Excise Tax on Repurchase of Corporate Stock, 25980-26067 [2024-07117]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 89, Number 72 (Friday, April 12, 2024)]
[Proposed Rules]
[Pages 25980-26067]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-07117]



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Vol. 89

Friday,

No. 72

April 12, 2024

Part III





Department of the Treasury





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Internal Revenue Service





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26 CFR Parts 1 and 58





Excise Tax on Repurchase of Corporate Stock; Proposed Rule

Federal Register / Vol. 89 , No. 72 / Friday, April 12, 2024 / 
Proposed Rules

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 58

[REG-115710-22]
RIN 1545-BQ59


Excise Tax on Repurchase of Corporate Stock

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that would provide 
guidance regarding the application of the new excise tax on repurchases 
of corporate stock made after December 31, 2022. The proposed 
regulations would affect certain publicly traded corporations that 
repurchase their stock or whose stock is acquired by certain specified 
affiliates. Another notice of proposed rulemaking (REG-118499-23) on 
this topic is published in the Proposed Rules section of this issue of 
the Federal Register to propose rules on procedure and administration 
applicable to this new excise tax.

DATES: Written or electronic comments and requests for a public hearing 
must be received by June 11, 2024.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at https://www.regulations.gov (indicate IRS and 
REG-115710-22) by following the online instructions for submitting 
comments. Requests for a public hearing must be submitted as prescribed 
in the ``Comments and Requests for a Public Hearing'' section. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury (Treasury Department) and 
the IRS will publish for public availability any comment submitted 
electronically or on paper to its public docket.
    Send paper submissions to: CC:PA:01:PR (REG-115710-22), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning proposed Sec. Sec.  
58.4501-1 through 58.4501-6, Samuel G. Trammell at (202) 317-6975; 
concerning proposed Sec.  58.4501-7, Brittany N. Dobi at (202) 317-
5469; concerning proposed Sec.  1.1275-6(f)(12)(iii), Jonathan A. 
LaPlante at (202) 317-3900; concerning submissions of comments and 
requests for a public hearing, Vivian Hayes at (202) 317-6901 (not 
toll-free numbers) or by email at [email protected] (preferred).

SUPPLEMENTARY INFORMATION:

Background

    This notice of proposed rulemaking proposes regulations under 
section 4501 of the Internal Revenue Code (Code) that would implement 
the new excise tax on repurchases of corporate stock (stock repurchase 
excise tax) imposed by section 4501 for repurchases made after December 
31, 2022. As proposed in this notice of proposed rulemaking, the 
regulations are proposed to be added as proposed subpart A of new 26 
CFR part 58 (Stock Repurchase Excise Tax Regulations), which is 
proposed to be added to subchapter D of 26 CFR chapter I (Miscellaneous 
Excise Taxes). This notice of proposed rulemaking also proposes to 
amend regulations under section 1275 of the Code in 26 CFR part 1 
(Income Tax Regulations) to implement the provisions of section 4501. 
Another notice of proposed rulemaking published in the Proposed Rules 
section of this issue of the Federal Register relating to the stock 
repurchase excise tax proposes rules on procedure and administration 
applicable to the reporting and payment of the stock repurchase excise 
tax that would be added as proposed subpart B of 26 CFR part 58.

I. Overview of Section 4501

A. In General

    Section 4501 was added to a new chapter 37 of the Code by the 
enactment of section 10201 of Public Law 117-169, 136 Stat. 1818 
(August 16, 2022), commonly referred to as the Inflation Reduction Act 
of 2022 (IRA). Section 4501 imposes the stock repurchase excise tax on 
each covered corporation for repurchases made after December 31, 2022. 
The stock repurchase excise tax is equal to one percent of the fair 
market value of any stock of the corporation that is repurchased by the 
corporation during the taxable year. Section 4501(a). For purposes of 
the stock repurchase excise tax, the term ``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) of the 
Code). Section 4501(b).
    Section 4501(c)(1) provides that repurchases of covered corporation 
stock to which the stock repurchase excise tax may apply include the 
following two types of transactions. First, the term ``repurchase'' 
means a redemption within the meaning of section 317(b) of the Code 
with regard to the stock of a covered corporation (section 317(b) 
redemption). Section 4501(c)(1)(A). Second, the term ``repurchase'' 
also means any transaction determined by the Secretary of the Treasury 
or her delegate (Secretary) to be economically similar to a section 
317(b) redemption (economically similar transaction). Section 
4501(c)(1)(B).

B. Specified Affiliates

    For purposes of the stock repurchase excise tax, section 
4501(c)(2)(A) provides a special rule that treats the acquisition of 
stock of a covered corporation by a specified affiliate of the covered 
corporation, from a person who is not the covered corporation or a 
specified affiliate of the covered corporation, as a repurchase of the 
stock of the covered corporation by the covered corporation. For this 
purpose, the term ``specified affiliate'' means, with regard to any 
corporation, (i) any corporation more than 50 percent of the stock of 
which is owned (by vote or by value), directly or indirectly, by the 
corporation, and (ii) any partnership more than 50 percent of the 
capital interests or profits interests of which is held, directly or 
indirectly, by the corporation. Section 4501(c)(2)(B).

C. Adjustment to Amount Taken Into Account Under Section 4501(a)

    The stock repurchase excise tax is applied to the fair market value 
of any stock of the covered corporation repurchased by the covered 
corporation during its taxable year. However, the amount of these 
repurchases is reduced by the fair market value of any issuances of the 
covered corporation's stock during the covered corporation's taxable 
year (netting rule).
    Specifically, the netting rule provides that the amount taken into 
account under section 4501(a) with respect to any stock repurchased by 
a covered corporation is reduced by the fair market value of any stock 
issued by the covered corporation during the taxable year, including 
the fair market value of any stock issued or provided to employees of 
the covered corporation or employees of a specified affiliate of the 
covered corporation during the taxable year (whether or not the stock 
is issued or provided in response to the exercise of an option to 
purchase the stock). Section 4501(c)(3).

D. Special Rules for Certain Acquisitions and Repurchases of Stock of 
Certain Foreign Corporations

    Section 4501(d) provides special rules for the imposition of the 
stock repurchase excise tax on acquisitions of

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stock of applicable foreign corporations and covered surrogate foreign 
corporations. For purposes of section 4501(d), the term ``applicable 
foreign corporation'' means any foreign corporation the stock of which 
is traded on an established securities market. Section 4501(d)(3)(A). 
The term ``covered surrogate foreign corporation'' means any surrogate 
foreign corporation (as determined under section 7874(a)(2)(B) of the 
Code by substituting ``September 20, 2021'' for ``March 4, 2003'' each 
place it appears) the stock of which is traded on an established 
securities market, but only with respect to taxable years that include 
any portion of the applicable period with respect to that corporation 
under section 7874(d)(1). Section 4501(d)(3)(B).
    Section 4501(d)(1) applies in the case of an acquisition of stock 
of an applicable foreign corporation by a specified affiliate of the 
corporation (other than a foreign corporation or a foreign partnership 
(unless the partnership has a domestic entity as a direct or indirect 
partner)) from a person that is not the applicable foreign corporation 
or a specified affiliate of the applicable foreign corporation. If 
section 4501(d)(1) applies, then for purposes of determining the stock 
repurchase excise tax: (i) the specified affiliate is treated as a 
covered corporation with respect to the acquisition; (ii) the 
acquisition is treated as a repurchase of stock of a covered 
corporation by the covered corporation; and (iii) the adjustment under 
section 4501(c)(3) (that is, the netting rule) is determined only with 
respect to stock issued or provided by the specified affiliate to 
employees of the specified affiliate.
    Section 4501(d)(2) applies in the case of either a repurchase of 
stock of a covered surrogate foreign corporation by the covered 
surrogate foreign corporation, or an acquisition of stock of a covered 
surrogate foreign corporation by a specified affiliate of such 
corporation. If section 4501(d)(2) applies, then for purposes of 
determining the stock repurchase excise tax: (i) the expatriated entity 
(within the meaning of section 7874(a)(2)(A)) with respect to the 
covered surrogate foreign corporation is treated as a covered 
corporation with respect to the repurchase or acquisition; (ii) the 
repurchase or acquisition is treated as a repurchase of stock of a 
covered corporation by the covered corporation; and (iii) the 
adjustment under section 4501(c)(3) is determined only with respect to 
stock issued or provided by the expatriated entity to employees of the 
expatriated entity.

