a pure ``tracing'' rule potentially
would permit avoidance of the funding rule with relative ease given the
fungible nature of liquid assets that often may be most relevant to the
proposed funding rule.
E. Status as an Applicable Foreign Corporation, Covered Surrogate
Foreign Corporation, Applicable Specified Affiliate, Relevant Entity,
Specified Affiliate
1. Status as an Applicable Foreign Corporation or a Covered Surrogate
Foreign Corporation
The rules for determining when a corporation becomes or ceases to
be an applicable foreign corporation or a covered surrogate foreign
corporation are provided in proposed Sec. 58.4501-7(f). These rules
are based on the rules in proposed Sec. 58.4501-2(d) (duration of
covered corporation status) for determining when a corporation becomes
or ceases to be a covered corporation. Under proposed Sec. 58.4501-
7(f)(2), in general, a corporation becomes an applicable foreign
corporation or a covered surrogate foreign corporation, as applicable,
at the beginning of the initiation date (as defined in proposed Sec.
58.4501-1(b)(15)), and a corporation ceases to be an applicable foreign
corporation or a covered surrogate foreign corporation, as applicable,
at the end of the cessation date (as defined in proposed Sec. 58.4501-
1(b)(2)). Proposed Sec. 58.4501-7(f)(2) and (3), respectively, would
provide additional rules for when (i) a corporation transfers its
assets in an inbound or outbound F reorganization, or (ii) a foreign
corporation ceases to be an applicable foreign corporation or a covered
surrogate foreign corporation as part of a transaction that includes a
section 4501(d)(1) repurchase or section 4501(d)(2) repurchase, as
applicable.
[[Page 26026]]
2. Status as an Applicable Specified Affiliate, Relevant Entity, or
Specified Affiliate
The rules for determining whether a corporation or a partnership is
an applicable specified affiliate or a relevant entity of an applicable
foreign corporation or a specified affiliate of a covered surrogate
foreign corporation, as applicable, are provided in proposed Sec.
58.4501-7(g). These rules are based on the rules in proposed Sec.
58.4501-2(f)(2) (determination of specified affiliate status). Under
proposed Sec. 58.4501-7(g)(1), the determination of whether a
corporation or partnership is an applicable specified affiliate or a
relevant entity of an applicable foreign corporation or a specified
affiliate of a covered surrogate foreign corporation, as applicable, is
made whenever such determination is relevant. In the case of tiered
ownership structures, the rules for determining indirect ownership are
consistent with the rules provided in Sec. 58.4501-2(f)(2)(ii), except
for a special rule (described in part XVI.F of this Explanation of
Provisions) that applies for purposes of determining whether a domestic
entity is a direct or indirect partner in a partnership. See proposed
Sec. 58.4501-7(g)(2).
Finally, similar to proposed Sec. 58.4501-2(f)(3), proposed Sec.
58.4501-7(g)(3) describes the tax consequences if a corporation or
partnership becomes a specified affiliate and owns stock of the
applicable foreign corporation or covered surrogate foreign
corporation, as applicable, that was acquired after December 31, 2022.
In this case, for purposes of applying the section 4501(d) proposed
regulations, the corporation or partnership is generally treated as
acquiring such stock immediately after the corporation or partnership
becomes a specified affiliate.
F. Foreign Partnerships That are Applicable Specified Affiliates
1. In General
Section 4501(d)(1) provides that, if a foreign partnership that is
a specified affiliate of an applicable foreign corporation has a direct
or indirect partner that is a domestic entity, then the foreign
partnership is an applicable specified affiliate of the application
foreign corporation. The rules for determining if a foreign partnership
is an applicable specified affiliate are in proposed Sec. 58.4501-
7(h).
2. Direct and Indirect Partners
In section 6 of Notice 2023-2, the Treasury Department and the IRS
requested comments regarding the factors that should be considered in
determining whether a domestic entity is an indirect partner of a
foreign partnership for purposes of section 4501(d)(1).
One stakeholder recommended that indirect domestic partners not be
taken into account if they hold their interests in the foreign
partnership through an intermediate foreign corporation or an
intermediate domestic corporation or partnership. (In the latter case,
the intermediate domestic corporation or partnership itself already
would be a direct or indirect domestic partner.) The stakeholder argued
that this recommendation is consistent with general Federal income tax
principles and would simplify the determination of whether a domestic
entity is an indirect partner of a foreign partnership. Another
stakeholder recommended that the stock repurchase excise tax apply to
acquisitions by a foreign partnership in which a domestic entity owns
(within the meaning of section 958(a)) its interest directly or
indirectly through a CFC.
The Treasury Department and the IRS do not agree with the first
recommendation because the statute does not limit indirect ownership to
indirect ownership solely through a foreign partnership. Moreover,
limiting the scope of indirect ownership in this manner for purposes of
determining whether a foreign partnership is an applicable specified
affiliate could facilitate avoidance of the statute. For instance, a
domestic entity could form a wholly owned foreign corporation to hold
the domestic entity's interest in a foreign partnership in which the
domestic entity otherwise would be a domestic entity partner for
purposes of section 4501(d)(1). The Treasury Department and the IRS are
of the view that this type of transaction should not alter whether a
foreign partnership is an applicable specified affiliate for purposes
of section 4501(d)(1). Accordingly, section 4501(d) proposed
regulations would not follow this approach.
With respect to the second recommendation, although the stakeholder
made this suggestion in the context of interpreting the term
``acquisition,'' the Treasury Department and the IRS agree that a
domestic entity that owns its interest in a foreign partnership through
a CFC generally should be an indirect partner for purposes of
determining whether a foreign partnership is an applicable specified
affiliate.
The section 4501(d) proposed regulations would, in part, follow a
similar approach. Specifically, the section 4501(d) proposed
regulations would provide that a domestic entity is an indirect partner
with respect to a foreign partnership if the domestic entity owns an
interest in the foreign partnership through: (i) one or more foreign
partnerships; (ii) one or more foreign corporations controlled by one
or more domestic entities (domestic control requirement), or (iii) an
ownership chain with one or more entities described in the preceding
clauses (i) and (ii). See proposed Sec. 58.4501-7(h)(2)(ii).
For this purpose, a foreign corporation is controlled by one or
more domestic entities if more than 50 percent of the total combined
voting power of all classes of stock of such corporation entitled to
vote or the total value of the stock of such corporation is owned,
directly or indirectly, in aggregate by one or more domestic entities.
See proposed Sec. 58.4501-7(h)(3). These domestic entities do not need
to be related to each other.
However, the section 4501(d) proposed regulations would provide
that a domestic entity is not treated as indirectly owning stock in a
foreign corporation or an interest in a foreign partnership solely by
reason of owning, directly or indirectly, stock of the applicable
foreign corporation. See proposed Sec. 58.4501-7(h)(4). For example,
assume that a U.S. corporation (USX) directly owns stock of an
applicable foreign corporation (FP), which directly owns 100 percent of
the stock of two foreign corporations, FS1 and FS2. FS1 and FS2, in
aggregate, own all the interests in a foreign partnership (FPS). Under
these facts, USX would not be treated as indirectly owning stock of FS1
or FS2 or an interest in FPS.
The Treasury Department and the IRS are of the view that, absent
the domestic control requirement, look-through for indirect ownership
for this purpose under the statute would require full, proportionate
look-through of all foreign corporations. See part XVI.E.2 of this
Explanation of Provisions. The Treasury Department and the IRS are of
the view that it is appropriate to narrow the application of this
statutory rule in this context to address compliance and
administrability concerns.
3. The Proposed De Minimis Rule for Domestic Entity Ownership
Several stakeholders recommended that the Treasury Department and
the IRS: (i) adopt a de minimis threshold for direct or indirect
domestic ownership of a foreign partnership before the foreign
partnership is treated as an applicable specified affiliate; and (ii)
limit the
[[Page 26027]]
applicability of section 4501(d)(1) to foreign partnerships to
situations in which the domestic entity partner is related to the
relevant applicable foreign corporation. Although the plain language of
the statute does not provide for either of these limitations, the
stakeholders contended that a de minimis exception or a relatedness
requirement (or both) are appropriate in light of the statute's focus
on entities with a meaningful U.S. connection and the potential
diligence issues with determining indirect domestic ownership for
foreign partnerships potentially subject to the section 4501(d) excise
tax.
One stakeholder recommended a de minimis threshold of one or two
percent, analogizing to de minimis exceptions under other Code
provisions (see Sec. Sec. 1.351-1(c)(7), Example 1 (treating a less-
than-one percent interest as de minimis for purposes of section
351(e)), and 1.1202-2(a)(2) (applying a two percent de minimis
threshold for purposes of section 1202 of the Code)). Another
stakeholder recommended a 10 percent de minimis threshold, analogizing
to Sec. 1.59A-7(d)(2) (exception for base erosion tax benefits for
certain small partners). A stakeholder also suggested that the section
4501(d) proposed regulations should require the domestic entity partner
to be related (within the meaning of section 267 of the Code) to the
applicable foreign corporation in order to be consistent with the
purpose of the stock repurchase excise tax, which (in the stakeholder's
view) was to impose a tax on repurchases or acquisitions of stock of
publicly traded corporations and persons related to them.
The Treasury Department and the IRS are of the view that a de
minimis threshold would be appropriate to address compliance and
administrability concerns regarding the determination of when direct or
indirect ownership by domestic entity partners causes a foreign
partnership to be an applicable specified affiliate. Accordingly, the
section 4501(d) proposed regulations would provide that a foreign
partnership with one or more direct or indirect domestic entity
partners is not considered an applicable specified affiliate if the
domestic entities hold, directly or indirectly, in aggregate, less than
five percent of the capital and profits interests in the foreign
partnership. See proposed Sec. 58.4501-7(h)(5).
The Treasury Department and the IRS also are of the view that,
because the statute does not require any relationship between the
direct or indirect domestic entity partner and the applicable foreign
corporation of which the foreign partnership is a specified affiliate,
no such relationship is required. The addition of such a relatedness
requirement in the section 4501(d) proposed regulations would be a
departure from the statutory structure. However, the de minimis rule
would provide a minimum threshold of direct or indirect domestic
ownership required for treating a foreign partnership as an applicable
specified affiliate.
4. Domestic Entity
A stakeholder recommended that a domestic entity that is a
disregarded entity and holds an interest in a partnership should not
itself be treated as a partner. The statute does not treat a ``true''
U.S. branch as a domestic entity; therefore, the Treasury Department
and the IRS agree with this recommendation. See proposed Sec. 58.4501-
7(b)(2)(x) (definition of ``domestic entity'').
5. Filing Requirements
Section 6.02(6) of Notice 2023-2 requested comments on whether the
foreign partnership or the domestic entity partner should be required
to file the Form 720 and pay the stock repurchase excise tax. Several
stakeholders recommended that the domestic entity partner be required
to file the stock repurchase excise tax return and pay the stock
repurchase excise tax. One stakeholder requested guidance regarding the
level of diligence required to determine whether a foreign partnership
has a direct or indirect domestic entity as a partner. The stakeholder
recommended that the diligence process should not impose undue burdens
and expense on taxpayers given the limited application of the stock
repurchase excise tax to acquisitions of applicable foreign corporation
stock by foreign entities.
The stakeholder therefore recommended that, assuming a 10 percent
de minimis partner threshold and a related-party requirement (discussed
in part XVI.F.2 of this Explanation of Provisions), the domestic entity
partner(s), rather than the foreign partnership, should be required (i)
to determine the applicability of the stock repurchase excise tax, and
(ii) to report and pay the stock repurchase excise tax on the full
amount of the stock acquisition. The stakeholder noted that imposing
the reporting and payment obligation on domestic entities does not
raise the jurisdictional, enforcement, and collectability challenges
that arise when such obligations are imposed on the foreign
partnership, and that regulations could impose joint and several
liability on the domestic entity partner(s). The stakeholder also
recommended that the section 4501(d) proposed regulations provide
procedures describing how a domestic entity may determine whether it
holds the requisite ownership interest in a foreign partnership and
whether the stock repurchase excise tax applies, and suggested rules
similar to the safe harbor rules for determining whether a domestic
entity holds an interest in a CFC in Rev. Proc. 2019-40, 2019-43 I.R.B.
982.
However, the stakeholder acknowledged that, if the 10 percent de
minimis threshold and related-party requirements were not adopted, then
a relatively small indirect domestic partner would not be able to file
the stock repurchase excise tax return as it would be unlikely to have
the requisite information. In the stakeholder's view, imposing the full
excise tax on such partners would be unfair. Accordingly, the
stakeholder recommended that, in this scenario, domestic partners only
should be required to pay their allocable share of stock repurchase
tax, although the stakeholder acknowledged that this approach could be
complex and impracticable.
The Treasury Department and the IRS do not agree that the domestic
entity partner should be required to file Form 720 and pay the section
4501(d) excise tax. Under the statute, the foreign partnership is the
entity that is the applicable specified affiliate, which, in turn, is
the entity that is liable for the section 4501(d) excise tax. The
Treasury Department and the IRS continue to evaluate adding items
relevant to the section 4501(d) excise tax to other existing tax return
forms, including forms that at least certain domestic entity partners
may otherwise be required to file.
Consequently, the section 4501(d) proposed regulations would not
provide special filing or liability rules with respect to an applicable
specified affiliate that is a foreign partnership with a direct or
indirect domestic entity partner. Rather, such an applicable specified
affiliate would be subject to the general requirements that apply to
all entities that are section 4501(d) covered corporations.
The section 4501(d) proposed regulations also would not include
diligence procedures for determining an entity's status as an
applicable specified affiliate. The Treasury Department and the IRS are
of the view that relevant diligence considerations may vary based on
the particular facts and circumstances, and so specific
[[Page 26028]]
guidelines would be neither appropriate nor practical.
G. AFC Repurchases and CSFC Repurchases
Proposed Sec. 58.4501-7(j) would provide rules for determining
whether an acquisition by an applicable foreign corporation of its
stock is an ``AFC repurchase'' and whether an acquisition by a covered
surrogate foreign corporation of its stock is a ``CSFC repurchase'' for
purposes of proposed Sec. 58.4501-7. These rules are based on the
rules in proposed Sec. 58.4501-2(e) for determining whether a
transaction is a repurchase for purposes of proposed Sec. 58.4501-2.
These rules are relevant for purposes of determining whether there is a
covered purchase that could be subject to the proposed funding rule and
whether a covered surrogate foreign corporation's repurchase of its
stock is subject to section 4501(d)(2).
H. Date of Section 4501(d)(1) or Section 4501(d)(2) Repurchase; Fair
Market Value of Stock
Proposed Sec. 58.4501-7(k) would provide rules for determining the
date on which a section 4501(d)(1) repurchase or a section 4501(d)(2)
repurchase occurs. These proposed rules generally reflect the rules in
proposed Sec. 58.4501-2(g), except that the rule in proposed Sec.
58.4501-7(k)(4) would provide that stock subject to a covered purchase
to which the funding rule applies is treated as acquired by the
applicable specified affiliate on the later of the date of the covered
funding or the covered purchase. See part XVI.D.2.b of this Explanation
of Provisions.
Proposed Sec. 58.4501-7(l) would provide rules for determining the
fair market value of stock of an applicable foreign corporation or a
covered surrogate foreign corporation, as applicable, that is subject
to a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase.
These rules generally follow the rules in proposed Sec. 58.4501-2(h)
for determining the fair market value of stock of a covered corporation
that is repurchased.
I. Section 4501(d) Statutory Exceptions
1. In General
Section 4501(d) operates by modifying the general rules in section
4501(a) and (c). Because section 4501(d) operates in this manner, the
section 4501(e) exceptions can be relevant to transactions subject to
section 4501(d), except in one respect described in part XVI.I.2 of
this Explanation of Provisions.
Proposed Sec. 58.4501-7(m) would provide rules for determining the
applicability of the statutory exceptions (section 4501(d) statutory
exceptions), other than the section 4501(d) de minimis exception, to
transactions that are subject to section 4501(d). The rules in proposed
Sec. 58.4501-7(m) are based on the rules in proposed Sec. 58.4501-3,
with certain modifications discussed in part XVI.I.2 of this
Explanation of Provisions. For a discussion of the section 4501(d) de
minimis exception, see part XVI.B.2 of this Explanation of Provisions.
2. Application of Section 4501(d) Statutory Exceptions
The section 4501(d) reorganization exception would apply only with
respect to stock of an applicable foreign corporation repurchased in an
AFC repurchase that is a section 4501(d)(1) repurchase and to stock of
a covered surrogate foreign corporation repurchased in a CSFC
repurchase that is a section 4501(d)(2) repurchase. See proposed Sec.
58.4501-7(m)(2). The Treasury Department and the IRS are of the view
that, based on the statutory language and the operation of section
4501(d), the relevant ``stock'' for purposes of applying the section
4501(d) reorganization exception is the stock of the applicable foreign
corporation or the covered surrogate foreign corporation, as
applicable. The references to ``stock'' in section 4501 refer to stock
of the types of corporations subject to the excise tax that is
repurchased or acquired--that is, covered corporations, applicable
foreign corporations, and covered surrogate foreign corporations. Thus,
the plain language of the statute demonstrates that ``stock'' for
purposes of the section 4501(d) reorganization exception can only be
stock of the applicable foreign corporation or covered surrogate
corporation, as applicable. In accordance with this plain meaning, the
Treasury Department and the IRS are of the view that the section
4501(d) reorganization exception only applies to repurchases and
acquisitions of the equity of the corporation that is traded on an
established securities market.
The stock contribution exception would apply only with respect to
contributions of stock of an applicable foreign corporation or a
covered surrogate foreign corporation, as applicable, to an employer-
sponsored retirement plan of the section 4501(d) covered corporation.
See proposed Sec. 58.4501-7(m)(3). The section 4501(d) proposed
regulations would limit the employer-sponsored retirement plan
exception to contributions to the employer-sponsored retirement plans
of the section 4501(d) covered corporation to be consistent with the
scope of the section 4501(d) netting rule, which only allows netting of
stock provided by an applicable specified affiliate or an expatriated
entity to its respective employees.
The section 4501(d) proposed regulations would apply the section
4501(e)(4) exception for certain repurchases by a dealer in securities
in the ordinary course of the dealer's business based on the rules in
proposed Sec. 58.4501-3(e). See proposed Sec. 58.4501-7(m)(4). For
this purpose, the exception would apply to any repurchasing or
acquiring entity that is a dealer in securities, whether such entity is
an applicable foreign corporation, covered surrogate foreign
corporation, or a specified affiliate of either.
The section 4501(d) proposed regulations would provide that the
exception for RICs and REITs does not apply to a section 4501(d)
repurchase or section 4501(d)(2) repurchase because each of an
applicable foreign corporation or a covered surrogate foreign
corporation will not qualify as a RIC or a REIT. See proposed Sec.
58.4501-7(m)(5).
The dividend equivalence exception in proposed Sec. 58.4501-
7(m)(6) generally reflects the exception in proposed Sec. 58.4501-
3(g), including that the exception would apply to repurchases (as
defined in proposed Sec. Sec. 58.4501-2(e) and 58.4501-7(j)) but not
to acquisitions by specified affiliates. However, with respect to the
rebuttable presumption of no dividend equivalence, proposed Sec.
58.4501-7(m)(6)(ii) would differ regarding how a section 4501(d)
covered corporation may rebut the presumption, because section 4501(d)
covered corporations are not the entities that are engaging in the
repurchase for purposes of determining dividend equivalence. Further,
unlike covered corporations, certain applicable foreign corporations or
covered surrogate foreign corporations may not have relevant Federal
income tax return filing requirements.
3. Feedback Received
One stakeholder requested clarification that the exceptions in
section 4501(e) apply with respect to stock acquisitions or repurchases
under section 4501(d). The section 4501(d) proposed regulations would
implement that request in the manner described in part XVI.I.2 of this
Explanation of Provisions.
One stakeholder recommended that, if an applicable specified
affiliate uses stock of the applicable foreign corporation as
consideration in a transaction, its acquisition of the
[[Page 26029]]
applicable foreign corporation stock should not be subject to section
4501(d)(1) as a matter of policy because the total amount of
outstanding equity of the applicable foreign corporation would not be
changed as a result of the two transactions taken together. The
Treasury Department and the IRS are of the view that this
recommendation is contrary to the plain language and statutory
structure of section 4501(d)(1). However, in appropriate cases,
transfers of applicable foreign corporation stock may qualify for a
section 4501(d) statutory exception.
J. Section 4501(d) Netting Rule
1. Overview
Section 4501(d)(1)(C) and (d)(2)(C) provide that the adjustment in
section 4501(c)(3) is determined only with respect to stock issued or
provided by the section 4501(d) covered corporation to employees of the
section 4501(d) covered corporation. Proposed Sec. 58.4501-7(n) would
provide rules for applying the section 4501(d) netting rule. Proposed
Sec. 58.4501-7(n) would clarify that the section 4501(d) netting rule
applies only to stock of the applicable foreign corporation or covered
surrogate foreign corporation, as applicable, that is issued or
provided by a section 4501(d) covered corporation to an employee in
connection with the employee's performance of services in the
employee's capacity as an employee of the section 4501(d) covered
corporation.
These proposed rules are generally based on the rules in proposed
Sec. 58.4501-4, except that proposed Sec. 58.4501-7(n) generally
would incorporate the provisions of proposed Sec. 58.4501-5 relating
to the issuance or provision of stock to employees in connection with
the performance of services.
2. Feedback Received
a. Relevant Stock
Section 6 of Notice 2023-2 requested comments on whether, for
purposes of the section 4501(d) netting rule, there are any
circumstances in which stock of the applicable specified affiliate or
expatriated entity should be taken into account in addition to, or in
lieu of, the stock of the applicable foreign corporation or covered
surrogate foreign corporation, respectively.
One stakeholder recommended that, because the statute uses the term
``issued by,'' and an applicable specified affiliate or expatriated
entity can issue only its own stock, stock of the applicable specified
affiliate or expatriated entity, as applicable, should be taken into
account for purposes of the section 4501(d) netting rule. The
stakeholder also recognized that an applicable specified affiliate
could provide the stock of the applicable foreign corporation to its
employees, or an expatriated entity could provide the stock of the
covered surrogate foreign corporation to its employees.
The Treasury Department and the IRS are of the view that, based on
the statutory language, the relevant ``stock'' referenced in section
4501(d)(1)(C) and (d)(2)(C) is stock of the applicable foreign
corporation and covered surrogate foreign corporation. All antecedent
references to ``stock'' in section 4501(d) refer to stock of the
applicable foreign corporation and covered surrogate foreign
corporation. More broadly, all other references to ``stock'' in section
4501 refer to stock of the types of corporations subject to the excise
tax that is repurchased or acquired--that is, covered corporations,
applicable foreign corporations, and covered surrogate foreign
corporations. Further, if an applicable specified affiliate or
expatriated entity transfers to an employee treasury stock of an
applicable foreign corporation or a covered surrogate foreign
corporation, that transfer could be interpreted to constitute an
issuance of that stock within the meaning of the statutory language.
Thus, the plain language of the statute demonstrates that ``stock''
for purposes of the section 4501(d) netting rule only can be stock of
the applicable foreign corporation or covered surrogate corporation, as
relevant. In accordance with this plain meaning, the Treasury
Department and the IRS are of the view that the section 4501(d) netting
rule functions to tailor the section 4501(d) excise tax base to the net
reduction of the equity of the corporation that is traded on an
established securities market.
Further, the stakeholder acknowledged that, under its
recommendation, a partnership that is a section 4501(d) covered
corporation would be unable to qualify for the section 4501(d) netting
rule with respect to its equity because partnership interests are not
``stock.'' However, this discontinuity in the application of the
section 4501(d) netting rule would be avoided if ``stock'' is
interpreted to refer to stock of an applicable foreign corporation or a
covered surrogate foreign corporation.
The stakeholder further acknowledged that allowing netting under
the section 4501(d) netting rule for stock of a section 4501(d) covered
corporation would permit the section 4501(d) covered corporation to
redeem any such issued stock without application of section 4501
(assuming the applicable specified affiliate or expatriated entity is
not itself a covered corporation). The Treasury Department and the IRS
are of the view that it is not appropriate to allow stock issuances by
section 4501(d) covered corporations to reduce the section 4501(d)
excise tax base if the repurchase or acquisition of that stock would
not be subject to section 4501.
Accordingly, the section 4501(d) proposed regulations would provide
that only stock of the applicable foreign corporation or covered
surrogate foreign corporation, as appropriate, is taken into account
for purposes of the section 4501(d) netting rule. See proposed Sec.
58.4501-7(n)(1).
b. Stock Issued or Provided by Specified Affiliates
The section 4501(d) netting rule would apply only with respect to
stock issued or provided by the section 4501(d) covered corporation to
employees (in connection with the performance of services) of the
section 4501(d) covered corporation. See proposed Sec. 58.4501-
7(n)(1). However, stakeholders recommended that, if the Notice funding
rule applies to treat an applicable specified affiliate as acquiring
the stock of the applicable foreign corporation when it funds the
applicable foreign corporation's repurchase, the proposed regulations
also should provide that the section 4501(d) netting rule applies at
least to some degree with respect to stock issued or provided by the
applicable foreign corporation to employees of the applicable foreign
corporation.
The Treasury Department and the IRS are of the view that such a
modification would be inappropriate. The proposed funding rule is
intended to prevent an applicable specified affiliate from avoiding the
section 4501(d) excise tax through funding transactions. Therefore, the
section 4501(d) proposed regulations should not provide for such an
expansion of the section 4501(d) netting rule if the funding rule
applies. Furthermore, the Treasury Department and the IRS are of the
view that this requested modification to the section 4501(d) netting
rule is unwarranted given the narrower scope of the proposed funding
rule relative to the Notice funding rule.
One stakeholder also requested clarification as to whether the
section 4501(d) netting rule is applied on an entity-by-entity basis or
on an aggregate basis. Under an entity-by-entity approach, the section
4501(d) netting
[[Page 26030]]
rule would be applied separately to each section 4501(d) covered
corporation. In contrast, under an aggregate approach, the modified
netting rule would be applied on an aggregate basis to all section
4501(d) covered corporations. The stakeholder expressed the view that
the entity-by-entity approach arguably is more consistent with the
statutory language of the section 4501(d) netting rule, but that the
aggregate approach would better achieve the anti-dilutive policy focus
of the stock repurchase excise tax and simplify compliance.
The Treasury Department and the IRS agree with the stakeholder that
the entity-by-entity approach follows the statutory language of the
section 4501(d) netting rule. Section 4501(d)(1)(C) and (d)(2)(C)
require the section 4501(d) netting rule to apply ``only'' with respect
to stock issued or provided by ``such'' applicable specified affiliate
or expatriated entity. Therefore, the Treasury Department and the IRS
are of the view that the statute provides for an entity-by-entity
approach. Furthermore, the Treasury Department and the IRS are of the
view that it is not appropriate to expand the section 4501(d) netting
rule beyond that statutory scope.
c. Employee-Related Issues
One stakeholder recommended that, for purposes of applying the
section 4501(d) netting rule, employee status alone should be
sufficient, and there should be no requirement that the stock be issued
or provided to the employee in connection with the performance of
services.
The Treasury Department and the IRS do not agree with the
stakeholder. The reference in the statue to ``employees'' is most
naturally read to refer to employees in their capacity as employees
providing services to their employer. The requirement that the stock be
issued in connection with the performance of services also would
prevent potential abuse in situations in which a company could make an
individual into a nominal employee and then allow the individual to
acquire stock of the applicable foreign corporation or covered
surrogate foreign corporation, as applicable.
In addition, the issuance or provision of an instrument that is not
in the legal form of stock generally is disregarded for purposes of the
section 4501(d) netting rule. An exception is provided if such an
instrument is repurchased or acquired in a section 4501(d)(1)
repurchase or section 4501(d)(2) repurchase, as applicable, but only if
such instrument is issued or provided by the section 4501(d) covered
corporation to its employees. The Treasury Department and the IRS are
of the view that it is unlikely that an applicable specified affiliate
would issue or provide an instrument that is not in the legal form of
stock to its employees in connection with the employee's performance of
services in its capacity as an employee. The Treasury Department and
the IRS request comments on whether this provision should be retained,
deleted, or modified to reflect actual practices of applicable
specified affiliate issuing or providing instruments that are not in
the legal form of stock as compensation for an employee's performance
of services.
In section 6 of Notice 2023-2, the Treasury Department and the IRS
also requested comments on whether, in cases in which a foreign
partnership is the applicable specified affiliate, stock issued or
provided to any employees of the foreign partnership should be taken
into account, or whether the section 4501(d) netting rule should be
applied to stock issued or provided only to employees of the domestic
entity that is a direct or indirect partner.
One stakeholder recommended against adopting an approach that would
distinguish between the treatment of domestic and foreign partnerships
that are applicable specified affiliates because that approach would be
inconsistent with the statute, which does not make that type of
distinction.
The Treasury Department and the IRS agree with the stakeholder that
the section 4501(d) proposed regulations should not distinguish between
the treatment of domestic partnership and foreign partnerships in this
respect for purposes of the section 4501(d) netting rule. Furthermore,
section 4501(d)(1)(C) and (d)(2)(C) apply the section 4501(d) netting
rule to ``employees of the specified affiliate'' and ``employees of the
expatriated entity'' (emphasis added). The statute thus provides for
netting with respect to stock issued or provided to employees of the
applicable specified affiliate or the expatriated entity itself, and
not to employees of partners or shareholders of the applicable
specified affiliate or expatriated entity.
K. Rules Applicable Before April 13, 2024
Proposed Sec. 58.4501-7(o) would provide rules that track section
3.05(2) of Notice 2023-2 and that would apply to transactions occurring
on or after December 31, 2022, and before April 12, 2024. See proposed
Sec. 58.4501-7(r)(2). A section 4501(d) covered corporation may
generally choose, in lieu of applying proposed Sec. 58.4501-7(o) to
this period, to apply the section 4501(d) proposed regulations (other
than proposed Sec. Sec. 58.4501-7(o) and (r)(1)-(2)), as finalized.
See proposed Sec. 58.4501-7(r)(3). Thus, a section 4501(d) covered
corporation would have this option not to apply the rules in proposed
Sec. 58.4501-7(o) to any period. See part XVI.L of this Explanation of
Provisions (discussion of applicability dates for proposed Sec.
58.4501-7).
L. Applicability Dates
Proposed Sec. 58.4501-7(r)(1) would provide that the section
4501(d) proposed regulations (other than proposed Sec. 58.4501-7(o))
generally apply to transactions occurring after April 12, 2024. See
section 7805(b)(1)(B) of the Code. Transactions would include a covered
purchase after that date to which a covered funding that occurred on or
after December 27, 2022, and on or before April 12, 2024 is allocated.
See proposed Sec. 58.4501-7(e)(1).
Proposed Sec. 58.4501-7(r)(2) would provide that proposed Sec.
58.4501-7(o) applies to transactions occurring on or after December 31,
2022, and on or before April 12, 2024. See section 7805(b)(1)(C).
Transactions would include a covered purchase during this period that
is funded by a funding that occurred on or after December 27, 2022, and
on or before April 12, 2024. See proposed Sec. 58.4501-7(o)(2).
Proposed Sec. 58.4501-7(r)(3) would provide that a section 4501(d)
covered corporation may generally choose instead to apply the section
4501(d) proposed regulations (other than proposed Sec. Sec. 58.4501-
7(o) and (r)(1)-(2)), as finalized, with respect to transactions
occurring after December 31, 2022, subject to a consistency
requirement. Transactions would include a covered purchase after
December 31, 2022, to which a covered funding that occurred on or after
December 27, 2022, is allocated. See proposed Sec. 58.4501-7(e)(1).
XVII. Procedure and Administration
Subpart B of part 58, as proposed elsewhere in this issue of the
Federal Register, would add rules on procedure and administration under
sections 6001, 6011, 6060, 6061, 6065, 6071, 6091, 6107, 6109, 6151,
6694, 6695, and 6696 of the Code to prescribe the manner and method of
reporting and paying the stock repurchase excise tax.
Effect on Other Documents
Notice 2023-2, 2023-3 I.R.B. 374, is obsoleted for repurchases,
issuances, and provisions of stock of a covered
[[Page 26031]]
corporation occurring after April 12, 2024.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
requires that a Federal agency obtain the approval of the Office of
Management and Budget (OMB) before collecting information from the
public, whether such collection of information is mandatory, voluntary,
or required to obtain or retain a benefit.
The collections of information in these proposed regulations
contain reporting, third-party disclosure, and recordkeeping
requirements in Sec. Sec. 58.4501-2(j)(6) and 58.4501-7(e)(2). This
information is necessary for the IRS to accurately determine the stock
repurchase excise tax due and is required by law to comply with the
provisions of section 4501 of the Code as enacted by section 10201 of
the Inflation Reduction Act of 2022. A Federal agency may not conduct
or sponsor, and a person is not required to respond to, a collection of
information unless the collection of information displays a valid
control number.
The recordkeeping requirements mentioned within these proposed
regulations are considered general tax records under section 6001.
These records are required for the IRS to validate that taxpayers have
met the regulatory requirements and are required as proof of their
qualification for an exception to the stock repurchase excise tax. For
PRA purposes, general tax records are already approved by OMB under
1545-0123 for business filers and 1545-0074 for individual filers.
The reporting and third-party disclosure requirements will be
covered within Form 7208 and its instructions. The IRS is seeking OMB
approval and requesting a new OMB control number for Form 7208 in
accordance with the procedures outlined in 5 CFR 1320.10.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that these proposed regulations will not have a
significant economic impact on a substantial number of small entities.
This certification is based on the fact that these proposed regulations
apply only to publicly traded corporations, which tends to consist of
larger businesses. Specifically, based on data available to the IRS,
for tax year 2021, 4,366 corporations reported publicly traded common
stock. Of those corporations, 2,407 (over 55 percent) reported gross
receipts over $100 million, and 3,272 (approximately 75 percent)
reported gross receipts over $10 million. Meanwhile, for tax year 2021,
the IRS received 7,464,790 Corporation Income Tax Returns and 4,710,457
U.S. Returns of Partnership Income. IRS Publication 6292, Fiscal Year
Projections for the United States: 2022-2029, Fall 2022, Table 2. Of
these corporation and partnership returns for tax year 2021, 11,685,207
reported total assets below $10 million. Thus, the number of
corporations affected by these proposed regulations that reported total
assets below $10 million is less than one hundredth of one percent of
the total number of businesses that reported total assets below $10
million for tax year 2021. Therefore, these proposed regulations will
not create additional obligations for, or impose an economic impact on,
a substantial number of small entities. Accordingly, the Secretary
certifies that the proposed regulations will not have a significant
economic impact on a substantial number of small entities and a
regulatory flexibility analysis under the Regulatory Flexibility Act is
not required.
IV. Section 7805(f)
Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking has been submitted to the Chief Counsel for the Office of
Advocacy of the Small Business Administration for comment on its impact
on small business.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation.
