On June 28, 2024, Treasury and the IRS filed final regulations regarding the payment and reporting aspects of the stock repurchase excise tax under section 4501 of the Code1 (Buyback Tax) (Final Regulations). The Final Regulations, which are effective on June 28, 2024, generally adopt the proposed regulations addressing the payment and reporting aspects of the Buyback Tax (Proposed Regulations), with certain revisions, including (1) clarifying that neither regulated investment companies (RICs) nor real estate investment trusts (REITs) are required to file a Buyback Tax excise tax return (a Return), (2) clarifying that a Return must only be filed with respect to any taxable year in which a covered corporation or person treated as a covered corporation makes a repurchase or is treated as making a repurchase, and (3) modifying the applicability dates of the Final Regulations such that the Final Regulations will apply to Returns (and as relevant, to claims for refund) required to be filed after June 28, 2024.
For previous reporting by Eversheds Sutherland regarding the Buyback Tax, see Inflation Reduction Act imposes a nondeductible 1% excise tax on certain corporate stock buybacks, Unpacking The Interim Guidance On New Stock Buyback Tax, and IRS announcement will aid cos. in buyback tax planning.
Eversheds Sutherland Observation: The preamble to the Final Regulations notes that the proposed regulations regarding the operative rules of the Buyback Tax (Operative Proposed Regulations) have yet to be finalized, and that Treasury and the IRS intend to finalize such rules when they have completed their review of the comments they have received. While the Operative Proposed Regulations have yet to be finalized, taxpayers, nevertheless, need to start complying with the reporting requirements under the Final Regulations, even though there are open questions regarding the operation of the technical rules.
Eversheds Sutherland Observation: The preamble to the Final Regulations notes that the proposed regulations regarding the operative rules of the Buyback Tax (Operative Proposed Regulations) have yet to be finalized, and that Treasury and the IRS intend to finalize such rules when they have completed their review of the comments they have received. While the Operative Proposed Regulations have yet to be finalized, taxpayers, nevertheless, need to start complying with the reporting requirements under the Final Regulations, even though there are open questions regarding the operation of the technical rules.
Eversheds Sutherland Observation: Under President Biden’s Fiscal Year 2025 Budget Proposal, the excise tax rate would increase to 4%. In addition, a 2% federal tax on share repurchases was proposed in Canada, and a 4% tax on stock repurchases was also proposed in the United Kingdom.
The Buyback Tax rules (1) extend repurchases to certain transactions by certain affiliates of covered corporations and publicly traded foreign corporations, (2) provide for adjustments for certain stock issuances, (3) apply to US corporations that have entered into, or will enter into, an inversion transaction, and (4) provide exceptions to the Buyback Tax.
On January 17, 2023, Treasury and the IRS published Notice 2023-2 (Notice), which addressed, among other things, (1) calculation of the Buyback Tax and its application to reorganizations, spinoffs, liquidations, and certain stock exchanges, (2) treatment of stock issuances to employees, (3) application of the Buyback Tax to other routine corporate transactions, and (4) the anticipated rules for reporting and paying any liability for the Buyback Tax.
On April 12, 2024, Treasury and the IRS published both the Operative Proposed Regulations and the Proposed Regulations. Except for certain exceptions, the Operative Proposed Regulations and the Proposed Regulations generally retained the framework of the Notice. Finally, on June 28, 2024, Treasury and the IRS filed the Final Regulations, which, as discussed below, generally adopt the Proposed Regulations, with certain revisions.
The Final Buyback Tax Payment and Reporting Regulations
Requirement for a Return and Recordkeeping
In general, each covered corporation, or any person treated as a covered corporation, that makes a repurchase, or is treated as making a repurchase, after December 31, 2022, is required to both file a Return and maintain complete and detailed records sufficient to establish accurately the amount of repurchases, adjustments, or exceptions required to be included on a Return. Neither RICs nor REITs, however, are required to file a Return. In addition, the Final Regulations clarify that a Return is only required to be filed by a covered corporation or person treated as one with respect to a taxable year in which such covered corporation or person makes or was treated as making a repurchase.