E. Statutory Exceptions to the Application of Section 4501(a)

    Section 4501(e) lists transactions that are statutorily excepted, 
in whole or in part, from the application of section 4501(a), each 
referred to as a ``statutory exception'' in this preamble. As a result 
of the statutory exceptions, section 4501(a) does not apply to a 
repurchase of a covered corporation's stock:
    (1) To the extent that the repurchase is part of a reorganization 
(within the meaning of section 368(a) of the Code) and no gain or loss 
is recognized on the repurchase by the shareholder under chapter 1 of 
the Code (chapter 1) by reason of the reorganization (section 
4501(e)(1));
    (2) In any case in which the stock repurchased is, or an amount of 
stock equal to the value of the stock repurchased is, contributed to an 
employer-sponsored retirement plan, employee stock ownership plan 
(ESOP), or similar plan (section 4501(e)(2));
    (3) In any case in which the total value of the stock repurchased 
during the taxable year does not exceed $1,000,000 (section 
4501(e)(3));
    (4) Under regulations prescribed by the Secretary, in cases in 
which the repurchase is by a dealer in securities in the ordinary 
course of business (section 4501(e)(4));
    (5) By a regulated investment company (RIC), as defined in section 
851 of the Code, or by a real estate investment trust (REIT), as 
defined in section 856(a) of the Code (section 4501(e)(5)); or
    (6) To the extent that the repurchase is treated as a dividend for 
purposes of the Code (section 4501(e)(6)).

F. Regulations and Other Guidance

    Under section 4501(f), the Secretary is authorized to prescribe 
such regulations and other guidance as are necessary or appropriate to 
carry out, and to prevent the avoidance of, the purposes of the stock 
repurchase excise tax. Regulations or other guidance described in 
section 4501(f) may include guidance: (i) to prevent the abuse of the 
statutory exceptions; (ii) to address special classes of stock and 
preferred stock; and (iii) for the application of the special rules for 
acquisitions of stock of certain foreign corporations under section 
4501(d).

G. Applicability of Stock Repurchase Excise Tax Provisions

    Except to the extent that a statutory exception applies, the stock 
repurchase excise tax applies to repurchases after December 31, 2022, 
subject to the netting rule. See section 10201(d) of the IRA.
    In contrast to the December 31, 2022, effective date expressly 
provided by section 10201(d) of the IRA with regard to repurchases, the 
netting rule expressly takes into account any issuances by a covered 
corporation during the entirety of its taxable year. See generally 
section 4501(c)(3). Specifically, under the netting rule, the amount 
taken into account under section 4501(a) with respect to any 
repurchases is ``reduced by the fair market value of any stock issued 
by the covered corporation during the taxable year. ''Section 
4501(c)(3) (emphasis added). Therefore, a covered corporation with a 
taxable year that both began before January 1, 2023, and ended after 
December 31, 2022, may apply the netting rule to reduce the fair market 
value of the covered corporation's repurchases of stock during the 
portion of that taxable year beginning on January 1, 2023, by the fair 
market value of all issuances of its stock during the entirety of that 
taxable year.

H. No Deduction for Payment of Stock Repurchase Excise Tax

    No deduction is allowed for the payment of the stock repurchase 
excise tax. See section 275(a)(6) of the Code (as amended by section 
10201(b) of the IRA to add a reference to chapter 37, which contains 
section 4501).

II. Notice 2023-2

    On January 17, 2023, the Treasury Department and the IRS published 
Notice 2023-2, 2023-3 I.R.B. 374, to provide initial guidance regarding 
the application of the stock repurchase excise tax. Specifically, the 
Treasury Department and the IRS published Notice 2023-2 to facilitate 
administration of the stock repurchase excise tax by describing rules 
expected to be provided in forthcoming proposed regulations for 
determining the amount of stock repurchase excise tax owed, along with 
anticipated rules for reporting and paying any liability for the tax.
    Under those rules, the amount of stock repurchase excise tax 
imposed on a covered corporation equals the product obtained by 
multiplying one percent by the stock repurchase excise tax base of the 
covered corporation. The ``stock repurchase excise tax base'' is the 
amount (not less than zero) obtained by: (i) determining the aggregate 
fair market value of all repurchases of the covered corporation's stock 
by the covered corporation during its taxable year; (ii) reducing that 
amount by the fair market value of stock of the covered corporation 
repurchased during its taxable year to the extent any statutory

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exceptions apply; and then (iii) further reducing that amount by the 
aggregate fair market value of stock of the covered corporation issued 
or provided by the covered corporation during its taxable year under 
the netting rule.
    The Treasury Department and the IRS have received feedback on the 
stock repurchase excise tax, including in response to Notice 2023-2. 
Based on the feedback received, and based on further consideration of 
section 4501 and Notice 2023-2, the Treasury Department and the IRS are 
proposing these regulations under section 4501 to be added as a new 
part 58 under the Miscellaneous Excise Taxes, as well as adding new 
Sec.  1.1275-6(f)(12)(iii) to 26 CFR part 1.
    The issues related to section 4501 and Notice 2023-2 with respect 
to which stakeholders have provided feedback, as well as issues that 
the Treasury Department and the IRS have considered after the 
publication of Notice 2023-2, are discussed in the following 
Explanation of Provisions.

Explanation of Provisions

    Subpart A of new part 58 would provide operative rules under 
section 4501. Proposed Sec.  58.4501-1 would provide an overview of the 
stock repurchase excise tax, generally applicable definitions, the 
scope of the regulations implementing that tax, and certain operating 
rules applicable to those regulations. Proposed Sec.  58.4501-2 would 
provide general rules regarding the application and computation of the 
stock repurchase excise tax and proposed Sec.  58.4501-7 would provide 
rules specifically relating to the application of section 4501(d). 
Except as provided in proposed Sec.  58.4501-7, proposed Sec.  58.4501-
3 would provide rules regarding the application of the exceptions in 
section 4501(e) (other than the de minimis exception described in 
section 4501(e)(3) and to which proposed Sec.  58.4501-2(b)(2) 
applies), and proposed Sec.  58.4501-4 would provide rules regarding 
the application of section 4501(c)(3). Proposed Sec.  58.4501-5 would 
provide examples that illustrate the application of section 4501, other 
than the provisions of proposed Sec.  58.4501-7 (which are illustrated 
by examples in Sec.  58.4501-7(p) and (q)), and proposed Sec.  58.4501-
6 would provide applicability dates (other than for the rules in Sec.  
58.4501-7).

I. Statutory Effective Date; Transition Relief

A. Repurchases by a Fiscal-Year Taxpayer Prior to the Statutory 
Effective Date

    A covered corporation is not subject to the stock repurchase excise 
tax with regard to a taxable year if, during that taxable year, the 
aggregate fair market value of the covered corporation's repurchases of 
its stock does not exceed $1,000,000 (de minimis exception). See 
section 4501(e)(3); see also section 3.03(2)(a) of Notice 2023-2.
    One stakeholder requested that the proposed regulations make clear 
that repurchases of stock by a fiscal-year taxpayer prior to the 
January 1, 2023, effective date of section 4501 are not taken into 
account for purposes of applying the de minimis exception. According to 
the stakeholder, the plain language of the statute requires that 
repurchases by a fiscal-year taxpayer prior to January 1, 2023, not be 
taken into account for any purpose under section 4501, including for 
purposes of applying the de minimis exception.
    The Treasury Department and the IRS have interpreted section 4501 
in the same manner. The rule described in section 3.03(3)(b) of Notice 
2023-2 provides that repurchases by a covered corporation before 
January 1, 2023, are not included in the covered corporation's stock 
repurchase excise tax base. The proposed regulations would clarify that 
repurchases before January 1, 2023, are not taken into account for 
purposes of applying the de minimis exception. See proposed Sec.  
58.4501-2(c)(3).

B. Issuances by a Fiscal-Year Taxpayer Prior to the Effective Date

    One stakeholder recommended that stock issued by a fiscal-year 
taxpayer prior to January 1, 2023, should not be taken into account for 
purposes of the netting rule, because such an approach would create a 
mismatch between the treatment of issuances for purposes of the netting 
rule and the treatment of repurchases for purposes of the de minimis 
exception. See part I.A of this Explanation of Provisions. Another 
stakeholder recommended that fiscal-year taxpayers be permitted to use 
only net issuances (that is, issuances net of repurchases) from the 
portion of their taxable year prior to January 1, 2023, because, 
according to the stakeholder, taxpayers arguably should not be 
permitted to offset gross issuances during the portion of a fiscal year 
before January 1, 2023, against repurchases during the portion of a 
fiscal year beginning on January 1, 2023.
    The Treasury Department and the IRS disagree with the stakeholders' 
recommendations. Section 4501(c)(3) expressly provides that the amount 
taken into account under section 4501(a) with respect to any stock 
repurchased by a covered corporation is reduced by the fair market 
value of any stock issued by the covered corporation ``during the 
taxable year.'' Moreover, although section 10201(d) of the IRA 
expressly provides that the stock repurchase excise tax applies to 
repurchases after December 31, 2022, it does not contain similar 
language for issuances. Therefore, the Treasury Department and the IRS 
are of the view that, in the case of a covered corporation that has a 
taxable year that both begins before January 1, 2023, and ends after 
December 31, 2022, that covered corporation may apply the netting rule 
to reduce the fair market value of the covered corporation's 
repurchases during that taxable year by the fair market value of all 
issuances of its stock during the entirety of that taxable year. See 
proposed Sec.  58.4501-4(b)(3). Thus, the proposed regulations would 
not adopt these recommendations.