These proposed regulations do not include any Federal mandate that
may result in expenditures by State, local, or Tribal governments, or
by the private sector in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These proposed regulations do not
have federalism implications and do not impose substantial direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive order.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ADDRESSES heading.
The Treasury Department and the IRS request comments on all aspects of
the proposed regulations, including on forms related to the proposed
regulations. In addition, the Treasury Department and the IRS request
comments on the specific requests made in the Explanation of
Provisions. All commenters are strongly encouraged to submit comments
electronically. The Treasury Department and the IRS will publish for
public availability any comment submitted electronically or on paper to
its public docket on https://www.regulations.gov.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing are encouraged to be made electronically. If a public
hearing is scheduled, a notice of the date and time for the public
hearing will be published in the Federal Register.
Statement of Availability of IRS Documents
Any IRS Revenue Procedure, Revenue Ruling, Notice, or other
guidance cited in this document is published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and is available from the
Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.
Drafting Information
The principal authors of these proposed regulations are Samuel G.
Trammell of the Office of Associate Chief Counsel (Corporate), Naomi
Lehr of the Office of Associate Chief Counsel
[[Page 26032]]
(Employee Benefits, Exempt Organizations, and Employment Taxes),
Jonathan A. LaPlante of the Office of Associate Chief Counsel
(Financial Institutions and Products), and Brittany N. Dobi of the
Office of Associate Chief Counsel (International). However, other
personnel from the Treasury Department and the IRS participated in
their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 58
Excise taxes, Stock repurchase excise tax, Reporting and
recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR chapter 1 as follows:
PART 1--INCOME TAX
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.1275-6 is amended by adding paragraph (f)(12)(iii) to
read as follows:
Sec. 1.1275-6 Integration of qualifying debt instruments.
* * * * *
(f) * * *
(12) * * *
(iii) Excise tax on repurchase of corporate stock. If a taxpayer
enters into an integrated transaction (for example, a convertible debt
instrument integrated with one or more Sec. 1.1275-6 hedges consisting
of an option on the taxpayer's own stock), then, solely for purposes of
section 4501 of the Code and the stock repurchase excise tax
regulations (as defined in Sec. 58.4501-1(b)(30) of this chapter), the
taxpayer must apply the rules that would apply on a separate basis to
the components of the integrated transaction rather than the rules that
otherwise would apply to the integrated transaction under this section.
Notwithstanding paragraph (j) of this section, this paragraph
(f)(12)(iii) applies to an integrated transaction outstanding after
December 31, 2022 (regardless of when such integrated transaction was
entered into by the taxpayer).
* * * * *
0
Par. 3. Add part 58 to read as follows:
PART 58--STOCK REPURCHASE EXCISE TAX
Subpart A--Excise Tax on Stock Repurchases
Sec.
58.4501-0 Table of contents.
58.4501-1 Excise tax on stock repurchases.
58.4501-2 General rules regarding excise tax on stock repurchases.
58.4501-3 Statutory exceptions.
58.4501-4 Application of netting rule.
58.4501-5
58.4501-6 Applicability dates.
58.4501-7 Special rules for acquisitions or repurchases of stock of
certain foreign corporations.
Subpart B [Reserved]
Authority: 26 U.S.C. 4501(f) and 7805.
Subpart A--Excise Tax on Stock Repurchases
Sec. 58.4501-0 Table of contents.
This section lists the major captions that appear in Sec. Sec.
58.4501-1 through 58.4501-7.
Sec. 58.4501-1 Excise tax on stock repurchases.
(a) Excise tax imposed.
(b) Definitions.
(1) Acquisitive reorganization.
(2) Applicable percentage.
(3) Cessation date.
(4) Clawback.
(5) Controlled corporation.
(6) Covered corporation.
(7) De minimis exception.
(8) Distributing corporation.
(9) Economically similar transaction.
(10) Employee.
(11) Employer-sponsored retirement plan.
(i) In general.
(ii) ESOPs included.
(12) E reorganization.
(13) Established securities market.
(14) F reorganization.
(15) Forfeiture.
(16) Initiation date.
(17) IRS.
(18) Netting rule.
(19) Qualifying property repurchase.
(20) REIT.
(21) Reorganization exception.
(22) Repurchase.
(23) RIC.
(24) Section 317(b) redemption.
(25) Specified affiliate.
(26) Split-off.
(27) Statutory exception.
(28) Statutory references.
(i) Chapter 1.
(ii) Code.
(29) Stock.
(i) In general.
(ii) Additional tier 1 capital.
(30) Stock repurchase excise tax.
(31) Stock repurchase excise tax base.
(32) Stock repurchase excise tax regulations.
(33) Taxable year.
(34) Treasury stock.
(c) No application for any purposes of chapter 1.
(d) Status as a domestic or foreign corporation.
Sec. 58.4501-2 General rules regarding excise tax on stock
repurchases.
(a) Scope.
(b) Computation of excise tax liability.
(1) Imposition of tax.
(2) De minimis exception.
(i) In general.
(ii) Determination.
(c) Stock repurchase excise tax base.
(1) In general.
(2) Taxable year determination.
(3) Repurchases before January 1, 2023.
(d) Duration of covered corporation status.
(1) Initiation date.
(2) Cessation date.
(i) In general.
(ii) Repurchases after cessation date.
(3) Inbound and outbound F reorganizations.
(i) Inbound F reorganization.
(ii) Outbound F reorganization.
(e) Repurchase.
(1) Overview.
(2) Scope of repurchase.
(3) Certain section 317(b) redemptions that are not repurchases.
(i) Section 304(a)(1) transactions.
(ii) Payment by a covered corporation of cash in lieu of
fractional shares.
(4) Economically similar transactions.
(i) Acquisitive reorganizations.
(ii) E reorganizations.
(iii) F reorganizations.
(iv) Split-offs.
(v) Complete liquidations to which both sections 331 and 332
apply.
(vi) Certain forfeitures and clawbacks of stock.
(5) Transactions that are not repurchases.
(i) Complete liquidations generally.
(ii) Distributions during taxable year of complete liquidation
or dissolution.
(iii) Divisive transactions under section 355 other than split-
offs.
(iv) Non-redemptive distributions subject to section 301(c)(2)
or (3).
(v) Net cash settlement of an option contract or other
derivative financial instrument.
(f) Acquisitions by specified affiliates.
(1) Acquisitions of stock of a covered corporation by a
specified affiliate treated as a repurchase.
(2) Determination of specified affiliate status.
(i) Timing of determination.
(ii) Indirect ownership.
(3) Constructive specified affiliate acquisition.
(i) General rule.
(ii) Stock previously treated as repurchased not subject to
deemed repurchase more than once.
(iii) Specific identification.
(g) Date of repurchase.
(1) General rule.
(2) Regular-way sale.
(3) Repurchase pursuant to certain economically similar
transactions.
(4) Constructive specified affiliate acquisition.
(h) Fair market value of repurchased stock.
(1) In general.
(2) Stock traded on an established securities market.
[[Page 26033]]
(i) In general.
(ii) Acceptable methods.
(iii) Date of repurchase not a trading day.
(iv) Consistency requirement.
(v) Stock traded on multiple exchanges.
(3) Stock not traded on an established securities market.
(i) General rule.
(ii) Consistency requirement.
(4) Market price of stock denominated in non-U.S. currency.
Sec. 58.4501-3 Statutory exceptions.
(a) Scope.
(b) Reduction of covered corporation's stock repurchase excise
tax base.
(c) Reorganization exception.
(d) Stock contributions to an employer-sponsored retirement
plan.
(1) Reductions in computing covered corporation's stock
repurchase excise tax base.
(i) General rule.
(ii) Special rule for leveraged ESOPs.
(2) Classes of stock contributed to an employer-sponsored
retirement plan.
(3) Same class of stock repurchased and contributed.
(4) Different class of stock repurchased and contributed.
(i) In general.
(ii) Maximum reduction permitted.
(5) Timing of contributions.
(i) In general.
(ii) Treatment of contributions after close of taxable year.
(iii) No duplicate reductions.
(6) Contributions before January 1, 2023.
(e) Repurchases or acquisitions by a dealer in securities in the
ordinary course of business.
(1) In general.
(2) Applicability.
(f) Repurchases by a RIC or a REIT.
(g) Repurchase treated as a dividend.
(1) Reduction of covered corporation's stock repurchase excise
tax base.
(2) Rebuttable presumption of no dividend equivalence.
(i) Presumption.
(ii) Condition to rebut presumption.
(iii) Sufficient evidence requirement.
(3) Content of shareholder certification.
(4) Agreement to shareholder certification.
(5) Documentation of sufficient evidence.
Sec. 58.4501-4 Application of netting rule.
(a) Scope.
(b) Issuances and provisions of stock that are a reduction in
computing stock repurchase excise tax base.
(1) General rule.
(2) Stock issued or provided outside period of covered
corporation status.
(3) Issuances or provisions before January 1, 2023.
(4) F reorganizations.
(c) Stock issued or provided in connection with the performance
of services.
(1) In general.
(2) Sale of shares to cover exercise price and withholding.
(i) Payment or advance by third party equal to exercise price.
(ii) Advance by third party equal to withholding obligation.
(d) Date of issuance.
(1) In general.
(2) Stock issued or provided in connection with the performance
of services.
(e) Fair market value of issued or provided stock.
(1) In general.
(2) Stock traded on an established securities market.
(i) In general.
(ii) Acceptable methods.
(iii) Date of issuance not a trading day.
(iv) Consistency requirement.
(v) Stock traded on multiple exchanges.
(3) Stock not traded on an established securities market.
(i) General rule.
(ii) Consistency requirement.
(4) Market price of stock denominated in non-U.S. currency.
(5) Stock issued or provided in connection with the performance
of services.
(f) Issuances that are disregarded for purposes of applying the
netting rule.
(1) Distributions by a covered corporation of its own stock.
(2) Issuances to a specified affiliate.
(i) In general.
(ii) Subsequent transfer by a specified affiliate.
(iii) Specific identification.
(iv) Subsequent transfers in connection with the performance of
services for a specified affiliate.
(3) No double benefit for issuances that are part of a
transaction to which the reorganization exception applies.
(4) Deemed issuances under section 304(a)(1).
(5) Deemed issuance of a fractional share.
(6) Issuance by a covered corporation that is a dealer in
securities.
(7) Issuance by the target corporation in a reverse triangular
merger.
(8) Issuance as part of a section 1036(a) exchange.
(9) Issuance as part of a distribution under section 355.
(10) Stock contributions to an employer-sponsored retirement
plan.
(11) Net exercises and share withholding.
(i) In general.
(ii) Net share settlement not in connection with performance of
services.
(12) Settlement other than in stock.
(13) Instrument not in the legal form of stock.
(i) Generally disregarded.
(ii) Certain instruments treated as issued.
Sec. 58.4501-5 Examples.
(a) Scope.
(b) In general.
(1) Example 1: Redemption of preferred stock.
(2) Example 2: Valuation of repurchase.
(3) Example 3: Acquisition partially funded by the target
corporation.
(4) Example 4: Leveraged buyout.
(5) Example 5: Pro rata stock split.
(6) Example 6: Acquisition of a target corporation in an
acquisitive reorganization.
(7) Example 7: Cash paid in lieu of fractional shares.
(8) Example 8: Two-step asset acquisition.
(9) Example 9: E Reorganization.
(10) Example 10: F Reorganization.
(11) Example 11: Section 355 split-off.
(12) Example 12: Section 355 split-off as part of a D
reorganization.
(13) Example 13: Spin-off.
(14) Example 14: Section 355 spin-off as part of a D
reorganization.
(15) Example 15: Repurchase pursuant to an accelerated share
repurchase agreement.
(16) Example 16: Distribution in complete liquidation of a
covered corporation.
(17) Example 17: Complete liquidation of a covered corporation
to which sections 331 and 332(a) both apply.
(18) Example 18: Acquisition by disregarded entity.
(19) Example 19: Reverse triangular merger.
(20) Example 20: Multiple repurchases and contributions of same
class of stock.
(21) Example 21: Multiple repurchases and contributions of
different classes of stock.
(22) Example 22: Treatment of contributions after the taxable
year.
(23) Example 23: Becoming a covered corporation.
(24) Example 24: Actual redemption in partial liquidation.
(25) Example 25: Constructive redemption in partial liquidation.
(26) Example 26: Physical settlement of call option contract.
(27) Example 27: Net cash settlement of call option contract.
(28) Example 28: Physical settlement of put option contract.
(29) Example 29: Net cash settlement of put option contract.
(30) Example 30: Indirect ownership.
(31) Example 31: Constructive specified affiliate acquisition.
(32) Example 32: Restricted stock provided to a service
provider.
(33) Example 33: Restricted stock provided to a service provider
with section 83(b) election.
(34) Example 34: Vested stock provided to a service provider
with share withholding.
(35) Example 35: Stock option net exercise.
(36) Example 36: Net share settlement not in connection with the
performance of services.
(37) Example 37: Broker-assisted net exercise.
(38) Example 38: Stock provided by a specified affiliate to an
employee.
(39) Example 39: Stock provided by a specified affiliate to a
nonemployee.
(40) Example 40: Corporation treated as a domestic corporation
under section 7874(b).
Sec. 58.4501-6 Applicability date.
(a) In general.
(b) Exceptions.
(1) Applicability date for certain rules.
(2) Special rules for acquisitions or repurchases of stock of
certain foreign corporations.
Sec. 58.4501-7 Special rules for acquisitions or repurchases of
stock of certain foreign corporations.
(a) Scope.
(b) Definitions.
(1) Application of definitions in Sec. 58.4501-1(b).
(2) Section 4501(d) definitions.
(i) AFC repurchase.
(ii) Allocable amount of a covered purchase.
[[Page 26034]]
(iii) Applicable foreign corporation.
(iv) Applicable specified affiliate.
(v) CSFC repurchase.
(vi) Covered funding.
(vii) Covered purchase.
(viii) Covered surrogate foreign corporation.
(ix) Direct partner.
(x) Domestic entity.
(xi) Downstream relevant entity.
(xii) Expatriated entity.
(xiii) Indirect partner.
(xiv) Relevant entity.
(xv) Section 4501(d) covered corporation.
(xvi) Section 4501(d) de minimis exception.
(xvii) Section 4501(d) economically similar transaction.
(xviii) Section 4501(d) excise tax.
(xix) Section 4501(d) excise tax base.
(xx) Section 4501(d) netting rule.
(xxi) Section 4501(d) reorganization exception.
(xxii) Section 4501(d)(1) repurchase.
(xxiii) Section 4501(d)(2) repurchase.
(xxiv) Section 4501(d) statutory exception.
(c) Computation of section 4501(d) excise tax liability for a
section 4501(d) covered corporation.
(1) Imposition of tax.
(2) Section 4501(d) de minimis exception.
(i) In general.
(ii) Determination.
(3) Section 4501(d) excise tax base.
(i) In general.
(ii) Taxable year determination.
(4) Section 4501(d)(1) repurchases or section 4501(d)(2)
repurchases before January 1, 2023.
(d) Section 4501(d)(2) coordination rules.
(1) Coordination rule for section 4501(d)(1) repurchases and
section 4501(d)(2) repurchases.
(2) Coordination rule for multiple section 4501(d) covered
corporations.
(i) In general.
(ii) Full payment and reporting by a section 4501(d) covered
corporation.
(e) Acquisitions and AFC repurchases of stock funded by
applicable specified affiliates.
(1) Principal purpose rule.
(2) Rebuttable presumption.
(3) Date stock of applicable foreign corporation is treated as
acquired.
(4) Amount of stock of applicable foreign corporation treated as
acquired.
(5) Rules for determining the allocable amount of a covered
purchase.
(6) Priority rule for covered fundings.
(7) Rules for allocating covered fundings to allocable amounts
of covered purchases.
(i) In general.
(ii) Multiple covered purchases.
(iii) Single covered funding.
(iv) Multiple covered fundings.
(f) Status as applicable foreign corporation or covered
surrogate foreign corporation.
(1) Initiation date.
(2) Cessation date.
(i) In general.
(ii) Repurchases after cessation date.
(3) Inbound and outbound F reorganizations.
(i) Inbound F reorganization.
(ii) Outbound F reorganization.
(g) Status as applicable specified affiliate, a relevant entity
of an applicable foreign corporation, or a specified affiliate of a
covered surrogate foreign corporation.
(1) Timing of determination.
(2) Determination of indirect ownership.
(3) Consequences of becoming a specified affiliate.
(i) General rule.
(ii) Stock previously treated as acquired not subject to deemed
acquisition more than once.
(iii) Specific identification.
(h) Foreign partnerships that are applicable specified
affiliates.
(1) In general.
(2) Direct or indirect partner.
(3) Control of a foreign corporation.
(4) Indirect interests held through applicable foreign
corporations.
(5) De minimis domestic entity (direct or indirect) partner.
(i) [Reserved]
(j) AFC repurchase or CSFC repurchase.
(1) Overview.
(2) Scope of AFC repurchases and CSFC repurchases.
(3) Certain section 317(b) redemptions not AFC repurchases or
CSFC repurchases.
(i) Section 304(a)(1) transactions.
(ii) Payment by an applicable foreign corporation or a covered
surrogate foreign corporation of cash in lieu of fractional shares.
(4) Section 4501(d) economically similar transactions.
(i) Acquisitive reorganizations.
(ii) E Reorganizations.
(iii) F Reorganizations.
(iv) Split-offs.
(v) Complete liquidations to which both sections 331 and 332
apply.
(vi) Certain forfeitures and clawbacks of stock.
(5) Transactions that are not AFC repurchases or CSFC
repurchases.
(i) Complete liquidations generally.
(ii) Distributions during taxable year of complete liquidation
or dissolution.
(iii) Divisive transactions under section 355 other than split-
offs.
(iv) Non-redemptive distributions subject to section 301(c)(2)
or (3).
(v) Net cash settlement of an option contract.
(k) Date of section 4501(d)(1) repurchase or section 4501(d)(2)
repurchase.
(1) General rule.
(2) Regular-way sale.
(3) AFC repurchase or CSFC repurchase pursuant to certain
section 4501(d) economically similar transactions.
(4) Section 4501(d)(1) repurchase pursuant to a covered funding.
(l) Fair market value of stock of an applicable foreign
corporation or a covered surrogate foreign corporation that is
repurchased or acquired.
(1) In general.
(2) Stock traded on an established securities market.
(i) In general.
(ii) Acceptable methods.
(iii) Date of section 4501(d)(1) repurchase or section
4501(d)(2) repurchase not a trading day.
(iv) Consistency requirement.
(v) Stock traded on multiple exchanges.
(3) Stock not traded on an established securities market.
(i) General rule.
(ii) Consistency requirement.
(4) Market price of stock denominated in non-U.S. currency.
(m) Section 4501(d) statutory exceptions.
(1) In general.
(i) Overview.
(ii) Reduction of section 4501(d) excise tax base.
(2) Section 4501(d) reorganization exception.
(3) Stock contributions to an employer-sponsored retirement
plan.
(i) Reductions to section 4501(d) excise tax base.
(ii) Classes of stock contributed to an employer-sponsored
retirement plan.
(iii) Determining amount of reduction to section 4501(d) excise
tax base.
(iv) Timing of contributions.
(v) Contributions before January 1, 2023.
(4) Repurchases or acquisitions by a dealer in securities in the
ordinary course of business.
(i) In general.
(ii) Applicability.
(5) Repurchases by a RIC or REIT.
(6) AFC repurchase or CSFC repurchase treated as a dividend.
(i) In general.
(ii) Rebuttable presumption of no dividend equivalence.
(n) Application of section 4501(d) netting rule.
(1) In general.
(2) Stock issued or provided outside period of applicable
foreign corporation or covered surrogate foreign corporation status.
(3) Issuances or provisions before January 1, 2023.
(4) F reorganizations.
(5) Stock Issued or provided in connection with the performance
of services.
(i) In general.
(ii) Sale of shares to cover exercise price or withholding.
(6) Date of issuance or provision for section 4501(d) netting
rule.
(i) In general.
(ii) Stock options and stock appreciation rights.
(iii) Stock on which a section 83(b) election is made.
(7) Fair market value of stock of an applicable foreign
corporation or a covered surrogate foreign corporation that is
issued or provided to employees.
(i) In general.
(ii) Market price of stock denominated in non-U.S. currency.
(8) Issuances that are disregarded for purposes of applying the
section 4501(d) netting rule.
(i) In general.
(ii) Stock contributions to an employer-sponsored retirement
plan.
(iii) Net exercises and share withholding.
(iv) Settlement other than in stock.
(v) Instrument not in the legal form of stock.
(o) Rules applicable before April 13, 2024.
(1) Section 4501(d)(1) repurchase.
[[Page 26035]]
(2) Funding rule.
(3) Per se rule.
(4) Section 4501(d)(2) repurchase.
(5) Definitions solely for purposes of paragraph (o).
(i) Application of definitions in Sec. 58.4501-1(b) and Sec.
58.4501-7(b)(2).
(ii) Definition of applicable specified affiliate.
(p) Section 4501(d)(1) examples.
(1) Example 1: The section 4501(d) netting rule with respect to
a single applicable specified affiliate.
(2) Example 2: The section 4501(d) netting rule with respect to
multiple applicable specified affiliates.
(3) Example 3: A single covered funding and covered purchase.
(4) Example 4: Multiple covered fundings and a single covered
purchase.
(5) Example 5: The rebuttable presumption.
(6) Example 6: Indirect funding subject to rebuttable
presumption.
(7) Example 7: Indirect funding.
(8) Example 8: A foreign partnership that is an applicable
specified affiliate.
(9) Example 9: A foreign partnership that is not an applicable
specified affiliate.
(10) Example 10: A foreign partnership that is directly owned by
foreign corporations and is an applicable specified affiliate.
(q) Section 4501(d)(2) examples.
(1) Example 1: The section 4501(d) netting rule with respect to
an expatriated entity.
(2) Example 2: Section 4501(d)(2) repurchase from the covered
surrogate foreign corporation or another specified affiliate of the
covered surrogate foreign corporation.
(3) Example 3: Liability with respect to multiple expatriated
entities.
(r) Applicability dates.
(1) In general.
(2) Rules applicable before April 13, 2024.
(3) Early application.
Sec. 58.4501-1 Excise tax on stock repurchases.
(a) Excise tax imposed. Section 4501(a) of the Code imposes on each
covered corporation an excise tax (stock repurchase excise tax) equal
to the applicable percentage of the fair market value of any stock of
the corporation that is repurchased by the corporation during the
taxable year. This section and Sec. 58.4501-2 provide generally
applicable definitions and operating rules regarding the application of
the stock repurchase excise tax and the computation of the stock
repurchase excise tax liability of a covered corporation. Section
58.4501-3 provides rules regarding the application of the exceptions in
section 4501(e) (other than the de minimis exception described in
section 4501(e)(3), which is addressed in Sec. 58.4501-2(b)(2)), and
Sec. 58.4501-4 provides rules regarding the application of section
4501(c)(3). Section 58.4501-5 provides examples that illustrate the
application of section 4501 and the stock repurchase excise tax
regulations. Section 58.4501-6 provides applicability dates for the
stock repurchase excise tax regulations (other than Sec. 58.4501-7).
For special rules and examples regarding the application of section
4501(d) to acquisitions or repurchases of stock of certain foreign
corporations, see Sec. 58.4501-7.
(b) Definitions. The following definitions apply for purposes of
this section and 58.4501-2 through 58.4501-6, and, to the extent
provided in Sec. 58.4501-7, for purposes of Sec. 58.4501-7:
(1) Acquisitive reorganization. The term acquisitive reorganization
means a transaction that qualifies as a reorganization under--
(i) Section 368(a)(1)(A) of the Code (A reorganization) (including
by reason of section 368(a)(2)(D) or section 368(a)(2)(E) (reverse
triangular merger));
(ii) Section 368(a)(1)(C);
(iii) Section 368(a)(1)(D) (D reorganization) (if the D
reorganization satisfies the requirements of section 354(b)(1) of the
Code); or
(iv) Section 368(a)(1)(G) (if the reorganization satisfies the
requirements of section 354(b)(1)).
(2) Applicable percentage. The term applicable percentage means the
percentage provided in section 4501(a).
(3) Cessation date. The term cessation date means the date on which
all stock of a covered corporation ceases to be traded on an
established securities market.
(4) Clawback. The term clawback means a surrender of stock pursuant
to a contractual provision that requires an employee to return vested
stock.
(5) Controlled corporation. The term controlled corporation has the
meaning given the term in section 355(a)(1)(A) of the Code.
(6) Covered corporation. The term covered corporation means any
domestic corporation (including within the meaning of paragraph (f) of
this section) the stock of which is traded on an established securities
market.
(7) De minimis exception. The term de minimis exception has the
meaning given the term in Sec. 58.4501-2(b)(2)(i).
(8) Distributing corporation. The term distributing corporation has
the meaning given the term in section 355(a)(1)(A).
(9) Economically similar transaction. The term economically similar
transaction means a transaction described in Sec. 58.4501-2(e)(4).
(10) Employee. The term employee means an employee as defined in
section 3401(c) of the Code and Sec. 31.3401(c)-1 of this chapter, or
a former employee, of the covered corporation or specified affiliate
(as appropriate).
(11) Employer-sponsored retirement plan--(i) In general. The term
employer-sponsored retirement plan means a retirement plan that is
qualified under section 401(a) of the Code and maintained by a covered
corporation or a specified affiliate of the covered corporation.
(ii) ESOPs included. The term employer-sponsored retirement plan
includes an employee stock ownership plan described in section
4975(e)(7) of the Code (ESOP) that is maintained by a covered
corporation or a specified affiliate of the covered corporation.
(12) E reorganization. The term E reorganization means a
transaction that qualifies as a reorganization under section
368(a)(1)(E).
(13) Established securities market. The term established securities
market has the meaning given the term in Sec. 1.7704-1(b) of this
chapter.
(14) F reorganization. The term F reorganization means a
transaction that qualifies as a reorganization under section
368(a)(1)(F).
(15) Forfeiture. The term forfeiture means a surrender of stock to
the issuing corporation for no consideration.
(16) Initiation date. The term initiation date means the date on
which stock of a corporation begins to be traded on an established
securities market.
(17) IRS. The term IRS means the Internal Revenue Service.
(18) Netting rule. The term netting rule has the meaning given the
term in Sec. 58.4501-4(a).
(19) Qualifying property repurchase. The term qualifying property
repurchase has the meaning given the term in Sec. 58.4501-3(c).
(20) REIT. The term REIT has the meaning given the term real estate
investment trust in section 856(a) of the Code.
(21) Reorganization exception. The term reorganization exception
has the meaning given the term in Sec. 58.4501-3(c).
(22) Repurchase. The term repurchase has the meaning given the term
in Sec. 58.4501-2(e)(2).
(23) RIC. The term RIC has the meaning given the term regulated
investment company in section 851 of the Code.
(24) Section 317(b) redemption. The term section 317(b) redemption
means a redemption within the meaning of section 317(b) of the Code
with regard to the stock of a covered corporation.
(25) Specified affiliate. The term specified affiliate means, with
regard to any corporation--
[[Page 26036]]
(i) Any corporation more than 50 percent of the stock of which is
owned (by vote or by value), directly or indirectly, by the
corporation; and
(ii) Any partnership more than 50 percent of the capital interests
or profits interests of which is held, directly or indirectly, by the
corporation.
(26) Split-off. The term split-off means a distribution qualifying
under section 355 (or so much of section 356 of the Code as relates to
section 355) by a distributing corporation pursuant to which the
shareholders of the distributing corporation exchange stock of the
distributing corporation for stock of the controlled corporation and,
if applicable, other property (including securities of the controlled
corporation) or money.
(27) Statutory exception. The term statutory exception has the
meaning given the term in Sec. 58.4501-3(a).
(28) Statutory references. For purposes of this part--
(i) The term chapter 1 means chapter 1 of the Code; and
(ii) The term Code means the Internal Revenue Code.
(29) Stock--(i) In general. The term stock means any instrument
issued by a corporation that is stock (including treasury stock) or
that is treated as stock for Federal tax purposes at the time of
issuance, regardless of whether the instrument is traded on an
established securities market.
(ii) Additional tier 1 capital. The term stock does not include
preferred stock that--
(A) Qualifies as additional tier 1 capital (within the meaning of
12 CFR 3.20(c), 217.20(c), or 324.20(c)); and
(B) Does not qualify as common equity tier 1 capital (within the
meaning of 12 CFR 3.20(b), 217.20(b), or 324.20(b)).
(30) Stock repurchase excise tax. The term stock repurchase excise
tax has the meaning given the term in paragraph (a) of this section.
(31) Stock repurchase excise tax base. The term stock repurchase
excise tax base has the meaning given the term in Sec. 58.4501-
2(c)(1).
(32) Stock repurchase excise tax regulations. The term stock
repurchase excise tax regulations means the following provisions of 26
CFR chapter I:
(i) Subpart A of this part, which consists of this section and
Sec. Sec. 58.4501-2 through 58.4501-7.
(ii) Subpart B of this part.
(iii) Section 1.1275-6(f)(12)(iii) of this chapter, which provides
that the integration of a qualifying debt instrument with a hedge
pursuant to Sec. 1.1275-6 of this chapter is not taken into account in
determining whether and when stock is repurchased or issued.
(33) Taxable year. The term taxable year has the meaning given the
term in section 7701(a)(23) of the Code.
(34) Treasury stock. The term treasury stock means treasury stock
within the meaning of section 317(b).
(c) No application for any purposes of chapter 1. The rules of this
part have no application for purposes of chapter 1.
(d) Status as a domestic or foreign corporation. If a corporation
is, or is treated as, a domestic corporation for purposes of the Code
or for purposes that include chapter 37 of the Code, then the
corporation is a domestic corporation for purposes of the stock
repurchase excise tax regulations. A corporation that is not a domestic
corporation for purposes of the stock repurchase excise tax regulations
is a foreign corporation for such purposes.
Sec. 58.4501-2 General rules regarding excise tax on stock
repurchases.
(a) Scope. This section provides general rules regarding the
application of the stock repurchase excise tax and the computation of
the stock repurchase excise tax liability of a covered corporation.
Paragraphs (b) and (c) of this section provide rules for computing a
covered corporation's stock repurchase excise tax liability. Paragraph
(d) of this section provides rules for determining whether a
corporation is a covered corporation. Paragraph (e) of this section
provides rules for determining whether a transaction is a repurchase.
Paragraph (f) of this section provides rules for acquisitions of stock
of a covered corporation by a specified affiliate of the covered
corporation. Paragraph (g) of this section provides rules for
determining when stock is repurchased. Paragraph (h) of this section
provides rules for determining the fair market value of repurchased
stock.
(b) Computation of excise tax liability--(1) Imposition of tax.
Except as provided in paragraph (b)(2) of this section (regarding the
de minimis exception), the amount of stock repurchase excise tax
imposed on a covered corporation for a taxable year equals the product
obtained by multiplying--
(i) The applicable percentage; by
(ii) The stock repurchase excise tax base of the covered
corporation for the taxable year determined in accordance with
paragraph (c)(1) of this section.
(2) De minimis exception--(i) In general. A covered corporation is
not subject to the stock repurchase excise tax with regard to a taxable
year if, during that taxable year, the aggregate fair market value of
the stock described in paragraphs (b)(2)(i)(A) and (B) of this section
does not exceed $1,000,000 (de minimis exception):
(A) The stock of the covered corporation that is repurchased by the
covered corporation.
(B) The stock of the covered corporation that is acquired by a
specified affiliate of the covered corporation.
(ii) Determination. A determination of whether the de minimis
exception applies with regard to a taxable year is made before
applying--
(A) Any statutory exception under Sec. 58.4501-3; and
(B) Any adjustments pursuant to the netting rule under Sec.
58.4501-4.
(c) Stock repurchase excise tax base--(1) In general. With regard
to a covered corporation, the term stock repurchase excise tax base
means the dollar amount (not less than zero) that is obtained by--
(i) Determining (in accordance with paragraphs (e) through (h) of
this section) the aggregate fair market value of--
(A) The stock of the covered corporation that is repurchased by the
covered corporation during the covered corporation's taxable year; and
(B) The stock of the covered corporation that is acquired by a
specified affiliate of the covered corporation during the covered
corporation's taxable year;
(ii) Reducing the amount determined under paragraph (c)(1)(i) of
this section by the fair market value of the stock of the covered
corporation repurchased by the covered corporation or acquired by a
specified affiliate of the covered corporation during the covered
corporation's taxable year to the extent any statutory exceptions apply
in accordance with Sec. 58.4501-3; and then
(iii) Reducing the amount determined under paragraphs (c)(1)(i) and
(ii) of this section by the aggregate fair market value of stock of the
covered corporation issued by the covered corporation, or provided by a
specified affiliate of the covered corporation, during the covered
corporation's taxable year under the netting rule in accordance with
Sec. 58.4501-4.
(2) Taxable year determination--(i) In general. The determinations
under paragraph (c)(1)(i) of this section are made separately for each
covered corporation and for each taxable year of the covered
corporation.
(ii) No carrybacks or carryforwards. Reductions under paragraphs
(c)(1)(ii) and (iii) of this section in excess of the amount determined
under paragraph (c)(1)(i) of this section with regard to a
[[Page 26037]]
covered corporation are not carried forward or backward to preceding or
succeeding taxable years of the covered corporation.
(3) Repurchases before January 1, 2023. Stock of a covered
corporation repurchased by the covered corporation or acquired by a
specified affiliate of the covered corporation before January 1, 2023
(as determined under paragraphs (e) through (g) of this section) is
neither--
(i) Included in the stock repurchase excise tax base of the covered
corporation; nor
(ii) Taken into account in determining the applicability of the de
minimis exception.
(d) Duration of covered corporation status--(1) Initiation date. A
corporation becomes a covered corporation at the beginning of the
corporation's initiation date.
(2) Cessation date--(i) In general. Except as provided in paragraph
(d)(2)(ii) of this section, a corporation ceases to be a covered
corporation at the end of the corporation's cessation date.
(ii) Repurchases after cessation date. 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 (for example, if stock of a
covered corporation ceases trading prior to completion of an
acquisitive reorganization), 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.
(3) Inbound and outbound F reorganizations--(i) Inbound F
reorganization. In the case of a foreign corporation that transfers its
assets or that is treated as transferring its assets to a domestic
corporation in an F reorganization (as described in Sec. 1.367(b)-2(f)
of this chapter), the corporation is not treated as a domestic
corporation until the day after the reorganization.
(ii) Outbound F reorganization. In the case of a domestic
corporation that transfers its assets or that is treated as
transferring its assets to a foreign corporation in an F reorganization
(as described in Sec. 1.367(a)-1(e) of this chapter), the corporation
is not treated as a foreign corporation until the day after the
reorganization.
