In final regulations (TD 10002), the Treasury Department and IRS describe how covered corporations must report and pay the stock repurchase excise tax. The final regulations closely follow the proposed regulations, with some minor modifications (see Tax Alert 2024-0785).

The final regulations apply to stock repurchase excise tax returns required to be filed after June 28, 2024, the date the final regulations were filed in the Federal Register. Taxpayers with tax years ending after December 31, 2022, and on or before June 28, 2024, must file and pay the excise tax by October 31, 2024, on Form 7208, Excise Tax on Repurchase of Corporate Stock, via an attachment to Form 720, Quarterly Federal Excise Tax Return.

The IRS and Treasury Department stated in the Preamble that they will release the final regulations on computing the excise tax at a later date (see Tax Alert 2024-0786 for a description of the proposed regulations).

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 years following December 31, 2022. 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 that 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.

Final regulations

Under the final regulations, any covered corporation that makes a repurchase or is treated as making a repurchase after December 31, 2022, must file a return and keep records of the repurchases, exceptions or adjustments, even if it qualifies for an exception to the tax. The records must be available for IRS inspection, for purposes of determining whether the covered corporation is liable for the tax.

The final regulations follow the proposed regulations in requiring excise tax to be reported on Form 720. Taxpayers must calculate the excise tax on Form 7208, which will be released in its final version before the filing deadline.

Form 7208 generally must be filed with Form 720 by the due date of the Form 720 for the first full calendar quarter after the covered corporation's tax year ends.

For a tax year ending after December 31, 2022, and on or before June 28, 2024, Form 7208 must be filed by the due date of the Form 720 for the first full calendar quarter after June 28, 2024, the effective date of the final regulations. Accordingly, the first Form 7208 is due, via attachment to Form 720, by October 31, 2024, for all tax years ending after December 31, 2022, and on or before June 28, 2024.

If a covered corporation has more than one tax year ending after December 31, 2022, and on or before June 28, 2024, the corporation should file a single Form 720, with two separate Forms 7208, by October 31, 2024.

REITS and RICs

The final regulations modified the proposed regulations by exempting REITS and RICS from the filing requirements so long as they are a covered corporation that qualifies as a REIT or RIC for the tax year(s). They are, however, still subject to the recordkeeping requirements. According to the Preamble, if the REIT or RIC fails to qualify during the tax year or revokes its election to be a REIT for the tax year, these records could be used in an IRS assessment.

Implications

Taxpayers should be aware of the October 31, 2024 filing deadline for stock repurchase excise tax returns for tax years ending on or before June 28, 2024. For tax years ending after June 28, 2024, the excise tax return should be filed on Form 7208 with Form 720 by the due date of the Form 720 for the first full calendar quarter after the covered corporation's tax year ends. Taxpayers should monitor the IRS for when the final Form 7208 is released.

Due to the complexity of the form 7208 and associated calculations, as well as the IRS's requirement of record keeping, taxpayers should begin preparing now.

In addition, taxpayers, including REITS and RICs, should maintain records to determine any potential tax liability.