C. Contributions by Fiscal-Year Taxpayer to Employer-Sponsored 
Retirement Plan Prior to Effective Date

    A stakeholder also recommended that stock contributed by a fiscal-
year taxpayer to an employer-sponsored retirement plan prior to the 
January 1, 2023, effective date of section 4501, should not be taken 
into account for purposes of the statutory exception in section 
4501(e)(2) because, according to the stakeholder, such an approach 
would create a mismatch between this exception and the de minimis 
exception. However, as discussed in part I.B of this Explanation of 
Provisions, the effective date in section 10201(d) of the IRA expressly 
applies to repurchases (and not to issuances or contributions). 
Therefore, the Treasury Department and the IRS are of the view that 
contributions to an employer-sponsored retirement plan during the 2022 
portion of a taxable year beginning before January 1, 2023, and ending 
after December 31, 2022, should be taken into account for purposes of 
section 4501(e)(2). See proposed Sec.  58.4501-3(d)(5).

D. Trade Date or Settlement Date

    A stakeholder asked whether the date of repurchase of stock occurs 
on (i) the trade date for the sale or purchase of that stock (that is, 
the date a broker executes the trade), or (ii) the settlement date with 
regard to that stock (that is, the date the shares are delivered). The

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stakeholder asked this question for purposes of determining whether a 
repurchase occurs after the effective date of section 4501. The 
stakeholder requested that the proposed regulations clarify that the 
trade date for the sale or purchase of that stock constitutes the date 
of repurchase.
    The proposed regulations would clarify that the date of repurchase 
for a regular-way sale of stock on an established securities market 
(that is, a transaction in which a trade order is placed on the trade 
date, and settlement of the transaction, including payment and delivery 
of the stock, occurs a standardized number of days after the trade 
date) is the trade date. See proposed Sec.  58.4501-2(g)(2). For rules 
regarding the date of repurchase generally, see part III.B.1 of this 
Explanation of Provisions.

E. Transition Relief for Certain Transactions Entered Into Prior to 
Enactment Date

    Several stakeholders requested transition relief (that is, an 
exemption from the stock repurchase excise tax) for certain repurchases 
that occur after the January 1, 2023, effective date of section 4501, 
pursuant to a binding commitment entered into before the August 16, 
2022, enactment date of section 4501. For example, one stakeholder 
requested an exemption for redemptions of stock issued before the 
enactment date and redeemed pursuant to the terms of the stock after 
the effective date, on the grounds that the stock repurchase excise tax 
did not exist when the terms of that stock were negotiated. Another 
stakeholder suggested that candidates for transition relief could 
include: (i) redemptions by, and liquidations of, a special purpose 
acquisition company (SPAC) formed prior to the enactment date (to the 
extent the SPAC is contractually obligated to offer redemption rights 
to its shareholders as agreed prior to the enactment date); (ii) 
payments in connection with merger and acquisition (M&A) transactions 
pursuant to a binding commitment entered into prior to the enactment 
date; (iii) redemptions of non-participating, non-convertible preferred 
stock, and complete redemptions of tracking stock, issued prior to the 
enactment date; (iv) repurchases pursuant to accelerated share 
repurchase agreements if completed pursuant to a binding commitment 
entered into prior to the enactment date; and (v) liquidating 
distributions subject to section 331 of the Code pursuant to a plan of 
liquidation adopted prior to the enactment date.
    The plain language of section 10201(d) of the IRA provides that the 
amendments made by section 10201 of the IRA apply to repurchases of 
stock after December 31, 2022. That section contains no reference to 
repurchases that occur pursuant to a binding commitment entered into 
prior to the enactment date. As a result, the Treasury Department and 
the IRS are of the view that transition relief would not be 
appropriate. The proposed regulations accordingly would not adopt the 
stakeholders' recommendation.

II. Application of the Stock Repurchase Excise Tax to Various Types of 
Financial Instruments

A. Definition of ``Stock''

    For purposes of Notice 2023-2, ``stock'' would be defined as any 
instrument issued by a corporation that is stock or that is treated as 
stock for Federal tax purposes at the time of issuance, regardless of 
whether the instrument is traded on an established securities market. 
See section 3.02(25) of Notice 2023-2.
    The proposed regulations generally would maintain this definition 
of ``stock.'' See proposed Sec.  58.4501-1(b)(29). However, the 
proposed definition of ``stock'' would not include ``additional tier 1 
preferred stock,'' which the proposed regulations would define to mean 
preferred stock that qualifies as additional tier 1 capital (within the 
meaning of 12 CFR 3.20(c), 217.20(c), or 324.20(c)) and does not 
qualify as common equity tier 1 capital (within the meaning of 12 CFR 
3.20(b), 217.20(b), or 324.20(b)). See proposed Sec.  58.4501-
1(b)(29)(ii). Therefore, unless the limited-scope exception regarding 
additional tier 1 preferred stock applies, the stock repurchase excise 
tax would apply to preferred stock in the same manner as to common 
stock. Likewise, the stock repurchase excise tax would apply to 
repurchases of instruments that are not in the legal form of stock but 
that are treated as stock for Federal tax purposes at the time of 
issuance. In contrast, the stock repurchase excise tax would not apply 
to repurchases of instruments treated as debt for Federal tax purposes.
    The proposed regulations would include the foregoing definition of 
``stock'' for the following reasons. First, the plain language of 
section 4501 repeatedly refers to ``stock'' and does not, for example, 
refer solely to ``common stock.'' See, for example, section 4501(a) 
(imposing an excise tax ``equal to 1 percent of the fair market value 
of any stock of the corporation''); section 4501(b) (defining the term 
covered corporation to mean ``any domestic corporation the stock of 
which is traded on an established securities market''); section 
4501(c)(1)(A) (defining the term repurchase to mean a redemption within 
the meaning of section 317(b) ``with regard to the stock of a covered 
corporation''). Second, if the stock repurchase excise tax were 
implemented to be applicable solely to common stock, then taxpayers 
could avoid the tax simply by repurchasing other classes of stock (or 
other instruments treated as stock for Federal tax purposes).
    Section 4501(f)(2) authorizes the Secretary to issue such 
regulations and other guidance as are necessary or appropriate to carry 
out, and to prevent the avoidance of, the purposes of the stock 
repurchase excise tax, including guidance ``to address special classes 
of stock and preferred stock.'' Accordingly, in section 6.01(1) of 
Notice 2023-2, the Treasury Department and the IRS requested comments 
on whether there are circumstances under which special rules should be 
provided for redeemable preferred stock or other special classes of 
stock or debt (including debt with features that allow the debt to be 
converted into stock) and, if so, what objectively verifiable criteria 
should be incorporated into such special rules to provide certainty for 
taxpayers and the IRS.
1. Straight Preferred Stock; Mandatorily Redeemable Stock
    Stakeholders recommended that the stock repurchase excise tax 
should not apply to redemptions of preferred stock. Although two 
stakeholders recommended an exception for redemptions of any type of 
preferred stock, other stakeholders generally recommended an exception 
only for redemptions of so-called ``straight preferred stock'' (that 
is, preferred stock that is limited and preferred as to dividends, does 
not participate in corporate growth to any significant extent, and is 
not convertible into another class of stock). See section 1504(a)(4)(B) 
and (D) of the Code. One stakeholder also argued against providing an 
exception for redemptions of preferred stock other than straight 
preferred stock. See part II.A.2 of this Explanation of Provisions.
    The stakeholders uniformly contended that, although straight 
preferred stock is treated as ``stock'' for Federal tax purposes, 
repayments of such stock are akin to repaying debt and do not implicate 
the policy concerns underlying the stock repurchase excise tax. The 
stakeholders further contended that, if redemptions of straight 
preferred