(e) Repurchase--(1) Overview. This paragraph (e) provides rules for
determining whether a transaction is a repurchase. Paragraph (e)(2) of
this section provides a general rule regarding the scope of the term
repurchase. Paragraph (e)(3) of this section provides an exclusive list
of transactions that are treated as a section 317(b) redemption but are
not a repurchase. Paragraph (e)(4) of this section provides an
exclusive list of transactions that are economically similar
transactions. Paragraph (e)(5) of this section provides a non-exclusive
list of transactions that are not repurchases. Paragraph (f) of this
section provides rules regarding acquisitions of covered corporation
stock by specified affiliates.
(2) Scope of repurchase. A repurchase means solely--
(i) A section 317(b) redemption, except as provided in paragraph
(e)(3) of this section; or
(ii) An economically similar transaction described in paragraph
(e)(4) of this section.
(3) Certain section 317(b) redemptions that are not repurchases.
This paragraph (e)(3) provides an exclusive list of transactions that
are section 317(b) redemptions but are not repurchases.
(i) Section 304(a)(1) transactions--(A) Rule regarding deemed
distributions. If section 304(a)(1) of the Code applies to an
acquisition of stock by an acquiring corporation (within the meaning of
section 304(a)(1)), the acquiring corporation's deemed distribution in
redemption of the acquiring corporation's stock (resulting from the
application of section 304(a)(1)) is not a repurchase.
(B) Scope of rule. The rule described in paragraph (e)(3)(i)(A) of
this section applies to a transaction described in paragraph
(e)(3)(i)(A) of this section regardless of whether section 302(a) or
(d) of the Code applies to the acquiring corporation's deemed
distribution in redemption of its stock.
(C) Rule regarding deemed issuances. For the rule addressing the
treatment of any stock deemed to be issued by the acquiring corporation
as a result of the application of section 304(a)(1), see Sec. 58.4501-
4(f)(4).
(ii) Payment by a covered corporation of cash in lieu of fractional
shares. A payment by a covered corporation of cash in lieu of a
fractional share of the covered corporation's stock is not a repurchase
if--
(A) The payment is carried out as part of a transaction that
qualifies as a reorganization under section 368(a) or a distribution to
which section 355 applies, or pursuant to the settlement of an option
or similar financial instrument (for example, a convertible debt
instrument or convertible preferred share);
(B) The cash received by the shareholder entitled to the fractional
share is not separately bargained-for consideration (that is, the cash
paid by the covered corporation in lieu of the fractional share
represents a mere rounding off of the shares issued in the exchange or
settlement);
(C) The payment is carried out solely for administrative
convenience (and, therefore, solely for non-tax reasons); and
(D) The amount of cash paid to the shareholder in lieu of a
fractional share does not exceed the fair market value of one full
share of the class of stock of the covered corporation with respect to
which the payment of cash in lieu of a fractional share is made.
(4) Economically similar transactions. This paragraph (e)(4)
provides an exclusive list of transactions that are economically
similar transactions. For rules regarding the statutory exceptions, see
Sec. 58.4501-3.
(i) Acquisitive reorganizations. In the case of an acquisitive
reorganization in which the target corporation is a covered
corporation, the exchange by the target corporation shareholders of
their target corporation stock pursuant to the plan of reorganization
is a repurchase by the target corporation.
(ii) E reorganizations. In the case of an E reorganization in which
the recapitalizing corporation is a covered corporation, the exchange
by the recapitalizing corporation shareholders of their recapitalizing
corporation stock pursuant to the plan of reorganization is a
repurchase by the recapitalizing corporation.
(iii) F reorganizations. In the case of an F reorganization in
which the transferor corporation (as defined in Sec. 1.368-2(m)(1) of
this chapter) is a covered corporation, the exchange by the transferor
corporation shareholders of their transferor corporation stock pursuant
to the plan of reorganization is a repurchase by the transferor
corporation.
(iv) Split-offs. In the case of a split-off by a distributing
corporation that is a covered corporation, the exchange by the
distributing corporation shareholders of their distributing corporation
stock is a repurchase by the distributing corporation.
(v) Complete liquidations to which both sections 331 and 332 apply.
In the case of a complete liquidation of a covered corporation to which
sections 331 and 332(a) of the Code respectively apply to component
distributions of the complete liquidation--
(A) Each distribution to which section 331 applies is a repurchase
by the covered corporation; and
(B) The distribution to which section 332(a) applies is not a
repurchase by the
[[Page 26038]]
covered corporation (see paragraph (e)(5)(i)(A) of this section).
(vi) Certain forfeitures and clawbacks of stock--(A) In general. In
the case of a forfeiture or clawback of stock of a covered corporation
pursuant to a legal or contractual obligation, the forfeiture or
clawback is a repurchase by the covered corporation or acquisition by a
specified affiliate of the covered corporation (as appropriate) on the
date of forfeiture or clawback (as appropriate) if the stock was
treated as issued or provided under Sec. 58.4501-4(b) and the
forfeiture or clawback of the stock (as appropriate) is described in
paragraph (e)(4)(vi)(B), (C), or (D) of this section.
(B) Stock subject to post-closing price adjustments. The stock was
issued pursuant to an acquisition of a target entity or its business,
and the forfeiture of the stock was in accordance with the terms of the
documents governing the transaction (for example, to compensate the
acquiring corporation for breaches of representations or warranties
made by the target entity, or because the business of the target entity
did not achieve certain performance benchmarks agreed upon in the
transaction documents).
(C) Stock for which a section 83(b) election was made. The stock
was subject to a substantial risk of forfeiture within the meaning of
section 83(a) of the Code on the date the stock was issued or provided,
the service provider made a valid election under section 83(b) with
regard to the stock, and the forfeiture resulted from the service
provider failing to meet the vesting condition.
(D) Clawbacks. On the date the stock was issued or provided, the
stock was subject to a clawback agreement, and a clawback of the stock
resulted from the occurrence of an event specified in the clawback
agreement.
(5) Transactions that are not repurchases. This paragraph (e)(5)
provides a non-exclusive list of transactions that are not repurchases.
(i) Complete liquidations generally. Except as provided in
paragraph (e)(4)(v)(A) of this section, the following is not a
repurchase by a covered corporation:
(A) A distribution in complete liquidation of the covered
corporation to which section 331 or 332(a) applies.
(B) A distribution pursuant to the resolution or plan of
dissolution of the covered corporation that is reported on the original
(but not a supplemented or an amended) IRS Form 966, Corporate
Dissolution or Liquidation (or any successor form).
(C) A distribution pursuant to a deemed dissolution of the covered
corporation (for instance, pursuant to a deemed liquidation under Sec.
301.7701-3 of this chapter).
(ii) Distributions during taxable year of complete liquidation or
dissolution. Unless paragraph (e)(4)(v) of this section applies, no
distribution by a covered corporation during a taxable year of the
covered corporation is a repurchase by the covered corporation if the
covered corporation--
(A) Completely liquidates during the taxable year (that is, has a
final distribution during the taxable year in a complete liquidation to
which section 331 applies);
(B) Dissolves during the taxable year pursuant to the resolution or
plan of dissolution as reported on the original (but not a supplemented
or an amended) IRS Form 966, Corporate Dissolution or Liquidation (or
any successor form); or
(C) Is deemed to dissolve during the taxable year (for instance,
pursuant to a deemed liquidation under Sec. 301.7701-3 of this
chapter).
(iii) Divisive transactions under section 355 other than split-
offs--(A) In general. Subject to paragraph (e)(5)(iii)(B) of this
section, a distribution by a distributing corporation that is a covered
corporation of stock of a controlled corporation qualifying under
section 355 that is not a split-off is not a repurchase by the
distributing corporation.
(B) Exception regarding non-qualifying property in spin-offs. A
distribution by a distributing corporation that is a covered
corporation of other property or money in exchange for stock of the
distributing corporation is a repurchase by the distributing
corporation if it occurs in pursuance of a transaction qualifying under
section 355 in which the distribution by the distributing corporation
of stock of the controlled corporation is with respect to stock of the
distributing corporation.
(iv) Non-redemptive distributions subject to section 301(c)(2) or
(3). A distribution to which section 301 of the Code applies by a
covered corporation to a distributee is not a repurchase by the covered
corporation if the distribution--
(A) Is subject to section 301(c)(2) or (3); and
(B) The distributee does not exchange stock of the covered
corporation (and is not treated as exchanging stock of the covered
corporation for Federal income tax purposes).
(v) Net cash settlement of an option contract or other derivative
financial instrument. The net cash settlement of an option contract or
other derivative financial instrument with respect to stock of a
covered corporation is not a repurchase by the covered corporation. The
net cash settlement of an instrument in the legal form of an option
contract or other derivative financial instrument that is treated as
stock for Federal tax purposes at the time of issuance is treated as a
repurchase of that instrument, and therefore a repurchase by the
covered corporation.
(f) Acquisitions by specified affiliates--(1) Acquisitions of stock
of a covered corporation by a specified affiliate treated as a
repurchase. If a specified affiliate of a covered corporation acquires
stock of the covered corporation from a person that is not the covered
corporation or another specified affiliate of the covered corporation,
the acquisition is treated as a repurchase of the stock of the covered
corporation by the covered corporation.
(2) Determination of specified affiliate status--(i) Timing of
determination. A covered corporation must determine if another
corporation or a partnership is a specified affiliate of the covered
corporation if the determination is relevant for purposes of computing
the stock repurchase excise tax with regard to the covered corporation.
(ii) Indirect ownership. For purposes of determining whether a
corporation or a partnership is a specified affiliate of a covered
corporation, the covered corporation is treated as indirectly owning
stock in the corporation or holding capital or profits interests in the
partnership in the percentage equal to the covered corporation's
proportionate percentage of stock owned, or capital or profits
interests held, through other entities.
(3) Constructive specified affiliate acquisition--(i) General rule.
Except as provided in paragraph (f)(3)(ii) of this section, shares of
stock of a covered corporation are treated as repurchased by the
covered corporation if--
(A) A corporation or a partnership becomes a specified affiliate of
the covered corporation;
(B) At the time the corporation or partnership becomes a specified
affiliate of the covered corporation, the corporation or partnership
owns such shares, and such shares represent more than one percent of
the fair market value of the assets of the corporation or partnership
as determined at such time; and
(C) The corporation or partnership acquired such shares after
December 31, 2022.
(ii) Stock previously treated as repurchased not subject to deemed
repurchase more than once. Paragraph
[[Page 26039]]
(f)(3)(i) of this section does not apply with regard to any shares of
stock of a covered corporation--
(A) Held by the corporation or partnership described in paragraph
(f)(3)(i) of this section at the time that it becomes a specified
affiliate of the covered corporation; and
(B) That the covered corporation identifies as previously having
been treated as repurchased by the covered corporation under paragraph
(f)(3)(i) of this section when held by the corporation or partnership.
(iii) Specific identification. For purposes of paragraphs (f)(3)(i)
and (ii) of this section, if the corporation or partnership described
in paragraph (f)(3)(i) of this section is unable to specifically
identify which shares of stock of the covered corporation the
corporation or partnership is treated as holding at the time it becomes
a specified affiliate of the covered corporation, the covered
corporation must treat the corporation or partnership as holding the
most recently acquired shares of the stock of the covered corporation.
(g) Date of repurchase--(1) General rule. In general, stock of a
covered corporation is treated as repurchased by the covered
corporation or acquired by a specified affiliate of the covered
corporation on the date on which ownership of the stock transfers to
the covered corporation or specified affiliate (as appropriate) for
Federal income tax purposes. To determine the date of repurchase in
particular situations, see paragraphs (g)(2), (3), and (4) of this
section.
(2) Regular-way sale. A regular-way sale of stock of a covered
corporation (that 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) is treated as a repurchase
by the covered corporation or an acquisition by a specified affiliate
of the covered corporation on the trade date.
(3) Repurchase pursuant to certain economically similar
transactions. Stock of a covered corporation repurchased in an
economically similar transaction described in paragraph (e)(4) of this
section is treated as repurchased on the date the shareholders of the
covered corporation exchange their stock in the covered corporation.
(4) Constructive specified affiliate acquisition. Stock of a
covered corporation that is treated as repurchased by the covered
corporation under paragraph (f)(3)(i) of this section is treated as
acquired by a specified affiliate on the date on which the other
corporation or partnership described in paragraph (f)(3)(i) of this
section becomes a specified affiliate of the covered corporation.
(h) Fair market value of repurchased stock--(1) In general. The
fair market value of stock of a covered corporation that is repurchased
by the covered corporation or acquired by a specified affiliate of the
covered corporation is the market price of the stock on the date the
stock is repurchased or acquired (as determined under paragraph (g) of
this section). That is, if the price at which the repurchased or
acquired stock is purchased differs from the market price of the stock
on the date the stock is repurchased or acquired, the fair market value
of the stock is the market price on the date the stock is repurchased
or acquired.
(2) Stock traded on an established securities market--(i) In
general. If stock of a covered corporation that is repurchased by the
covered corporation or acquired by a specified affiliate of the covered
corporation is traded on an established securities market, the covered
corporation must determine the market price of the repurchased or
acquired stock by applying one of the methods provided in paragraph
(h)(2)(ii) of this section. For purposes of this paragraph (h)(2),
repurchased or acquired stock of a covered corporation is treated as
traded on an established securities market if any stock of the same
class and issue of stock is so traded, regardless of whether the shares
repurchased or acquired are so traded.
(ii) Acceptable methods. The following are acceptable methods for
determining the market price of repurchased or acquired stock of a
covered corporation traded on an established securities market:
(A) The daily volume-weighted average price as determined on the
date the stock is repurchased by the covered corporation or acquired by
a specified affiliate of the covered corporation.
(B) The closing price on the date the stock is repurchased by the
covered corporation or acquired by a specified affiliate of the covered
corporation.
(C) The average of the high and low prices on the date the stock is
repurchased by the covered corporation or acquired by a specified
affiliate of the covered corporation.
(D) The trading price at the time the stock is repurchased by the
covered corporation or acquired by a specified affiliate of the covered
corporation.
(iii) Date of repurchase not a trading day. For purposes of each
method provided in paragraph (h)(2)(ii) of this section, if the date
the stock of a covered corporation is repurchased by the covered
corporation or acquired by a specified affiliate of the covered
corporation is not a trading day, the date on which the market price is
determined is the immediately preceding trading day.
(iv) Consistency requirement--(A) Solely one method permitted for
determining market price of repurchased or acquired stock. The market
price of repurchased or acquired stock of a covered corporation that is
traded on an established securities market must be determined by
consistently applying one (but not more than one) of the methods
provided in paragraph (h)(2)(ii) of this section to all stock of the
covered corporation repurchased by the covered corporation or acquired
by a specified affiliate of the covered corporation throughout the
covered corporation's taxable year.
(B) Application to netting rule. Except as provided in the second
sentence of this paragraph (h)(2)(iv)(B), the method used by the
covered corporation under paragraph (h)(2)(iv)(A) of this section must
be consistently applied to determine the market price of all stock of
the covered corporation issued or provided under the netting rule
throughout the covered corporation's taxable year. The consistency rule
set forth in the first sentence of this paragraph (h)(2)(iv)(B) does
not apply to the determination of the fair market value of stock of a
covered corporation that the covered corporation issues, or that a
specified affiliate of the covered corporation provides, in connection
with the performance of services. See Sec. 58.4501-4(e)(5).
(v) Stock traded on multiple exchanges--(A) In general. A covered
corporation the stock of which is traded on multiple established
securities markets must determine the market price of the stock of the
covered corporation by reference to trading on the established
securities market in the country in which the covered corporation is
organized, including a regional established securities market that
trades in that country.
(B) Stock traded on multiple exchanges in country where covered
corporation is organized. If a covered corporation's stock is traded on
multiple established securities markets in the country in which the
covered corporation is organized, the covered corporation must
determine the market price of the stock by reference to trading on the
established securities market in that country with the highest trading
volume in that stock in the prior taxable year.
[[Page 26040]]
(C) Other cases in which stock is traded on multiple exchanges. If
stock of a covered corporation is traded on multiple established
securities markets and neither paragraph (h)(2)(v)(A) nor (B) of this
section applies, the covered corporation must determine the fair market
value of its traded stock in a manner that is reasonable under the
facts and circumstances.
(3) Stock not traded on an established securities market--(i)
General rule. If repurchased or acquired stock of a covered corporation
is not traded on an established securities market, the market price of
the stock is determined as of the date the stock is repurchased by the
covered corporation or acquired by a specified affiliate of the covered
corporation under the principles of Sec. 1.409A-1(b)(5)(iv)(B)(1) of
this chapter.
(ii) Consistency requirement--(A) Solely one method permitted for
determining market price of repurchased or acquired stock. The
valuation method for determining the market price of repurchased or
acquired stock of a covered corporation that is not traded on an
established securities market must be used for all repurchases of stock
of the covered corporation or acquisitions by a specified affiliate of
the covered corporation of the same class throughout the covered
corporation's taxable year, unless the application of that method to a
particular repurchase or acquisition would be unreasonable under the
facts and circumstances as of the valuation date within the meaning of
Sec. 1.409A-1(b)(5)(iv)(B)(1).
(B) Application to netting rule. Except as provided in the second
sentence of this paragraph (h)(3)(ii)(B), the method used by the
covered corporation under paragraph (h)(3)(ii)(A) of this section also
must be consistently applied to determine the market price of all stock
of the covered corporation of the same class issued under the netting
rule throughout the covered corporation's taxable year. The consistency
rule set forth in the first sentence of this paragraph (h)(3)(ii)(B)
does not apply to the determination of the market price of stock of the
covered corporation that is issued in connection with the performance
of services or if the application of that method to a particular
issuance would be unreasonable under the facts and circumstances as of
the valuation date.
(4) Market price of stock denominated in non-U.S. currency. The
market price of any stock of a covered corporation that is denominated
in a currency other than the U.S. dollar is converted into U.S. dollars
at the spot rate (as defined in Sec. 1.988-1(d)(1) of this chapter) on
the date the stock is repurchased by the covered corporation or
acquired by a specified affiliate of the covered corporation.
Sec. 58.4501-3 Statutory exceptions.
(a) Scope. This section provides rules regarding the application of
each statutory exception (that is, each exception set forth in section
4501(e) of the Code), other than the de minimis exception described in
section 4501(e)(3) and subject to Sec. 58.4501-2(b)(2), to a
repurchase of stock of a covered corporation by the covered corporation
or an acquisition of stock of a covered corporation by a specified
affiliate of the covered corporation (as appropriate). For rules
regarding the application of the statutory exceptions in the context of
section 4501(d), see Sec. 58.4501-7(m).
(b) Reduction of covered corporation's stock repurchase excise tax
base. The fair market value of stock of a covered corporation
repurchased by the covered corporation or acquired by a specified
affiliate of the covered corporation in a repurchase or acquisition
described in this section is a reduction for purposes of computing the
covered corporation's stock repurchase excise tax base. See Sec.
58.4501-2(c)(1)(ii).
(c) Reorganization exception. The fair market value of stock of a
covered corporation repurchased by the covered corporation in a
repurchase described in any of paragraphs (c)(1) through (4) of this
section is a reduction for purposes of computing the covered
corporation's stock repurchase excise tax base (that is, the
reorganization exception) to the extent that the repurchase is for
property permitted by section 354 or 355 to be received without the
recognition of gain or loss (each, a qualifying property repurchase):
(1) A repurchase by a target corporation in an acquisitive
reorganization pursuant to the plan of reorganization.
(2) A repurchase by a recapitalizing corporation in an E
reorganization pursuant to the plan of reorganization.
(3) A repurchase by a transferor corporation in an F reorganization
pursuant to the plan of reorganization.
(4) A repurchase by a distributing corporation in a split-off
(whether or not part of a D reorganization).
(d) Stock contributions to an employer-sponsored retirement plan--
(1) Reductions in computing covered corporation's stock repurchase
excise tax base--(i) General rule. The fair market value of stock of a
covered corporation that is repurchased by the covered corporation or
acquired by a specified affiliate of the covered corporation is a
reduction for purposes of computing the covered corporation's stock
repurchase excise tax base if the stock that is repurchased or
acquired, or an amount of stock equal to the fair market value of the
stock repurchased or acquired, is contributed to an employer-sponsored
retirement plan. The amount of the reduction under this paragraph
(d)(1) is determined as provided in paragraph (d)(3) or (4) of this
section.
(ii) Special rule for leveraged ESOPs. If a covered corporation or
a specified affiliate of the covered corporation maintains an ESOP with
an exempt loan (as defined in section 4975(d)(3)), allocations of
qualifying employer securities from the ESOP suspense account to ESOP
participants' accounts that are attributable to employer contributions
(and not to dividends) are treated as contributions of stock under this
paragraph (d) as of the date stock attributable to repayment of the
exempt loan is released from the suspense account and allocated to ESOP
participants' accounts.
(2) Classes of stock contributed to an employer-sponsored
retirement plan. This paragraph (d) applies to contributions of any
class of covered corporation stock to an employer-sponsored retirement
plan, regardless of the class of stock that was repurchased or
acquired.
(3) Same class of stock repurchased and contributed. If stock of a
covered corporation is repurchased by the covered corporation or
acquired by a specified affiliate of the covered corporation, and stock
of the covered corporation of the same class is contributed to an
employer-sponsored retirement plan, the amount of the reduction under
paragraph (d)(1) of this section is equal to the lesser of--
(i) The aggregate fair market value of the stock of the same class
that was repurchased or acquired (as determined under Sec. 58.4501-
2(h)) during the covered corporation's taxable year; or
(ii) The amount obtained by--
(A) Determining the aggregate fair market value of all stock of
that class repurchased or acquired (as determined under Sec. 58.4501-
2(h)) during the covered corporation's taxable year, reduced by the
fair market value of shares of that class of stock that is a reduction
to the stock repurchase excise tax base for the taxable year under a
statutory exception other than the exception in this paragraph (d);
(B) Dividing the amount determined under paragraph (d)(3)(ii)(A) of
this section by the number of shares of that class repurchased or
acquired, reduced by the number of shares of that class of
[[Page 26041]]
stock the fair market value of which is a reduction to the stock
repurchase excise tax base for the taxable year under a statutory
exception other than the exception in this paragraph (d); and
(C) Multiplying the amount determined under paragraph (d)(3)(ii)(B)
of this section by the number of shares of that class contributed to an
employer-sponsored retirement plan for the taxable year.
(4) Different class of stock repurchased and contributed--(i) In
general. Subject to paragraph (d)(4)(ii) of this section, if stock of a
covered corporation is repurchased by the covered corporation or
acquired by a specified affiliate of the covered corporation, and stock
of the covered corporation of a different class is contributed to an
employer-sponsored retirement plan, then the amount of the reduction
under paragraph (d)(1) of this section is equal to the fair market
value of the contributed stock at the time the stock is contributed to
the employer-sponsored retirement plan.
(ii) Maximum reduction permitted. The amount of the reduction under
paragraph (d)(4)(i) of this section must not exceed the aggregate fair
market value of stock repurchased or acquired during the covered
corporation's taxable year, reduced by the fair market value of any
stock that is a reduction to the stock repurchase excise tax base for
the taxable year under a statutory exception other than the exception
in this paragraph (d).
(5) Timing of contributions--(i) In general. The reduction in the
stock repurchase excise tax base, in accordance with paragraph (d)(1)
of this section (that is, the reduction in computing the stock
repurchase excise tax base), for a taxable year applies to
contributions of covered corporation stock to an employer-sponsored
retirement plan during the covered corporation's taxable year.
(ii) Treatment of contributions after close of taxable year. For
purposes of paragraph (d)(1) of this section, a covered corporation may
treat stock contributions to an employer-sponsored retirement plan made
after the close of the covered corporation's taxable year as having
been contributed during that taxable year if the following two
requirements are satisfied:
(A) The stock must be contributed to the employer-sponsored
retirement plan by the filing deadline for the form on which the stock
repurchase excise tax must be reported (applicable form) that is due
for the first full quarter after the close of the covered corporation's
taxable year.
(B) The stock must be treated by the employer-sponsored retirement
plan in the same manner that the plan would treat a contribution
received on the last day of that taxable year.
(iii) No duplicate reductions. Stock contributions that are treated
under paragraph (d)(5)(ii) of this section as having been contributed
in the taxable year to which the applicable form applies may not be
treated as having been contributed for any other taxable year for
purposes of the stock repurchase excise tax.
(6) Contributions before January 1, 2023. A covered corporation
with a taxable year that both begins before January 1, 2023, and ends
after December 31, 2022, may include the fair market value of all
contributions of its stock to an employer-sponsored retirement plan
during the entirety of that taxable year for purposes of applying this
paragraph (d).
(e) Repurchases or acquisitions by a dealer in securities in the
ordinary course of business--(1) In general. Subject to paragraph
(e)(2) of this section, the fair market value of stock of a covered
corporation repurchased by the covered corporation or acquired by a
specified affiliate of the covered corporation (as appropriate) that is
a dealer in securities (within the meaning of section 475(c)(1) of the
Code) is a reduction for purposes of computing the covered
corporation's stock repurchase excise tax base to the extent the stock
is acquired in the ordinary course of the dealer's business of dealing
in securities.
(2) Applicability. The reduction described in paragraph (e)(1) of
this section applies solely to the extent that--
(i) The dealer accounts for the stock as securities held primarily
for sale to customers in the dealer's ordinary course of business;
(ii) The dealer disposes of the stock within a period of time that
is consistent with the holding of the stock for sale to customers in
the dealer's ordinary course of business, taking into account the terms
of the stock and the conditions and practices prevailing in the markets
for similar stock during the period in which the stock is held; and
(iii) The dealer (if it is a covered corporation) does not sell or
otherwise transfer the stock to a specified affiliate of the covered
corporation, or the dealer (if it is a specified affiliate of the
covered corporation) does not sell or otherwise transfer the stock to
the covered corporation or to another specified affiliate of the
covered corporation, in each case other than in a sale or transfer to a
dealer that also satisfies the requirements of this paragraph (e)(2).
(f) Repurchases by a RIC or REIT. The fair market value of stock of
a covered corporation that is a RIC or a REIT that is repurchased by
the covered corporation or acquired by a specified affiliate of the
covered corporation is a reduction for purposes of computing the
covered corporation's stock repurchase excise tax base.
(g) Repurchase treated as a dividend--(1) Reduction of covered
corporation's stock repurchase excise tax base. Except as provided in
paragraph (g)(2)(ii) of this section, the fair market value of stock of
a covered corporation repurchased by the covered corporation (excluding
stock treated as repurchased under Sec. 58.4501-2(f)(1) and (3)) is a
reduction for purposes of computing the covered corporation's stock
repurchase excise tax base to the extent the repurchase is treated as a
distribution of a dividend under section 301(c)(1) or 356(a)(2).
(2) Rebuttable presumption of no dividend equivalence--(i)
Presumption. A repurchase to which section 302 or 356(a) applies is
presumed to be subject to section 302(a) or 356(a)(1), respectively
(and, therefore, is presumed ineligible for the exception in paragraph
(g)(1) of this section).
(ii) Rebuttal of presumption. A covered corporation may rebut the
presumption described in paragraph (g)(2)(i) of this section with
regard to a specific shareholder solely by establishing with sufficient
evidence that the shareholder treats the repurchase as a dividend on
the shareholder's Federal income tax return.
(iii) Sufficient evidence requirement. To provide sufficient
evidence under paragraph (g)(2)(ii) of this section to establish that
the shareholder treats the repurchase as a dividend on the
shareholder's Federal income tax return, the covered corporation must--
(A) Obtain certification from the shareholder, in accordance with
paragraph (g)(3) of this section, that the repurchase constitutes a
redemption treated as a distribution to which section 301 applies by
reason of section 302(d), or that the repurchase has the effect of the
distribution of a dividend under section 356(a)(2), including evidence
that applicable withholding occurred if required;
(B) Treat the repurchase consistent with the shareholder
certification required under paragraph (g)(2)(iii)(A) of this section;
(C) Have no knowledge of facts that would indicate that the
shareholder certification required under paragraph
[[Page 26042]]
(g)(2)(iii)(A) of this section is incorrect; and
(D) Demonstrate sufficient earnings and profits to treat as a
dividend either the redemption under section 302 or the receipt of
money or other property under section 356.
(3) Content of shareholder certification. The shareholder
certification required under paragraph (g)(2)(iii)(A) of this section
must include the following information:
(i) The name of the shareholder.
(ii) The name of the covered corporation.
(iii) The total number of shares of the covered corporation
outstanding immediately before and immediately after the repurchase.
(iv) A certification from the shareholder that either--
(A) The repurchase is a payment in exchange for stock because the
shareholder's proportionate interest in the corporation has been
reduced but not completely terminated;
(B) The repurchase is a payment in exchange for stock because the
shareholder's interest in the corporation is completely terminated; or
(C) The repurchase is a dividend.
(v) With respect to the certification described in paragraph
(g)(3)(iv) of this section--
(A) The number of shares actually and constructively owned by the
shareholder before and after the repurchase; and
(B) The shareholder's percentage ownership before and after the
repurchase.
(vi) With respect to the certification described in paragraph
(g)(3)(iv)(C) of this section, if the shareholder is not a United
States person (within the meaning of section 7701(a)(30)) and the
shares are held through a broker (within the meaning of section 6045(c)
of the Code), the certification also must include a statement that a
copy of the certification has been provided to the shareholder's
broker.
(vii) Any other information required by the IRS in forms or
instructions or in publications or guidance published in the Internal
Revenue Bulletin (see Sec. Sec. 601.601(d)(2) and 601.602 of this
chapter).
(viii) A penalties of perjury statement.
(ix) The signature of the shareholder and date of signature.
(4) Agreement to shareholder certification. After receiving the
shareholder certification required under paragraph (g)(2)(iii)(A) of
this section, the covered corporation must include on the shareholder
certification a statement signed by the covered corporation under
penalties of perjury that the covered corporation--
(i) Agrees to treat the repurchase consistent with the shareholder
certification required under paragraph (g)(2)(iii)(A) of this section;
and
(ii) Has no knowledge of facts that would indicate that the
shareholder certification required under paragraph (g)(2)(iii)(A) of
this section is incorrect.
(5) Documentation of sufficient evidence--(i) Retention and
availability of evidence. A covered corporation must retain the
evidence described in paragraph (g)(2)(iii) of this section and make
that evidence available for inspection to the IRS if any of the
evidence becomes material in the administration of any internal revenue
law.
(ii) Retention of supporting records. The covered corporation must
retain records of all information necessary to document and
substantiate all content of the shareholder certification described in
paragraph (g)(2)(iii)(A) of this section.
Sec. 58.4501-4 Application of netting rule.
(a) Scope. This section provides rules regarding the application of
section 4501(c)(3) of the Code. Paragraph (b) of this section provides
general rules regarding the adjustment to a covered corporation's stock
repurchase excise tax base with respect to stock that is issued by the
covered corporation or provided by a specified affiliate of the covered
corporation (netting rule). Paragraph (c) of this section provides
special rules for stock issued or provided in connection with the
performance of services. Paragraph (d) of this section provides rules
for determining the date on which stock is issued or provided.
Paragraph (e) of this section provides rules for determining the fair
market value of stock that is issued or provided. Paragraph (f) of this
section sets forth the sole circumstances under which an issuance or
provision of stock is disregarded for purposes of the netting rule. For
rules regarding the application of the netting rule in the context of
section 4501(d), see Sec. 58.4501-7(n).
(b) Issuances and provisions of stock that are a reduction in
computing the stock repurchase excise tax base--(1) General rule. Under
the netting rule provided by this paragraph (b)(1), the aggregate fair
market value of stock of a covered corporation is a reduction for
purposes of computing the covered corporation's stock repurchase excise
tax base for a taxable year if the stock is issued by the covered
corporation or provided by a specified affiliate of the covered
corporation in the following circumstances:
(i) Issued by the covered corporation during the covered
corporation's taxable year in connection with the performance of
services for the covered corporation by an employee or other service
provider of the covered corporation.
(ii) Provided by a specified affiliate of the covered corporation
in connection with the performance of services for the specified
affiliate by an employee of the specified affiliate during the covered
corporation's taxable year.
(iii) Issued by the covered corporation during the covered
corporation's taxable year not in connection with the performance of
services.
(2) Stock issued or provided outside period of covered corporation
status. Any stock of a covered corporation issued by the covered
corporation or provided by a specified affiliate of the covered
corporation before the initiation date or after the cessation date is
not taken into account under paragraph (b)(1) of this section. See
Sec. 58.4501-2(d).
(3) Issuances or provisions before January 1, 2023. Except as
provided in paragraph (b)(2) of this section, a covered corporation
with a taxable year that begins before January 1, 2023, and ends after
December 31, 2022, must include the fair market value of all issuances
or provisions of its stock during the entirety of that taxable year for
purposes of applying paragraph (b)(1) of this section to that taxable
year.
(4) F reorganizations. For purposes of this section, the transferor
corporation and the resulting corporation (as defined in Sec. 1.368-
2(m)(1) of this chapter) in an F reorganization are treated as the same
corporation.
(c) Stock issued or provided in connection with the performance of
services--(1) In general. For purposes of this section, stock of a
covered corporation is transferred by the covered corporation or a
specified affiliate of the covered corporation in connection with the
performance of services only if the transfer is described in section
83, including pursuant to a nonqualified stock option described in
Sec. 1.83-7 of this chapter, or is pursuant to a stock option
described in section 421 of the Code. A specified affiliate of the
covered corporation is not a service provider for purposes of this
section.
(2) Sale of shares to cover exercise price and withholding--(i)
Payment or advance by third party equal to exercise price. If a third
party pays the exercise price of a stock option on behalf of a service
provider or advances to a service provider an amount equal to the
exercise price of a stock option that the service provider uses to
exercise the option, then any stock transferred by the
[[Page 26043]]
covered corporation to the service provider, by a specified affiliate
to the specified affiliate's employee, or by the covered corporation or
specified affiliate to the third party upon exercise of the option in
connection with exercising the option is treated as issued or provided
in connection with the performance of the services.
(ii) Advance by third party equal to withholding obligation. If a
third party advances an amount equal to the withholding obligation of a
service provider, then any stock transferred by the covered corporation
to the service provider, by a specified affiliate to the specified
affiliate's employee, or by the covered corporation or specified
affiliate to the third party in connection with this arrangement is
treated as issued or provided in connection with the performance of
services.
(d) Date of issuance--(1) In general. Except as provided in
paragraph (d)(2) of this section, stock of a covered corporation is
treated as issued by the covered corporation or provided by a specified
affiliate of the covered corporation on the date on which ownership of
the stock transfers to the recipient for Federal income tax purposes.
