On November 21, 2025, Treasury and the IRS released final regulations (TD 10037) on the stock repurchase excise tax. The final regulations make several changes to the proposed regulations, most significantly excluding certain repurchases that occur (or are deemed to occur) in acquisitive reorganizations, "take private" transactions and certain other M&A transactions. The final regulations also withdraw the "funding rule," which would have imposed the excise tax on repurchases of stock by foreign corporations to the extent those purchases were "funded" by domestic subsidiaries of those foreign corporations, and expand exemptions for redemptions of certain preferred stock.

The final regulations include numerous examples illustrating how the rules apply.

Background

IRC Section 4501, which was enacted under the Inflation Reduction Act (IRA), 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 its specified affiliate 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.

For foreign corporations whose stock is publicly traded, IRC Section 4501 treats a domestic specified affiliate of the foreign parent corporation as a covered corporation with respect to certain purchases of the foreign parent corporation's stock.

For inversions under IRC Section 7874, special rules apply to a "surrogate foreign corporation." In that case, a repurchase of stock by a covered surrogate foreign corporation or an acquisition of a covered surrogate foreign corporation's stock by a specified affiliate of that corporation results in the "expatriated entity" (i.e., the domestic entity described in IRC Section 7874(a)(2)(A)) being treated as the covered corporation that repurchased stock.

Subject to certain exceptions and adjustments, the excise tax equals 1% of the fair market value (FMV) 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 is reduced 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 (the netting rule).

IRC Section 4501 defines a "repurchase" as (1) a stock redemption within the meaning of IRC Section 317(b) (i.e., any acquisition of stock by a corporation from a shareholder in exchange for property, which, under IRC Section 317(a), is almost anything other than stock of the corporation), or (2) any other economically similar transaction as determined by Treasury. The statute provides that the excise tax does not apply to:

• The extent the repurchase is part of an IRC Section 368(a) reorganization, and for which the shareholder did not recognize gain or loss
• Repurchased stock (or an equivalent value of stock) that is contributed to an employee pension plan, employee stock ownership plan or similar plan
• Total stock repurchases of $1 million or less during the tax year
• A repurchase by a securities dealer in the ordinary course of business
• A repurchase by a regulated investment company (RIC) or real estate investment trust (REIT)
• The extent a repurchase is treated as a dividend

Previous guidance

Proposed regulations (REG-115710-22) were released on April 9, 2024 (see Tax Alert 2024-0786), and adopted much of the interim guidance in Notice 2023-2 (see Tax Alert 2023-0054) with some modifications. At the same time, separate regulations REG-118499-23 described the procedures for reporting and paying the excise tax (see Tax Alert 2024-0785). The proposed regulations also introduced a new certification that could be confusing to shareholders that already receive withholding tax certifications (see Tax Alert 2024-0946). The final regulations (TD 10002), on reporting and paying the excise tax closely followed the proposed regulations, with some minor modifications (see Tax Alert 2024-1357).

Final regulations

Exclusion of certain repurchases

Acquisitive reorganizations

According to the Preamble, Congress generally did not intend for the stock repurchase excise tax to apply to transactions, such as acquisitive reorganizations, that fundamentally restructure corporate ownership or control through combinations of separate business entities. Therefore, the final regulations do not consider the exchange of target corporation stock by the target corporation's shareholders under a reorganization plan to be a repurchase for purposes of the stock repurchase excise tax.

"Take private" transactions

The Preamble also stated that Congress generally did not intend for the stock repurchase excise tax to apply to transactions, such as leveraged buyouts and other "take private" transactions, that fundamentally restructure corporate ownership or control by combining separate business entities. As a result, the final regulations do not treat the stock repurchase excise tax as applying when a covered corporation redeems shares as part of a process where it ceases to be a covered corporation.

Other M&A transactions

Citing consistency with the treatment of acquisitive reorganizations, the Preamble stated that IRC Section 4501 does not apply to complete liquidations. Accordingly, the final regulations do not apply the stock repurchase excise tax to complete liquidations to which IRC Sections 331, 332(a), or both apply.

Funding rule

Another significant change from the proposed regulations is the withdrawal of the funding rule, which was a source of many of the comments on the proposed rule. This proposed funding rule generally would have affected US subsidiaries of a publicly traded foreign-parented group.

If an "applicable specified affiliate" of a foreign corporation provided funding for a repurchase or stock acquisition — whether through distributions, debt or capital contributions — with the main intent to avoid the IRC Section 4501(d) excise tax, the proposed funding rule would have considered the affiliate to have acquired the corporation's stock. The proposed regulations treated direct or indirect funding by a domestic specified affiliate of its foreign parent's own buybacks as having an IRC Section 4501(d) avoidance purpose. The Preamble to the final regulations noted a wide range of comments on this rule, including comments that it generally is an uncommon transaction for US affiliates to acquire stock of their foreign parent (the prototypical transaction that attracts an excise tax under IRC Section 4501(d)).

Redemptions of preferred stock

The final regulations also expand and add exemptions from the stock repurchase excise tax for redemptions of certain preferred stock.