[[Page 25984]]

stock were subject to the stock repurchase excise tax, publicly traded 
corporations might be incentivized to increase their leverage by 
issuing debt in lieu of straight preferred stock.
    One stakeholder also recommended a rule under which actual or 
deemed issuances of straight preferred stock would not be taken into 
account for purposes of the netting rule. The stakeholder further 
recommended that exchanges of straight preferred stock for other stock 
(that is, for stock to which the stock repurchase excise tax applies) 
should be treated as economically similar transactions.
    Alternatively, stakeholders recommended an exception to the stock 
repurchase excise tax for the redemption of stock pursuant to a 
mandatory redemption provision or a unilateral put option of the 
shareholder. In the stakeholders' view, this exception would be 
appropriate because such a redemption would not be within the control 
of (and would not be susceptible to any timing manipulation by) the 
issuing corporation.
    As described in part II.A of this Explanation of Provisions, the 
plain language of section 4501 consistently refers to ``stock'' without 
providing any exceptions for particular types of stock. In addition, 
the Treasury Department and the IRS are of the view that Treasury 
regulations that utilize the broadly applicable term ``stock'' would 
facilitate the IRS's ability to administer and enforce the stock 
repurchase excise tax. Consequently, the Treasury Department and the 
IRS also are of the view that adoption of the stakeholders' numerous 
suggested exceptions would significantly hamper the IRS's ability to 
administer and enforce that tax, as well as reduce taxpayer certainty 
regarding its application. Therefore, except with regard to additional 
tier 1 preferred stock, the proposed regulations would not incorporate 
the stakeholders' suggested exceptions. See proposed Sec. Sec.  
58.4501-1(b)(29), 58.4501-2(e)(2), and 58.4501-4(b)(1); see also 
proposed Sec.  58.4501-1(b)(29)(ii) and part II.A.3 of this Explanation 
of Provisions (discussion of additional tier 1 preferred stock).
2. Convertible Preferred Stock and Participating Preferred Stock
    One stakeholder recommended that, even if straight preferred stock 
is excluded from the stock repurchase excise tax, preferred stock that 
is convertible into the issuer's common stock at the holder's option 
(convertible preferred stock), and preferred stock with certain 
dividend or liquidation participation rights that enable the holder to 
participate in corporate growth to a significant extent (participating 
preferred stock), should continue to be subject to the stock repurchase 
excise tax. In the stakeholder's view, a redemption of such stock 
generally is more akin to a redemption of common stock than to a 
repayment of debt or a redemption of straight preferred stock (for 
example, there are fewer outstanding shares of stock participating in 
future corporate growth after such a redemption).
    For the reasons stated in part II.A.1 of this Explanation of 
Provisions, the Treasury Department and the IRS agree with the 
stakeholder's recommendation. Accordingly, under the proposed 
regulations, the repurchase of convertible or participating preferred 
stock would be subject to the stock repurchase excise tax, and the 
issuance of such stock would be taken into account for purposes of the 
netting rule. See proposed Sec. Sec.  58.4501-1(b)(29), 58.4501-
2(e)(2), and 58.4501-4(b)(1).
3. Additional Tier 1 Preferred Stock
    Several stakeholders noted that the issuance and redemption of 
preferred stock is used routinely in certain industries as a way to 
manage risk. One stakeholder recommended an exception to the stock 
repurchase excise tax and the netting rule for redemptions or issuances 
of preferred stock that qualifies as additional tier 1 capital for 
purposes of regulatory requirements for regulated financial 
institutions (additional tier 1 preferred stock).
    According to the stakeholder, the issuing corporation may not 
redeem or repurchase additional tier 1 preferred stock without prior 
approval from regulators. Moreover, if such an instrument is callable 
by its terms, (i) it may not be called for at least five years; (ii) 
the issuing corporation must receive prior approval from regulators to 
exercise the call option; and (iii) the issuing corporation must either 
replace the instrument with other tier 1 capital or demonstrate to 
regulators that it will continue to hold capital commensurate with 
risk.
    Based on the feedback received, the Treasury Department and the IRS 
are of the view that the stock repurchase excise tax regulations should 
not apply to additional tier 1 preferred stock. See proposed Sec.  
58.4501-1(b)(29)(ii). Consequently, under the proposed regulations, 
additional tier 1 preferred stock would not be 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.
4. Convertible Debt
    Stakeholders have requested confirmation that redemptions of 
convertible debt instruments are not subject to the stock repurchase 
excise tax. One stakeholder contended that such transactions should not 
be treated as ``economically similar'' to a section 317(b) redemption 
because the definition of ``redemption'' in section 317(b) encompasses 
only redemptions of stock, and because a redemption of a convertible 
debt instrument does not reduce the number of a corporation's 
outstanding shares. Another stakeholder contended that the 
determination of whether an instrument constitutes debt or equity 
should be made at the time of issuance. Therefore, if the convertible 
debt instrument is characterized as ``debt'' at the time of issuance, 
the subsequent redemption or cash settlement of that instrument should 
not be treated as a repurchase. Likewise, the issuance of a convertible 
debt instrument by a covered corporation should not be treated as an 
issuance for purposes of the netting rule.
    The Treasury Department and the IRS agree with these stakeholders. 
Although Notice 2023-2 does not expressly address convertible debt 
instruments, the Treasury Department and the IRS continue to be of the 
view that, for purposes of the stock repurchase excise tax, whether an 
instrument is debt or equity should be determined at the time of 
issuance under Federal income tax principles, and that this 
characterization should not be retested while the debt instrument is 
outstanding. See proposed Sec.  58.4501-1(b)(29); see also part II.B of 
this Explanation of Provisions. Such an approach would better 
facilitate the IRS's ability to administer and enforce the stock 
repurchase excise tax and enable taxpayers to apply the tax with 
greater certainty. Moreover, the term ``repurchase'' includes only 
section 317(b) redemptions with regard to ``stock'' of a covered 
corporation as well as transactions that are ``economically similar'' 
to such redemptions. See section 4501(c)(1). Accordingly, the Treasury 
Department and the IRS are of the view that no special rules are needed 
for convertible debt. However, for a discussion of the application of 
the netting rule to an instrument not in the legal form of stock, see 
part XI.C.9 of this Explanation of Provisions.
5. Tracking Stock
    Tracking stock is an instrument that tracks the performance of a 
division of the parent corporation or a subsidiary (for example, by 
providing dividend rights that are determined by reference

[[Page 25985]]

to the earnings of the tracked division or subsidiary). Because 
tracking stock participates in corporate growth, a stakeholder 
recommended treating the redemption of less than all shares of a class 
of tracking stock in the same manner as the redemption of other common 
stock--that is, as subject to the stock repurchase excise tax.
    However, the stakeholder also suggested that an exemption may be 
warranted for the redemption of an entire class of tracking stock in 
connection with the disposition of the underlying tracked business, 
because such a redemption (i) does not accrete to the interests of the 
corporation's remaining shareholders in the corporation's remaining 
assets, and (ii) may be equivalent to a distribution in partial 
liquidation. (As discussed in part VI.B of this Explanation of 
Provisions, the stakeholder recommended treating partial liquidations 
as generally outside the scope of the stock repurchase excise tax.)
    The Treasury Department and the IRS are of the view that the 
treatment of tracking stock for purposes of the stock repurchase excise 
tax should follow the general Federal tax treatment of tracking stock. 
Accordingly, no special guidance regarding the proper treatment of 
tracking stock is included in these proposed regulations.

B. Characterization of Instruments as Stock or Debt

    One stakeholder requested confirmation that the determination of 
whether an instrument is stock or debt for purposes of the stock 
repurchase excise tax is made at the time of issuance under Federal tax 
principles, and that this characterization is not retested subsequently 
while the instrument is outstanding. The Treasury Department and the 
IRS agree with this recommendation, because, as previously stated, such 
an approach under which an instrument is tested only once would better 
facilitate the IRS's ability to administer and enforce the stock 
repurchase excise tax and enable taxpayers to apply the tax with 
greater certainty. See proposed Sec.  58.4501-1(b)(29).