(2) Stock issued or provided in connection with the performance of
services--(i) In general. Stock of a covered corporation is issued by
the covered corporation or provided by a specified affiliate of the
covered corporation in connection with the performance of services as
of the date the recipient of the stock is treated as the beneficial
owner of the stock for Federal income tax purposes. In general, a
recipient is treated as the beneficial owner of the stock when the
stock is both transferred by the covered corporation (or a specified
affiliate of the covered corporation) and substantially vested within
the meaning of Sec. 1.83-3(b) of this chapter. Thus, stock transferred
pursuant to a vested stock award or restricted stock unit is issued or
provided when the covered corporation or a specified affiliate of the
covered corporation initiates payment of the stock. Stock transferred
that is not substantially vested within the meaning of Sec. 1.83-3(b)
of this chapter is not issued or provided until it vests, except as
provided in paragraph (d)(2)(iii) of this section.
(ii) Stock options and stock appreciation rights. Stock of a
covered corporation transferred by the covered corporation or a
specified affiliate of the covered corporation pursuant to an option
described in Sec. 1.83-7 of this chapter or section 421 or a stock
appreciation right is issued by the covered corporation or provided by
the specified affiliate of the covered corporation (as applicable) as
of the date the option or stock appreciation right is exercised.
(iii) Stock on which a section 83(b) election is made. Stock of a
covered corporation transferred by the covered corporation or a
specified affiliate of the covered corporation when it is not
substantially vested within the meaning of Sec. 1.83-3(b) of this
chapter, but as to which a valid election under section 83(b) is made,
is treated as issued by the covered corporation or provided by the
specified affiliate of the covered corporation (as applicable) as of
the transfer date.
(e) Fair market value of issued or provided stock--(1) In general.
Except as provided in paragraph (e)(5) of this section, the fair market
value of stock of a covered corporation issued by the covered
corporation or provided by a specified affiliate of the covered
corporation is the market price of the stock on the date the stock is
issued or provided.
(2) Stock traded on an established securities market--(i) In
general. If stock of a covered corporation that is issued by the
covered corporation is traded on an established securities market, the
covered corporation must determine the market price of the stock by
applying one of the methods provided in paragraph (e)(2)(ii) of this
section.
(ii) Acceptable methods. The following are acceptable methods for
determining the market price of stock of a covered corporation traded
on an established securities market:
(A) The daily volume-weighted average price as determined on the
date the stock is issued by the covered corporation.
(B) The closing price on the date the stock is issued by the
covered corporation.
(C) The average of the high and low prices on the date the stock is
issued by the covered corporation.
(D) The trading price at the time the stock is issued by the
covered corporation.
(iii) Date of issuance not a trading day. For purposes of each
method provided in paragraph (e)(2)(ii) of this section, if the date
the stock of a covered corporation is issued by the covered corporation
is not a trading day, the date on which the market price is determined
is the immediately preceding trading day.
(iv) Consistency requirement--(A) Solely one method permitted for
determining market price of issued stock. The market price of stock of
a covered corporation that is traded on an established securities
market must be determined by consistently applying solely one of the
methods provided in paragraph (e)(2)(ii) of this section to all stock
of the covered corporation issued by the covered corporation throughout
the covered corporation's taxable year.
(B) Application to repurchased stock. The method used by the
covered corporation under paragraph (e)(2)(ii)(A) of this section must
be consistently applied to determine the market price of all stock of
the covered corporation repurchased by the covered corporation or
acquired by a specified affiliate of the covered corporation throughout
the covered corporation's taxable year. See Sec. 58.4501-2(h)(2)(iv).
(v) Stock traded on multiple exchanges. See Sec. 58.4501-
2(h)(2)(v) for rules regarding the valuation of stock of a covered
corporation traded on multiple established securities markets.
(3) Stock not traded on an established securities market--(i)
General rule. If stock of a covered corporation is not traded on an
established securities market, the market price of the stock is
determined as of the date the stock is issued by a covered corporation
under the principles of Sec. 1.409A-1(b)(5)(iv)(B)(1) of this chapter.
(ii) Consistency requirement. In determining the market price of
stock of a covered corporation that is not traded on an established
securities market, the same valuation method must be used for all
issuances of stock of the covered corporation belonging to the same
class throughout the covered corporation's taxable year, unless the
application of that method to a particular issuance would be
unreasonable under the facts and circumstances as of the valuation
date. That same method also must be consistently applied to determine
the market price of all stock of the covered corporation of the same
class repurchased by the covered corporation or acquired by a specified
affiliate of the covered corporation throughout the covered
corporation's taxable year, unless the application of that method to a
particular issuance would be unreasonable under the facts and
circumstances as of the valuation date. See Sec. 58.4501-2(h)(3)(ii).
(4) Market price of stock denominated in non-U.S. currency. The
market price of any stock of a covered corporation that is denominated
in a currency other than the U.S. dollar is converted into U.S. dollars
at the spot rate (as defined in Sec. 1.988-1(d)(1) of this chapter) on
the date the stock is issued by the covered corporation or provided by
a specified affiliate of the covered corporation (as applicable).
[[Page 26044]]
(5) Stock issued or provided in connection with the performance of
services. The fair market value of stock of a covered corporation
issued by the covered corporation or provided by a specified affiliate
of the covered corporation (as applicable) in connection with the
performance of services is the fair market value of the stock, as
determined under section 83, as of the date the stock is issued by the
covered corporation or provided by the specified affiliate of the
covered corporation (as applicable). For purposes of this section, the
fair market value of the stock is determined under the rules provided
in section 83 regardless of whether an amount is includible in the
service provider's income under section 83 or otherwise. For example,
the fair market value of stock issued by a covered corporation pursuant
to a stock option described in section 421 and stock issued by a
covered corporation to a nonresident alien for services performed
outside of the United States is determined using the rules provided in
section 83.
(f) Issuances that are disregarded for purposes of applying the
netting rule. This paragraph (f) lists the sole circumstances in which
an issuance of stock of a covered corporation is disregarded for
purposes of the netting rule.
(1) Distributions by a covered corporation of its own stock. Stock
of a covered corporation distributed by the covered corporation to its
shareholders with respect to the covered corporation's stock is
disregarded for purposes of the netting rule.
(2) Issuances to a specified affiliate--(i) In general. Subject to
paragraphs (f)(2)(ii) through (iv) of this section, stock of a covered
corporation issued by the covered corporation to a specified affiliate
of the covered corporation, or issued by the covered corporation in
connection with the performance of services by an employee or other
service provider for a specified affiliate of the covered corporation,
is disregarded for purposes of the netting rule.
(ii) Subsequent transfer by specified affiliate. Stock of a covered
corporation issued by the covered corporation to a specified affiliate
of the covered corporation that is subsequently transferred by the
specified affiliate of the covered corporation to a person that is not
a specified affiliate of the covered corporation is regarded for
purposes of the netting rule, and is treated as issued by the covered
corporation on the date of the subsequent transfer, only if--
(A) The subsequent transfer by the specified affiliate occurs
within the same taxable year that the specified affiliate receives the
stock from the covered corporation (applicable year);
(B) The covered corporation does not otherwise reduce its stock
repurchase excise tax base for the applicable year with respect to the
stock under this section; and
(C) The subsequent transfer by the specified affiliate is not in
connection with the performance of services provided to the specified
affiliate.
(iii) Specific identification. For purposes of paragraph (f)(2)(ii)
of this section, unless specifically identified, the shares of stock of
the covered corporation treated as subsequently transferred by the
specified affiliate are the earliest shares issued by the covered
corporation to the specified affiliate.
(iv) Subsequent transfers in connection with the performance of
services for a specified affiliate. Stock issued by a covered
corporation in connection with the performance of services for a
specified affiliate is not treated as issued by the covered
corporation. However, a transfer of stock of a covered corporation
described in Sec. 1.83-6(d) of this chapter (in addition to an actual
provision of stock by a specified affiliate described in paragraph
(b)(1)(ii) of this section) by a specified affiliate of the covered
corporation to an employee of the specified affiliate is treated as a
provision of stock described in paragraph (b)(1)(ii) of this section.
(3) No double benefit for issuances that are part of a transaction
to which the reorganization exception applies. Stock of a covered
corporation issued by the covered corporation as part of a transaction
qualifying as a reorganization under section 368(a) or a distribution
under section 355 is disregarded for purposes of the netting rule if--
(i) The stock constitutes property permitted to be received under
section 354 or 355 without the recognition of gain;
(ii) The stock is used by another covered corporation (second
covered corporation) to repurchase stock of the second covered
corporation in a transaction that is a repurchase under Sec. 58.4501-
2(e)(4)(i), (ii), (iii), or (iv); and
(iii) The repurchase described in paragraph (f)(3)(ii) of this
section is not included in the second covered corporation's stock
repurchase excise tax base because that repurchase is a qualifying
property repurchase.
(4) Deemed issuances under section 304(a)(1). Any stock treated as
issued by the acquiring corporation by reason of the application of
section 304(a)(1) to a transaction (as more fully described in Sec.
58.4501-2(e)(3)(i)) is disregarded for purposes of the netting rule.
(5) Deemed issuance of a fractional share. Any fractional share of
a covered corporation's stock deemed to be issued for Federal income
tax purposes (in a payment described in Sec. 58.4501-2(e)(3)(ii)) is
disregarded for purposes of the netting rule.
(6) Issuance by a covered corporation that is a dealer in
securities. Any stock of a covered corporation issued by the covered
corporation that is a dealer in securities is disregarded for purposes
of the netting rule to the extent the stock is issued, or otherwise is
used to satisfy obligations to customers arising, in the ordinary
course of the dealer's business of dealing in securities.
(7) Issuance by the target corporation in a reverse triangular
merger. Any target corporation stock that is issued by the target
corporation to the merged corporation (within the meaning of section
368(a)(2)(E)) in exchange for consideration that includes the stock of
the controlling corporation (within the meaning of section
368(a)(2)(E)) in a transaction qualifying as a reverse triangular
merger is disregarded for purposes of the netting rule.
(8) Issuance as part of a section 1036(a) exchange. Any stock of a
covered corporation issued by the covered corporation in exchange for
stock of the covered corporation in a transaction that qualifies under
section 1036(a) of the Code is disregarded for purposes of the netting
rule.
(9) Issuance as part of a distribution under section 355. Any stock
issued by a controlled corporation in a distribution qualifying under
section 355 (or so much of section 356 as relates to section 355) that
is not a split-off is disregarded for purposes of the netting rule.
(10) Stock contributions to an employer-sponsored retirement plan.
Any stock of a covered corporation contributed to an employer-sponsored
retirement plan, any stock of a covered corporation treated as
contributed to an employer-sponsored retirement plan under Sec.
58.4501-3(d)(1)(ii) and (d)(5)(ii), and any stock of a covered
corporation sold to a leveraged or non-leveraged ESOP, is disregarded
for purposes of the netting rule.
(11) Net exercises and share withholding--(i) In general. Stock of
a covered corporation withheld by the covered corporation or a
specified affiliate of the covered corporation to satisfy the exercise
price of a stock option issued in connection with the performance of
services, or to pay any withholding obligation, is disregarded for
purposes of the netting rule. For
[[Page 26045]]
example, stock of a covered corporation withheld by a covered
corporation or a specified affiliate of the covered corporation to pay
the exercise price of a stock option, to satisfy an employer's income
tax withholding obligation under section 3402 of the Code, to satisfy
an employer's withholding obligation under section 3102 of the Code, or
to satisfy an employer's withholding obligation for State, local, or
foreign taxes, is disregarded for purposes of the netting rule.
(ii) Net share settlement not in connection with the performance of
services. Settlement in net shares of an option or other derivative
financial instrument that is not issued in connection with the
performance of services is treated as an issuance of the net shares
delivered.
(12) Settlement other than in stock. Settlement of an option
contract with respect to stock of a covered corporation using any
consideration other than stock of the covered corporation (including
cash) is disregarded for purposes of the netting rule.
(13) Instrument not in the legal form of stock--(i) Generally
disregarded. Except as provided in paragraph (f)(13)(ii) of this
section, the issuance by a covered corporation or provision by a
specified affiliate of the corporation of an instrument that is not in
the legal form of stock of the covered corporation but is treated as
stock for Federal income tax purposes (non-stock instrument) is
disregarded for purposes of the netting rule.
(ii) Certain instruments treated as issued--(A) In general. Subject
to paragraphs (f)(13)(ii)(B), (C), and (D) of this section, if a non-
stock instrument is repurchased by a covered corporation or acquired by
a specified affiliate of the covered corporation, the issuance or
provision of the instrument is regarded for purposes of the netting
rule at the time of such repurchase or acquisition. For purposes of the
stock repurchase excise tax regulations, the delivery of stock pursuant
to the terms of a non-stock instrument is treated as a repurchase of
the non-stock instrument in exchange for an issuance or provision of
the stock that is delivered.
(B) Issuance or provision before the initiation date or after the
cessation date. Any non-stock instrument issued by the covered
corporation or provided by a specified affiliate of the covered
corporation before the initiation date or after the cessation date is
not regarded for purposes of the netting rule.
(C) Identification of an instrument not in the legal form of stock.
The covered corporation must identify the repurchase or acquisition of
a non-stock instrument as the repurchase or acquisition of a non-stock
instrument on the return on which the stock repurchase excise tax must
be reported for the covered corporation's taxable year in which the
repurchase or acquisition occurs (repurchase year) in order for the
issuance or provision to be regarded under paragraph (f)(13)(ii)(A) of
this section.
(D) Consistency requirement. In the repurchase year of a non-stock
instrument (tested non-stock instrument), the issuance or provision of
the non-stock instrument is not regarded under paragraph (f)(13)(ii)(A)
of this section unless the covered corporation reports or has reported
the repurchase or acquisition of all other comparable non-stock
instruments repurchased or acquired within the five taxable years
ending on the last day of the repurchase year in a consistent manner. A
comparable non-stock instrument is a non-stock instrument that has
substantially similar economic terms as the tested non-stock
instrument, regardless of whether the comparable non-stock instrument
and the tested non-stock instrument have the same legal form. A
comparable non-stock instrument is reported in a consistent manner if
it is or was timely reported on the return on which the stock
repurchase excise tax must be reported that is or was due for the first
full quarter after the close of the repurchase year for such comparable
non-stock instrument. Notwithstanding the first sentence of this
paragraph (f)(13)(ii)(D), the issuance or provision of the tested non-
stock instrument will be regarded if the covered corporation
demonstrates to the satisfaction of the IRS that the covered
corporation's failure to timely report the repurchase or acquisition of
the comparable non-stock instruments was due to reasonable cause
(within the meaning of Sec. 1.6664-4 of this chapter) and not willful
neglect. In determining whether this failure to report was due to
reasonable cause and not willful neglect, the IRS will consider all the
facts and circumstances, including the steps the covered corporation
took to comply with its Federal tax reporting and payment obligations.
(E) Fair market value of the instrument. The amount of the
reduction for purposes of computing the covered corporation's stock
repurchase excise tax base for a taxable year under this section for
the issuance or provision of a non-stock instrument is equal to the
lesser of the fair market value of the instrument when the instrument
was issued or provided within the meaning of paragraph (e) of this
section or the fair market value of the instrument at the time of the
repurchase by the covered corporation or acquisition by the specified
affiliate of the covered corporation.
Sec. 58.4501-5 Examples.
(a) Scope. This examples in this section illustrate the application
of section 4501 of the Code and the stock repurchase excise tax
regulations other than the provisions of section 4501(d) and Sec.
58.4501-7. See Sec. 58.4501-7(p) and (q) for examples that illustrate
the application of the rules in Sec. 58.4501-7 related to section
4501(d)(1) and (2), respectively.
(b) In general. For purposes of the examples in this section,
unless otherwise stated: each of Corporation X and unrelated Target is
a covered corporation that is a calendar-year taxpayer; the only
outstanding stock of each of Corporation X and Target is a single class
of common stock that is traded on an established securities market; any
shareholder whose stock is redeemed in a section 317(b) redemption
qualifies for sale or exchange treatment under section 302(a); the de
minimis exception does not apply; the receipt of money or other
property by any shareholder whose stock is repurchased in an
acquisitive reorganization or an E reorganization is not treated as
having the effect of a distribution of a dividend under section
356(a)(2); the covered corporation determines the fair market value of
its stock repurchased or issued based on the trading price of the stock
at the time it is repurchased or issued; and any instrument that is not
in the legal form of stock is not treated as stock for Federal income
tax purposes.
(1) Example 1: Redemption of preferred stock--(i) Facts.
Corporation X has outstanding common stock that is traded on an
established securities market. Corporation X also has outstanding
mandatorily redeemable preferred stock that is stock for Federal tax
purposes but that is neither additional tier 1 capital nor traded on
an established securities market. On January 1, 2024, Corporation X
redeems the preferred stock pursuant to its terms.
(ii) Analysis. The redemption by Corporation X of its
mandatorily redeemable preferred stock is a repurchase because
Corporation X redeemed an instrument that is stock for Federal tax
purposes (that is, mandatorily redeemable preferred stock issued by
Corporation X) and the redemption is a section 317(b) redemption.
See Sec. Sec. 58.4501-1(b)(29) and 58.4501-2(e)(2)(i).
(2) Example 2: Valuation of repurchase--(i) Facts. On April 15,
2024, when the stock of Corporation X is trading at $0.70x per
share, Corporation X purchases 50 shares of its stock for $35x from
one of its shareholders on an established securities market. The
shareholder is required to deliver the stock
[[Page 26046]]
to Corporation X within the standard settlement cycle for the stock
(a regular-way sale), which is one business day after execution of
the sale (that is, the trade date of April 15, 2024). On April 17,
2024, the 50 shares are delivered to Corporation X.
(ii) Analysis. Corporation X's purchase of 50 shares of
Corporation X stock is a repurchase because the transaction is a
section 317(b) redemption. See Sec. 58.4501-2(e)(2)(i). For
purposes of computing Corporation X's stock repurchase excise tax
base, the trade date of April 15, 2024, is the date of repurchase.
See Sec. 58.4501-2(g)(1). The fair market value of the 50 shares of
stock repurchased on April 15, 2024, is the aggregate market price
of those shares on the date of repurchase, or $35x ($0.70x per share
x 50 shares = $35x). See Sec. 58.4501-2(h)(1). Accordingly, the
repurchase by Corporation X increases its stock repurchase excise
tax base for the 2024 taxable year by $35x.
(iii) Application of netting rule. The facts are the same as in
paragraph (b)(2)(i) of this section (Example 2), except that, on
August 1, 2024, Corporation X issues 20 shares of its stock to an
unrelated party, at which time ownership of the stock transfers to
the unrelated party for Federal income tax purposes. On that date,
the stock of Corporation X is trading at $0.50x per share. For
purposes of computing Corporation X's stock repurchase excise tax
base, Corporation X is treated as issuing the 20 shares of its stock
on August 1, 2024 (that is, the date on which ownership of the stock
transfers to the recipient for Federal income tax purposes). See
Sec. 58.4501-4(d)(1). The fair market value of that issued stock is
its aggregate market price on the date of issuance by Corporation X,
or $10x ($0.50x per share x 20 shares = $10x). See Sec. 58.4501-
4(e)(1). Accordingly, the net increase in Corporation X's stock
repurchase excise tax base for its 2024 taxable year is $25x ($35x
repurchase-$10x issuance = $25x). See Sec. 58.4501-2(c)(1).
(3) Example 3: Acquisition partially funded by the target
corporation--(i) Facts. On May 30, 2024, Corporation X acquires all
of Target's outstanding stock (Target Stock Acquisition). To
effectuate the Target Stock Acquisition, Corporation X causes the
following transactions steps to occur. First, Corporation X
contributes $40x to a newly formed corporation (Merger Sub). Second,
Merger Sub merges into Target, with Target surviving the merger
(Subsidiary Merger). At the time of the Subsidiary Merger, the stock
of Target has an aggregate fair market value of $100x. In the
Subsidiary Merger, Target's shareholders exchange all their Target
stock for $100x of cash, of which $60x is funded by Target and $40x
is funded by Corporation X. For Federal income tax purposes, the
transitory existence of Merger Sub is disregarded, and Target is
treated as if Target redeemed 60 percent of its outstanding stock
for $60x as part of the Subsidiary Merger. (This treatment results
from the fact that Target funded $60x of the consideration received
by Target's shareholders in exchange for their Target stock.) All of
Target's stock ceases to trade on an established securities market
upon completion of the Target Stock Acquisition.
(ii) Analysis. Target ceases to be a covered corporation at the
end of the day on May 30, 2024 (that is, the cessation date of
Target). See Sec. 58.4501-2(d)(2). Target's redemption of 60
percent of its outstanding stock is a redemption within the meaning
of section 317(b) with regard to the stock of a covered corporation.
See Sec. 58.4501-1(b)(24). In addition, Target's redemption is not
included in the exclusive list of transactions under Sec. 58.4501-
2(e)(3) that are treated as a section 317(b) redemption but are not
a repurchase. Accordingly, the redemption is a repurchase. See Sec.
58.4501-2(e)(2). Therefore, as a result of the Target Stock
Acquisition, Target's stock repurchase excise tax base for its 2024
taxable year is increased by $60x. See Sec. 58.4501-2(c)(1).
(4) Example 4: Leveraged buyout--(i) Facts. The facts are the
same as in paragraph (b)(3)(i) of this section (Example 3), except
that $60x of the consideration received by Target's shareholders in
exchange for their Target stock is funded by a $60x loan to Merger
Sub from an unrelated lender. In the Subsidiary Merger, Target
assumes Merger Sub's obligation on the $60x loan. As a result of the
disregarded transitory existence of Merger Sub, the Target Stock
Acquisition is treated for Federal income tax purposes as though
Target directly borrowed $60x from the unrelated lender and then
used the loan proceeds to redeem $60x of its stock from the Target
shareholders.
(ii) Analysis. The analysis is the same as in paragraph
(b)(3)(ii) of this section (Example 3).
(5) Example 5: Pro rata stock split--(i) Facts. On October 1,
2024, Corporation X distributes three shares of Corporation X stock
with respect to each existing share of its outstanding stock
(Corporation X Stock Split).
(ii) Analysis. The stock distributed by Corporation X to its
shareholders through the Corporation X Stock Split is disregarded
for purposes of the netting rule because Corporation X distributed
the stock to its shareholders with respect to its outstanding stock.
See Sec. 58.4501-4(f)(1). Accordingly, the Corporation X Stock
Split is not taken into account in computing Corporation X's stock
repurchase excise tax base for its 2024 taxable year. See Sec.
58.4501-2(c)(1) (regarding the computation of the stock repurchase
excise tax base).
(6) Example 6: Acquisition of a target corporation in an
acquisitive reorganization--(i) Facts. On October 1, 2024, Target
merges into Corporation X in a transaction that qualifies as an A
reorganization (Target Merger). On the date of the Target Merger,
the fair market value of Target's outstanding stock is $100x. In the
Target Merger, Target's shareholders exchange $60x of their Target
stock for Corporation X stock and $40x of their Target stock for
$40x of cash.
(ii) Analysis regarding repurchase treatment, timing, and
amount. The exchange by the Target shareholders of their Target
stock for the consideration received in the Target Merger is a
repurchase by Target because the exchange is an economically similar
transaction. See Sec. 58.4501-2(e)(2)(ii) and (e)(4)(i). This
repurchase occurs on October 1, 2024 (that is, the date on which the
Target shareholders exchange their Target shares as part of the
Target Merger). See Sec. 58.4501-2(g)(2). The amount of this
repurchase by Target is $100x, which equals the aggregate fair
market value of the Target stock on the date the stock is exchanged
by the Target shareholders as part of the Target Merger (that is,
October 1, 2024). See Sec. 58.4501-2(h)(1).
(iii) Analysis regarding impact of Target Merger on Target's
stock repurchase excise tax base. Target's stock repurchase excise
tax base for its 2024 taxable year initially is increased by $100x
on account of the Target Merger. See Sec. 58.4501-2(c)(1)(i). Under
the reorganization exception, the fair market value of the Target
stock exchanged by the Target shareholders for Corporation X stock
in the Target Merger (that is, $60x) is a reduction in Target's
stock repurchase excise tax base. See Sec. Sec. 58.4501-2(c)(1)(ii)
and 58.4501-3(c)(1) (regarding acquisitive reorganizations).
However, the fair market value of the Target stock exchanged by the
Target shareholders for $40x of cash in the Target Merger does not
qualify for the reorganization exception. See Sec. 58.4501-3(c).
Therefore, Target's stock repurchase excise tax base for its 2024
taxable year is increased by $40x ($100x repurchase-$60x exception =
$40x) as a result of the Target Merger.
(iv) Analysis regarding impact of Target Merger on Corporation
X's stock repurchase excise tax base. Corporation X's transfer of
Corporation X stock to Target in the Target Merger is disregarded
for purposes of the netting rule because Corporation X's issuance of
that stock is part of a transaction to which the reorganization
exception applies. See Sec. 58.4501-4(f)(3) (disregarding such
types of issuances to ensure no double benefit). Specifically,
Corporation X's transfer of Corporation X stock to Target is
disregarded for purposes of the netting rule because the Corporation
X stock constitutes property permitted to be received under section
354 without the recognition of gain, the Corporation X stock is used
by a covered corporation (that is, Target) to repurchase its stock
in a transaction that is a repurchase under Sec. 58.4501-
2(e)(4)(i), and the repurchase by Target is not included in Target's
stock repurchase excise tax base because it is a qualifying property
repurchase. See id. Therefore, Corporation X does not take into
account any of the $60x of its stock transferred to Target in the
Target Merger in computing Corporation X's stock repurchase excise
tax base for its 2024 taxable year under Sec. 58.4501-4(b)(1).
(7) Example 7: Cash paid in lieu of fractional shares--(i)
Facts. The facts are the same as in paragraph (b)(6)(i) of this
section (Example 6). Additionally, the exchange ratio in the Target
Merger is 1.25 shares of Corporation X stock for each share of
Target stock. As part of the Target Merger, Shareholder A (who owns
two shares of Target stock) receives two shares of Corporation X
stock as well as cash in lieu of a 0.5 fractional share in
Corporation X. The payment by Corporation X to Shareholder A of cash
in lieu of a fractional share of Corporation X stock was not
separately bargained-for consideration (that is, the cash paid by
Corporation X in lieu of the fractional shares represented a mere
[[Page 26047]]
rounding off of the two Corporation X shares issued to Shareholder A
in the exchange). In addition, the payment by Corporation X to
Shareholder A of cash in lieu of a fractional share of Corporation X
stock was carried out solely for administrative convenience (and
therefore, solely for non-tax reasons) and was for an amount of cash
that did not exceed the value of one full share of Corporation X
stock.
(ii) Analysis. The payment by Corporation X of cash to
Shareholder A in lieu of a fractional share of Corporation X stock
is treated for Federal income tax purposes as though the 0.5
fractional share were distributed by Corporation X to Shareholder A
as part of the Target Merger and then redeemed by Corporation X for
cash. This deemed redemption is not a repurchase because the payment
of cash in lieu of a fractional share satisfies the requirements of
Sec. 58.4501-2(e)(3)(ii). In addition, Corporation X's deemed
issuance of the fractional share to Shareholder A is disregarded for
purposes of the netting rule. See Sec. 58.4501-4(f)(5).
(8) Example 8: Two-step asset acquisition--(i) Facts.
Corporation X acquires the assets of Target through the following
transaction steps pursuant to an integrated plan to effect the
acquisition. First, on September 30, 2024, Corporation X contributes
$60x of Corporation X stock and $40x of cash to a newly formed
subsidiary (Merger Sub). Second, on October 1, 2024, Merger Sub
merges into Target in a statutory merger, with Target surviving
(Subsidiary Merger). Third, on October 15, 2024, Target merges into
Corporation X in a statutory merger (Upstream Merger). On the date
of the Subsidiary Merger, the fair market value of Target's
outstanding stock is $100x. In the Subsidiary Merger, $60x of Target
stock is exchanged for Corporation X stock, and $40x of Target stock
is exchanged for $40x of cash. For Federal income tax purposes, the
Subsidiary Merger and the Upstream Merger are integrated into a
single statutory merger of Target into Corporation X that qualifies
as an A reorganization.
(ii) Analysis. The analysis is the same as in paragraph (b)(6)
of this section (Example 6).
(9) Example 9: E reorganization--(i) Facts. On November 1, 2024,
Corporation X issues new stock, with an aggregate fair market value
of $100x (New Common Stock), to its shareholders in exchange for
their outstanding stock in Corporation X (Old Common Stock). The
exchange (Recapitalization) qualifies as an E reorganization. At the
time of the Recapitalization, the fair market value of Corporation
X's Old Common Stock is $100x.
(ii) Analysis regarding repurchase treatment, timing, and
amount. The exchange by the Corporation X shareholders of their Old
Common Stock for New Common Stock in the Recapitalization pursuant
to the plan of reorganization is a repurchase by Corporation X
because that exchange is an economically similar transaction. See
Sec. 58.4501-2(e)(2)(ii) and (e)(4)(ii). This repurchase occurs on
November 1, 2024 (that is, the date on which the Target shareholders
exchange their old Common Stock pursuant to the plan of
reorganization). See Sec. 58.4501-2(g)(2). The amount of this
repurchase by Corporation X is $100x, which equals the aggregate
fair market value of the Old Common Stock on the date that stock is
exchanged by the Corporation X shareholders pursuant to the plan of
reorganization (that is, November 1, 2024). See Sec. 58.4501-
2(h)(1).
(iii) Analysis regarding impact of repurchase of Old Common
Stock on Corporation X's stock repurchase excise tax base.
Corporation X's stock repurchase excise tax base for its 2024
taxable year initially is increased by $100x on account of the
Recapitalization. See Sec. 58.4501-2(c)(1)(i). Under the
reorganization exception, the fair market value of the Old Common
Stock exchanged by the Corporation X shareholders for New Common
Stock in the Recapitalization (that is, $100x) is a qualifying
property repurchase that reduces the amount of Corporation X's stock
repurchase excise tax base. See Sec. Sec. 58.4501-2(c)(1)(ii) and
Sec. 58.4501-3(c)(2). Consequently, because all the Old Common
Stock was exchanged by the Corporation X shareholders for New Common
Stock, the Recapitalization does not increase Corporation X's stock
repurchase excise tax base for its 2024 taxable year ($100x
repurchase-$100x exception = $0).
(iv) Analysis regarding impact of issuance of New Common Stock
on Corporation X's stock repurchase excise tax base. Corporation X's
issuance of the New Common Stock is disregarded for purposes of the
netting rule because Corporation X's issuance of that stock is part
of a transaction to which the reorganization exception applies. See
Sec. 58.4501-4(f)(3) (disregarding such types of issuances to
ensure no double benefit). Specifically, Corporation X's issuance of
its New Common Stock to Corporation X's shareholders is disregarded
for purposes of the netting rule because the New Common Stock
constitutes property permitted to be received under section 354
without the recognition of gain, the New Common Stock is used by a
covered corporation (that is, Corporation X) to repurchase its stock
in a transaction that is a repurchase under Sec. 58.4501-
2(e)(4)(ii), and the repurchase by Corporation X is not included in
Corporation X's stock repurchase excise tax base for its 2024
taxable year because it is a qualifying property repurchase. See id.
Therefore, Corporation X does not take into account any of the $100x
of New Common Stock issued to its shareholders in computing its
stock repurchase excise tax base for its 2024 taxable year under
Sec. 58.4501-4(b)(1).
(10) Example 10: F reorganization--(i) Facts. Corporation X is a
State A corporation. In order to reorganize under the laws of State
B, on November 15, 2024, Corporation X forms Corporation Y (a State
B corporation) and merges into Corporation Y in a transaction
(Corporation X Redomiciliation) that qualifies as an F
reorganization. On the date of the Corporation X Redomiciliation,
the fair market value of Corporation X's stock is $100x. Shareholder
A owns $25x of Corporation X's outstanding stock. In the Corporation
X Redomiciliation, Shareholder A transfers all its Corporation X
stock to Corporation X in exchange for $25x of cash, which is
treated for Federal income tax purposes as an unrelated, separate
transaction from the Corporation X Redomiciliation to which section
302(a) applies (Shareholder A Redemption). See Sec. 1.368-
2(m)(3)(iii) of this chapter. The remaining Corporation X
shareholders exchange their Corporation X stock for Corporation Y
stock as part of the Corporation X Redomiciliation.
(ii) Analysis regarding repurchase treatment, timing, and
amount. The exchange by Shareholder A of its Corporation X stock is
a repurchase by Corporation X in the amount of $25x because it is a
section 317(b) redemption. See Sec. 58.4501-2(e)(2)(i). In
addition, the exchange by Corporation X's other shareholders of
their Corporation X stock for Corporation Y stock is a repurchase by
Corporation X in the amount of $75x because that exchange is an
economically similar transaction. See Sec. 58.4501-2(e)(2)(ii) and
(e)(4)(iii). These repurchases occur on November 15, 2024 (that is,
the date on which the Corporation X shareholders transfer their
Corporation X stock to Corporation X as part of the transaction).
See Sec. 58.4501-2(g)(1) and (2). The total amount of these
repurchases by Corporation X is $100x, which equals the sum of $25x
(the fair market value of the Corporation X stock redeemed in the
Shareholder A Redemption on the date of the redemption) and $75x
(the aggregate fair market value of the Corporation X stock on the
date that stock is exchanged by the remaining Corporation X
shareholders as part of the Corporation X Redomiciliation (that is,
November 15, 2024)). See Sec. 58.4501-2(h)(1).
(iii) Analysis regarding impact of Shareholder A Redemption and
Corporation X Redomiciliation on Corporation X's stock repurchase
excise tax base. Corporation X's stock repurchase excise tax base
for its 2024 taxable year initially is increased by $100x on account
of the Shareholder A Redemption and the Corporation X
Redomiciliation. See Sec. 58.4501-2(c)(1)(i). Under the
reorganization exception, the fair market value of the Corporation X
stock exchanged by the Corporation X shareholders for Corporation Y
stock in the Corporation X Redomiciliation (that is, $75x) is a
qualifying property repurchase that reduces the amount of
Corporation X's stock repurchase excise tax base. See Sec. Sec.
58.4501-2(c)(1)(ii) and 58.4501-3(c)(3). Accordingly, Corporation
X's stock repurchase excise tax base for its 2024 taxable year is
increased by $25x ($25x repurchase + ($75x repurchase-$75x
exception) = $25x) because of the Corporation X Redomiciliation.
(iv) Analysis regarding impact of Corporation X Redomiciliation
on Corporation Y's stock repurchase excise tax base. Corporation Y's
transfer of the $75x of its stock to Corporation X in the
Corporation X Redomiciliation is disregarded for purposes of the
netting rule because Corporation Y's issuance of that stock is part
of a transaction to which the reorganization exception applies. See
Sec. 58.4501-4(f)(3) (disregarding such types of issuances to
ensure no double benefit). Specifically, Corporation Y's transfer of
its stock to Corporation X is disregarded for purposes of the
netting rule because the Corporation Y
[[Page 26048]]
stock constitutes property permitted to be received under section
354 without the recognition of gain, the Corporation Y stock is used
by a covered corporation (that is, Corporation X) to repurchase its
stock in a transaction that is a repurchase under Sec. 58.4501-
2(e)(4)(iii), and the repurchase by Corporation X is not included in
Corporation X's stock repurchase excise tax base for its 2024
taxable year because it is a qualifying property repurchase. See id.
