Treasury and the IRS have released final regulations on the 1% excise tax on the value of stock repurchased by publicly traded corporations. The final regs, which are effective November 24, 2025, clarify the tax’s application, scale back application to corporations engaging in acquisitive reorganizations, and withdraw the “funding rule” that would have impacted foreign corporation affiliates. (T.D. 10037, 11/21/2025)
Background
The 2022 Inflation Reduction Act added IRC § 4501 to impose a new excise tax on certain stock repurchases. The excise tax is equal to 1% of the aggregate fair market value of stock repurchased by certain corporations during the tax year. The excise tax applies to repurchases after December 31, 2022. Covered corporations include domestic corporations for which stock is traded on an established securities market.
The IRS proposed computational and procedural regulations related to the corporate stock repurchase excise tax in April 2024. The agency finalized the procedural regulations in July 2024, providing clarity on how to report and pay the excise tax.
The IRS, however, held off on finalizing the computational regulations after receiving negative comments from stakeholders. Commenters argued that portions of the proposed regs were ambiguous and could cause the tax to be applied to long-standing, normal-course corporate transactions. In light of the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, commenters also contended the proposed regs do not reflect “the best interpretation of the statutory text.”
The IRS took these comments into account in the final computational regulations, which are effective November 24, 2025.
Final Regs Narrow Applicability of Excise Tax
Preferred stock. The IRS did not take up commenters’ suggestions to exclude redemptions of all preferred stock from the excise tax. However, the final regs do exclude from the tax repurchases of preferred stock under IRC § 1504(a)(4) – which the IRS describes as “more akin to repaying debt.” The final rule also provides transition relief for certain preferred stock issued before August 16, 2022, that is either mandatorily redeemable or subject to a holder’s unilateral put option.
Repurchases and reorganizations. In another reversal, the final regs provide that redemptions occurring as part of a transaction in which a covered corporation ceases to be publicly traded (a “take-private” transaction) are not considered repurchases. The final regs also exclude many leveraged buyouts and acquisitive reorganizations from the tax.
In addition, the final regs clarify that an E reorganization is now treated as a repurchase only to the extent that shareholders receive non-qualifying property and that property is not treated as a distribution. Split-offs under IRC § 355, however, are considered repurchases, though the reorganization exception may apply to reduce the taxable amount.
Funding rule. In response to comments, the IRS has withdrawn a portion of the proposed regs known as the “funding rule.” That rule would have treated a U.S. subsidiary as repurchasing its foreign parent’s stock if it funded the parent’s repurchase with the principal purpose of avoiding the tax. Commenters said the rule was burdensome and unclear.
Netting rule. The final regs also eliminate the “no double benefit” portion of the netting rule – which would have disregarded certain stock issued as part of a reorganization or distribution. In addition, the final regs provide that stock issued by a controlled corporation in a distribution under § 355 is disregarded for netting rule purposes.
Dividend exception. Additionally, the final rule simplifies the process for claiming the dividend exception. A covered corporation may now rebut the presumption of a non-dividend repurchase by establishing with sufficient evidence that the repurchase should be treated as a dividend, without being required to obtain a certification from every shareholder.
For more information regarding the stock repurchase excise tax, see Checkpoint’s Federal Tax Coordinator 2d ¶ F-11920.
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