C. Options and Similar Financial Instruments

1. Overview
    As discussed previously, Notice 2023-2 would define ``stock'' to 
mean any instrument issued by a corporation that is stock or that is 
treated as stock for Federal tax purposes at the time of issuance. See 
section 3.02(25) of Notice 2023-2. This definition of ``stock'' 
generally excludes options other than options that are treated as stock 
for Federal tax purposes at the time of issuance.
    To the extent option contracts are not treated as stock at the time 
of issuance, the acquisition of such contracts is not a repurchase 
under Notice 2023-2 because such acquisition is neither a section 
317(b) redemption nor included in the exclusive list of economically 
similar transactions in section 3.04(4)(a) of Notice 2023-2. 
Consequently, under Notice 2023-2, there is a repurchase or an issuance 
of stock only at the time of exercise of a physically settled option 
(when a covered corporation repurchases or issues the actual underlying 
stock). In turn, the amount of such repurchase or issuance is equal to 
the market price of the stock on the date the stock is repurchased or 
issued. See sections 3.06(1)(a), 3.06(2), 3.08(2), and 3.08(5) of 
Notice 2023-2; see also part III of this Explanation of Provisions 
(discussion of valuation and timing).
    Several questions have arisen regarding the application of the 
stock repurchase excise tax to options and similar financial 
instruments. In section 6.02(4) of Notice 2023-2, the Treasury 
Department and the IRS requested comments on: (i) whether any 
additional rules with regard to financial arrangements, such as options 
or other similar financial instruments, should be added to prevent 
avoidance of the stock repurchase excise tax; and (ii) how such 
additional rules should apply consistently for purposes of determining 
a covered corporation's repurchases and issuances.
2. Physical Settlement of Option Contracts
    Stakeholders recommended that the fair market value of shares 
acquired or issued (as appropriate) by a covered corporation upon 
physical settlement of an option contract should be the fair market 
value of the shares on the date of exercise, rather than the strike 
price (that is, the price at which the option can be exercised). For 
example (Example 1), assume that corporation X issues a call option to 
individual A that entitles A to buy 100 shares of X stock for $100 
($1.00 per share) from X for a limited time. The terms of the option 
require physical settlement. On the date the option is issued, X stock 
is trading at $1.00 per share. On the date the option is exercised, X 
stock is trading at $1.30 per share. Upon settlement of the option, A 
pays $100 to X, which issues 100 shares of X stock (worth $130) to A.
    Alternatively (Example 2), assume the same facts as in Example 1, 
except that X issues a put option to A that entitles A to sell 100 
shares of X stock for $100 ($1.00 per share) to X, and that X stock is 
trading at $0.70 per share on the date the option is exercised. To 
settle the option, X purchases 100 shares of X stock (worth $70) for 
$100 from A.
    As another example (Example 3), assume that A issues a call option 
to unrelated individual B that entitles B to buy 100 shares of X stock 
for $100 ($1.00 per share) from A for a limited time. The terms of the 
option require physical settlement. Subsequently, X purchases the 
option contract from B. On the date the option is exercised, X stock is 
trading at $1.30 per share. To settle the option, X pays $100 to A, who 
delivers 100 shares of X stock (worth $130) to X.
    The netting rule requires the stock repurchase excise tax base to 
be reduced by ``the fair market value of any stock issued by the 
covered corporation during the taxable year.'' See section 4501(c)(3). 
Thus, according to stakeholders, the amount of the issuance in Example 
1 should be $130 (the fair market value of the stock at the time of 
issuance) even though A pays only $100 to excise the option.
    Similarly, the stock repurchase excise tax applies to ``the fair 
market value of any stock of the corporation which is repurchased by 
such corporation during the taxable year.'' See section 4501(a). 
Consequently, stakeholders suggested that the amount of the repurchase 
in Example 2 should be $70, and that the $30 premium paid by X 
represents the amount paid for a property right separate from the stock 
being repurchased. Cf. Rev. Rul. 70-108, 1970-1 C.B. 78 (holding that 
the right to purchase additional shares constitutes separate property 
from the underlying shares). Consistent with this approach, 
stakeholders also suggested that the amount of the repurchase in 
Example 3 should be $130 (the fair market value of the stock on the 
exercise date).
    The Treasury Department and the IRS agree with the stakeholders 
that the amount of the issuance in Example 1 should be $130 (the fair 
market value of the issued stock on the exercise date) rather than $100 
(the strike price paid by A). Similarly, the Treasury Department and 
the IRS agree that the amount of the repurchase in Example 2 should be 
$70 rather than $100, and that the amount of the repurchase in Example 
3 should be $130 rather than $100.
    The foregoing approach, which is consistent with Notice 2023-2, is 
embedded in the proposed rules regarding the fair market value of 
repurchased or issued stock. See proposed Sec. Sec.  58.4501-2(h)(1) 
and

[[Page 25986]]

58.4501-4(e)(1), respectively. Thus, the Treasury Department and the 
IRS are of the view that special rules are not needed with respect to 
the fair market value of stock repurchased or issued upon the physical 
settlement of an option. However, the proposed regulations would 
include several examples to illustrate the proposed approach. See 
proposed Sec.  58.4501-5(b)(26) and (28). For special rules for valuing 
stock issued or provided to an employee or other service provider in 
connection with the performance of services, see proposed Sec.  
58.4501-4(e)(5) and part XI.G.7 of this Explanation of Provisions.
3. Cash Settlement of Option Contracts
    As previously discussed in part II.C.2 of this Explanation of 
Provisions, stakeholders recommended treating the physical settlement 
of an option as a repurchase or an issuance (as appropriate) based on 
the fair market value of the stock repurchased or issued on the date of 
exercise. In contrast, a stakeholder recommended that the cash 
settlement of a put option issued by a covered corporation should not 
be treated as a repurchase by the covered corporation, because any 
excess of the strike price over the fair market value of the underlying 
stock should be viewed as payment for property that is separate from 
the underlying stock. Cf. Rev. Rul. 70-108.
    For example, assume that corporation X issues a put option to 
individual A that entitles A to sell 100 shares of X stock for $100 
($1.00 per share) to X, and that X stock is trading at $0.70 per share 
on the date the option is exercised. The terms of the option require 
net cash settlement; thus, X pays $30 to A to settle the option. The 
stakeholder recommended not treating the net cash settlement as a 
repurchase, even though the settlement could be construed as a purchase 
by X of the 100 X shares from A for $100, immediately followed by an 
issuance by X of 100 shares to A for $70.
    For the cash settlement of a call option, the stakeholder generally 
recommended either (i) treating the net cash settlement as a deemed 
issuance of stock immediately followed by a repurchase of the same 
stock (resulting in no net adjustment to the stock repurchase excise 
tax base), or (ii) simply disregarding the cash settlement altogether 
for purposes of the stock repurchase excise tax. For example, assume 
that X issues a call option to A that entitles A to buy 100 shares of X 
stock for $100 ($1.00 per share) from X, and that X stock is trading at 
$1.30 per share on the date the option is exercised. The terms of the 
option require net cash settlement; thus, X pays $30 to A to settle the 
option.
    The net cash payment in the foregoing example is the economic 
equivalent of (i) A paying $100 to exercise the option, (ii) X issuing 
100 shares (worth $130) to A, and then (iii) X immediately redeeming 
those shares for $130 in cash. Thus, X could be deemed to have issued 
and repurchased $130 of its shares in a transaction that fully offsets 
for purposes of the stock repurchase excise tax. Alternatively, X's net 
cash settlement could be disregarded altogether and simply treated as 
the sale or exchange of an option. See section 1234(c)(2); Rev. Rul. 
88-31, 1988-1 C.B. 302 (providing that the net cash settlement of a 
price-protection contingent value right is treated as a cash settlement 
of a put option subject to section 1234(c)(2)).
    The Treasury Department and the IRS are of the view that, for 
purposes of the stock repurchase excise tax, the net cash settlement of 
an option should not be treated as involving a deemed issuance and 
repurchase of shares in the interest of simplicity and 
administrability. Accordingly, under the proposed regulations, the net 
cash settlement of an option contract would result in neither the 
repurchase nor the issuance of stock other than as discussed in part 
II.C.4 of this Explanation of Provisions. This rule would apply to the 
net cash settlement of an embedded option (for example, if the issuer 
pays the investor solely in cash on exercise of the conversion right in 
a convertible bond). See proposed Sec. Sec.  58.4501-2(e)(5)(v) and 
58.4501-4(f)(12).
4. Deep-in-the-Money Options
    Several stakeholders recommended that options that are treated as 
constructively exercised at the time of their grant under Federal 
income tax principles (commonly referred to as ``deep-in-the-money'' 
options) should be treated similarly for purposes of the stock 
repurchase excise tax. For example, according to the stakeholders, if 
the grant of an option is treated as the issuance of the underlying 
stock as of the date of the grant for Federal income tax purposes, the 
grant of the option should be treated as an issuance of stock for 
purposes of the netting rule, and the cash settlement of the option 
should be treated as a repurchase of stock in the year of the 
settlement.
    The stakeholders further recommended that the determination of 
whether an option is deep in the money should be made only at the time 
of grant and generally should not be revisited. Thus, if a corporation 
grants a call option that is exercisable or convertible into the 
corporation's stock and that is not constructively exercised at the 
time of grant, the stock should not be treated as issued until the 
option is exercised or converted into stock.
    The Treasury Department and the IRS are of the view that, if a 
deep-in-the-money option is determined to be constructively exercised 
at the time of grant under Federal income tax principles, the cash 
settlement of such an option would be a repurchase of the underlying 
stock on the date of settlement under the proposed regulations. See 
proposed Sec.  58.4501-2(e)(5)(v). However, for a discussion of the 
application of the netting rule to deep-in-the-money options or other 
instruments not in the legal form of stock, see part XI.C.9 of this 
Explanation of Provisions.
5. Section 305(a) Warrants
    A stakeholder recommended that, if an option to acquire a covered 
corporation's stock is distributed in a distribution under section 
305(a) of the Code (section 305(a) warrant), the adjustment to the 
stock repurchase excise tax base upon settlement of the section 305(a) 
warrant should be determined by reference to the strike price (and not 
the value of the underlying stock) because the section 305(a) 
distribution should be disregarded.
    The Treasury Department and the IRS are of the view that the 
treatment of warrants distributed in a section 305 distribution should 
not deviate from the treatment of other types of financial instruments 
under the proposed regulations. The Treasury Department and the IRS 
view this approach as facilitating the IRS's ability to administer and 
enforce the stock repurchase excise tax and enable taxpayers to apply 
the tax with greater certainty. Accordingly, the proposed regulations 
would not provide special rules for warrants distributed in a section 
305 distribution. See proposed Sec. Sec.  58.4501-2(e)(5)(v) and 
58.4501-4(f)(12); see also part II.C.3 of this Explanation of 
Provisions (discussion of cash settlement of option contracts).
6. Integration of Qualifying Debt Instruments Under Sec.  1.1275-6
    A stakeholder requested clarification on how section 4501 applies 
to a synthetic debt instrument resulting from an integrated transaction 
under Sec.  1.1275-6. In general, Sec.  1.1275-6 provides for the 
integration of a qualifying debt instrument (as defined in Sec.  
1.1275-6(b)(1)) with a Sec.  1.1275-6 hedge or combination of Sec.  
1.1275-6

