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The IRS and Treasury released proposed regulations (REG-118499-23) on how covered corporations would have to report and pay the new excise tax on stock repurchases. The proposed regulations confirm that taxpayers would not be required to report or pay the IRC Section 4501 excise tax on stock repurchases on any tax return filed before the final regulations are published in the Federal Register. The stock repurchase excise tax, which was enacted by the Inflation Reduction Act, imposes a 1% surcharge on certain corporate stock buybacks occurring after December 31, 2022.

At the same time, the IRS and Treasury also released proposed regulations (REG-115710-22) on applying and calculating the excise tax (see Tax Alert 2024-0786). These proposed regulations include rules on the general application of, and exceptions to, the new excise tax.

The proposed regulations would apply to stock repurchase excise tax returns and claims for refund required to be filed after the final regulations are published in the Federal Register and during the tax years ending after that date. Comments and requests for a public hearing must be submitted by May 13, 2024.

Background

IRC Section 4501 imposes an excise tax on a "covered corporation" to the extent its stock is repurchased by the covered corporation or its majority-owned or controlled subsidiary during the tax year. A "covered corporation" is generally defined as any publicly traded domestic corporation. A repurchase by the covered corporation includes a repurchase by a specified affiliate of the covered corporation from a person who is not the covered corporation or its specified affiliate. A specified affiliate is generally a greater-than-50% subsidiary of the covered corporation that is treated either as a partnership or corporation.

Subject to certain exceptions and adjustments, the excise tax equals 1% of the fair market value of the stock repurchased by the covered corporation during the tax year. The excise tax payment is non-deductible for income tax purposes. The repurchase amount subject to the excise tax decreases by the value of any stock issued by the covered corporation during the tax year, including stock issued to the covered corporation's or a subsidiary's employees.

Proposed regulations

Under the proposed regulations, any covered corporation that makes a repurchase or is treated as making a repurchase would have to file the return and keep records of the repurchases, exceptions or adjustments, even if they qualify for an exception to the tax. The records would be available to the IRS for inspection, for purposes of determining whether the covered corporation is liable for the tax.

Form 7208

The excise tax would be reported on Form 720, Quarterly Federal Excise Tax Return. Taxpayers would calculate the excise tax on Form 7208, Excise Tax on Repurchase of Corporate Stock. According to the IRS news release announcing the proposed regulations, a draft version of Form 7208 is currently available, and the final version will be released before the first due date on which the excise tax must be reported.

Filing dates

Once the regulations are finalized, Form 7208 would be filed with Form 720 by the due date of the Form 720 for the first full calendar quarter after the tax year of the covered corporation ends. This confirms the schedule in Announcement 2023-18 (see Tax Alert 2023-1166).

Until then, covered corporations with tax years ending after December 31, 2022, and on or before the final regulations are published in the Federal Register, would file Form 7208 with Form 720 by the due date of Form 720 for the first full calendar quarter after the date of the final regulations are published in the Federal Register.

Implications

The IRS has confirmed that taxpayers will not be responsible for filing or paying the excise tax until the final regulations are published. This clarifies earlier guidance that had left some doubt as to whether the filing requirements would begin after the proposed regulations were published (see Tax Alert 2023-1166). Taxpayers, however, should keep detailed records sufficient to establish the amount of repurchases, adjustments, and exceptions in preparation for filing and paying the excise tax. Additionally, any covered corporation or person treated as a covered corporation that makes a repurchase after December 31, 2022, is required to file a return and keep adequate records, even if every repurchase is eligible for statutory exceptions, or is offset by issuances.

Taxpayers should become familiar with draft Form 7208, Excise Tax on Repurchase of Corporate Stock and its instructions to prepare for the eventual filing requirements.