Therefore, Corporation Y does not take into account any of the $75x
of its stock transferred to Corporation X in computing Corporation
Y's stock repurchase excise tax base for its 2024 taxable year under
Sec. 58.4501-4(f)(2)(i).
(11) Example 11: Section 355 split-off--(i) Facts. Corporation X
owns all the stock of a pre-existing subsidiary (Controlled). On
December 1, 2024, Corporation X distributes all the stock of
Controlled and $20x of cash to certain of its shareholders
(Participating Shareholders) in exchange for $100x of Corporation X
stock in a split-off (Corporation X Split-Off). On the date of the
Corporation X Split-Off, the Corporation X stock has a fair market
value of $100x, and the Controlled stock has a fair market value of
$80x.
(ii) Analysis regarding repurchase treatment, timing, and
amount. The exchange by the Participating Shareholders of their
Corporation X stock for the $80x of Controlled stock and $20x of
cash in the Corporation X Split-Off is a repurchase by Corporation X
because the exchange is an economically similar transaction. See
Sec. 58.4501-2(e)(2)(ii) and (e)(4)(iv). This repurchase occurs on
December 1, 2024 (that is, the date on which the Participating
Shareholders exchange their Corporation X stock as part of the
Corporation X Split-Off). See Sec. 58.4501-2(g)(2). The amount of
the repurchase by Corporation X is $100x, which equals the aggregate
fair market value of the Corporation X stock on the date the stock
is exchanged by the Participating Shareholders in the Corporation X
Split-Off (that is, December 1, 2024). See Sec. 58.4501-2(h)(1).
(iii) Analysis regarding impact of Corporation X Split-Off on
Corporation X's stock repurchase excise tax base. Corporation X's
stock repurchase excise tax base for its 2024 taxable year initially
is increased by $100x on account of the Corporation X Split-Off.
However, under the reorganization exception, the fair market value
of the Corporation X stock exchanged by the Participating
Shareholders for Controlled stock in the Corporation X Split-Off
(that is, $80x) is a qualifying property repurchase that reduces the
amount of Corporation X's stock repurchase excise tax base. See
Sec. Sec. 58.4501-2(c)(1)(ii) and 58.4501-3(c)(4). The fair market
value of the Corporation X stock exchanged by the Participating
Shareholders for the $20x of cash in the Corporation X Split-Off
does not qualify for the reorganization exception. See Sec.
58.4501-3(c). Therefore, Corporation X's stock repurchase excise tax
base for its 2024 taxable year is increased by $20x ($100x
repurchase - $80x exception = $20x) as a result of the Corporation X
Split-Off.
(12) Example 12: Section 355 split-off as part of a D
reorganization--(i) Facts. The facts are the same as in paragraph
(b)(11)(i) of this section (Example 11), except that Controlled is a
newly formed corporation, and the Corporation X Split-Off is carried
out as part of a transaction qualifying as a D reorganization in
which Corporation X transfers assets to Controlled.
(ii) General analysis. Except as described in paragraph
(b)(12)(iii) of this section, the analysis is the same as in
paragraphs (b)(11)(ii) and (iii) of this section (Example 11).
(iii) Analysis regarding Controlled's stock repurchase excise
tax base. Controlled's transfer of $80x of its stock to Corporation
X in the Corporation X Split-Off is disregarded for purposes of the
netting rule because Controlled's issuance of that stock is part of
a transaction to which the reorganization exception applies. See
Sec. 58.4501-4(f)(3) (disregarding such types of issuances to
ensure no double benefit). Specifically, Controlled's transfer of
its stock to Corporation X is disregarded for purposes of the
netting rule because the Controlled stock constitutes property
permitted to be received under section 355 without the recognition
of gain, the Controlled stock is used by a covered corporation (that
is, Corporation X) to repurchase its stock in a transaction that is
a repurchase under Sec. 58.4501-2(e)(4)(iv), and the repurchase by
Corporation X is not included in Corporation X's stock repurchase
excise tax base for its 2024 taxable year because it is a qualifying
property repurchase. See id. Controlled's transfer of its stock to
Corporation X also is disregarded for purposes of the netting rule
because Controlled is not a covered corporation at the time of the
transfer. See Sec. 58.4501-2(d)(1). Therefore, Controlled does not
take into account any of the $80x of its stock transferred to
Corporation X in computing Controlled's stock repurchase excise tax
base for its 2024 taxable year under Sec. 58.4501-4(b)(1).
(13) Example 13: Spin-off--(i) Facts. The facts are the same as
in paragraph (b)(11)(i) of this section (Example 11), except that
Corporation X distributes the Controlled stock and cash to its
shareholders pro rata without the shareholders exchanging any
Corporation X stock (Corporation X Spin-Off).
(ii) Analysis. The Corporation X Spin-Off is not a repurchase by
Corporation X. See Sec. 58.4501-2(e)(5)(iii).
(14) Example 14: Section 355 spin-off as part of a D
reorganization--(i) Facts. The facts are the same as in paragraph
(b)(13)(i) of this section (Example 13), except that Controlled is a
newly formed corporation, the Corporation X Spin-Off is carried out
as part of a transaction qualifying as a D reorganization in which
Corporation X transfers assets to Controlled, and Corporation X
receives the $20x of cash from Controlled and distributes the cash
to certain of Corporation X's shareholders in exchange for
Corporation X stock.
(ii) Analysis regarding Corporation X. The distribution by
Corporation X of the $80x of stock of Controlled in the Corporation
X Spin-Off is not a repurchase by Corporation X. See Sec. 58.4501-
2(e)(5)(iii)(A). The distribution by Corporation X of the $20x of
cash in exchange for Corporation X stock is a repurchase. See Sec.
58.4501-2(e)(5)(iii)(B).
(iii) Analysis regarding Controlled's stock repurchase excise
tax base. Controlled's transfer of the $80x of its stock to
Corporation X is disregarded for purposes of the netting rule. See
Sec. 58.4501-4(f)(9) (providing that any stock issued by a
controlled corporation in a distribution qualifying under section
355 (or so much of section 356 as relates to section 355) that is
not a split-off is disregarded for purposes of the netting rule).
(15) Example 15: Repurchase pursuant to an accelerated share
repurchase agreement--(i) Facts. On October 10, 2022, Corporation X
entered into an accelerated share repurchase (ASR) agreement with an
investment bank (Bank). Under the terms of the ASR agreement, Bank
agrees to deliver a number of shares of Corporation X stock to
Corporation X during the term of the ASR, in an amount determined by
reference to the price of Corporation X stock on specified days
during the term of the ASR. Pursuant to the terms of the ASR
agreement, Corporation X paid Bank a prepayment amount. Bank
borrowed 80 shares of Corporation X stock from a party not related
to Bank or Corporation X. Pursuant to the terms of the ASR
agreement, Bank delivered 80 shares of Corporation X stock to
Corporation X on October 12, 2022. On final settlement of the ASR,
Bank may be required to deliver additional shares of Corporation X
stock to Corporation X or Corporation X may be required to make a
payment to Bank. The terms of the ASR agreement and the facts and
circumstances cause ownership of the 80 shares to transfer from Bank
to Corporation X for Federal income tax purposes at the time of
delivery (that is, October 12, 2022). The agreement will settle in
2023. On February 1, 2023, Bank delivers an additional 20 shares to
Corporation X in final settlement of the ASR agreement. For Federal
income tax purposes, ownership of those 20 shares is treated as
transferring from Bank to Corporation X at the time of delivery
(that is, February 1, 2023).
(ii) Analysis. Corporation X is treated as repurchasing 80
shares of Corporation X stock on October 12, 2022 (that is, the date
on which ownership of the 80 shares delivered by Bank transferred
from Bank to Corporation X for Federal income tax purposes). See
Sec. 58.4501-2(g)(1). However, the repurchase by Corporation X of
the 80 shares of Corporation X stock does not increase Corporation
X's stock repurchase excise tax base for its 2023 taxable year
because the repurchase occurred prior to January 1, 2023. See Sec.
58.4501-2(c)(3); see also section 10201(d) of the IRA (providing
that the stock repurchase excise tax applies to repurchases after
December 31, 2022). The delivery by Bank to Corporation X of 20
shares of Corporation X stock on February 1, 2023, constitutes a
repurchase because, for Federal income tax purposes, the terms of
the ASR agreement and the facts and circumstances cause ownership of
those shares to transfer from Bank to Corporation X on that date.
See Sec. 58.4501-2(g)(1). Therefore, the repurchase by Corporation
X of those 20 shares of Corporation X stock
[[Page 26049]]
increases Corporation X's stock repurchase excise tax base for its
2023 taxable year.
(16) Example 16: Distribution in complete liquidation of a
covered corporation--(i) Facts. Corporation X adopts a plan of
complete liquidation that becomes effective on March 1, 2024
(Corporation X Liquidation). Corporation X has 100 shares of stock
outstanding. On April 1, 2024, all shareholders of Corporation X
receive a liquidating distribution by Corporation X in full payment
for their Corporation X stock. On the date on which Corporation X
distributes all its corporate assets to its shareholders in complete
liquidation (that is, April 1, 2024), Corporation X stock is trading
at $1x per share. Each distribution in complete liquidation is
subject to section 331.
(ii) Analysis. A distribution in complete liquidation of a
covered corporation (that is, Corporation X) to which section 331
(but not section 332(a)) applies is not a repurchase by the covered
corporation. See Sec. 58.4501-2(e)(5)(i). Therefore, none of the
distributions by Corporation X in complete liquidation is a
repurchase by Corporation X, and Corporation X's stock repurchase
excise tax for its 2024 taxable year is not increased because of the
Corporation X Liquidation.
(17) Example 17: Complete liquidation of a covered corporation
to which sections 331 and 332(a) both apply--(i) Facts. The facts
are the same as in paragraph (b)(16)(i) of this section (Example
16), except that one of Corporation X's shareholders (Corporation Z)
is an 80-percent distributee (as defined in section 337(c) of the
Code), and the liquidating distribution by Corporation X to
Corporation Z as part of the Corporation X Liquidation qualifies as
a complete liquidation under section 332(a).
(ii) Analysis. In the case of a complete liquidation of a
covered corporation, if sections 331 and 332(a), respectively, apply
to component distributions of the complete liquidation, a
distribution to which section 331 applies is a repurchase by the
covered corporation, and the distribution to which section 332(a)
applies is not a repurchase by the covered corporation. See Sec.
58.4501-2(e)(4)(v). Therefore, as a result of the component
liquidating distributions of the Corporation X Liquidation to which
section 331 applies, Corporation X repurchased 20 shares of its
stock on April 1, 2024. The Corporation X Liquidation results in a
$20x increase in Corporation X's stock repurchase excise tax base
for its 2024 taxable year because the fair market value of
Corporation X's stock on the date of repurchase (that is, April 1,
2024) was $1x per share (20 shares x $1x = $20x). See Sec. 58.4501-
2(h)(1).
(18) Example 18: Acquisition by disregarded entity--(i) Facts.
Corporation X owns all the interests in LLC, a domestic limited
liability company that is disregarded as an entity separate from its
owner for Federal tax purposes (disregarded entity) under Sec.
301.7701-3 of this chapter. On May 31, 2024, LLC purchases shares of
Corporation X's stock for cash from an unrelated shareholder.
(ii) Analysis. Because LLC is a disregarded entity, the May 31,
2024, acquisition of Corporation X stock is treated as an
acquisition by Corporation X. Accordingly, the acquisition is a
section 317(b) redemption and therefore a repurchase. See Sec.
58.4501-2(e)(2)(i). Section 301.7701-2(c)(2)(v) of this chapter
(treating disregarded entities as corporations for purposes of
certain excise taxes) does not apply to treat LLC as a corporation
because neither chapter 37 of the Code nor section 4501 is described
in Sec. 301.7701-2(c)(2)(v)(A) of this chapter.
(19) Example 19: Reverse triangular merger--(i) Facts. On
October 1, 2024, Corporation X acquires all of Target's outstanding
stock (Target Stock Acquisition) in a transaction that qualifies as
a reverse triangular merger. To effectuate the Target Stock
Acquisition, Corporation X causes the following steps to occur on
the same day. First, Corporation X contributes $80x of Corporation X
stock and $20x of cash (Merger Consideration) to a newly formed
corporation (Merger Sub). Second, Merger Sub merges into Target in a
statutory merger, with Target surviving (Reverse Triangular Merger).
On the date of the Reverse Triangular Merger (that is, October 1,
2024), the fair market value of Target's outstanding stock is $100x.
In the Reverse Triangular Merger, $80x of Target stock is exchanged
for Corporation X stock, and $20x of Target stock is exchanged for
$20x of cash.
(ii) Analysis regarding repurchase treatment, timing, and
amount. The exchange by the Target shareholders of their Target
stock for the Merger Consideration is a repurchase by Target because
that exchange is an economically similar transaction. See Sec.
58.4501-2(e)(2)(ii) and (e)(4)(i). The repurchase occurs on October
1, 2024 (that is, the date on which the Target shareholders exchange
their Target shares as part of the Reverse Triangular Merger). See
Sec. 58.4501-2(g)(2). The amount of the repurchase is $100x, which
equals the aggregate fair market value of the Target stock on the
date the stock is exchanged by the Target shareholders as part of
the Reverse Triangular Merger (that is, October 1, 2024). See Sec.
58.4501-2(h)(1).
(iii) Analysis regarding impact of Reverse Triangular Merger on
Target's stock repurchase excise tax base. Target's stock repurchase
excise tax base for its 2024 taxable year initially is increased by
$100x on account of the Reverse Triangular Merger. See Sec.
58.4501-2(c)(1)(i). Under the reorganization exception, the fair
market value of the Target stock exchanged by the Target
shareholders for Corporation X stock in the Reverse Triangular
Merger (that is, $80x) is a qualifying property repurchase that
reduces the amount of Target's stock repurchase excise tax base. See
Sec. Sec. 58.4501-2(c)(1)(ii) and 58.4501-3(c)(1) (regarding
acquisitive reorganizations). However, the fair market value of the
Target stock exchanged by the Target shareholders for the $20x of
cash in the Reverse Triangular Merger does not qualify for the
reorganization exception. See Sec. 58.4501-3(c). In addition, any
Target stock that is deemed to be issued by Target to Merger Sub in
exchange for the Merger Consideration is disregarded for purposes of
the netting rule. See Sec. 58.4501-4(f)(7). Therefore, Target's
stock repurchase excise tax base for its 2024 taxable year is
increased by $20x ($100x repurchase - $80x exception = $20x) as a
result of the Reverse Triangular Merger.
(iv) Analysis regarding impact of Reverse Triangular Merger on
Corporation X's stock repurchase excise tax base. Corporation X's
issuance of Corporation X stock in the Reverse Triangular Merger is
disregarded for purposes of the netting rule because Corporation X's
issuance of that stock is part of a transaction to which the
reorganization exception applies. See Sec. 58.4501-4(f)(3)
(disregarding such types of issuances to ensure no double benefit).
Specifically, Corporation X's issuance of Corporation X stock is
disregarded for purposes of the netting rule because the Corporation
X stock constitutes property permitted to be received under section
354 without the recognition of gain, the Corporation X stock is used
by a covered corporation (that is, Target) to repurchase its stock
in a transaction that is a repurchase under Sec. 58.4501-
2(e)(4)(i), and the repurchase by Target is not included in Target's
stock repurchase excise tax base because it is a qualifying property
repurchase. See id. Therefore, Corporation X does not take into
account any of the $80x of its stock issued in the Reverse
Triangular Merger in computing its stock repurchase excise tax base
for its 2024 taxable year under Sec. 58.4501-4(b)(1).
(20) Example 20: Multiple repurchases and contributions of same
class of stock--(i) Facts. On January 15, 2024, Corporation X
repurchases 100 shares of its Class A stock that have an aggregate
fair market value of $1,000x ($10x per share). On September 16,
2024, Corporation X repurchases 50 shares of its Class A stock that
have an aggregate fair market value of $200x ($4x per share).
Corporation X contributes to its ESOP 75 shares of its Class A stock
on March 15, 2024, and 75 shares of its Class A stock on October 15,
2024.
(ii) Analysis. Corporation X's stock repurchase excise tax base
for its 2024 taxable year initially is increased by $1,200x ($1,000x
+ $200x = $1,200x) as a result of the repurchases of its Class A
stock. See Sec. 58.4501-2(c)(1)(i). Under the exception for stock
contributions to an employer-sponsored retirement plan, Corporation
X's stock contributions reduce the amount of Corporation X's stock
repurchase excise tax base. See Sec. Sec. 58.4501-2(c)(1)(ii) and
58.4501-3(d). The amount of the reduction is determined by dividing
the aggregate fair market value of shares of Class A stock
repurchased by the number of shares repurchased ($1,200x/150 shares
= $8 per share) and multiplying the number of shares contributed by
the average price of the repurchased shares (150 shares x $8 per
share = $1,200x). See Sec. 58.4501-3(d)(3)(i). Therefore,
Corporation X's stock repurchase excise tax base for its 2024
taxable year is $0 ($1,200x repurchase - $1,200x exception = $0).
(21) Example 21: Multiple repurchases and contributions of
different classes of stock--(i) Facts. The facts are the same as in
paragraph (b)(20)(i) of this section (Example 20), except that
Corporation X has Class B stock and contributes its Class B stock
rather than its Class A stock to its ESOP. On October 15, 2024,
Corporation X contributes to its ESOP
[[Page 26050]]
75 shares of its Class B stock that have an aggregate fair market
value of $1,000x. On December 16, 2024, Corporation X contributes to
its ESOP 25 shares of its Class B stock that have an aggregate fair
market value of $500x.
(ii) Analysis. Corporation X's reduction in computing its stock
repurchase excise tax base is equal to the sum of the fair market
values of the different class of stock at the time the stock is
contributed to the employer-sponsored retirement plan ($1,000x +
$500x = $1,500x). However, the amount of the reduction must not
exceed the aggregate fair market value of stock of a different class
repurchased during the taxable year by Corporation X (that is,
$1,200x). See Sec. 58.4501-3(d)(4)(ii). Therefore, Corporation X's
stock repurchase excise tax base for its 2024 taxable year is $0
($1,200x repurchase - $1,200x exception = $0).
(22) Example 22: Treatment of contributions after the taxable
year--(i) Facts. Corporation X repurchases 200 shares of its stock
on December 31, 2024, for $200x ($1x per share). Corporation X has
no other repurchases in 2024. On February 2, 2026, Corporation X
contributes 200 shares of stock to its ESOP. Corporation X treats
the contribution as if it had been received for the 2024 calendar
year for plan allocation purposes. See Sec. 58.4501-3(d)(5)(ii).
(ii) Analysis. Corporation X may use the contribution of the
200x shares of its stock on February 2, 2026, to reduce its $200x
stock repurchase excise tax base for 2024. See Sec. 58.4501-
3(d)(5)(ii).
(23) Example 23: Becoming a covered corporation--(i) Facts. As
of January 1, 2024, all of Corporation X's stock is privately held
(and, therefore, none of Corporation X's stock is traded on an
established securities market). On February 15, 2024, Corporation X
purchases 10 shares of its stock for $5x of cash ($.50x per share).
On April 1, 2024, Corporation X issues 100 shares of its stock to
the public (Public Shareholders), at which time Corporation X's
stock begins trading on an established securities market. On
November 15, 2024, when Corporation X stock is trading at $2x per
share, Corporation X purchases 60 shares of its stock for $120x of
cash.
(ii) Analysis regarding purchase on February 15, 2024.
Corporation X becomes a covered corporation at the beginning of the
day on April 1, 2024 (the initiation date). See Sec. 58.4501-
2(d)(1). Accordingly, Corporation X's purchase of 10 shares of its
stock for $5x of cash on February 15, 2024, is not a repurchase. See
Sec. 58.4501-1(b)(24). Thus, the purchase on February 15, 2024, is
not included in Corporation X's stock repurchase excise tax base for
its 2024 taxable year.
(iii) Analysis regarding issuance on April 1, 2024. Corporation
X is a covered corporation on April 1, 2024. See Sec. 58.4501-
2(d)(1). Accordingly, the Corporation X stock issued to the Public
Shareholders on that date is stock of a covered corporation for
purposes of the netting rule. See Sec. 58.4501-4(b)(1). As a
result, Corporation`s stock repurchase excise tax base for its 2024
taxable year is reduced by $100x. See Sec. 58.4501-2(c)(1)(iii).
(iv) Analysis regarding purchase on November 15, 2024.
Corporation X is a covered corporation on November 15, 2024.
Accordingly, Corporation X's purchase of 60x shares of its stock on
that date is a repurchase because the transaction is a section
317(b) redemption (that is, a redemption within the meaning of
section 317(b) with regard to the stock of a covered corporation).
See Sec. Sec. 58.4501-1(b)(24) and 58.4501-2(e)(2)(i). For purposes
of computing Corporation X's stock repurchase excise tax base, the
fair market value of the 60 shares of stock repurchased on November
15, 2024, is the aggregate market price of those shares on that
repurchase date, or $120x ($2x per share x 60 shares = $120x). See
Sec. 58.4501-2(g)(1). Accordingly, Corporation`s stock repurchase
excise tax base for its 2024 taxable year is increased by $120x. See
Sec. 58.4501-2(c)(1)(i).
(24) Example 24: Actual redemption in partial liquidation--(i)
Facts. Corporation X is actively engaged in the conduct of
Businesses A and B. Each business constitutes a qualified trade or
business within the meaning of section 302(e)(3). On September 1,
2024, pursuant to a plan of partial liquidation adopted in the same
taxable year, Corporation X sells Business B for $100x and
distributes the proceeds to its shareholders pro rata in redemption
of $100x of Corporation X stock. The transaction qualifies as a
distribution in partial liquidation under section 302(b)(4) and (e).
(ii) Analysis. Corporation X's distribution in partial
liquidation is a section 317(b) redemption. In addition, Corporation
X's distribution in partial liquidation is not included in the
exclusive list of transactions under Sec. 58.4501-2(e)(3) that are
treated as a section 317(b) redemption but are not a repurchase.
Accordingly, the distribution in partial liquidation is a
repurchase. See Sec. 58.4501-2(e)(2)(i). Therefore, as a result of
the distribution, Corporation X's stock repurchase excise tax base
for its 2024 taxable year is increased by $100x. See Sec. 58.4501-
2(c)(1)(i).
(25) Example 25: Constructive redemption in partial
liquidation--(i) Facts. The facts are the same as in paragraph
(b)(24)(i) of this section (Example 24), except that the
shareholders of Corporation X surrender no stock in exchange for the
proceeds from the sale of Business B. For Federal income tax
purposes, a constructive redemption of stock is deemed to occur, and
the transaction qualifies as a distribution in partial liquidation
under section 302(b)(4) and (e).
(ii) Analysis. The analysis is the same as in paragraph
(b)(24)(ii) of this section (Example 24).
(26) Example 26: Physical settlement of call option contract--
(i) Facts. On March 1, 2024, Corporation X issues an option that
entitles the holder to buy 100 shares of Corporation X stock from
Corporation X for $150x ($1.50x per share). On the date the option
is issued, Corporation X stock is trading at $1x per share. On
November 1, 2024, when Corporation X stock is trading at $2x per
share, the holder pays Corporation X $150x to exercise the option,
and Corporation X issues 100 shares of Corporation X stock to the
holder, at which time ownership of the shares transfers to the
holder for Federal income tax purposes.
(ii) Analysis. For purposes of computing Corporation X's stock
repurchase excise tax base, Corporation X is treated as issuing 100
shares of Corporation X stock on November 1, 2024. See Sec.
58.4501-4(d)(1). The fair market value of that stock is its
aggregate market price on the date of issuance by Corporation X, or
$200x ($2x per share x 100 shares = $200x). See Sec. 58.4501-
4(e)(1). Accordingly, the issuance is a reduction of $200x in
computing Corporation X's stock repurchase excise tax base for its
2024 taxable year. See Sec. 58.4501-2(c)(1)(iii).
(27) Example 27: Net cash settlement of call option contract--
(i) Facts. The facts are the same as in paragraph (b)(26)(i) of this
section (Example 26), except that Corporation X net cash settles the
option by paying the holder $50x.
(ii) Analysis. The net cash settlement is disregarded for
purposes of the netting rule. See Sec. 58.4501-4(f)(12)
(disregarding the settlement of an option contract with respect to
stock of a covered corporation using any consideration other than
stock of the covered corporation).
(28) Example 28: Physical settlement of put option contract--(i)
Facts. On April 1, 2024, Corporation X issues an option entitling
the holder to sell 100 shares of Corporation X stock to Corporation
X for $100x ($1x per share). On the date the option is issued,
Corporation X stock is trading at $1.25x per share. On October 1,
2024, when Corporation X stock is trading at $0.75x per share, the
holder exercises the option, and Corporation X purchases 100 shares
of Corporation X stock for $100x, at which time ownership of the
shares transfers to Corporation X.
(ii) Analysis. Corporation X's purchase on October 1, 2024, is a
repurchase because it is a section 317(b) redemption. For purposes
of computing Corporation X's stock repurchase excise tax base, the
fair market value of the repurchased stock is its aggregate market
price on the date on which ownership of the stock transfers to
Corporation X for Federal income tax purposes (October 1, 2024), or
$75x ($0.75x per share x 100 shares = $75x). See Sec. 58.4501-
2(g)(1) and (h)(1). Accordingly, the repurchase is an increase of
$75x in computing Corporation X's stock repurchase excise tax base
for its 2024 taxable year. See Sec. 58.4501-2(c)(1)(i).
(29) Example 29: Net cash settlement of put option contract--(i)
Facts. The facts are the same as in paragraph (b)(28)(i) of this
section (Example 28), except that Corporation X net cash settles the
put option by paying the holder $25x.
(ii) Analysis. The net cash settlement is not a repurchase. See
Sec. 58.4501-2(e)(5)(iv) (providing that net cash settlement of an
option contract with respect to stock of a covered corporation is
not a repurchase by the covered corporation).
(30) Example 30: Indirect ownership--(i) Facts. Corporation X
owns 60 percent of the only class of stock of Sub 1, a domestic
corporation. Sub 1 owns 60 percent of the only class of stock of Sub
2, which is also a domestic corporation. On October 15, 2024, Sub 2
purchases stock of Corporation X with a market price of $100,000.
(ii) Analysis. The determination of whether Sub 2 is a specified
affiliate of Corporation X is relevant at the time Sub 2 purchases
Corporation X stock on October 15, 2024, and
[[Page 26051]]
therefore must be made at that time. See Sec. 58.4501-2(f)(2)(i).
Under Sec. 58.4501-2(f)(2)(ii), Corporation X indirectly owns 36
percent (60% x 60% = 36%) of the stock of Sub 2. Sub 2 is not a
specified affiliate of Corporation X, because Corporation X does not
own, directly or indirectly, more than 50 percent of the stock of
Sub 2. See Sec. 58.4501-1(b)(25). Accordingly, Sub 2's purchase of
Corporation X stock on October 15, 2024, is not a repurchase under
Sec. 58.4501-2(f)(1).
(31) Example 31: Constructive specified affiliate acquisition--
(i) Facts. The facts are the same as in paragraph (b)(30)(i) of this
section (Example 30), except that, on January 15, 2025, Sub 1
acquires an additional 40 percent of the stock of Sub 2.
(ii) Analysis. Because Sub 2 owns stock of Corporation X, the
determination of whether Sub 2 is a specified affiliate of
Corporation X is relevant at the time Sub 1 purchases acquires
additional stock of Sub 2 on January 15, 2025. See Sec. 58.4501-
2(f)(2)(i). Under Sec. 58.4501-2(f)(2)(ii), Corporation X
indirectly owns 60 percent (60% x 100% = 60%) of the stock of Sub 2.
Accordingly, Sub 2 becomes a specified affiliate of Corporation X on
January 15, 2025, because Corporation X owns, directly or
indirectly, more than 50 percent of the stock of Sub 2. See Sec.
58.4501-1(b)(25). Because Sub 2 owns stock of Corporation X that Sub
2 acquired after December 31, 2022, and Sub 2 became a specified
affiliate of Corporation X after Sub 2 acquired the stock of
Corporation X, the stock of Corporation X owned by Sub 2 is treated
as repurchased by Corporation X on January 15, 2025. See Sec.
58.4501-2(f)(3)(i) and (g)(4).
(32) Example 32: Restricted stock provided to a service
provider--(i) Facts. Individual M provides services to Corporation
X. In 2024, as compensation for Individual M's services, Corporation
X transfers to individual M 100 shares of Corporation X restricted
stock with an aggregate fair market value of $500x ($5x per share).
The shares vest in 2028. Individual M does not make an election
under section 83(b). In 2028, Corporation X withholds from
Individual M's other wages amounts that are required to pay the
income tax and employment tax withholding obligations arising from
the stock transfer. The shares have a fair market value of $7x per
share when they vest.
(ii) Analysis. Corporation X is treated as issuing 100 shares of
stock to Individual M when they become substantially vested in 2028.
See Sec. 58.4501-4(d)(2)(i). The fair market value of the shares
issued is $700x (100 shares x $7x per share = $700x). Accordingly,
the issuance is a reduction of $700x in computing corporation X's
stock repurchase excise tax base for its 2028 taxable year.
(33) Example 33: Restricted stock provided to a service provider
with section 83(b) election--(i) Facts. The facts are the same as in
paragraph (b)(32)(i) of this section (Example 32), except that
Individual M makes a valid election under section 83(b) to include
the fair market value of the shares of restricted stock in gross
income when the shares are transferred.
(ii) Analysis. Corporation X is treated as issuing 100 shares of
stock to Individual M when the shares are transferred in 2024. See
Sec. 58.4501-4(d)(2)(iii). The fair market value of the shares
issued is $500x (100 shares x $5x per share = $500x). Accordingly,
the issuance is a reduction of $500x in computing Corporation X's
stock repurchase excise tax base for its 2024 taxable year.
Corporation X is not treated as issuing stock to Individual M when
the shares vest in 2028.
(34) Example 34: Vested stock provided to a service provider
with share withholding--(i) Facts. Employee N is an employee of
Corporation X. In 2024, as compensation for Employee N's services,
Corporation X grants Employee N 100 restricted stock units (RSUs).
Pursuant to the RSUs, if Employee N remains employed by Corporation
X through December 31, 2027, Corporation X will transfer 100 shares
of Corporation X stock to Employee N in January 2028. Employee N
remains employed by Corporation X through December 31, 2027. In
January 2028, when the shares have a fair market value of $5x per
share, Corporation X initiates the transfer of 60 shares of
Corporation X stock to Employee N and withholds 40 shares to satisfy
its income tax and employment tax withholding obligations arising
from Employee N vesting in the shares.
(ii) Analysis. Corporation X is treated as issuing 60 shares of
stock to Employee N when the shares are transferred in 2028. See
Sec. 58.4501-4(d)(2)(i). The 40 shares of Corporation X stock
withheld to satisfy Corporation X's withholding obligations are
disregarded for purposes of the netting rule. See Sec. 58.4501-
4(f)(11)(i). The fair market value of the shares issued is $300x (60
shares x $5x per share = $300x). Accordingly, the issuance is a
reduction of $300x in computing Corporation X's stock repurchase
excise tax base for its 2028 taxable year.
(35) Example 35: Stock option net exercise--(i) Facts. Employee
O is an employee of Corporation X. In 2024, in connection with the
performance of services, Corporation X transfers to Employee O
options to purchase 100 shares of Corporation X stock with an
exercise price of $4x per share ($400x exercise price in total). The
options are described in Sec. 1.83-7 of this chapter and do not
have a readily ascertainable fair market value. Employee O exercises
the option to purchase 100 shares in 2026, when the fair market
value is $5x per share. Corporation X withholds 80 shares to pay the
$400x exercise price (80 shares x $5x per share = $400x).
(ii) Analysis. Corporation X is treated as issuing 20 shares of
stock to Employee O when Employee O exercises the options in 2026.
See Sec. 58.4501-4(d)(2)(ii). The 80 shares of Corporation X stock
withheld to pay the exercise price are disregarded for purposes of
the netting rule. See Sec. 58.4501-4(f)(11)(i). The fair market
value of the shares issued is $100x (20 shares x $5x per share =
$100x). Accordingly, the issuance is a reduction of $100x in
computing Corporation X's stock repurchase excise tax base for its
2026 taxable year.
(36) Example 36: Net share settlement not in connection with
performance of services--(i) Facts. Corporation X issues a call
option to Individual A that entitles Individual A to buy 100 shares
of Corporation X stock for $100x ($1x per share) from Corporation X
for a limited time. The terms of the option require or permit net
share settlement. On the date the option is issued, Corporation X
stock is trading at $1x per share. On the date the option is
exercised, Corporation X stock is trading at $1.25x per share. To
settle the option, Individual A makes no payment to Corporation X,
and Corporation X issues 20 shares of Corporation X stock (worth
$25x).
(ii) Analysis. Corporation X is treated as issuing 20 shares
with a fair market value of $25x. See Sec. 58.4501-4(f)(11)(ii).
(37) Example 37: Broker-assisted net exercise--(i) Facts. The
facts are the same as in paragraph (b)(35)(i) of this section
(Example 35), except that, instead of Corporation X withholding
shares to pay the exercise price, a third-party broker pays an
amount equal to the exercise price (that is, $400x) to Corporation
X. Corporation X transfers 100 shares of Corporation X stock to the
third-party broker, which deposits the 100 shares into Employee O's
account. The third-party broker then immediately sells 80 shares to
recover the $400x exercise price paid to Corporation X (80 shares x
$5x per share = $400x).
(ii) Analysis. Corporation X is treated as issuing 100 shares of
stock to Employee O when Employee O exercises the options in 2026.
See Sec. 58.4501-4(c)(2) and (d)(1)(i). The fair market value of
the shares issued is $500x (100 shares x $5x per share = $500x).
Accordingly, the issuance is a reduction of $500x in computing
Corporation X's stock repurchase excise tax base for its 2026
taxable year.
(38) Example 38: Stock provided by a specified affiliate to an
employee--(i) Facts. Individual P is an employee of Corporation Y,
which is a specified affiliate of Corporation X. In 2024,
Corporation X transfers 100 shares of its stock to Individual P,
when the stock is valued at $9x per share, in connection with
Individual P's performance of services as an employee of Corporation
Y.
(ii) Analysis. Under Sec. 1.83-6(d) of this chapter,
Corporation X is treated as contributing the stock to the capital of
Corporation Y, which is treated as transferring the shares to
Individual P as compensation for services. Corporation Y is treated
as providing 100 shares to individual P. See Sec. 58.4501-
4(b)(1)(ii) and (f)(2)(iv). The fair market value of the shares
provided is $900x (100 shares x $9x per share = $900x). Accordingly,
the provision is a reduction of $900x in computing Corporation X's
stock repurchase excise tax base for its 2024 taxable year.