[[Page 25987]]

hedges in certain circumstances. The circumstances in which Sec.  
1.1275-6 may apply involve a convertible debt instrument as well as one 
or more options or other financial instruments involving underlying 
stock, provided that the combined cash flows of the financial 
instrument and the debt instrument permit the calculation of a yield to 
maturity under section 1272 of the Code or the right to the combined 
cash flows would qualify as a specified type of variable rate debt 
instrument, and other conditions are satisfied.
    Under Sec.  1.1275-6(f), except as otherwise provided in published 
guidance, the synthetic debt instrument resulting from an integrated 
transaction is recognized as a single debt instrument for Federal 
income tax purposes for the period that the transaction qualifies as an 
integrated transaction and is not subject to the Federal income tax 
rules that would apply on a separate basis to the instruments 
comprising the integrated transaction if the transaction were not 
integrated.
    Because an integrated transaction does not change the amount of 
stock actually repurchased or issued, the Treasury Department and the 
IRS are of the view that the determination of whether and when stock is 
repurchased or issued for purposes of the stock repurchase excise tax 
should be determined without regard to the integration of a qualifying 
debt instrument with a Sec.  1.1275-6 hedge or combination of Sec.  
1.1275-6 hedges under Sec.  1.1275-6. See proposed Sec.  1.1275-
6(f)(12)(iii).

D. Forfeiture or Clawback of Restricted Stock

    One stakeholder recommended that the forfeiture of restricted stock 
(that is, stock transferred to a service provider that is subject to a 
substantial risk of forfeiture at grant) that was transferred to a 
service provider in connection with the performance of services should 
not be treated as a repurchase for purposes of the stock repurchase 
excise tax to the extent no payment is made to the service provider in 
connection with the forfeiture. Instead, the stakeholder recommended 
treating the stock as repurchased only to the extent of any payment 
received in connection with the forfeiture, with any excess of the 
value of the stock over the amount paid treated as a forfeiture. In 
other words, the stakeholder recommended using the amount paid rather 
than market price to compute the amount of the repurchase in this 
situation.
    The stakeholder cited to Sec.  1.83-6(c) in support of its 
recommendation. Section 1.83-6(c) provides that, if (under section 
83(h) of the Code and Sec.  1.83-6(a)) a deduction, an increase in 
basis, or a reduction of gross income was allowable to an employer in 
respect of a transfer of property, and if such property subsequently is 
forfeited, then the amount of such deduction, increase in basis, or 
reduction of gross income is included in the employer's gross income 
for the taxable year in which the forfeiture occurs. According to the 
stakeholder, the fact that the employer does not recognize additional 
income or gain suggests that the property forfeited, to the extent it 
exceeds any amount paid by the employer to the forfeiting service 
provider, is treated as a capital contribution to the employer under 
section 118(a) rather than as a redemption.
    Notice 2023-2 does not expressly address the forfeiture of 
restricted stock. Under section 3.06(2) of Notice 2023-2, if property 
is paid for the forfeited stock, the stock is treated as repurchased 
for an amount equal to the market price on the date of repurchase 
(regardless of the amount actually paid) because there is a section 
317(b) redemption. If no property is paid in exchange for the forfeited 
shares, the forfeiture is not treated as a repurchase, because the 
forfeiture is neither a section 317(b) redemption nor treated as an 
economically similar transaction. However, under both Notice 2023-2 and 
these proposed regulations, there would be an issuance for purposes of 
the netting rule when the ownership of the restricted stock transfers 
to the recipient for Federal income tax purposes. See proposed Sec.  
58.4501-4(d)(2).
    The Treasury Department and the IRS are of the view that, if a 
covered corporation takes into account an issuance of restricted stock 
for purposes of the netting rule because a section 83(b) election has 
been made, a forfeiture of such stock likewise should be treated as a 
repurchase. Conversely, if a covered corporation does not take into 
account an issuance of restricted stock for purposes of the netting 
rule, a forfeiture of such stock should not be treated as a repurchase. 
This approach is necessary to preserve consistency in the treatment of 
issuances and repurchases. Moreover, the economic effect of a 
forfeiture is similar to that of a repurchase, insofar as the shares 
are retired (or held as treasury stock) in both cases.
    Accordingly, the proposed regulations would treat a forfeiture of 
restricted stock as a repurchase on the date of forfeiture (in an 
amount equal to the fair market value of such stock on the date of 
forfeiture) if such forfeited stock was treated as issued or provided 
under the netting rule. See proposed Sec.  58.4501-2(e)(4)(vi); see 
also part XII.D of this Explanation of Provisions (discussion of a 
proposal to provide similar treatment with regard to forfeitures of 
stock issued as part of an earnout or to satisfy an indemnification 
obligation).
    It is the view of the Treasury Department and the IRS that stock 
received by a covered corporation or specified affiliate pursuant to a 
clawback agreement (that is, a contractual provision that requires an 
employee to return vested stock) is economically similar to restricted 
stock forfeited to the covered corporation after failure to vest. 
Accordingly, these proposed regulations also would provide that, if the 
stock were treated as issued or provided under the netting rule, then 
the clawed back stock would be treated as repurchased on the date of 
clawback (in an amount equal to the fair market value of such stock on 
such date). See proposed Sec.  58.4501-2(e)(4)(vi).

III. Valuation and Timing

A. Valuation

1. Overview
    Under sections 3.06(2) and 3.08(5) of Notice 2023-2, the fair 
market value of stock repurchased or issued (other than stock issued or 
provided to an employee) is the market price of the stock on the date 
the stock is repurchased or issued, respectively. Thus, if the price at 
which the repurchased stock is purchased differs from the market price 
of the stock on the date the stock is repurchased, the fair market 
value of the stock is the market price on the date the stock is 
repurchased.
    The Treasury Department and the IRS continue to be of the view that 
this approach is more consistent with the plain language of the 
statute, and simpler for the IRS to administer and for taxpayers to 
apply, than an approach that defines fair market value by reference to 
the amount paid to repurchase stock. For example, under Notice 2023-2, 
adjustments are not required for transaction costs or non-arm's-length 
transactions, and special rules are not needed for situations in which 
stock is redeemed for consideration other than cash (such as a non-
publicly traded note).
    Section 3.08(3)(c) of Notice 2023-2 describes a special rule for 
valuing stock issued or provided to employees. The fair market value of 
such stock is the fair market value of the stock, as determined under 
section 83, as of the date the stock is issued or provided to the 
employee, as determined under section 3.08(3)(b)