The final regulations follow the proposed regulations in excluding preferred stock that (1) qualifies as additional tier 1 capital and (2) does not qualify as common equity tier 1 capital. Thus, additional tier 1 preferred stock is not 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. The final regulations also include the exemption of tier 1 preferred stock that had applied to preferred stock of "system entities" such as production credit associations in the Farm Credit System as well as savings and loan holding companies.

More generally, the final regulations exempt a new type of stock by specifying that the stock repurchase excise tax does not apply to repurchases of "plain vanilla" preferred stock described in IRC Section 1504(a)(4).

Certain types of stock issued before the IRA was enacted are granted transition relief if the covered corporation no longer has discretion to determine whether to repurchase the stock. Accordingly, the final regulations offer transition relief for mandatorily redeemable stock and stock with a unilateral holder put option, if issued before August 16, 2022.

Stock-based compensation transactions and contributions

Generally, the final regulations are consistent with the proposed regulations, with one helpful change. Under the final regulations, the netting rule takes into account stock issued to employees and non-employee service providers of a covered corporation and its specified affiliates. The proposed regulations would have excluded stock transferred to non-employee service providers of a specified affiliate for purposes of the netting rule.

Effective dates

The final regulations generally apply to repurchases and stock issuances during tax years ending after December 31, 2022. Special effective dates (repurchases and issuances after April 12, 2024) apply for certain rules that were not described in Notice 2023-2. A special transition effective date also applies under a de minimis rule for foreign partnerships. Taxpayers may, however, generally apply all final rules to earlier periods, provided they apply those rules consistently.

Reporting requirements

The final regulations did not change the reporting requirements but clarify how to correct previous filings that may now need to be amended.

Effect on prior returns

If a taxpayer previously filed a Form 7208, Excise Tax on Repurchase of Corporate Stock, applying Notice 2023-1 or the proposed regulations, and would like to file a refund claim after the regulations are finalized, the Preamble instructs the covered corporation to file a Form 7208-X, Amended Quarter Federal Excise Tax Return, for the affected quarter and attach a corrected Form 7208 (with "Amended" written on top). The same process applies for covered corporations that need to remit excise tax as a result of the final regulations.

Taxpayers that would like to file a refund claim but are not the original filer can file a claim on Form 8849, Claim for Refund of Excise Taxes, and attach Schedule 6, Other Claims, and a corrected Form 7208.

A covered corporation that filed Form 720-X for the third quarter of 2024 and previously submitted two Forms 7208 (one for a tax year ending in 2023 and another for a tax year ending in 2024) with the Form 720 for that quarter must attach two corrected Forms 7208 (with "Amended" written at the top of each corrected Form 7208) to the Form 720-X for that quarter.

Updated to general return requirement

Treas. Reg. Section 58.6011-1(a), specifying the obligation to file a stock repurchase excise tax return, has been updated to include non-RIC '40 Act funds in the list of entities that are exempted from this filing requirement.

Implications

Compared to the proposed regulations, the final regulations significantly scale back the scope of the stock buyback excise tax, particularly for corporate mergers and acquisitions. The reasoning behind this change is reflected in the comments the Preamble highlights. For example, the government agreed with a commenter who asserted that "acquisitive reorganizations and other M&A transactions do not bear the traditional hallmarks of conventional, often opportunistic stock repurchase transactions and programs that, in the stakeholder's view, were the intended target of the stock repurchase excise." Relatedly, the Preamble agreed with another commenter that the focus of IRC Section 4501 should be on "single-company transactions that distribute corporate value to shareholders in exchange for the surrender of corporate stock," thus excluding acquisitive IRC Section 368(a) reorganizations, "take-private" transactions and most divisive transactions under IRC Section 355, among other M&A transactions.

The narrower scope of the final IRC Section 4501 regulations will likely be well received by many corporate taxpayers, not simply those engaged in M&A transactions. For example, some taxpayers may simply be relieved to have narrower or even non-existent reporting obligations under IRC Section 4501 because, for example, they do not engage in buybacks or other repurchases to which the tax applies. Other taxpayers may welcome the exclusion of more types of preferred stock from the scope of an IRC Section 4501 "repurchase." Given the overall narrower scope of the excise tax in the final regulations, there may be opportunities to seek refunds for excise tax paid for prior periods. In addition, US affiliates of publicly traded foreign companies will likely appreciate not having to analyze whether ordinary-course cross-border transactions with a related party represent an indirect "funding" of the foreign parent company's own stock buybacks.

There are still certain transaction types that might seem to be unusual candidates for a stock buyback excise tax. For example, a publicly traded corporation that sells off a division and declares a pro-rata special dividend could be engaging in a "partial liquidation" that attracts an excise tax under the final regulations, at least to the extent that "dividend" might be treated as an exchange to individual shareholders. Additionally, in the context of IRC Section 355 divisive transactions, the final regulations underscore that how such transactions are structured could still matter for excise tax purposes (e.g., "split-offs" with boot are generally subject to the buyback tax, as are exchanges of distributing corporation stock for boot in connection with an IRC Section 355 distribution that is not a split-off). But again, most corporate taxpayers are likely to welcome the overall narrowed scope of IRC Section 4501 as reflected in the final regulations.