(39) Example 39: Stock provided by a specified affiliate to a
nonemployee--(i) Facts. The facts are the same as in paragraph
(b)(38)(i) of this section (Example 38), except that Individual P
provides services as a non-employee service provider of Corporation
Y.
(ii) Analysis. Corporation Y is not treated as providing shares
for purposes of the netting rule because P is a non-employee service
provider. See Sec. 58.4501-4(b)(1)(ii) and (f)(2)(iv). Accordingly,
there is no reduction in Corporation X's stock repurchase excise tax
base for its 2024 taxable year.
[[Page 26052]]
(40) Example 40: Corporation treated as a domestic corporation
under section 7874(b)--(i) Facts. Corporation FB is a corporation
the stock of which is traded on an established securities market
(within the meaning of section 7704(b)(1) of the Code) and that is
created or organized in a foreign jurisdiction. Corporation FB is
treated as a domestic corporation under section 7874(b).
(ii) Analysis. Corporation FB is treated for purposes of this
title as a domestic corporation under section 7874(b). Corporation
FB is a covered corporation because it is treated for purposes of
this title as a domestic corporation and its stock is traded on an
established securities market. See Sec. 58.4501-1(b)(6).
Sec. 58.4501-6 Applicability dates.
(a) In general. Except as provided in paragraph (b) of this
section, Sec. Sec. 58.4501-1 through 58.4501-5 apply to--
(1) Repurchases of stock of a covered corporation occurring after
December 31, 2022, and during taxable years ending after December 31,
2022; and
(2) Issuances and provisions of stock of a covered corporation
occurring during taxable years ending after December 31, 2022.
(b) Exceptions--(1) Applicability date for certain rules. Sections
58.4501-2(d), (e)(4)(vi), (f)(2) and (3), (g)(4), (h)(2)(v), and
(h)(3)(ii), 58.4501-3(g)(3) and (4), 58.4501-4(e)(2)(v), (e)(3)(ii),
(f)(2)(ii), and (f)(8), (9), and (13) apply to--
(i) Repurchases of stock of a covered corporation occurring after
April 12, 2024, and during taxable years ending after April 12, 2024;
and
(ii) Issuances and provisions of stock of a covered corporation
occurring after April 12, 2024, and during taxable years ending after
April 12, 2024.
(2) Special rules for acquisitions or repurchases of stock of
certain foreign corporations. See Sec. 58.4501-7(r) for applicability
dates for the provisions of Sec. 58.4501-7 and the provisions of Sec.
58.4501-1 as applicable to transactions subject to Sec. 58.4501-7.
Sec. 58.4501-7 Special rules for acquisitions or repurchases of stock
of certain foreign corporations.
(a) Scope. This section provides rules regarding the application of
section 4501(d) of the Code. Paragraph (b) of this section provides
definitions applicable for purposes of this section. Paragraph (c) of
this section provides rules for computing a section 4501(d) covered
corporation's section 4501(d) excise tax liability. Paragraph (d) of
this section provides certain coordination rules related to section
4501(d)(2). Paragraph (e) of this section provides rules that apply if
an applicable specified affiliate funds certain acquisitions or
repurchases of stock of an applicable foreign corporation. Paragraph
(f) of this section provides certain rules for determining the status
of a corporation as an applicable foreign corporation or a covered
surrogate foreign corporation. Paragraph (g) of this section provides
certain rules for determining the status of a corporation or
partnership as an applicable specified affiliate, a relevant entity of
an applicable foreign corporation, or a specified affiliate of a
covered surrogate foreign corporation. Paragraph (h) of this section
provides rules for determining whether a foreign partnership is an
applicable specified affiliate. Paragraph (i) of this section is
reserved. Paragraph (j) of this section defines the terms AFC
repurchase and CSFC repurchase. Paragraph (k) of this section provides
rules for determining the date of a section 4501(d)(1) repurchase or
section 4501(d)(2) repurchase. Paragraph (l) of this section provides
rules for determining the fair market value of stock of an applicable
foreign corporation or a covered surrogate foreign corporation that is
repurchased or acquired. Paragraph (m) of this section provides rules
regarding the application of certain section 4501(d) statutory
exceptions. Paragraph (n) of this section provides rules regarding the
section 4501(d) netting rule. Paragraph (o) of this section provides
rules applicable before April 15, 2024. Paragraph (p) of this section
illustrates the application of the rules of this section through
examples involving section 4501(d)(1). Paragraph (q) of this section
illustrates the application of the rules of this section through
examples involving section 4501(d)(2). Paragraph (r) of this section
provides the applicability date of this section.
(b) Definitions--(1) Application of definitions in Sec. 58.4501-
1(b). Any term used in this section (other than paragraph (o) of this
section as provided in paragraph (o)(5) of this section) but not
defined in paragraph (b)(2) of this section has the meaning provided in
Sec. 58.4501-1(b), provided, however, that:
(i) For all definitions provided in Sec. 58.4501-1(b) other than
those described in paragraph (b)(1)(ii) of this section, any reference
in those definitions to a covered corporation is treated as a reference
to a section 4501(d) covered corporation or applicable foreign
corporation or covered surrogate foreign corporation as appropriate
based on the context.
(ii) For the definitions of employee and employer-sponsored
retirement plan provided in Sec. 58.4501-1(b)(10) and (11), any
reference to a covered corporation or its specified affiliates is
treated solely as a reference to a section 4501(d) covered corporation.
(2) Section 4501(d) definitions. The definitions in this paragraph
(b)(2) apply solely for purposes of this section (other than paragraph
(o) of this section as provided in paragraph (o)(5) of this section).
(i) AFC repurchase. The term AFC repurchase has the meaning
provided in paragraph (j) of this section.
(ii) Allocable amount of a covered purchase. The term allocable
amount of a covered purchase has the meaning provided in paragraph
(e)(5) of this section.
(iii) Applicable foreign corporation. The term applicable foreign
corporation means any foreign corporation the stock of which is traded
on an established securities market.
(iv) Applicable specified affiliate. The term applicable specified
affiliate means 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, as determined under paragraph (h) of this section).
(v) CSFC repurchase. The term CSFC repurchase has the meaning
provided in paragraph (j) of this section.
(vi) Covered funding. The term covered funding means a funding
described in paragraph (e)(1) of this section.
(vii) Covered purchase. The term covered purchase means an AFC
repurchase or an acquisition of stock of an applicable foreign
corporation by a relevant entity.
(viii) Covered surrogate foreign corporation. The term covered
surrogate foreign corporation means any surrogate foreign corporation
(as determined under section 7874(a)(2)(B) of the Code by substituting
September 20, 2021 for March 4, 2003 each place it appears) the stock
of which is traded on an established securities market, including any
successor to the surrogate foreign corporation (as determined under
Sec. 1.7874-12(a)(10) of this chapter), but only with respect to
taxable years that include any portion of the applicable period with
respect to such corporation under section 7874(d)(1).
(ix) Direct partner. The term direct partner has the meaning given
the term in paragraph (h)(2)(i) of this section.
(x) Domestic entity. The term domestic entity means a domestic
corporation, a domestic partnership, or a trust within the meaning of
section 7701(a)(30)(E) of the Code.
(xi) Downstream relevant entity. The term downstream relevant
entity means a relevant entity--
[[Page 26053]]
(A) 25 percent or more of the stock of which is owned (by vote or
by value), directly or indirectly, by, individually or in aggregate,
one or more applicable specified affiliates of an applicable foreign
corporation; or
(B) 25 percent or more of the capital interests or profits
interests of which is held, directly or indirectly, by, individually or
in aggregate, one or more applicable specified affiliates of an
applicable foreign corporation.
(xii) Expatriated entity. The term expatriated entity has the
meaning given the term in section 7874(a)(2)(A) and Sec. 1.7874-
12(a)(8) of this chapter, including any successor (as determined under
Sec. 1.7874-12(a)(6) of this chapter).
(xiii) Indirect partner. The term indirect partner has the meaning
given the term in paragraph (h)(2)(ii) of this section.
(xiv) Relevant entity. 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.
(xv) Section 4501(d) covered corporation. The term section 4501(d)
covered corporation means either--
(A) An applicable specified affiliate of an applicable foreign
corporation that is treated as a covered corporation under section
4501(d)(1)(A) by reason of a section 4501(d)(1) repurchase; or
(B) Any expatriated entity with respect to a covered surrogate
foreign corporation that is treated as a covered corporation under
section 4501(d)(2)(A) by reason of a section 4501(d)(2) repurchase.
(xvi) Section 4501(d) de minimis exception. The term section
4501(d) de minimis exception has the meaning provided in paragraph
(c)(2)(i) of this section.
(xvii) Section 4501(d) economically similar transaction. The term
section 4501(d) economically similar transaction has the meaning
provided in paragraph (j)(4) of this section.
(xviii) Section 4501(d) excise tax. The term section 4501(d) excise
tax has the meaning provided in paragraph (c)(1) of this section.
(xix) Section 4501(d) excise tax base. The term section 4501(d)
excise tax base has the meaning provided in paragraph (c)(3)(i) of this
section.
(xx) Section 4501(d) netting rule. The term section 4501(d) netting
rule has the meaning provided in paragraph (n)(1) of this section.
(xxi) Section 4501(d) reorganization exception. The term section
4501(d) reorganization exception has the meaning provided in paragraph
(m)(2) of this section.
(xxii) Section 4501(d)(1) repurchase. The term section 4501(d)(1)
repurchase means--
(A) An acquisition of stock of an applicable foreign corporation by
an applicable specified affiliate of the applicable foreign corporation
from a person other than the applicable foreign corporation or a
specified affiliate of the applicable foreign corporation; and
(B) A covered purchase to the extent an applicable specified
affiliate is treated under paragraph (e) of this section as acquiring
stock of the applicable foreign corporation that is repurchased or
acquired, as applicable, in the covered purchase.
(xxiii) Section 4501(d)(2) repurchase. The term section 4501(d)(2)
repurchase means a CSFC repurchase or an acquisition of stock of a
covered surrogate foreign corporation by a specified affiliate of the
covered surrogate foreign corporation.
(xxiv) Section 4501(d) statutory exception. The term section
4501(d) statutory exception has the meaning provided in paragraph
(m)(1) of this section.
(c) Computation of section 4501(d) excise tax liability for a
section 4501(d) covered corporation--(1) Imposition of tax. Except as
provided in paragraph (c)(2) of this section (regarding the section
4501(d) de minimis exception), the amount of excise tax imposed
pursuant to section 4501(d) on a section 4501(d) covered corporation
(section 4501(d) excise tax) for a taxable year equals the product
obtained by multiplying--
(i) The applicable percentage; by
(ii) The section 4501(d) excise tax base of the section 4501(d)
covered corporation for the taxable year determined in accordance with
paragraph (c)(3)(i) of this section.
(2) Section 4501(d) de minimis exception--(i) In general. A section
4501(d) covered corporation is not subject to the section 4501(d)
excise tax with regard to a taxable year of the section 4501(d) covered
corporation if, during that taxable year, the aggregate fair market
value of all section 4501(d)(1) repurchases with respect to all
applicable specified affiliates or all section 4501(d)(2) repurchases
with respect to an expatriated entity, as applicable, does not exceed
$1,000,000 (section 4501(d) de minimis exception).
(ii) Determination. A determination of whether the section 4501(d)
de minimis exception applies with regard to a taxable year of a section
4501(d) covered corporation is made before applying--
(A) Any section 4501(d) statutory exception under paragraph (m) of
this section; and
(B) Any adjustments pursuant to the section 4501(d) netting rule
under paragraph (n) of this section.
(3) Section 4501(d) excise tax base--(i) In general. With regard to
a section 4501(d) covered corporation, the term section 4501(d) excise
tax base means the dollar amount (not less than zero) that is obtained
by--
(A) Determining the aggregate fair market value of, as applicable,
all section 4501(d)(1) repurchases or section 4501(d)(2) repurchases
during the section 4501(d) covered corporation's taxable year;
(B) Reducing the amount determined under paragraph (c)(3)(i)(A) of
this section by the fair market value of stock repurchased or acquired
in all section 4501(d)(1) repurchases or section 4501(d)(2)
repurchases, as applicable, during the section 4501(d) covered
corporation's taxable year to the extent any section 4501(d) statutory
exceptions apply in accordance with paragraph (m) of this section; and
then
(C) Reducing the amount determined under paragraphs (c)(3)(i)(A)
and (B) of this section by the aggregate fair market value of, as
applicable, stock of the applicable foreign corporation or stock of the
covered surrogate foreign corporation to the extent the section 4501(d)
netting rule applies in accordance with paragraph (n) of this section.
(ii) Taxable year determination--(A) In general. The determinations
under paragraph (c)(3)(i) of this section are made separately for each
section 4501(d) covered corporation and for each taxable year of such
section 4501(d) covered corporation.
(B) No carrybacks or carryforwards. Reductions under paragraphs
(c)(3)(i)(B) and (C) of this section in excess of the amount determined
under paragraph (c)(3)(i)(A) of this section with regard to a section
4501(d) covered corporation are not carried forward or backward to
preceding or succeeding taxable years of the section 4501(d) covered
corporation.
(4) Section 4501(d)(1) repurchases or section 4501(d)(2)
repurchases before January 1, 2023. Section 4501(d)(1) repurchases and
section 4501(d)(2) repurchases before January 1, 2023, are neither
included in the section 4501(d) excise tax base of a section 4501(d)
covered corporation nor taken into account in determining the
applicability of the section 4501(d) de minimis exception.
(d) Section 4501(d)(2) coordination rules--(1) Coordination rule
for section 4501(d)(1) repurchases and section 4501(d)(2) repurchases.
To the extent any CSFC repurchase or acquisition of stock of a covered
surrogate foreign
[[Page 26054]]
corporation would be both a section 4501(d)(1) repurchase and a section
4501(d)(2) repurchase absent this paragraph (d)(1), the CSFC repurchase
or acquisition will only be a section 4501(d)(2) repurchase.
(2) Coordination rule for multiple section 4501(d) covered
corporations--(i) In general. Except as provided in paragraph
(d)(2)(ii) of this section, each section 4501(d) covered corporation
with respect to a covered surrogate foreign corporation is liable for
any section 4501(d) excise tax with respect to section 4501(d)(2)
repurchases that occur during a taxable year of the section 4501(d)
covered corporation.
(ii) Full payment and reporting by a section 4501(d) covered
corporation. If there are multiple section 4501(d) covered corporations
with respect to a covered surrogate foreign corporation, then provided
that one of those section 4501(d) covered corporations pays the amount
of section 4501(d) excise tax determined under paragraph (c)(1) of this
section with respect to all section 4501(d)(2) repurchases relating to
the covered surrogate foreign corporation and its specified affiliates
that occur during the paying section 4501(d) covered corporation's
taxable year and fulfills the filing obligations for the taxable year
with respect to such section 4501(d)(2) repurchases, no other section
4501(d) covered corporation with respect to the covered surrogate
foreign corporation is liable for section 4501(d) excise tax related to
such section 4501(d)(2) repurchases.
(e) Acquisitions and AFC repurchases of stock funded by applicable
specified affiliates--(1) Principal purpose rule. An applicable
specified affiliate of an applicable foreign corporation is treated as
acquiring stock of the applicable foreign corporation to the extent the
applicable specified affiliate funds by any means (including through
distributions, debt, or capital contributions), directly or indirectly,
a covered purchase with a principal purpose of avoiding the section
4501(d) excise tax (a covered funding). If a principal purpose of the
covered funding is to fund, directly or indirectly, a covered purchase,
then there is a principal purpose of avoiding the section 4501(d)
excise tax. Whether a covered funding is described in this paragraph
(e)(1) is determined based on all the facts and circumstances. A
covered funding may be described in this paragraph (e)(1) regardless of
whether the funding occurs before or after a covered purchase. This
paragraph (e)(1) applies to fundings that occur on or after December
27, 2022, in taxable years ending after December 27, 2022.
(2) Rebuttable presumption. A principal purpose described in
paragraph (e)(1) of this section is presumed to exist if the applicable
specified affiliate funds by any means, directly or indirectly, a
downstream relevant entity, and the funding occurs within two years of
a covered purchase by or on behalf of the downstream relevant entity.
The presumption described in this paragraph (e)(2) may be rebutted only
if facts and circumstances clearly establish that there was not a
principal purpose described in paragraph (e)(1) of this section. An
applicable specified affiliate that takes the position that the
presumption is rebutted must, for the taxable year that includes the
date on which the applicable specified affiliate would, absent the
rebuttal, be treated as acquiring stock of the applicable foreign
corporation: (i) attach a statement to its stock repurchase excise tax
return disclosing the relevant fundings and covered purchases and the
facts that rebut the presumption, and (ii) provide any additional
information that the stock repurchase excise tax return or the
accompanying instructions require. See paragraph (e)(3) of this section
for the date on which the applicable specified affiliate would, absent
the rebuttal, be treated as acquiring stock of the applicable foreign
corporation.
(3) Date stock of applicable foreign corporation is treated as
acquired. To the extent an applicable specified affiliate is treated,
by reason of a covered funding, as acquiring stock of an applicable
foreign corporation that is acquired by a relevant entity or applicable
foreign corporation in a covered purchase, such stock is treated as
acquired by the applicable specified affiliate on the later of the date
of the covered funding or the covered purchase.
(4) Amount of stock of applicable foreign corporation treated as
acquired. The amount of stock of an applicable foreign corporation
acquired in a covered purchase that is treated as acquired by an
applicable specified affiliate is equal to the amount of the applicable
specified affiliate's covered fundings that are allocated to the
covered purchase under paragraph (e)(7) of this section.
(5) Rules for determining the allocable amount of a covered
purchase. The allocable amount of a covered purchase is equal to the
aggregate fair market value of the shares repurchased or acquired in
the covered purchase (as determined in accordance with paragraph (l) of
this section), reduced by the amount described in paragraph (m)(2),
(4), or (6) of this section, as applicable.
(6) Priority rule for covered fundings. The allocable amount of a
covered purchase is treated as made first from covered fundings.
(7) Rules for allocating covered fundings to allocable amounts of
covered purchases--(i) In general. The rules of this paragraph (e)(7)
apply for purposes of determining the extent to which a covered
purchase is treated as funded by covered fundings. For purposes of
applying this paragraph (e)(7), a reference to covered fundings means
all covered fundings by all applicable specified affiliates with
respect to an applicable foreign corporation, and a covered funding
denominated in a currency other than the U.S. dollar is converted into
U.S. dollars at the spot rate (as defined in Sec. 1.988-1(d)(1) of
this chapter) on the date of the funding. To the extent covered
fundings are allocated to an allocable amount of a covered purchase
under this paragraph (e)(7), those fundings are not allocated to any
other allocable amounts of covered purchases.
(ii) Multiple covered purchases. If there are multiple covered
purchases by one or more relevant entities or an applicable foreign
corporation, then covered fundings are allocated to the allocable
amounts of covered purchases in the order in which the covered
purchases occur. If multiple covered purchases occur simultaneously,
covered fundings are allocated to the allocable amounts of those
simultaneous covered purchases on a pro rata basis, based on the
relative allocable amounts of those covered purchases.
(iii) Single covered funding. If there is a single covered funding,
the covered funding is allocated to a covered purchase to the extent of
the lesser of the amount of the covered funding or the allocable amount
of the covered purchase.
(iv) Multiple covered fundings. If there are multiple covered
fundings and the aggregate amount of those fundings exceeds the
allocable amount of the covered purchase, then covered fundings are
allocated to the allocable amount of the covered purchase in the order
in which the covered fundings occur. If multiple covered fundings occur
simultaneously, those covered fundings are allocated to the allocable
amount of the covered purchase on a pro rata basis, based on the
relative amounts of those covered fundings. To the extent the aggregate
amount of covered fundings exceeds the allocable amount of the covered
purchase, those excess covered fundings are allocated to
[[Page 26055]]
the allocable amounts of other covered purchases, if any.
(f) Status as applicable foreign corporation or covered surrogate
foreign corporation--(1) Initiation date. A corporation becomes an
applicable foreign corporation or a covered surrogate foreign
corporation, as applicable, at the beginning of the corporation's
initiation date.
(2) Cessation date--(i) In general. Except as provided in paragraph
(f)(2)(ii) of this section, a corporation ceases to be an applicable
foreign corporation or a covered surrogate foreign corporation, as
applicable, at the end of the corporation's cessation date.
(ii) Repurchases after cessation date. If an applicable foreign
corporation or a covered surrogate foreign corporation, as applicable,
ceases to be an applicable foreign corporation or a covered surrogate
foreign corporation, as applicable, pursuant to a plan that includes a
repurchase, and if the cessation date precedes the date on which any
section 4501(d)(1) repurchase or section 4501(d)(2) repurchase, as
applicable, undertaken pursuant to the plan occurs (for example, if
stock of an applicable foreign corporation ceases trading prior to
completion of an acquisitive reorganization), then the corporation will
continue to be an applicable foreign corporation or a covered surrogate
foreign corporation, as applicable, with regard to each repurchase
pursuant to the plan until the end of the date on which the last
section 4501(d)(1) repurchase or section 4501(d)(2) repurchase, as
applicable, pursuant to the plan occurs.
(3) Inbound and outbound F reorganizations--(i) Inbound F
reorganization. In the case of a foreign corporation that transfers its
assets or that is treated as transferring its assets to a domestic
corporation in an F reorganization (as described in Sec. 1.367(b)-2(f)
of this chapter), the corporation is not treated as a domestic
corporation until the day after the reorganization.
(ii) Outbound F reorganization. In the case of a domestic
corporation that transfers its assets or that is treated as
transferring its assets to a foreign corporation in an F reorganization
(as described in Sec. 1.367(a)-1(e) of this chapter), the corporation
is not treated as a foreign corporation until the day after the
reorganization.
(g) Status as applicable specified affiliate, a relevant entity of
an applicable foreign corporation, or a specified affiliate of a
covered surrogate foreign corporation--(1) Timing of determination. The
determination of whether a corporation or partnership is an applicable
specified affiliate or a relevant entity of an applicable foreign
corporation or a specified affiliate of a covered surrogate foreign
corporation, as applicable, is made whenever such determination is
relevant for purposes of this section.
(2) Determination of indirect ownership. Except as provided in
paragraph (h)(2)(ii)(B) of this section, a corporation or partnership
is treated as indirectly owning stock in a corporation or holding
capital or profits interests in a partnership equal to the
corporation's or partnership's proportionate percentage of stock owned
or capital or profits interests held through other entities.
(3) Consequences of becoming a specified affiliate--(i) General
rule. Except as provided in paragraph (g)(3)(ii) of this section, if a
corporation or partnership becomes a specified affiliate of an
applicable foreign corporation or a covered surrogate foreign
corporation, as applicable, and, at the time the corporation or
partnership becomes a specified affiliate, the corporation or
partnership owns stock of the applicable foreign corporation or covered
surrogate foreign corporation that the corporation or partnership
acquired after December 31, 2022, and such stock represents more than
one percent of the fair market value of the assets of the corporation
or partnership as determined at the time that the corporation or
partnership becomes a specified affiliate, then for purposes of this
section, such stock is treated as acquired by the corporation or
partnership immediately after the corporation or partnership becomes a
specified affiliate.
(ii) Stock previously treated as acquired not subject to deemed
acquisition more than once. Paragraph (g)(3)(i) of this section does
not apply with regard to any shares of stock of the applicable foreign
corporation or covered surrogate foreign corporation, as applicable--
(A) Held by the corporation or partnership described in paragraph
(g)(3)(i) of this section at the time that it becomes a specified
affiliate; and
(B) That the section 4501(d) covered corporation identifies as
previously having been subject to paragraph (g)(3)(i) of this section
when held by the corporation or partnership.
(iii) Specific identification. For purposes of paragraphs (g)(3)(i)
and (g)(3)(ii)(B) of this section, if the section 4501(d) covered
corporation is unable to specifically identify which shares of stock of
the applicable foreign corporation or covered surrogate foreign
corporation, as applicable, the corporation or partnership described in
paragraph (g)(3)(i) is treated as holding at the time it becomes a
specified affiliate, the section 4501(d) covered corporation must treat
the corporation or partnership described in paragraph (g)(3)(i) of this
section as holding the most recently acquired shares of the stock of
the applicable foreign corporation or covered surrogate foreign
corporation, as applicable.
(h) Foreign partnerships that are applicable specified affiliates--
(1) In general. A foreign partnership is an applicable specified
affiliate of an applicable foreign corporation, if--
(i) More than 50 percent of the capital interests or profits
interests of the foreign partnership are held, directly or indirectly,
by the applicable foreign corporation; and
(ii) Under the rules described in paragraphs (h)(2) through (5) of
this section, at least one domestic entity is a direct or indirect
partner with respect to the foreign partnership.
(2) Direct or indirect partner. Except as provided in paragraphs
(h)(4) and (5) of this section--
(i) A domestic entity is a direct partner with respect to a foreign
partnership if it directly owns an interest in the foreign partnership;
and
(ii) A domestic entity is an indirect partner with respect to a
foreign partnership if the domestic entity owns an interest in the
foreign partnership indirectly through--
(A) One or more other foreign partnerships;
(B) One or more foreign corporations controlled by one or more
domestic entities within the meaning of paragraph (h)(3) of this
section; or
(C) An ownership chain with one or more entities described in
paragraphs (h)(2)(ii)(A) and (B) of this section.
(3) Control of a foreign corporation. For purposes of paragraph
(h)(2)(ii)(B) of this section, a foreign corporation is controlled by
one or more domestic entities, if more than 50 percent of the total
combined voting power of all classes of stock of such corporation
entitled to vote or the total value of the stock of such corporation is
owned, directly or indirectly, in aggregate, by one or more domestic
entities.
(4) Indirect interests held through applicable foreign
corporations. Solely for purposes of paragraph (h)(2)(ii) of this
section, if an applicable foreign corporation owns, directly or
indirectly, stock of a foreign corporation or an interest in a foreign
partnership, a domestic entity is not treated as indirectly owning
stock of the foreign corporation or an interest in the foreign
[[Page 26056]]
partnership solely by reason of owning, directly or indirectly, stock
of the applicable foreign corporation.
(5) De minimis domestic entity (direct or indirect) partner. A
foreign partnership that has one or more domestic entities as direct or
indirect partners is not considered an applicable specified affiliate
if the domestic entities hold, directly or indirectly, in aggregate,
less than five percent of the capital interests and profits interests
in the foreign partnership.
(i) [Reserved]
(j) AFC repurchase or CSFC repurchase--(1) Overview. This paragraph
(j) provides rules for determining whether a transaction is an AFC
repurchase or CSFC repurchase for purposes of this section. Paragraph
(j)(2) of this section provides a general rule regarding the scope of
such terms. Paragraph (j)(3) of this section provides an exclusive list
of transactions that are treated as a section 317(b) redemption but are
not AFC repurchases or CSFC repurchases. Paragraph (j)(4) of this
section provides an exclusive list of transactions that are section
4501(d) economically similar transactions. Paragraph (j)(5) of this
section provides a non-exclusive list of transactions that are not AFC
repurchases or CSFC repurchases.
(2) Scope of AFC repurchases and CSFC repurchases. For purposes of
this section, an AFC repurchase or CSFC repurchase means solely--
(i) 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 paragraph (j)(3) of
this section; or
(ii) A section 4501(d) economically similar transaction described
in paragraph (j)(4) of this section.
(3) Certain section 317(b) redemptions not AFC repurchases or CSFC
repurchases. This paragraph (j)(3) provides an exclusive list of
transactions that are section 317(b) redemptions but are not AFC
repurchases or CSFC repurchases.
(i) Section 304(a)(1) transactions--(A) Rule regarding deemed
distributions. If section 304(a)(1) applies to an acquisition of stock
by an acquiring corporation (within the meaning of section 304(a)(1)),
the acquiring corporation's deemed distribution in redemption of the
acquiring corporation's stock (resulting from the application of
section 304(a)(1)) is not an AFC repurchase or CSFC repurchase, as
applicable.
(B) Scope of rule. The rule described in paragraph (j)(3)(i)(A) of
this section applies to a transaction described in paragraph
(j)(3)(i)(A) of this section regardless of whether section 302(a) or
(d) of the Code applies to the acquiring corporation's deemed
distribution in redemption of its stock.
(ii) Payment by an applicable foreign corporation or a covered
surrogate foreign corporation of cash in lieu of fractional shares. A
payment by an applicable foreign corporation or a covered surrogate
foreign corporation, as applicable, of cash in lieu of a fractional
share of the applicable foreign corporation or covered surrogate
foreign corporation is not an AFC repurchase or CSFC repurchase, as
applicable, if--
(A) The payment is carried out as part of a transaction that
qualifies as a reorganization under section 368(a) or a distribution to
which section 355 of the Code applies, or pursuant to the settlement of
an option or similar financial instrument (for example, a convertible
debt instrument or convertible preferred share);
(B) The cash received by the shareholder entitled to the fractional
share is not separately bargained-for consideration (that is, the cash
paid by the applicable foreign corporation or covered surrogate foreign
corporation in lieu of the fractional share represents a mere rounding
off of the shares issued in the exchange or settlement);
(C) The payment is carried out solely for administrative
convenience (and, therefore, solely for non-tax reasons); and
(D) The amount of cash paid to the shareholder in lieu of a
fractional share does not exceed the fair market value of one full
share of the class of stock of the applicable foreign corporation or
covered surrogate foreign corporation, as applicable, with respect to
which the payment of cash in lieu of a fractional share is made.
(4) Section 4501(d) economically similar transactions. This
paragraph (j)(4) provides an exclusive list of transactions that are
economically similar transactions for section 4501(d) purposes (each a
section 4501(d) economically similar transaction).
(i) Acquisitive reorganizations. In the case of an acquisitive
reorganization in which the target corporation is an applicable foreign
corporation or a covered surrogate foreign corporation, as applicable,
the exchange by the target corporation shareholders of their target
corporation stock pursuant to the plan of reorganization is an AFC
repurchase or a CSFC repurchase, as applicable, by the target
corporation.
(ii) E Reorganizations. In the case of an E reorganization in which
the recapitalizing corporation is an applicable foreign corporation or
a covered surrogate foreign corporation, as applicable, the exchange by
the recapitalizing corporation shareholders of their recapitalizing
corporation stock pursuant to the plan of reorganization is an AFC
repurchase or a CSFC repurchase, as applicable, by the recapitalizing
corporation.
(iii) F Reorganizations. In the case of an F reorganization in
which the transferor corporation (as defined in Sec. 1.368-2(m)(1) of
this chapter) is an applicable foreign corporation or a covered
surrogate foreign corporation, as applicable, the exchange by the
transferor corporation shareholders of their transferor corporation
stock pursuant to the plan of reorganization is an AFC repurchase or a
CSFC repurchase, as applicable, by the transferor corporation.
(iv) Split-offs. In the case of a split-off by a distributing
corporation that is an applicable foreign corporation or a covered
surrogate foreign corporation, as applicable, the exchange by the
distributing corporation shareholders of their distributing corporation
stock is an AFC repurchase or a CSFC repurchase, as applicable, by the
distributing corporation.
(v) Complete liquidations to which both sections 331 and 332 apply.
In the case of a complete liquidation of an applicable foreign
corporation or a covered surrogate foreign corporation, as applicable,
to which sections 331 and 332(a) of the Code respectively apply to
component distributions of the complete liquidation--
(A) Each distribution to which section 331 applies is an AFC
repurchase or a CSFC repurchase, as applicable; and
(B) The distribution to which section 332(a) applies is not an AFC
repurchase or a CSFC repurchase, as applicable. See paragraph
(j)(5)(i)(A) of this section.
(vi) Certain forfeitures and clawbacks of stock--(A) In general. In
the case of a forfeiture or clawback of stock of an applicable foreign
corporation or a covered surrogate foreign corporation, as applicable,
pursuant to a legal or contractual obligation, the forfeiture or
clawback is an AFC repurchase or a CSFC repurchase, as applicable, on
the date of forfeiture or clawback (as appropriate) if the stock was
treated as issued or provided under paragraph (n)(1) of this section
and the forfeiture or clawback of the stock (as appropriate) is
described in paragraph (j)(4)(vi)(B), (C), or (D) of this section.
(B) Stock subject to post-closing price adjustments. The stock was
issued pursuant to an acquisition of a target entity or its business,
and the forfeiture of the stock was in accordance with the terms of the
documents governing the
[[Page 26057]]
transaction (for example, to compensate the acquiring corporation for
breaches of representations or warranties made by the target entity, or
because the business of the target entity did not achieve certain
performance benchmarks agreed upon in the transaction documents).
(C) Stock for which a section 83(b) election was made. The stock
was subject to a substantial risk of forfeiture within the meaning of
section 83(a) of the Code on the date the stock was issued or provided,
the service provider made a valid election under section 83(b) with
regard to the stock, and the forfeiture resulted from the service
provider failing to meet the vesting condition.
(D) Clawbacks. On the date the stock was issued or provided, the
stock was subject to a clawback agreement, and a clawback of the stock
resulted from the occurrence of an event specified in the clawback
agreement.
(5) Transactions that are not AFC repurchases or CSFC repurchases.
This paragraph (j)(5) provides a non-exclusive list of transactions
that are not AFC repurchases or CSFC repurchases.
(i) Complete liquidations generally. Except as provided in
paragraph (j)(4)(v)(A) of this section, the following is not an AFC
repurchase or CSFC repurchase, as applicable:
(A) A distribution in complete liquidation of an applicable foreign
corporation or a covered surrogate foreign corporation, as applicable,
to which section 331 or 332(a) applies.
(B) A distribution pursuant to a plan of dissolution of such
corporation that is reported on the original (but not a supplemented or
an amended) IRS Form 966, Corporate Dissolution or Liquidation (or any
successor form).
(C) A distribution pursuant to a deemed dissolution of such
corporation (for instance, a deemed liquidation under Sec. 301.7701-3
of this chapter).
(ii) Distributions during taxable year of complete liquidation or
dissolution. Unless paragraph (j)(4)(v) of this section applies, no
distribution by an applicable foreign corporation or a covered
surrogate foreign corporation, as applicable, during such corporation's
taxable year is an AFC repurchase or CSFC repurchase, as applicable, if
the applicable foreign corporation or covered surrogate foreign
corporation--
(A) Completely liquidates during such corporation's taxable year
(that is, has a final distribution during the taxable year in a
complete liquidation to which section 331 applies);
(B) Dissolves during the taxable year pursuant to a plan of
dissolution as reported on the original (but not a supplemented or an
amended) IRS Form 966, Corporate Dissolution or Liquidation (or any
successor form); or
(C) Is deemed to dissolve during the taxable year (for instance,
pursuant to a deemed liquidation under Sec. 301.7701-3 of this
chapter).