[[Page 25988]]

of Notice 2023-2. See part XI.G.7 of this Explanation of Provisions 
(discussion of valuing stock issued or provided to an employee or other 
service provider).
    In section 6.01(2) of Notice 2023-2, the Treasury Department and 
the IRS requested comments on whether the fair market value of stock 
repurchased or issued should be an amount other than the market price 
of such stock. In section 6.01(6) of Notice 2023-2, the Treasury 
Department and the IRS also requested comments on whether a method 
should be provided for determining the market price of stock that is 
traded on multiple established securities markets and, if so, what 
modifications to the rules described in sections 3.06(2)(a)(i) and 
3.08(5)(a)(i) of Notice 2023-2 (concerning acceptable methods for 
determining the market price of repurchased or issued stock that is 
traded on an established securities market) would be required.
2. Valuation in Arm's-Length Transactions
    Consistent with the approach described in Notice 2023-2, 
stakeholders generally recommended that the fair market value of stock 
repurchased or issued should be the market price of the stock on the 
day of the repurchase or issuance, respectively. However, one 
stakeholder also recommended that covered corporations be required to 
determine fair market value based on the actual price the covered 
corporation pays or receives, if the repurchase or issuance is (i) from 
or to an unrelated party, (ii) for cash or cash-equivalents, (iii) 
negotiated at arm's length, and (iv) not pursuant to a pre-existing 
option contract or other arrangement (for example, an accelerated share 
repurchase agreement) that involves the delivery of stock at a price 
other than the stock's market price at delivery.
    Similarly, another stakeholder recommended an exception to the 
general fair market value rule for repurchases that result from a 
tender offer or other, similarly negotiated transaction that sets a 
transaction price prior to the closing date. According to the 
stakeholder, it is common for the transaction price and the market 
price on the closing date to differ, and it is not clear why the value 
of a repurchase should be determined based on the market price rather 
than the transaction price.
    The Treasury Department and the IRS continue to be of the view that 
an approach that references the market price of stock on the date the 
stock is repurchased or issued, respectively, is more consistent with 
the plain language of the statute, and would be simpler to administer, 
than an approach that references the amount paid to repurchase the 
stock. Moreover, the Treasury Department and the IRS are of the view 
that the two approaches likely would result in approximately similar 
values for most repurchases of publicly traded stock. Consequently, the 
proposed regulations would provide that the fair market value of stock 
repurchased or issued is the market price of the stock on the date the 
stock is repurchased or issued, respectively. See proposed Sec. Sec.  
58.4501-2(h)(1) and 58.4501-4(e)(1).
3. Valuation in Bankruptcy or Insolvency Workouts
    Another stakeholder recommended that, in the case of a bankruptcy 
or insolvency workout, the fair market value of repurchased stock 
should equal the value of the recovery shareholders are entitled or 
permitted to receive under the bankruptcy or insolvency workout, rather 
than the market price of the stock. The stakeholder recommended this 
approach because the market price of the stock will take the debt 
restructuring into account and, thus, may be much higher than the 
recovery value.
    However, the Treasury Department and the IRS are of the view that 
the proposed regulations should not adopt special valuation rules for 
financially troubled companies. As discussed in part XIII of this 
Explanation of Provisions, the Treasury Department and the IRS are of 
the view that distributions of cash or other non-qualifying property 
(that is, property that is not permitted to be received under section 
354 or 355 of the Code without the recognition of gain or loss) by 
troubled companies to their shareholders in exchange for their stock 
should be subject to the stock repurchase excise tax. Moreover, section 
4501 contains no indication that special valuation rules for 
financially troubled companies would be necessary or appropriate to 
carry out the purposes of the stock repurchase excise tax. The Treasury 
Department and the IRS are of this view because the exchange would be a 
section 317(b) redemption and providing a special rule would not be 
necessary or appropriate to carry out the purposes of section 4501.
4. Valuation of Publicly Traded Stock
a. In General
    One stakeholder recommended that taxpayers be permitted (but not 
required) to determine the market price of publicly traded stock based 
on one or more commonly accepted valuation methods, such as daily 
volume-weighted average price (VWAP), daily average high-low price, or 
daily closing price. Under the stakeholder's recommendation, a taxpayer 
would be required to consistently apply the taxpayer's chosen method to 
all its repurchases and issuances throughout the taxpayer's taxable 
year. According to the stakeholder, this approach would be consistent 
with established Federal tax valuation standards for the fair market 
value of publicly traded securities.
    Sections 3.06(2)(a)(i) and 3.08(5)(a)(i) of Notice 2023-2 describe 
an approach that would require taxpayers to determine the market price 
of repurchased or issued stock, respectively, that is traded on an 
established securities market by applying one of four methods: (i) the 
daily volume-weighted average price as determined on the date the stock 
is repurchased or issued; (ii) the closing price on the date the stock 
is repurchased or issued; (iii) the average of the high and low prices 
on the date the stock is repurchased or issued; and (iv) the trading 
price at the time the stock is repurchased or issued. Sections 
3.06(2)(a)(iii) and 3.08(5)(a)(iii) of Notice 2023-2 describe an 
approach that would require the market price of such stock to be 
determined by consistently applying one of the foregoing methods to all 
repurchases and issuances throughout the covered corporation's taxable 
year (other than stock issued to employees). Another stakeholder 
expressed appreciation for the flexibility provided under the approach 
described in sections 3.06(2)(a) and 3.08(5)(a) of Notice 2023-2.
    The Treasury Department and the IRS agree that commonly accepted 
valuation methods are an appropriate means of determining the fair 
market value of publicly traded stock for purposes of repurchases and 
issuances under section 4501. Accordingly, consistent with Notice 2023-
2, the proposed regulations would include four such methods: (i) daily 
VWAP; (ii) daily closing price; (iii) daily average high-low price; and 
(iv) trading price when stock is repurchased or issued. Consistent with 
Notice 2023-2, to facilitate the IRS's ability to administer and 
enforce the stock repurchase excise tax, the Treasury Department and 
the IRS are of the view that taxpayers should be required (rather than 
merely permitted) to use one of these methods. See proposed Sec. Sec.  
58.4501-2(h)(2)(ii) and 58.4501-4(e)(2)(ii).
    As reflected in sections 3.06(2)(a)(iii) and 3.08(5)(a)(iii) of 
Notice 2023-2, the

[[Page 25989]]

Treasury Department and the IRS also agree with the stakeholder that 
taxpayers should be required to consistently apply the chosen method to 
all repurchases and issuances throughout the taxable year. See proposed 
Sec. Sec.  58.4501-2(h)(2)(iv) and 58.4501-4(e)(2)(iv). For special 
rules for valuing stock issued or provided to an employee or other 
service provider in connection with the performance of services, see 
proposed Sec.  58.4501-4(e)(5) and part XI.G.7 of this Explanation of 
Provisions.
b. Stock Traded on Multiple Established Securities Markets
    One stakeholder recommended that a covered corporation with a class 
of stock that trades on multiple established securities markets should 
be permitted to select both the valuation method and the exchange to be 
used in determining the fair market value of the covered corporation's 
stock. The stakeholder had considered an alternative approach based on 
the market price of the shares on the exchange with the highest trading 
volume on the applicable date, but the stakeholder did not recommend 
such an approach due to the additional complexity it would create.
    The Treasury Department and the IRS are of the view that a covered 
corporation whose stock is traded on multiple exchanges should 
determine the fair market value of the covered corporation's stock by 
reference to trading on the exchange in the country in which the 
covered corporation is organized, including a regional established 
securities market that trades in that country. If the covered 
corporation's stock trades on multiple exchanges in the country in 
which the covered corporation is organized, fair market value is 
determined by reference to trading on the exchange in that country with 
the highest trading volume in that stock in the prior taxable year. See 
proposed Sec. Sec.  58.4501-2(h)(2)(v) and 58.4501-4(e)(2)(v). It is 
the view of the Treasury Department and the IRS that this approach 
would better facilitate the IRS's ability to administer and enforce the 
stock repurchase excise tax and enable taxpayers to apply the tax with 
greater certainty.
5. Valuation of Privately Owned Stock
    One stakeholder recommended that the market price of privately 
owned stock should be determined under general valuation principles for 
privately owned securities. Another stakeholder recommended that the 
market price of privately owned stock should equal the amount paid for 
such stock. According to this second stakeholder, valuation experts 
often disagree, and the transaction price typically is viewed as the 
best evidence of the value of privately owned stock. Further, allowing 
corporations to use the amount paid in valuing privately traded stock 
would relieve corporations from the need to evaluate whether there is a 
difference between the amount paid and the market price of such shares 
on the date on which ownership transfers for Federal income tax 
purposes.
    Under the approach described in sections 3.06(2)(b) and 3.08(5)(b) 
of Notice 2023-2, stock that is not traded on an established securities 
market would be valued on the date of repurchase or issuance under the 
principles of Sec.  1.409A-1(b)(5)(iv)(B)(1). Section 1.409A-
1(b)(5)(iv)(B)(1) provides, in part, that the fair market value of 
stock as of a valuation date means a value determined by the reasonable 
application of a reasonable valuation method, and that the 
determination of whether a valuation method is reasonable (or whether 
an application of a valuation method is reasonable) is made based on 
the facts and circumstances as of the valuation date. Section 1.409A-
1(b)(5)(iv)(B)(1) further provides that the amount paid is one factor 
to be considered under a reasonable valuation method. The Treasury 
Department and the IRS are of the view that the proposed regulations 
should implement the approach described in Notice 2023-2 and should not 
provide a separate rule that would permit taxpayers to use the amount 
paid, in and of itself, in determining the value of privately traded 
stock. See proposed Sec. Sec.  58.4501-2(h)(3) and 58.4501-4(e)(3). For 
special rules for valuing stock issued or provided to an employee or 
other service provider in connection with the performance of services, 
see proposed Sec.  58.4501-4(e)(5) and part XI.G.7 of this Explanation 
of Provisions.
    As with publicly traded stock, the Treasury Department and the IRS 
are of the view that repurchases and issuances of privately traded 
stock should be valued consistently. Specifically, the proposed 
regulations would provide that the same valuation method must be used 
for all repurchases and issuances of privately owned stock belonging to 
the same class throughout the covered corporation's taxable year, 
unless the application of that method to a particular repurchase or 
issuance would be unreasonable under the facts and circumstances as of 
the valuation date. See proposed Sec. Sec.  58.4501-2(h)(3)(ii) and 
58.4501-4(e)(3)(ii). For special rules for valuing stock issued or 
provided to an employee or other service provider in connection with 
the performance of services, see proposed Sec.  58.4501-4(e)(5) and 
part XI.G.7 of this Explanation of Provisions.
6. Annual Valuation Convention
    A stakeholder also questioned whether covered corporations should 
be permitted to use an annual valuation convention to determine a 
single, uniform value for all repurchases and issuances during a 
taxable year. According to the stakeholder, an annual valuation 
convention would eliminate the distortive effects of stock price 
volatility. In addition, such approach would simplify netting because 
the use of the same price for all repurchases and issuances in the 
taxable year would allow netting to be computed based on the number of 
shares repurchased versus issued.
    However, the stakeholder also acknowledged that converting the 
netting rule into such a ``share count'' rule would be in tension with 
the statutory requirement to value shares based on fair market value. 
The stakeholder also noted that volatility later in the year could 
cause a covered corporation's stock repurchase excise tax liability to 
rise or fall dramatically after issuances or repurchases earlier in the 
year, and that other Code provisions typically do not allow values to 
be averaged over such a long period.
    The Treasury Department and the IRS agree with the stakeholder that 
adoption of an annual valuation convention in the proposed regulations 
would be inconsistent with the statutory requirement under section 
4501(c)(3) to value shares based on fair market value. Accordingly, the 
proposed regulations would not adopt the stakeholder's annual valuation 
convention.