Eversheds Sutherland Observation: While RICs and REITs are not required to file a Return, RICs and REITs are still required to comply with the recordkeeping requirements discussed above, as such records could become relevant in the event that a covered corporation ceases to qualify as a RIC or a REIT for a taxable year, or if the covered corporation revokes its election to be a RIC or a REIT for a taxable year. In either case, the covered corporation’s repurchases would cease to qualify for the RIC/REIT exception under section 4501(e)(5).
Eversheds Sutherland Observation: Treasury and the IRS revised the language of the Final Regulations regarding when a Return is required to be filed, because such language could be construed as requiring a covered corporation or a person treated as one to file a Return with respect to taxable years in which such corporation or person has not made or been treated as making a repurchase.
Consistent with the Proposed Regulations, the Final Regulations define a Return as a Form 720, Quarterly Federal Excise Tax Return, which is due for the first full calendar quarter after the end of the covered corporation’s taxable year, with an attached Form 7208, Excise Tax on Repurchases of Corporate Stock, and any other forms, schedules, or statements prescribed by the Commissioner. A Form 720 is the form on which Buyback Tax liability is reported, and a Form 7208 is the form on which the Buyback Tax would be calculated. The Final Regulations clarify that neither a RIC nor a REIT is required to attach a Form 7208 to its Form 720, if any, for a taxable year.
Eversheds Sutherland Observation: Taxpayers are required to comply with the Return and recordkeeping requirements, regardless of the application of a statutory exception4 or whether repurchases are offset by issuances pursuant to the netting rule.5
In addition, provided that the IRS serves notice upon a covered corporation or a person treated as a covered corporation, the IRS can require such taxpayer to provide to the IRS such documents as are necessary for the purpose of determining whether the taxpayer is liable for the Buyback Tax.
Time and Place for Filing a Return and Paying Tax
In general, a Return must be filed by the due date of the Form 720 that is for the first full calendar quarter after the end of the taxable year of the covered corporation, or person treated as a covered corporation. With respect to a covered corporation, or a person treated as a covered corporation, with a taxable year ending after December 31, 2022, and on or before June 28, 2024, the Return for such taxable year must be filed by the due date of the Form 720 for the first full calendar quarter after June 28, 2024. If a covered corporation or person treated as one has more than one taxable year ending after December 31, 2022, and on or before June 28, 2024, such corporation or person only files a single Form 720 with two separate Forms 7208 attached thereto. For example, if a covered corporation has a taxable year that ends on January 30, such covered corporation would have more than one taxable year that ends after December 31, 2022, and on or before June 28, 2024, in which case, the covered corporation would only be required to file a single Form 720 with two separate Forms 7208 attached thereto. Any tax shown on a Return must be paid to the IRS at the time and place for filing such Return.
Conclusion
The Final Regulations generally adopt the framework of the Proposed Regulations, without significant modification. These rules provide welcome guidance regarding the procedure and administration of the Buyback Tax. A key takeaway is that proper and adequate documentation regarding the Buyback Tax will be crucial for both reporting and payment, as well as to support an audit. While the Final Regulations provide little insight into the forthcoming operative Buyback Tax rules, the preamble indicates that Treasury and the IRS are working to complete their review of the comments they received.
1 Unless otherwise noted, all “section” references are to provisions of the Internal Revenue Code of 1986, as amended (Code), and all “Prop. Treas. Reg. §” references are to the proposed Treasury regulations promulgated thereunder, all as in effect (or, in the case of proposed regulations, as proposed) as of the date of this legal alert.
2 “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). Section 4501(b).
3 “Repurchase” means (i) a redemption within the meaning of section 317(b) with regard to the stock of a covered corporation, and (ii) any transaction determined by Treasury to be economically similar to a redemption within the meaning of section 317(b). Section 4501(c)(1). In addition, section 4501(d) includes special rules under which the Buyback Tax can apply to acquisitions of stock of an “applicable foreign corporation,” which is any foreign corporation the stock of which is traded on an established securities market within the meaning of section 7704(b)(1). Section 4501(d)(3).
4 Section 4501(e) lists certain situations to which the Buyback Tax does not apply (i.e., statutory exceptions). For example, the Buyback Tax does not apply to, among other things, 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. Section 4501(e)(1).
5 In general, the netting rule reduces the excise tax liability of a covered corporation or a person treated as one to the extent stock of either a covered corporation or an applicable foreign corporation is issued under certain circumstances. See Prop. Treas. Reg. §§ 58.4501-4 and 58.4501-7(n).
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