(iii) Divisive transactions under section 355 other than split-
offs--(A) In general. Subject to paragraph (j)(5)(iii)(B) of this
section, a distribution by a distributing corporation that is an
applicable foreign corporation or a covered surrogate foreign
corporation, as applicable, of stock of a controlled corporation
qualifying under section 355 that is not a split-off is not an AFC
repurchase or CSFC repurchase, as applicable.
(B) Exception regarding non-qualifying property in spin-offs. A
distribution by a distributing corporation that is an applicable
foreign corporation or a covered surrogate foreign corporation, as
applicable, of other property or money in exchange for stock of the
distributing corporation is a repurchase by the distributing
corporation if it occurs in pursuance of a transaction qualifying under
section 355 in which the distribution by the distributing corporation
of stock of the controlled corporation is with respect to stock of the
distributing corporation.
(iv) Non-redemptive distributions subject to section 301(c)(2) or
(3). A distribution to which section 301 of the Code applies by an
applicable foreign corporation or a covered surrogate foreign
corporation to a distributee is not an AFC repurchase or CSFC
repurchase if the distribution--
(A) Is subject to section 301(c)(2) or (3); and
(B) The distributee does not exchange stock of the applicable
foreign corporation or covered surrogate foreign corporation, as
applicable (and is not treated as exchanging stock of the applicable
foreign corporation or covered surrogate foreign corporation, as
applicable, for Federal income tax purposes).
(v) Net cash settlement of an option contract. The net cash
settlement of an option contract with respect to stock of an applicable
foreign corporation or a covered surrogate foreign corporation is not
an AFC repurchase or CSFC repurchase, as applicable. The net cash
settlement of an instrument in the legal form of an option contract or
other derivative financial instrument that is treated as stock for
Federal tax purposes at the time of issuance is treated as a repurchase
of that instrument, and therefore an AFC repurchase or CSFC repurchase,
as applicable.
(k) Date of section 4501(d)(1) repurchase or section 4501(d)(2)
repurchase--(1) General rule. In general, stock of an applicable
foreign corporation or a covered surrogate foreign corporation is
treated as subject to a section 4501(d)(1) repurchase or section
4501(d)(2) repurchase, as applicable, on the date on which ownership of
the stock transfers to the specified affiliate of the applicable
foreign corporation, the applicable foreign corporation, the specified
affiliate of the covered surrogate foreign corporation, or the covered
surrogate foreign corporation, as applicable, for Federal income tax
purposes. To determine the date of repurchase in particular situations,
see paragraphs (k)(2), (3), and (4) of this section.
(2) Regular-way sale. A regular-way sale of stock of an applicable
foreign corporation or a covered surrogate foreign corporation (that
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) is treated as subject to a section
4501(d)(1) repurchase or section 4501(d)(2) repurchase, as applicable,
on the trade date.
(3) AFC repurchase or CSFC repurchase pursuant to certain section
4501(d) economically similar transactions. Stock of an applicable
foreign corporation or a covered surrogate foreign corporation
repurchased in an AFC repurchase or a CSFC repurchase that is a section
4501(d) economically similar transaction described in paragraph (j)(4)
of this section is treated as repurchased on the date the shareholders
of the applicable foreign corporation or covered surrogate foreign
corporation exchange their stock in such corporation.
(4) Section 4501(d)(1) repurchase pursuant to a covered funding. To
the extent an applicable specified affiliate of an applicable foreign
corporation is treated under paragraph (e) of this section as acquiring
stock of the applicable foreign corporation that is repurchased or
acquired in a covered purchase, such stock is treated as acquired by
the applicable specified affiliate on the date of the covered purchase.
However, if the date of the covered funding occurs after the date of
the covered purchase, then such stock is treated as acquired by the
applicable specified affiliate on the date of the covered funding.
(l) Fair market value of stock of an applicable foreign corporation
or a covered surrogate foreign corporation that is repurchased or
acquired--(1) In
[[Page 26058]]
general. The fair market value of stock of an applicable foreign
corporation or a covered surrogate foreign corporation, as applicable,
that is subject to a section 4501(d)(1) repurchase or section
4501(d)(2) repurchase is the market price of the stock on the date of
the section 4501(d)(1) repurchase or section 4501(d)(2) repurchase (as
determined under paragraph (k) of this section without regard to the
last sentence of paragraph (k)(4) of this section). That is, if the
price at which the repurchased or acquired stock is purchased differs
from the market price of the stock on the date the stock is repurchased
or acquired, the fair market value of the stock is the market price on
the date the stock is repurchased or acquired.
(2) Stock traded on an established securities market--(i) In
general. If stock of an applicable foreign corporation or a covered
surrogate foreign corporation, as applicable, that is subject to a
section 4501(d)(1) repurchase or section 4501(d)(2) repurchase with
respect to a section 4501(d) covered corporation is traded on an
established securities market, the section 4501(d) covered corporation
must determine the market price of the stock by applying one of the
methods provided in paragraph (l)(2)(ii) of this section. For purposes
of this paragraph (l)(2), stock of an applicable foreign corporation or
a covered surrogate foreign corporation, as applicable, is treated as
traded on an established securities market if any stock of the same
class and issue of stock is so traded, regardless of whether the shares
repurchased or acquired are so traded.
(ii) Acceptable methods. The following are acceptable methods for
determining the market price of stock of an applicable foreign
corporation or a covered surrogate foreign corporation, as applicable,
traded on an established securities market:
(A) The daily volume-weighted average price as determined on the
date the stock is subject to a section 4501(d)(1) repurchase or section
4501(d)(2) repurchase.
(B) The closing price on the date the stock is subject to a section
4501(d)(1) repurchase or section 4501(d)(2) repurchase.
(C) The average of the high and low prices on the date the stock is
subject to a section 4501(d)(1) repurchase or section 4501(d)(2)
repurchase.
(D) The trading price at the time the stock is subject to a section
4501(d)(1) repurchase or section 4501(d)(2) repurchase.
(iii) Date of section 4501(d)(1) repurchase or section 4501(d)(2)
repurchase not a trading day. For purposes of each method provided in
paragraph (l)(2)(ii) of this section, if the date stock is subject to a
section 4501(d)(1) repurchase or section 4501(d)(2) repurchase is not a
trading day, the date on which the market price is determined is the
immediately preceding trading day.
(iv) Consistency requirement. The market price of stock of an
applicable foreign corporation or a covered surrogate foreign
corporation, as applicable, that is traded on an established securities
market must be determined by consistently applying one (but not more
than one) of the methods provided in paragraph (l)(2)(ii) of this
section to all section 4501(d)(1) repurchases with respect to an
applicable foreign corporation or all section 4501(d)(2) repurchases
with respect to a covered surrogate foreign corporation, as applicable,
in the same taxable year of the applicable foreign corporation or
covered surrogate foreign corporation, as applicable (which, if the
applicable foreign corporation or covered surrogate foreign
corporation, as applicable, does not have a taxable year for Federal
income tax purposes, is the calendar year).
(v) Stock traded on multiple exchanges--(A) In general. A section
4501(d) covered corporation must determine the fair market value of the
stock of the applicable foreign corporation or covered surrogate
foreign corporation, as applicable, by reference to trading on the
established securities market in the country in which the applicable
foreign corporation or covered surrogate foreign corporation, as
applicable, is organized, including a regional established securities
market that trades in that country.
(B) Stock traded on multiple exchanges in country where corporation
is organized. If the stock of an applicable foreign corporation or a
covered surrogate foreign corporation, as applicable, is traded on
multiple established securities markets in the country in which the
applicable foreign corporation or covered surrogate foreign
corporation, as applicable, is organized, a section 4501(d) covered
corporation must treat the established securities market with the
highest trading volume in the stock of the applicable foreign
corporation or covered surrogate foreign corporation, as applicable, in
the section 4501(d) covered corporation's prior taxable year as the
established securities market that the section 4501(d) covered
corporation must reference to determine the fair market value of the
stock of the applicable foreign corporation or covered surrogate
foreign corporation, as applicable.
(C) Other cases in which stock is traded on multiple exchanges. If
stock of an applicable foreign corporation or a covered surrogate
foreign corporation, as applicable is traded on multiple established
securities markets and paragraphs (l)(2)(v)(A) and (B) of this section
do not apply, a section 4501(d) covered corporation must determine the
fair market value of the stock of the applicable foreign corporation or
covered surrogate foreign corporation, as applicable, in a manner that
is reasonable under the facts and circumstances.
(3) Stock not traded on an established securities market--(i)
General rule. If stock of an applicable foreign corporation or a
covered surrogate foreign corporation, as applicable, is not traded on
an established securities market, the market price of the stock is
determined as of the date of the section 4501(d)(1) repurchase or
section 4501(d)(2) repurchase under the principles of Sec. 1.409A-
1(b)(5)(iv)(B)(1) of this chapter.
(ii) Consistency requirement. The valuation method for determining
the market price of stock of an applicable foreign corporation or a
covered surrogate foreign corporation, as applicable, that is not
traded on an established securities market must be used for all section
4501(d)(1) repurchases with respect to the same class of stock of an
applicable foreign corporation or all section 4501(d)(2) repurchases
with respect to the same class of stock of a covered surrogate foreign
corporation, as applicable, in the same taxable year of the applicable
foreign corporation or covered surrogate foreign corporation, as
applicable (which, if the applicable foreign corporation or covered
surrogate foreign corporation, as applicable, does not have a taxable
year for Federal income tax purposes, is the calendar year), unless the
application of that method to a particular section 4501(d)(1)
repurchase or section 4501(d)(2) repurchase would be unreasonable under
the facts and circumstances as of the valuation date within the meaning
of Sec. 1.409A-1(b)(5)(iv)(B)(1) of this chapter.
(4) Market price of stock denominated in non-U.S. currency. The
market price of any stock of an applicable foreign corporation or a
covered surrogate foreign corporation that is denominated in a currency
other than the U.S. dollar is converted into U.S. dollars at the spot
rate (as defined in Sec. 1.988-1(d)(1) of this chapter) on the date
the stock is subject to a section 4501(d)(1) repurchase or section
4501(d)(2) repurchase.
[[Page 26059]]
(m) Section 4501(d) statutory exceptions--(1) In general--(i)
Overview. This paragraph (m) provides rules regarding the application
of the exceptions in section 4501(e) (each, a section 4501(d) statutory
exception), other than the section 4501(d) de minimis exception, to a
section 4501(d)(1) repurchase or section 4501(d)(2) repurchase.
(ii) Reduction of section 4501(d) excise tax base. The fair market
value of stock of an applicable foreign corporation or a covered
surrogate foreign corporation, as applicable, repurchased or acquired
in a section 4501(d)(1) repurchase or section 4501(d)(2) repurchase
described in this paragraph (m) is a reduction for purposes of
computing the section 4501(d) covered corporation's section 4501(d)
excise tax base. See paragraph (c)(3)(i)(B) of this section.
(2) Section 4501(d) reorganization exception. The fair market value
of stock repurchased in an AFC repurchase that is a section 4501(d)(1)
repurchase or a CSFC repurchase that is a section 4501(d)(2) repurchase
described in any of paragraphs (m)(2)(i) through (iv) of this section
is a reduction for purposes of computing the section 4501(d) covered
corporation's section 4501(d) excise tax base (section 4501(d)
reorganization exception) to the extent that such AFC repurchase or
CSFC repurchase is for property permitted by section 354 or 355 of the
Code to be received without the recognition of gain or loss:
(i) A repurchase by a target corporation in an acquisitive
reorganization pursuant to the plan of reorganization.
(ii) A repurchase by a recapitalizing corporation in an E
reorganization pursuant to the plan of reorganization.
(iii) A repurchase by a transferor corporation in an F
reorganization pursuant to the plan of reorganization.
(iv) A repurchase by a distributing corporation in a split-off
(whether or not part of a D reorganization).
(3) Stock contributions to an employer-sponsored retirement plan--
(i) Reductions to section 4501(d) excise tax base--(A) General rule.
The fair market value of stock of an applicable foreign corporation or
a covered surrogate foreign corporation, as applicable, that is
repurchased or acquired in a section 4501(d)(1) repurchase or section
4501(d)(2) repurchase, as applicable, with respect to a section 4501(d)
covered corporation, is a reduction for purposes of computing the
section 4501(d) covered corporation's section 4501(d) excise tax base
if the stock that is repurchased or acquired, or an amount of stock
equal to the fair market value of the stock repurchased or acquired, is
contributed to an employer-sponsored retirement plan.
(B) Special rule for leveraged ESOPs. If a section 4501(d) covered
corporation maintains an ESOP with an exempt loan (as defined in
section 4975(d)(3) of the Code), allocations of qualifying employer
securities that are stock of the applicable foreign corporation or
covered surrogate foreign corporation from the ESOP suspense account to
ESOP participants' accounts that are attributable to employer
contributions (and not to dividends) are treated as contributions of
stock under this paragraph (m)(3), as of the date stock attributable to
repayment of the exempt loan is released from the suspense account and
allocated to ESOP participants' accounts.
(ii) Classes of stock contributed to an employer-sponsored
retirement plan. This paragraph (m)(3) applies to contributions of any
class of stock of an applicable foreign corporation or a covered
surrogate foreign corporation, as applicable, to an employer-sponsored
retirement plan regardless of the class of stock that was repurchased
or acquired in a section 4501(d)(1) repurchase or section 4501(d)(2)
repurchase by the section 4501(d) covered corporation.
(iii) Determining amount of reduction to section 4501(d) excise tax
base. The amount of the reduction under paragraph (m)(3)(i) of this
section for a section 4501(d) covered corporation is determined as
provided in paragraph (m)(3)(iii)(A) or (B) of this section.
(A) Same class of stock repurchased and contributed. If stock of an
applicable foreign corporation or a covered surrogate foreign
corporation, as applicable, is repurchased or acquired in a section
4501(d)(1) repurchase or section 4501(d)(2) repurchase, as applicable,
with respect to a section 4501(d) covered corporation, and stock of the
applicable foreign corporation or covered surrogate foreign
corporation, as applicable, that is of the same class is contributed to
an employer-sponsored retirement plan of the section 4501(d) covered
corporation, the amount of the reduction under paragraph (m)(3)(i) of
this section is equal to the lesser of--
(1) The aggregate fair market value of the stock of the same class
that was repurchased or acquired (as determined under paragraph (l) of
this section) during the taxable year; or
(2) The amount obtained by--
(i) Determining the aggregate fair market value of all stock of
that class repurchased or acquired in all section 4501(d)(1)
repurchases or section 4501(d)(2) repurchases, as applicable, with
respect to the section 4501(d) covered corporation (as determined under
paragraph (l) of this section) during its taxable year, reduced by the
fair market value of shares of that class of stock that is a reduction
to the section 4501(d) excise tax base for the taxable year under a
section 4501(d) statutory exception other than this paragraph (m)(3);
(ii) Dividing the amount determined under paragraph
(m)(3)(iii)(A)(2)(i) of this section by the number of shares of that
class repurchased or acquired in all section 4501(d)(1) repurchases or
section 4501(d)(2) repurchases, as applicable, with respect to the
section 4501(d) covered corporation during the taxable year, reduced by
the number of shares of that class of stock the fair market value of
which is a reduction to the section 4501(d) excise tax base for the
taxable year under a section 4501(d) statutory exception other than
this paragraph (m)(3); and
(iii) Multiplying the amount determined under paragraph
(m)(3)(iii)(A)(2)(ii) of this section by the number of shares of that
class contributed to an employer-sponsored retirement plan for the
taxable year.
(B) Different class of stock repurchased and contributed--(1) In
general. If stock of an applicable foreign corporation or a covered
surrogate foreign corporation, as applicable, of a different class of
stock than is repurchased or acquired in a section 4501(d)(1)
repurchase or section 4501(d)(2) repurchase, as applicable, with
respect to a section 4501(d) covered corporation is contributed to an
employer-sponsored retirement plan of the section 4501(d) covered
corporation, then the amount of the reduction under paragraph (m)(3)(i)
of this section is equal to the fair market value of the contributed
stock at the time the stock is contributed to the employer-sponsored
retirement plan.
(2) Maximum reduction permitted. The amount of the reduction under
paragraph (m)(3)(i) of this section must not exceed the section 4501(d)
excise tax base for the taxable year (determined without regard to any
reduction under paragraph (m)(3)(i) of this section), reduced by the
fair market value of any stock that is a reduction to the section
4501(d) excise tax base for the taxable year under a section 4501(d)
statutory exception other than this paragraph (m)(3).
(iv) Timing of contributions--(A) In general. The reduction in the
section 4501(d) excise tax base, in accordance with paragraph (m)(3)(i)
of this section
[[Page 26060]]
(that is, the reduction in the section 4501(d) excise tax base), for a
taxable year applies to contributions of stock of an applicable foreign
corporation or a covered surrogate foreign corporation, as applicable,
to an employer-sponsored retirement plan during the section 4501(d)
covered corporation's taxable year.
(B) Treatment of contributions after close of taxable year. For
purposes of paragraph (m)(3)(i) of this section, a section 4501(d)
covered corporation may treat stock contributions to an employer-
sponsored retirement plan made after the close of the section 4501(d)
covered corporation's taxable year as having been contributed during
that taxable year if the following two requirements are satisfied:
(1) The stock must be contributed to the employer-sponsored
retirement plan by the filing deadline for the form on which the
section 4501(d) excise tax must be reported (applicable form) that is
due for the first full quarter after the close of the section 4501(d)
covered corporation's taxable year.
(2) The stock must be treated by the employer-sponsored retirement
plan in the same manner that the plan would treat a contribution
received on the last day of that taxable year.
(C) No duplicate reductions. Stock contributions that are treated
under paragraph (m)(3)(iv)(B) of this section as having been
contributed in the taxable year to which the applicable form applies
may not be treated as having been contributed for any other taxable
year for purposes of the section 4501(d) excise tax.
(v) Contributions before January 1, 2023. A section 4501(d) covered
corporation with a taxable year that both begins before January 1,
2023, and ends after December 31, 2022, may include the fair market
value of all contributions of its stock to an employer-sponsored
retirement plan during the entirety of that taxable year for purposes
of applying this paragraph (m)(3).
(4) Repurchases or acquisitions by a dealer in securities in the
ordinary course of business--(i) In general. Subject to paragraph
(m)(4)(ii) of this section, the fair market value of stock repurchased
or acquired in a section 4501(d)(1) repurchase (for this purpose,
determined without regard to paragraph (b)(2)(xxii)(B) of this section)
or a covered purchase that is treated as a section 4501(d)(1)
repurchase by a specified affiliate of an applicable foreign
corporation or an applicable foreign corporation, or in a section
4501(d)(2) repurchase by a specified affiliate of a covered surrogate
foreign corporation or a covered surrogate foreign corporation, is a
reduction for purposes of computing the section 4501(d) covered
corporation's section 4501(d) excise tax base if the repurchasing or
acquiring entity is a dealer in securities (within the meaning of
section 475(c)(1) of the Code) to the extent the stock is repurchased
or acquired in the ordinary course of the dealer's business of dealing
in securities.
(ii) Applicability. The reduction described in paragraph (m)(4)(i)
of this section applies solely to the extent that--
(A) The dealer accounts for the stock as securities held primarily
for sale to customers in the dealer's ordinary course of business;
(B) The dealer disposes of the stock within a period of time that
is consistent with the holding of the stock for sale to customers in
the dealer's ordinary course of business, taking into account the terms
of the stock and the conditions and practices prevailing in the markets
for similar stock during the period in which the stock is held; and
(C) The dealer (if it is an applicable foreign corporation or a
covered surrogate foreign corporation) does not sell or otherwise
transfer the stock to a specified affiliate of the applicable foreign
corporation or covered surrogate foreign corporation, as applicable, or
the dealer (if it is a specified affiliate of an applicable foreign
corporation or of a covered surrogate foreign corporation, as
applicable) does not sell or otherwise transfer the stock to the
applicable foreign corporation, covered surrogate foreign corporation,
or to another specified affiliate of the applicable foreign corporation
or covered surrogate foreign corporation, as applicable, in each case
other than in a sale or transfer to a dealer that also satisfies the
requirements of this paragraph (m)(4)(ii).
(5) Repurchases by a RIC or REIT. Section 4501(e)(5) does not apply
for purposes of section 4501(d).
(6) AFC repurchase or CSFC repurchase treated as a dividend--(i) In
general. In accordance with paragraph (m)(6)(ii) of this section, the
fair market value of stock repurchased by an applicable foreign
corporation or a covered surrogate foreign corporation in an AFC
repurchase or a CSFC repurchase, as applicable, is a reduction for
purposes of computing the section 4501(d) covered corporation's section
4501(d) excise tax base to the extent the AFC repurchase or CSFC
repurchase, as applicable, is treated as a distribution of a dividend
under section 301(c)(1) or 356(a)(2).
(ii) Rebuttable presumption of no dividend equivalence. An AFC
repurchase or CSFC repurchase to which section 302 or 356(a) applies is
presumed to be subject to section 302(a) or 356(a)(1), respectively
(and, therefore, is presumed ineligible for the exception in paragraph
(m)(6)(i) of this section). A section 4501(d) covered corporation may
rebut this presumption with regard to a specific shareholder of an
applicable foreign corporation or a covered surrogate foreign
corporation, as applicable, solely by establishing with sufficient
evidence that the shareholder treats the AFC repurchase or CSFC
repurchase as a dividend on the shareholder's Federal income tax return
or, for a shareholder who does not have a Federal income tax filing
obligation with respect to the AFC repurchase or CSFC repurchase, would
properly treat the AFC repurchase or CSFC repurchase as a dividend if
the shareholder filed a Federal income tax return.
(n) Application of section 4501(d) netting rule--(1) In general.
This paragraph (n) provides the section 4501(d) netting rule, under
which the section 4501(d) excise tax base with respect to a section
4501(d) covered corporation for a taxable year is reduced only by stock
of the applicable foreign corporation or covered surrogate foreign
corporation, as applicable, issued or provided by the section 4501(d)
covered corporation to its employees during its taxable year. Any
reference in this paragraph (n) to issuing or providing stock to an
employee refers solely to stock of the applicable foreign corporation
or covered surrogate foreign corporation, as applicable, that is issued
or provided by a section 4501(d) covered corporation to an employee in
connection with the employee's performance of services in the
employee's capacity as an employee of the section 4501(d) covered
corporation. The fair market value of stock of an applicable foreign
corporation or a covered surrogate foreign corporation, as applicable,
that is described in this paragraph (n) is a reduction for purposes of
computing the section 4501(d) covered corporation's section 4501(d)
excise tax base. See paragraph (c)(3)(i)(C) of this section.
(2) Stock issued or provided outside period of applicable foreign
corporation or covered surrogate foreign corporation status. Any stock
issued or provided prior to the initiation date or after the cessation
date of the applicable foreign corporation or covered surrogate foreign
corporation, as applicable, is not taken into account under paragraph
(n)(1) of
[[Page 26061]]
this section. See paragraph (f)(1) of this section.
(3) Issuances or provisions before January 1, 2023. Except as
provided in paragraph (n)(2) of this section, a section 4501(d) covered
corporation with a taxable year that begins before January 1, 2023, and
ends after December 31, 2022, must include the fair market value of
issuances or provisions of stock that occur before January 1, 2023, in
such taxable year for purposes of paragraph (n)(1) of this section for
that taxable year.
(4) F reorganizations. For purposes of this paragraph (n), the
transferor corporation and the resulting corporation (as defined in
Sec. 1.368-2(m)(1) of this chapter) in an F reorganization are treated
as the same corporation.
(5) Stock issued or provided in connection with the performance of
services--(i) In general. For purposes of this paragraph (n), stock of
an applicable foreign corporation or a covered surrogate foreign
corporation, as applicable, is transferred by the section 4501(d)
covered corporation in connection with the performance of services only
if the transfer is described in section 83, including pursuant to a
nonqualified stock option described in Sec. 1.83-7 of this chapter, or
is pursuant to a stock option described in section 421 of the Code.
(ii) Sale of shares to cover exercise price or withholding--(A)
Payment or advance by third party equal to exercise price. If a third
party pays the exercise price of a stock option on behalf of an
employee or advances to an employee an amount equal to the exercise
price of a stock option that the employee uses to exercise the option,
then any stock transferred by the section 4501(d) covered corporation
to the employee or to the third party in connection with exercising the
option is treated as issued or provided in connection with the
performance of the services.
(B) Advance by third party equal to withholding obligation. If a
third party advances an amount equal to the withholding obligation of
an employee, then any stock transferred by the section 4501(d) covered
corporation to the employee or to the third party in connection with
this arrangement is treated as issued or provided in connection with
the performance of services.
(6) Date of issuance or provision for section 4501(d) netting
rule--(i) In general. Stock of an applicable foreign corporation or a
covered surrogate foreign corporation, as applicable, is issued or
provided to an employee of a section 4501(d) covered corporation as of
the date the employee is treated as the beneficial owner of the stock
for Federal income tax purposes. In general, an employee is treated as
the beneficial owner of the stock when the stock is both transferred by
the section 4501(d) covered corporation and substantially vested within
the meaning of Sec. 1.83-3(b) of this chapter. Thus, stock transferred
pursuant to a vested stock award or restricted stock unit is issued or
provided when the section 4501(d) covered corporation initiates payment
of the stock. Stock transferred that is not substantially vested within
the meaning of Sec. 1.83-3(b) of this chapter is not issued or
provided until it vests, except as provided in paragraph (n)(6)(iii) of
this section.
(ii) Stock options and stock appreciation rights. Stock of an
applicable foreign corporation or a covered surrogate foreign
corporation, as applicable, transferred by a section 4501(d) covered
corporation pursuant to an option described in Sec. 1.83-7 of this
chapter or section 421 or a stock appreciation right is issued or
provided by the section 4501(d) covered corporation as of the date the
option or stock appreciation right is exercised.
(iii) Stock on which a section 83(b) election is made. Stock of an
applicable foreign corporation or a covered surrogate foreign
corporation, as applicable, transferred by the section 4501(d) covered
corporation when it is not substantially vested within the meaning of
Sec. 1.83-3(b) of this chapter, but as to which a valid election under
section 83(b) is made, is treated as issued or provided by the section
4501(d) covered corporation as of the transfer date.
(7) Fair market value of stock of an applicable foreign corporation
or a covered surrogate foreign corporation that is issued or provided
to employees--(i) In general. For purposes of paragraph (n)(1) of this
section, the fair market value of stock of an applicable foreign
corporation or a covered surrogate foreign corporation that is issued
or provided is determined under section 83 as of the date the stock is
issued or provided to an employee by the section 4501(d) covered
corporation. The fair market value of the stock is determined under the
rules provided in section 83 regardless of whether an amount is
includible in the employee's income under section 83 or otherwise. For
example, the fair market value of stock issued or provided by a section
4501(d) covered corporation to its employee pursuant to a stock option
described in section 421 and stock issued or provided by a section
4501(d) covered corporation to an employee who is a nonresident alien
for services performed outside of the United States is determined using
the rules provided in section 83.
(ii) Market price of stock denominated in non-U.S. currency. The
market price of any stock of an applicable foreign corporation or a
covered surrogate foreign corporation that is denominated in a currency
other than the U.S. dollar is converted into U.S. dollars at the spot
rate (as defined in Sec. 1.988-1(d)(1) of this chapter) on the date
the stock is issued or provided by the section 4501(d) covered
corporation to its employee.
(8) Issuances that are disregarded for purposes of applying the
section 4501(d) netting rule--(i) In general. This paragraph (n)(8)
lists the sole circumstances in which an issuance or provision of stock
by the section 4501(d) covered corporation to its employee is
disregarded for purposes of paragraph (n) of this section. The
transfers of stock described in Sec. 58.4501-4(f)(1) through (9) are
not issuances or provisions of stock by a section 4501(d) covered
corporation to its employees and therefore are not relevant to the
section 4501(d) netting rule.
(ii) Stock contributions to an employer-sponsored retirement plan.
Any stock of an applicable foreign corporation or a covered surrogate
foreign corporation, as applicable, contributed to an employer-
sponsored retirement plan, any stock of an applicable foreign
corporation or a covered surrogate foreign corporation, as applicable,
treated as contributed to an employer-sponsored retirement plan under
paragraph (m)(3) of this section, and any stock of an applicable
foreign corporation or a covered surrogate foreign corporation, as
applicable, sold to a leveraged or non-leveraged ESOP, is disregarded
for purposes of this paragraph (n).
(iii) Net exercises and share withholding. Stock of an applicable
foreign corporation or a covered surrogate foreign corporation, as
applicable, withheld by a section 4501(d) covered corporation to
satisfy the exercise price of a stock option issued to an employee, or
to pay any withholding obligation, is disregarded for purposes of
paragraph (n) of this section. For example, stock of an applicable
foreign corporation or a covered surrogate foreign corporation, as
applicable, withheld by a section 4501(d) covered corporation to pay
the exercise price of a stock option, to satisfy an employer's income
tax withholding obligation under section 3402 of the Code, to satisfy
an employer's withholding obligation under section 3102 of the Code, or
to
[[Page 26062]]
satisfy an employer's withholding obligation for State, local, or
foreign taxes, is disregarded for purposes of this paragraph (n) to an
employee.
(iv) Settlement other than in stock. Settlement of an option
contract with respect to an applicable foreign corporation or a covered
surrogate foreign corporation, as applicable, using any consideration
other than stock of the applicable foreign corporation or covered
surrogate foreign corporation, as applicable, (including cash) is
disregarded for purposes of this paragraph (n).
(v) Instrument not in the legal form of stock--(A) Generally
disregarded. Except as provided in paragraph (n)(8)(v)(B) of this
section, the issuance or provision by a section 4501(d) covered
corporation of an instrument that is not in the legal form of stock but
is treated as stock for Federal income tax purposes (non-stock
instrument) is disregarded for purposes of the section 4501(d) netting
rule.
(B) Certain instruments treated as issued--(1) In general. Subject
to paragraphs (n)(8)(v)(B)(2), (3), and (4) of this section, if there
is a section 4501(d)(1) repurchase or section 4501(d)(2) repurchase of
a non-stock instrument, the issuance or provision of the instrument is
regarded for purposes of the section 4501(d) netting rule at the time
of such section 4501(d)(1) repurchase or section 4501(d)(2) repurchase,
provided that the issuance or provision was by the section 4501(d)
covered corporation to its employees. For purposes of the stock
repurchase excise tax regulations, the delivery of stock pursuant to
the terms of a non-stock instrument is treated as a section 4501(d)(1)
repurchase or a section 4501(d)(2) repurchase, as applicable, of the
non-stock instrument in exchange for an issuance or provision of the
stock that is delivered.
(2) Issuances or provisions before the initiation date or after the
cessation date. Any non-stock instrument issued or provided by the
section 4501(d) covered corporation before the initiation date or after
the cessation date is not regarded for purposes of the section 4501(d)
netting rule.
(3) Identification of an instrument not in the legal form of stock.
The section 4501(d) covered corporation must identify the section
4501(d)(1) repurchase or section 4501(d)(2) repurchase, as applicable,
of a non-stock instrument on the return on which the stock repurchase
excise tax must be reported for the section 4501(d) covered
corporation's taxable year in which the section 4501(d)(1) repurchase
or section 4501(d)(2) repurchase, as applicable, occurs (repurchase
year) in order for the issuance or provision to be regarded under
paragraph (n)(8)(v)(B)(1) of this section.
(4) Consistency requirement. In the repurchase year of a non-stock
instrument (tested non-stock instrument), the issuance or provision of
the non-stock instrument is not regarded under paragraph
(n)(8)(v)(B)(1) of this section unless the section 4501(d) covered
corporation reports or has reported the section 4501(d)(1) repurchase
or section 4501(d)(2) repurchase of all other comparable non-stock
instruments repurchased or acquired within the five taxable years
ending on the last day of the repurchase year in a consistent manner. A
comparable non-stock instrument is a non-stock instrument that has
substantially similar economic terms as the tested non-stock
instrument, regardless of whether the comparable non-stock instrument
and the tested non-stock instrument have the same legal form. A
comparable non-stock instrument is reported in a consistent manner if
it is or was timely reported on the return on which the stock
repurchase excise tax must be reported that is or was due for the first
full quarter after the close of the repurchase year for such comparable
non-stock instrument. Notwithstanding the first sentence of this
paragraph (n)(8)(v)(B)(4), the issuance or provision of the tested non-
stock instrument will be regarded if the section 4501(d) covered
corporation demonstrates to the satisfaction of the IRS that the
section 4501(d) covered corporation's failure to timely report the
repurchase or acquisition of the comparable non-stock instruments was
due to reasonable cause (within the meaning Sec. 1.6664-4 of this
chapter) and not willful neglect. In determining whether this failure
to report was due to reasonable cause and not willful neglect, the IRS
will consider all the facts and circumstances, including the steps the
section 4501(d) covered corporation took to comply with its Federal tax
reporting and payment obligations.
(5) Fair market value of the instrument. The amount of the
reduction for purposes of computing the section 4501(d) covered
corporation's section 4501(d) excise tax base for a taxable year under
this section for the issuance or provision of a non-stock instrument is
equal to the lesser of the fair market value of the instrument when the
instrument was issued or provided within the meaning of paragraph
(n)(7) of this section or the fair market value of the instrument at
the time of the section 4501(d)(1) repurchase or section 4501(d)(2)
repurchase, as applicable.
(o) Rules applicable before April 13, 2024--(1) Acquisitions of
applicable foreign corporation stock. If an applicable specified
affiliate of an applicable foreign corporation acquires stock of the
applicable foreign corporation from a person that is not the applicable
foreign corporation or another specified affiliate of such applicable
foreign corporation--
(i) The applicable specified affiliate is treated as a covered
corporation with regard to the acquisition; and
(ii) The acquisition is treated as a repurchase of stock of a
covered corporation by a covered corporation.
(2) Funding rule. For purposes of applying section 4501(d)(1), an
applicable specified affiliate is treated as acquiring stock of an
applicable foreign corporation if the applicable specified affiliate
funds by any means (including through distributions, debt, or capital
contributions) the acquisition or repurchase of stock of the applicable
foreign corporation by the applicable foreign corporation or a
specified affiliate that is not also an applicable specified affiliate,
and such funding is undertaken for a principal purpose of avoiding the
stock repurchase excise tax. For purposes of the preceding sentence,
the fair market value of stock treated as acquired by the applicable
specified affiliate is limited to the amount funded by the applicable
specified affiliate. This paragraph (o)(2) applies with respect to a
funding that occurs on or after December 27, 2022, provided that the
covered purchase occurs after December 31, 2022, and on or before April
12, 2024. See paragraph (r)(2) of this section.
(3) Per se rule. A principal purpose described in paragraph (o)(2)
of this section is deemed to exist if the applicable specified
affiliate funds by any means, other than through distributions, the
applicable foreign corporation or a specified affiliate that is not
also an applicable specified affiliate, and such funded entity acquires
or repurchases stock of the applicable foreign corporation within two
years of the funding.
(4) Repurchases or acquisitions of covered surrogate foreign
corporation stock. If a covered surrogate foreign corporation
repurchases its stock, or if a specified affiliate of the covered
surrogate foreign corporation acquires stock of the covered surrogate
foreign corporation--
(i) The expatriated entity with respect to the covered surrogate
foreign corporation is treated as a covered
[[Page 26063]]
corporation with respect to the repurchase or acquisition; and
(ii) The repurchase or acquisition is treated as a repurchase of
stock of a covered corporation by the covered corporation.
(5) Definitions solely for purposes of paragraph (o)--(i)
Application of definitions in Sec. Sec. 58.4501-1(b) and 58.4501-
7(b)(2). Solely for purposes of this paragraph (o), any term used but
not defined in this paragraph (o) has the meaning provided in Sec.
58.4501-1(b) or paragraph (b)(2) of this section (other than paragraph
(b)(2)(xiii) of this section), as applicable.
(ii) Definition of applicable specified affiliate. Solely for
purposes of this paragraph (o), the term applicable specified affiliate
means 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).
(6) Early application of rules of this section other than paragraph
(o). See paragraph (r)(3) of this section regarding a section 4501(d)
covered corporation's ability to choose to apply all the rules of this
section (other than paragraphs (o) and (r)(1) and (2) of this section)
to transactions occurring after December 31, 2022.
(p) Section 4501(d)(1) examples. The following examples illustrate
the application of the rules in this section relating to section
4501(d)(1). For purposes of the following examples, unless otherwise
stated: Corporation FZ is an applicable foreign corporation; each
entity has a calendar taxable year, has no direct or indirect owner
that is a domestic entity, and is not related to any other entity; each
corporation's only outstanding stock is a single class of common stock;
the functional currency (within the meaning of section 985 of the Code)
of any entity is the U.S. dollar; any repurchase or acquisition of the
stock of an applicable foreign corporation is from a person who is not
the applicable foreign corporation or a specified affiliate of the
applicable foreign corporation; no stock is transferred to any
employee; for examples that expressly provide that stock is transferred
to any employee, such transfer is made in connection with the
employee's performance of services in its capacity as an employee of
the transferor, and the employee is treated as the beneficial owner of
the stock for Federal income tax purposes on the date of the transfer;
there are no covered fundings or covered purchases; and the section
4501(d) statutory exceptions are inapplicable.
(1) Example 1: The section 4501(d) netting rule with respect to
a single applicable specified affiliate--(i) Facts. Corporation FZ
owns all the outstanding stock of Corporation US1, a domestic
corporation. Each of Employee M and Employee P is an employee of
Corporation US1. On February 1, 2025, Corporation US1 purchases 100
shares of stock of Corporation FZ when the fair market value of each
share is $8x. On May 15, 2025, Corporation US1 transfers to Employee
M 50 shares of stock of Corporation FZ when the fair market value of
each share is $5x. On November 1, 2025, Corporation US1 transfers to
Employee P 30 shares of stock of Corporation US1 when the fair
market value of each share is $9x.
(ii) Analysis. Corporation US1's purchase of 100 shares of stock
of Corporation FZ on February 1, 2025, is a section 4501(d)(1)
repurchase. See paragraph (b)(2)(xxii)(A) of this section.
Corporation US1 is a section 4501(d) covered corporation with
respect to the section 4501(d)(1) repurchase. See paragraph
(b)(2)(xv)(A) of this section. For purposes of computing Corporation
US1's section 4501(d) excise tax base for its 2025 taxable year, the
fair market value of the 100 shares of stock of Corporation FZ
subject to the section 4501(d)(1) repurchase is $800x. See paragraph
(l) of this section. Accordingly, the section 4501(d)(1) repurchase
increases Corporation US1's section 4501(d) excise tax base for the
2025 taxable year by $800x. 50 shares of Corporation FZ stock are
treated as issued or provided to Employee M on May 15, 2025. See
paragraph (n) of this section. Therefore, Corporation US1's section
4501(d) excise tax base for its 2025 taxable year is reduced by
$250x (50 shares x $5x per share = $250x). See paragraph
(c)(3)(i)(C) of this section. Corporation US1's section 4501(d)
excise tax base for its 2025 taxable year is not reduced by the
transfer of stock of Corporation US1 to Employee P because the
section 4501(d) excise tax base with respect to Corporation US1 can
only be reduced by the fair market value of stock of Corporation FZ
issued or provided by Corporation US1 to employees of Corporation
US1. See paragraph (n) of this section. Accordingly, Corporation
US1's section 4501(d) excise tax base with respect to these
transactions for its 2025 taxable year is $550x ($800x repurchase-
$250x issuance = $550x).
(2) Example 2: The section 4501(d) netting rule with respect to
multiple applicable specified affiliates--(i) Facts. Corporation FZ
owns all the outstanding stock of both Corporation US1, a domestic
corporation, and Corporation US2, a domestic corporation. Employee T
is an employee of Corporation US2. On February 1, 2025, Corporation
US1 purchases 100 shares of stock of Corporation FZ when the fair
market value of each share is $8x. On May 15, 2025, Corporation US2
transfers to Employee T 50 shares of stock of Corporation FZ when
the fair market value of each share is $5x.
(ii) Analysis. Corporation US1's purchase of 100 shares of stock
of Corporation FZ on February 1, 2025, is a section 4501(d)(1)
repurchase. See paragraph (b)(2)(xxii)(A) of this section.
Corporation US1 is a section 4501(d) covered corporation with
respect to the section 4501(d)(1) repurchase. See paragraph
(b)(2)(xv)(A) of this section. For purposes of computing Corporation
US1's section 4501(d) excise tax base for its 2025 taxable year, the
fair market value of the 100 shares of stock of Corporation FZ
subject to the section 4501(d)(1) repurchase is $800x. See paragraph
(l) of this section. Accordingly, the section 4501(d)(1) repurchase
increases Corporation US1's section 4501(d) excise tax base for the
2025 taxable year by $800x. Corporation US1's section 4501(d) excise
tax base for its 2025 taxable year is not reduced by the transfer of
stock of Corporation FZ to Employee T, an employee of Corporation
US2, because the section 4501(d) excise tax base with respect to
Corporation US1 can only be reduced by the fair market value of
stock of Corporation FZ issued or provided by Corporation US1 to
employees of Corporation US1. See paragraph (n) of this section.
(3) Example 3: A single covered funding and covered purchase--
(i) Facts. Corporation FZ owns all the outstanding stock of
Corporation US1, a domestic corporation. On March 1, 2024,
Corporation US1 makes a distribution with respect to its stock of
$600x to Corporation FZ. A principal purpose of the distribution is
to fund a covered purchase. On May 15, 2026, Corporation FZ
repurchases 100 shares of its stock when the fair market value of
each share is $8x.
(ii) Analysis. Because a principal purpose of the distribution
by Corporation US1 to Corporation FZ is to fund a covered purchase,
the distribution of $600x is a covered funding. See paragraph (e)(1)
of this section. The repurchase by Corporation FZ of its stock is an
AFC repurchase and therefore a covered purchase. See paragraph
(b)(2)(vii) of this section. The entire amount of the covered
purchase, or $800x, is the allocable amount of the covered purchase.
See paragraph (e)(5) of this section. The entire amount of the
covered funding, or $600x, is allocated to the allocable amount of
the covered purchase because the amount of the covered funding is
less than the amount of the covered purchase. See paragraph
(e)(7)(iii) of this section. The amount of stock of Corporation FZ
acquired in the covered purchase that is treated as acquired by
Corporation US1 is equal to the amount of covered fundings allocated
to the allocable amount of the covered purchase, or $600x (which
represents 75 of the 100 shares of stock repurchased). See paragraph
(e)(4) of this section. Corporation US1 is treated as acquiring
stock of Corporation FZ in a section 4501(d)(1) repurchase on May
15, 2026. See paragraphs (b)(2)(xxii)(B) and (k)(4) of this section.
Corporation US1 is a section 4501(d) covered corporation with
respect to the section 4501(d)(1) repurchase. See paragraph
(b)(2)(xv)(A) of this section. For purposes of computing Corporation
US1's section 4501(d) excise tax base, the fair market value of the
75 shares of stock of Corporation FZ subject to the section
4501(d)(1) repurchase is $600x. See paragraph (l) of this section.
Accordingly, the section 4501(d)(1) repurchase by Corporation US1
increases its section 4501(d) excise tax base for the 2026 taxable
year by $600x.
(4) Example 4: Multiple covered fundings and a single covered
purchase--(i) Facts. The
[[Page 26064]]
facts are the same as in paragraph (p)(3)(i) of this section
(Example 3), except that Corporation FZ also owns all the stock of
Corporation FB, a foreign corporation. In addition, on April 15,
2024, Corporation FB makes a distribution with respect to its stock
of $1,000x to Corporation FZ. Further, on October 15, 2024,
Corporation US1 makes another distribution with respect to its stock
of $400x to Corporation FZ. A principal purpose of the October 15,
2024, distribution is also to fund a covered purchase.
(ii) Analysis. Because a principal purpose of the distributions
by Corporation US1 to Corporation FZ is to fund a covered purchase,
each of the March 1, 2024, distribution of $600x and the October 15,
2024, distribution of $400x is a covered funding. See paragraph
(e)(1) of this section. The repurchase by Corporation FZ of its
stock is an AFC repurchase and therefore a covered purchase. See
paragraph (b)(2)(vii) of this section. The entire amount of the
covered purchase, or $800x, is the allocable amount of the covered
purchase. See paragraph (e)(5) of this section. Further, the
allocable amount of the covered purchase is treated as made first
from the covered fundings. With respect to the covered fundings, the
March 1, 2024, distribution by Corporation US1 is treated as funding
the allocable amount of the covered purchase before the October 15,
2024, distribution by Corporation US1. See paragraphs (e)(6) and
(e)(7)(iv) of this section. Accordingly, the entire amount of the
March 1, 2024, distribution, or $600x, and $200x of the October 15,
2024, distribution is allocated to the allocable amount of the
covered purchase. The amount of stock of Corporation FZ acquired in
the covered purchase that is treated as acquired by Corporation US1
is equal to the amount of covered fundings allocated to the
allocable amount of the covered purchase, or $800x (which represents
the 100 shares of stock repurchased). See paragraph (e)(4) of this
section. Corporation US1 is treated as acquiring stock of
Corporation FZ in a section 4501(d)(1) repurchase on May 15, 2026.
See paragraphs (b)(2)(xxii)(B) and (k)(4) of this section.
Corporation US1 is a section 4501(d) covered corporation with
respect to the section 4501(d)(1) repurchase. See paragraph
(b)(2)(xv)(A) of this section. For purposes of computing Corporation
US1's section 4501(d) excise tax base, the fair market value of the
100 shares of stock of Corporation FZ subject to the section
4501(d)(1) repurchase is $800x. See paragraph (l) of this section.
Accordingly, the section 4501(d)(1) repurchase by Corporation US1
increases its section 4501(d) excise tax base for the 2026 taxable
year by $800x.
(5) Example 5: The rebuttable presumption--(i) Facts.
Corporation FZ owns all the outstanding stock of Corporation US1, a
domestic corporation. Corporation US1 owns all the outstanding stock
of Corporation FD, a foreign corporation. On March 1, 2024,
Corporation US1 makes a capital contribution of $600x to Corporation
FD. On May 15, 2024, Corporation FD acquires 100 shares of the stock
of Corporation FZ when the fair market value of each share is $8x.
The facts and circumstances do not clearly establish that there was
not a principal purpose of avoiding the section 4501(d) excise tax
as described in paragraph (e)(1) of this section.
(ii) Analysis. A principal purpose described in paragraph (e)(1)
of this section is presumed to exist because Corporation FD is a
downstream relevant entity and the capital contribution by
Corporation US1 to Corporation FD occurs within two years of a
covered purchase by Corporation FD. See paragraph (e)(2) of this
section. Because the facts and circumstances do not clearly
establish that there was not a principal purpose with respect to the
March 1, 2024, capital contribution of avoiding the section 4501(d)
excise tax as described in paragraph (e)(1) of this section, the
presumption is not rebutted. See paragraph (e)(2) of this section.
Accordingly, the capital contribution of $600x is a covered funding.
See paragraph (e)(1) of this section. The acquisition by Corporation
FD of the stock of Corporation FZ is an acquisition of stock of an
applicable foreign corporation by a relevant entity and therefore a
covered purchase. See paragraph (b)(2)(vii) of this section. The
entire amount of the covered purchase, or $800x, is the allocable
amount of the covered purchase. See paragraph (e)(5) of this
section. The entire amount of the covered funding, or $600x, is
allocated to the allocable amount of the covered purchase because
the amount of the covered funding is less than the amount of the
covered purchase. See paragraph (e)(7)(iii) of this section. The
amount of stock of Corporation FZ acquired in the covered purchase
that is treated as acquired by Corporation US1 is equal to the
amount of covered fundings allocated to the allocable amount of the
covered purchase, or $600x (which represents 75 of the 100 shares of
stock repurchased). See paragraph (e)(4) of this section.
Corporation US1 is treated as acquiring stock of Corporation FZ in a
section 4501(d)(1) repurchase on May 15, 2024. See paragraphs
(b)(2)(xxii)(B) and (k)(4) of this section. Corporation US1 is a
section 4501(d) covered corporation with respect to the section
4501(d)(1) repurchase. See paragraph (b)(2)(xv)(A) of this section.
For purposes of computing Corporation US1's section 4501(d) excise
tax base, the fair market value of the 75 shares of stock of
Corporation FZ subject to the section 4501(d)(1) repurchase is
$600x. See paragraph (l) of this section. Accordingly, the section
4501(d)(1) repurchase by Corporation US1 increases its section
4501(d) excise tax base for the 2024 taxable year by $600x. Other
covered fundings, if any, could be allocated to the remaining $200x
of stock of Corporation FZ that Corporation FD acquired.
(6) Example 6: Indirect funding subject to rebuttable
presumption--(i) Facts. Corporation FZ owns all the outstanding
stock of each of Corporation US1, a domestic corporation and
Corporation FB, a foreign corporation. Corporation US1 owns all the
outstanding stock of Corporation FY, a foreign corporation.
Corporation FY owns all the outstanding stock of Corporation FD, a
foreign corporation. On March 1, 2024, Corporation US1 makes a loan
of $1,000x to Corporation FB. On March 15, 2024, Corporation FB
makes a loan of $900x to Corporation FD. The facts and circumstances
do not clearly establish that there was not a principal purpose of
avoiding the section 4501(d) excise tax as described in paragraph
(e)(1) of this section. On May 15, 2024, Corporation FD acquires 100
shares of the stock of Corporation FZ when the fair market value of
each share is $8x.
(ii) Analysis. A principal purpose described in paragraph (e)(1)
of this section is presumed to exist because Corporation FD is a
downstream relevant entity and the March 1, 2024, loan by
Corporation US1 to Corporation FB occurs within two years of a
covered purchase by Corporation FD. See paragraph (e)(2) of this
section. Because the facts and circumstances do not clearly
establish that there was not a principal purpose of avoiding the
section 4501(d) excise tax as described in paragraph (e)(1) of this
section, the presumption is not rebutted. See paragraph (e)(2) of
this section. Accordingly, the March 1, 2024, loan is a covered
funding. See paragraph (e)(1) of this section. The acquisition by
Corporation FD of the stock of Corporation FZ is an acquisition of
stock of an applicable foreign corporation by a relevant entity and
therefore a covered purchase. See paragraph (b)(2)(vii) of this
section. The entire amount of the covered purchase, or $800x, is the
allocable amount of the covered purchase. See paragraph (e)(5) of
this section. $800x of the covered funding is allocated to the
allocable amount of covered purchase because the allocable amount of
the covered purchase is less than the amount of the covered funding.
See paragraph (e)(7)(iii) of this section. The amount of stock of
Corporation FZ acquired in the covered purchase that is treated as
acquired by Corporation US1 is equal to the amount of covered
fundings allocated to the allocable amount of the covered purchase,
or $800x (which represents the 100 shares of stock repurchased). See
paragraph (e)(4) of this section. Corporation US1 is treated as
acquiring stock of Corporation FZ in a section 4501(d)(1) repurchase
on May 15, 2024. See paragraphs (b)(2)(xxii)(B) and (k)(4) of this
section. Corporation US1 is a section 4501(d) covered corporation
with respect to the section 4501(d)(1) repurchase. See paragraph
(b)(2)(xv)(A) of this section. For purposes of computing Corporation
US1's section 4501(d) excise tax base, the fair market value of the
100 shares of stock of Corporation FZ subject to the section
4501(d)(1) repurchase is $800x. See paragraph (l) of this section.
Accordingly, the section 4501(d)(1) repurchase by Corporation US1
increases its section 4501(d) excise tax base for the 2024 taxable
year by $800x.
(7) Example 7: Indirect funding--(i) Facts. Corporation FZ owns
all the outstanding stock of two foreign corporations, Corporation
FB and Corporation FE, and all the outstanding stock of two domestic
corporations, Corporation US1 and Corporation US2. On March 1, 2024,
Corporation US1 makes a loan of $700x to Corporation FZ. On April 1,
2024, Corporation FZ makes a loan to Corporation FB of $1,100x. On
May 15, 2024, Corporation FE makes a loan of $900x to Corporation
FB. On June 1, 2024, Corporation US2 makes a
[[Page 26065]]
loan of $800x to Corporation FZ. A principal purpose of each of the
March 1, 2024, loan by Corporation US1 and the June 1, 2024, loan by
Corporation US2 is to fund a covered purchase. On December 1, 2024,
Corporation FB acquires 100 shares of stock of Corporation FZ when
the fair market value of each share is $8x.
(ii) Analysis. Because a principal purpose of each of the March
1, 2024, loan by Corporation US1 and the June 1, 2024, loan by
Corporation US2 is to fund a covered purchase, each of those loans
is a covered funding. See paragraph (e)(1) of this section. The
acquisition by Corporation FB of stock of Corporation FZ is an
acquisition of stock of an applicable foreign corporation by a
relevant entity and therefore a covered purchase. See paragraph
(b)(2)(vii) of this section. The entire amount of the covered
purchase, or $800x, is the allocable amount of the covered purchase.
See paragraph (e)(5) of this section. The March 1, 2024, loan by
Corporation US1 and the June 1, 2024, loan by Corporation US2 are
treated as funding the allocable amount of the covered purchase
before the May 15, 2024, loan by Corporation FE. See paragraph
(e)(5) of this section. Further, the March 1, 2024, loan by
Corporation US1 is treated as funding the allocable amount of the
covered purchase before the June 1, 2024, loan by Corporation US2.
See paragraph (e)(7)(iv) of this section. Accordingly, the entire
amount of the March 1, 2024, loan, or $700x, and $100x of the June
1, 2024, loan is allocated to the allocable amount of the covered
purchase. The amount of stock of Corporation FZ acquired in the
covered purchase that is treated as acquired by Corporation US1 is
the amount of covered fundings by Corporation US1 allocated to the
allocable amount of the covered purchase, or $700x (which represents
the 87.5 shares of stock repurchased). The amount of stock of
Corporation FZ acquired in the covered purchase that is treated as
acquired by Corporation US2 is equal to the amount of covered
fundings by Corporation US2 allocated to the allocable amount of the
covered purchase, or $100x (which represents the 12.5 shares of
stock repurchased). See paragraph (e)(4) of this section.
Corporation US1 and Corporation US2 are each treated as acquiring
stock of Corporation FZ in a section 4501(d)(1) repurchase on
December 1, 2024. See paragraphs (b)(2)(xxii)(B) and (k)(4) of this
section. Each of Corporation US1 and Corporation US2 is a section
4501(d) covered corporation with respect to its portion of the
section 4501(d)(1) repurchase. See paragraph (b)(2)(xv)(A) of this
section. For purposes of computing Corporation US1's section 4501(d)
excise tax base, the fair market value of the 87.5 shares of stock
of Corporation FZ subject to the section 4501(d)(1) repurchase is
$700x. For purposes of computing Corporation US2's section 4501(d)
excise tax base, the fair market value of the 12.5 shares of stock
of Corporation FZ subject to the section 4501(d)(1) repurchase is
$100x. See paragraph (l) of this section. Accordingly, the section
4501(d)(1) repurchase by Corporation US1 increases its section
4501(d) excise tax base for the 2024 taxable year by $700x, and the
section 4501(d)(1) repurchase by Corporation US2 increases its
section 4501(d) excise tax base for the 2024 taxable year by $100x.
(8) Example 8: A foreign partnership that is an applicable
specified affiliate--(i) Facts. Partnership FP is a foreign
partnership in which Corporation FZ, Corporation FB, a foreign
corporation, and Corporation US1, a domestic corporation, are
partners. Corporation FZ owns 70 percent of the capital interests
and profits interests of Partnership FP; Corporation FB owns 20
percent of the capital interests and profits interests of
Partnership FP; and Corporation US1 owns 10 percent of the capital
interests and profits interests of Partnership FP. On March 1, 2024,
Partnership FP purchases 100 shares of stock of Corporation FZ when
the fair market value of each share is $8x.
(ii) Analysis. Corporation US1 is a domestic entity. See
paragraph (b)(2)(x) of this section. Corporation US1 is a direct
partner with respect to Partnership FP for purposes of section
4501(d)(1) because Corporation US1 directly owns an interest in
Partnership FP and is not a de minimis domestic entity partner with
respect to Partnership FP. See paragraphs (h)(2)(i) and (h)(5) of
this section. Accordingly, Partnership FP is an applicable specified
affiliate of Corporation FZ because Corporation FZ owns more than 50
percent of the capital interests or profits interests of Partnership
FP, and Corporation US1, a domestic entity, is a direct partner of
Partnership FP. Partnership FP's purchase of 100 shares of stock of
Corporation FZ is a section 4501(d)(1) repurchase. See paragraph
(b)(2)(xxii)(A) of this section. Partnership FP is a section 4501(d)
covered corporation with respect to the section 4501(d)(1)
repurchase. See paragraph (b)(2)(xv)(A) of this section. For
purposes of computing Partnership FP's section 4501(d) excise tax
base, the fair market value of the 100 shares of stock of
Corporation FZ subject to the section 4501(d)(1) repurchase is
$800x. See paragraph (l) of this section. Accordingly, the section
4501(d)(1) repurchase increases Partnership FP's section 4501(d)
excise tax base for the 2024 taxable year by $800x.
(9) Example 9: A foreign partnership that is not an applicable
specified affiliate--(i) Facts. The facts are the same as in
paragraph (p)(8)(i) of this section (Example 8), except that
Corporation FZ owns 76 percent of the capital interests and profits
interests of Partnership FP; Corporation FB owns 20 percent of the
capital interests and profits interests of Partnership FP; and
Corporation US1 owns 4 percent of the capital interests and profits
interests of Partnership FP.
(ii) Analysis. Corporation US1 is not a direct or indirect
partner with respect to Partnership FP for purposes of section
4501(d)(1) because Corporation US1 qualifies as a de minimis
domestic entity partner. See paragraph (h)(5) of this section.
Partnership FP is not an applicable specified affiliate of
Corporation FZ because Partnership FP has no direct or indirect
domestic entity partner. Accordingly, Partnership FP's purchase of
100 shares of stock of Corporation FZ is not treated as a section
4501(d)(1) repurchase.
(10) Example 10: A foreign partnership that is directly owned by
foreign corporations and is an applicable specified affiliate--(i)
Facts. Corporation FZ owns all the outstanding stock of Corporation
US1, a domestic corporation. Corporation US1 owns all the
outstanding stock of Corporation FB, a foreign corporation.
Partnership FP is a foreign partnership in which Corporation FB and
Corporation FE, a foreign corporation, are partners. Corporation FB
owns 80 percent of the capital interests and profits interests of
Partnership FP, and Corporation FE owns 20 percent of the capital
interests and profits interests of Partnership FP.
(ii) Analysis. Corporation US1 is a domestic entity. See
paragraph (b)(2)(x) of this section. Corporation US1 owns an
interest in Partnership FP indirectly through Corporation FB, a
foreign corporation that Corporation US1 controls within the meaning
of paragraph (h)(3) of this section. Corporation US1 does not
qualify as a de minimis domestic entity partner with respect to
Partnership FP. See paragraph (h)(5) of this section. Corporation
US1 is thus an indirect partner with respect to Partnership FP for
purposes of section 4501(d)(1). See paragraph (h)(2)(ii)(B) of this
section. Accordingly, Partnership FP is an applicable specified
affiliate of Corporation FZ because Corporation FZ indirectly owns
more than 50 percent of the capital interests or profits interests
of Partnership FP and Corporation US1, a domestic entity, is an
indirect partner of Partnership FP.
(q) Section 4501(d)(2) examples. The following examples illustrate
the application of the rules in this section relating to section
4501(d)(2). For purposes of the following examples, unless otherwise
stated: Corporation FZ is a covered surrogate foreign corporation; each
domestic entity is an expatriated entity within the meaning of section
7874(a)(2)(A) with respect to Corporation FZ and is not a member of a
U.S. consolidated group; there are not any expatriated entities with
respect to Corporation FZ other than as described in the facts; a
reference to ownership refers to direct ownership; any repurchase or
acquisition of stock is during a taxable year that includes at least a
portion of the applicable period with respect to Corporation FZ under
section 7874(d)(1); each entity has a calendar taxable year; each
corporation's only outstanding stock is a single class of common stock;
the functional currency (within the meaning of section 985) of any
entity is the U.S. dollar; no stock is transferred to any employee; for
examples that expressly provide that stock is transferred to any
employee, such transfer is made in connection with the employee's
performance of services in its capacity as an employee of the
transferor, and the employee is treated as the beneficial owner of the
stock for Federal income tax purposes on the date of the transfer; and
the section 4501(d) statutory exceptions are inapplicable.
[[Page 26066]]
(1) Example 1: The section 4501(d) netting rule with respect to an
expatriated entity--(i) Facts. Corporation FZ owns all the outstanding
stock of Corporation US1, a domestic corporation. Employee M is an
employee of Corporation FZ, and Employee P is an employee of
Corporation US1. On February 1, 2024, Corporation US1 purchases 100
shares of stock of Corporation FZ when the fair market value of each
share is $8x. On May 15, 2024, Corporation FZ transfers to Employee M
50 shares of stock of Corporation FZ when the fair market value of each
share is $5x. On November 1, 2024, Corporation US1 transfers to
Employee P 30 shares of stock of Corporation US1 when the fair market
value of each share is $9x. On December 15, 2024, Corporation FZ
purchases 90 shares of its stock when the fair market value of each
share is $12x.
(ii) Analysis. Each of Corporation US1's purchase of 100 shares of
stock of Corporation FZ and Corporation FZ's purchase of 90 shares of
its stock is a section 4501(d)(2) repurchase. See paragraph
(b)(2)(xxiii) of this section. Corporation US1 is a section 4501(d)
covered corporation with respect to the section 4501(d)(2) repurchases.
See paragraph (b)(2)(xv)(B) of this section. For purposes of computing
Corporation US1's section 4501(d) excise tax base, the fair market
value of the 100 shares of stock of Corporation FZ subject to the
section 4501(d)(2) repurchase on February 1, 2024, is $800x, and the
fair market value of the 90 shares of stock of Corporation FZ subject
to the section 4501(d)(2) repurchase on December 15, 2024, is $1,080x.
See paragraph (l) of this section. The section 4501(d)(2) repurchases
thus increase Corporation US1's section 4501(d) excise tax base for the
2024 taxable year by $1,880x ($800x + $1,080x). Corporation US1's
section 4501(d) excise tax base for its 2024 taxable year is not
reduced by the fair market value of the stock of Corporation FZ
transferred to Employee M or the fair market value of the stock of
Corporation US1 transferred to Employee P because the section 4501(d)
excise tax base with respect to Corporation US1 can only be reduced by
the fair market value of stock of Corporation FZ issued or provided by
Corporation US1 to employees of Corporation US1. See paragraph (n) of
this section. Accordingly, Corporation US1's section 4501(d) excise tax
base with respect to these transactions for its 2024 taxable year is
$1,880x.
(2) Example 2: Section 4501(d)(2) repurchase from the covered
surrogate foreign corporation or another specified affiliate of the
covered surrogate foreign corporation--(i) Facts. Corporation FZ owns
all the outstanding stock of each of Corporation US1, a domestic
corporation, Corporation FB, a foreign corporation, and Corporation FE,
a foreign corporation. On February 1, 2024, Corporation US1 purchases
100 shares of stock of Corporation FZ from Corporation FB when the fair
market value of each share is $8x. On December 15, 2024, Corporation FZ
contributes 90 shares of its stock to Corporation FE when the fair
market value of each share is $12x.
(ii) Analysis. Each of Corporation US1's purchase of 100 shares of
stock of Corporation FZ and Corporation FZ's transfer of 90 shares of
its stock is a section 4501(d)(2) repurchase. See paragraph
(b)(2)(xxiii) of this section. Corporation US1 is a section 4501(d)
covered corporation with respect to the section 4501(d)(2) repurchases.
See paragraph (b)(2)(xv)(B) of this section. For purposes of computing
Corporation US1's section 4501(d) excise tax base, the fair market
value of the 100 shares of stock of Corporation FZ subject to the
section 4501(d)(2) repurchase on February 1, 2024, is $800x, and the
fair market value of the 90 shares of stock of Corporation FZ subject
to the section 4501(d)(2) repurchase on December 15, 2024, is $1,080x.
See paragraph (l) of this section. Accordingly, Corporation US1's
section 4501(d) excise tax base with respect to these transactions for
its 2024 taxable year is $1,880x.
(3) Example 3: Liability with respect to multiple expatriated
entities--(i) Facts. Corporation FZ owns all the outstanding stock of
each of Corporation US1, a domestic corporation, and Corporation US2, a
domestic corporation. Employee M is an employee of Corporation US1, and
Employee P is an employee of Corporation US2. On February 1, 2024,
Corporation US1 purchases 100 shares of stock of Corporation FZ when
the fair market value of each share is $8x. On May 15, 2024,
Corporation US2 purchases 40 shares of stock of Corporation FZ when the
fair market value of each share is $9x. On October 15, 2024,
Corporation FZ repurchases 50 shares of its stock when the fair market
value of each share is $7x. On November 1, 2024, Corporation US1
transfers to Employee M 30 shares of stock of Corporation FZ when the
fair market value of each share is $9x. On November 20, 2024,
Corporation US2 transfers to Employee P 30 shares of stock of
Corporation FZ when the fair market value of each share is $8x.
Corporation US1 pays the entire amount of section 4501(d) excise tax
that it owes with respect to all section 4501(d)(2) repurchases
relating to Corporation FZ and its specified affiliates that occur
during Corporation US1's 2024 taxable year and fulfills its filing
obligations for its 2024 taxable year with respect to such section
4501(d)(2) repurchases.
(ii) Analysis. Each of Corporation US1's purchase of 100 shares of
stock of Corporation FZ, Corporation US2's purchase of 40 shares of
stock of Corporation FZ, and Corporation FZ's repurchase of 50 shares
of its stock is a section 4501(d)(2) repurchase. See paragraphs
(b)(2)(xxiii) and (d)(2)(i) of this section. Each of Corporation US1
and Corporation US2 is a section 4501(d) covered corporation with
respect to the section 4501(d)(2) repurchases. See paragraph
(b)(2)(xv)(B) of this section. For purposes of computing the section
4501(d) excise tax base for each of Corporation US1 and Corporation
US2, the fair market value of the 100 shares subject to the section
4501(d)(2) repurchase on February 1, 2024, is $800x; the fair market
value of the 40 shares of stock of Corporation FZ subject to the
section 4501(d)(2) repurchase on May 15, 2024, is $360x; and the fair
market value of the 50 shares of stock of Corporation FZ subject to the
section 4501(d)(2) repurchase on October 15, 2024, is $350x. See
paragraph (l) of this section. The section 4501(d)(2) repurchases thus
increase each of Corporation US1's and Corporation US2's section
4501(d) excise tax base for the 2024 taxable year by $1,510x ($800x +
$360x + $350x). 30 shares of Corporation FZ stock are treated as issued
or provided to Employee M on November 1, 2024. See paragraph (n) of
this section. Therefore, Corporation US1's section 4501(d) excise tax
base is reduced for its 2024 taxable year by the fair market value of
the 30 shares of stock of Corporation FZ transferred on November 1,
2024, or $270x ($9x per share x 30 shares = $270x). See paragraph
(c)(3)(i)(C) of this section. Corporation US1's section 4501(d) excise
tax base for its 2024 taxable year is not reduced by the fair market
value of the stock of Corporation FZ that Corporation US2 transferred
to Employee P because the section 4501(d) excise tax base with respect
to Corporation US1 can only be reduced by the fair market value of
stock of Corporation FZ issued or provided by Corporation US1 to
employees of Corporation US1. See paragraph (n) of this section.
Accordingly, Corporation US1's section 4501(d) excise tax base with
respect to these transactions for its 2024 taxable year is $1,240x
($1,510x-$270x). Because Corporation
[[Page 26067]]
US1 pays the entire amount of section 4501(d) excise tax that it owes
with respect to all section 4501(d)(2) repurchases that occur during
Corporation US1's 2024 taxable year relating to Corporation FZ and its
specified affiliates and fulfills its filing obligations for its 2024
taxable year with respect to such section 4501(d)(2) repurchases,
Corporation US2 is not liable for section 4501(d) excise tax with
respect to such section 4501(d)(2) repurchases. See paragraph
(d)(2)(ii) of this section.
(r) Applicability dates--(1) In general. Except as provided in
paragraphs (e)(1) and (r)(3) of this section, the provisions of this
section (other than paragraph (o) of this section) apply to
transactions that occur after April 12, 2024.
(2) Rules applicable before April 13, 2024. Except as provided in
paragraphs (o)(2) and (r)(3) of this section, the rules in paragraph
(o) of this section apply to transactions that occur after December 31,
2022, and on or before April 12, 2024.
(3) Early application. A section 4501(d) covered corporation may
choose to apply all the rules of this section (other than paragraphs
(o), (r)(1), and (r)(2) of this section) to transactions occurring
after December 31, 2022, subject to paragraph (e)(1) of this section. A
section 4501(d) covered corporation may choose to apply the rules of
this section (other than paragraphs (o) and (r)(1) and (2) of this
section) pursuant to the immediately preceding sentence only if the
section 4501(d) covered corporation and all other section 4501(d)
covered corporations with respect to the same applicable foreign
corporation or covered surrogate foreign corporation, as applicable,
consistently apply all the rules of this section (other than paragraphs
(o) and (r)(1) and (2) of this section) as described in the immediately
preceding sentence.
Subpart B [Reserved]
Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2024-07117 Filed 4-9-24; 4:15 pm]
BILLING CODE 4830-01-P