B. Timing of Issuances and Repurchases

1. In General
    The approach described in sections 3.06(1)(a) and 3.08(2) of Notice 
2023-2 generally provides that stock is treated as repurchased or as 
issued or provided, respectively, at the time at which ownership of the 
stock transfers for Federal income tax purposes. In turn, the approach 
described in sections 3.06(2) and 3.08(5) of Notice 2023-2 provides 
that the fair market value of stock repurchased or issued is the market 
price of the stock on the date the stock is repurchased or issued, 
respectively.
    One stakeholder recommended that, consistent with the approach 
described in section 3.08(2) of Notice 2023-2, stock generally should 
be treated as issued for purposes of the netting rule

[[Page 25990]]

when tax ownership of the stock transfers to the recipient of the 
stock, rather than when the stock is issued for corporate law or 
financial statement purposes.
    The Treasury Department and the IRS agree with the stakeholder's 
general recommendation and continue to be of the view that stock 
generally should be treated as repurchased when tax ownership of the 
stock transfers to the covered corporation or to the specified 
affiliate (as appropriate). Therefore, the proposed regulations 
generally would retain this approach. See proposed Sec. Sec.  58.4501-
2(g)(1) and 58.4501-4(d)(1). For specific timing rules applicable in 
particular situations, see proposed Sec.  58.4501-2(g)(2), (3), and 
(4), and for special timing rules for stock issued or provided to an 
employee or other service provider in connection with the performance 
of services, see proposed Sec.  58.4501-4(d)(2) and part XI.G.6 of this 
Explanation of Provisions.
2. Repurchase Pursuant to an Economically Similar Transaction
    Under the rule described in section 3.06(1)(b) of Notice 2023-2, 
stock repurchased in an economically similar transaction is treated as 
repurchased when the shareholders of the covered corporation exchange 
their stock in the covered corporation. Consistent with part III.B.1 of 
this Explanation of Provisions and section 3.06(1)(b) of Notice 2023-2, 
the proposed regulations would provide that stock repurchased in an 
economically similar transaction described in proposed Sec.  58.4501-
2(e)(4) is treated as repurchased on the date the shareholders of the 
covered corporation exchange their stock in such corporation. See 
proposed Sec.  58.4501-2(g)(2).
3. Repurchase Pursuant to a Constructive Specified Affiliate 
Acquisition
    For a discussion of the timing rule for repurchases pursuant to a 
constructive specified affiliate acquisition, see part XIV.D of this 
Explanation of Provisions.
4. Accelerated Share Repurchase Agreements
    Although Notice 2023-2 does not describe special rules for 
accelerated share repurchase (ASR) agreements, section 3.09(15), 
Example 15, of Notice 2023-2 illustrates the application of the timing 
rules summarized in part III.B.1 of this Explanation of Provisions in 
the context of an ASR agreement. That example explicitly is limited to 
situations in which, based on the terms of the agreement and the facts 
and circumstances, the date on which shares are delivered by the bank 
to the covered corporation is the date on which tax ownership of the 
shares is transferred for Federal income tax purposes. As a result, the 
delivery date in the example is the repurchase date. The example 
illustrates the general principle that the date on which tax ownership 
of the shares is transferred for Federal income tax purposes, which is 
generally based on the particular ASR agreement and the facts and 
circumstances of a transaction, is the repurchase date.
    Several stakeholders requested guidance regarding the treatment of 
ASR agreements for purposes of the stock repurchase excise tax. In an 
ASR agreement, a corporation that wants to repurchase its outstanding 
shares from the market will make an initial cash payment to an 
investment bank in exchange for a certain number of shares. To deliver 
the shares to the corporation, (i) the investment bank first will 
borrow shares from stock lenders, and then (ii) over the term of the 
ASR agreement, the bank will purchase shares from the market and use 
such shares to gradually return the stock owed to the stock lenders.
    The price the corporation ultimately pays for its shares under the 
ASR agreement generally is based on an averaging of the VWAP of the 
shares on specified days over the term of the agreement. Upon final 
settlement of the agreement, the bank may be required to deliver 
additional shares or cash to the corporation, or the corporation may 
owe additional purchase price to the bank, depending on the VWAP of the 
shares over the term of the agreement.
    Several stakeholders recommended treating the initial delivery of 
shares by the bank to a covered corporation under an ASR agreement as a 
repurchase at the time of delivery, rather than at the time the bank 
purchases the shares from the market. Based on the plain language of 
section 4501(a), one stakeholder also recommended determining the 
amount of the repurchase by reference to the fair market value of the 
shares delivered on the date of delivery, rather than by reference to 
the initial payment amount under the ASR agreement. If the bank 
delivers additional shares to the covered corporation (or the covered 
corporation issues shares to the bank) upon final settlement of the ASR 
agreement, the stakeholder recommended that such delivery (or issuance) 
also should be considered as a repurchase (or an issuance) of shares 
for purposes of the stock repurchase excise tax, with the fair market 
value of the repurchase (or issuance) determined on that date.
    The stakeholders' recommendations are consistent with Notice 2023-
2, including section 3.09(15), Example 15, to the extent that the ASR 
agreement involved is one in which the date the shares are delivered by 
the bank to the covered corporation is the date on which tax ownership 
of shares is transferred for Federal income tax purposes. In such a 
situation, the date the shares are delivered would be the repurchase 
date. However, because the determination of the date on which tax 
ownership of shares is transferred is an inherently factual question, 
the Treasury Department and the IRS are of the view that no special 
rule should be included in the proposed regulations to determine the 
repurchase date for ASR agreements, and the proposed regulations would 
retain the approach described in Notice 2023-2. See proposed Sec. Sec.  
58.4501-2(h)(1), 58.4501-4(e)(1), and 58.4501-5(b)(15) (Example 15).
5. Other Forward Contracts
    A stakeholder also requested guidance on how the stock repurchase 
excise tax applies to other forward transactions (either variable or 
fixed price) in which a corporation agrees to acquire or issue its 
stock for delivery in a future trade. The stakeholder recommended that 
the stock repurchase excise tax and the netting rule generally should 
be applied based on the fair market value of the shares at the time of 
their actual acquisition or issuance by the corporation. However, if 
the stock underlying the transaction is treated as immediately acquired 
or issued under Federal income tax principles (for example, if the 
corporation effectively acquires the benefits and burdens of stock 
ownership upon entering into the forward contract), the timing rules 
for purposes of the stock repurchase excise tax (for example, the date 
used for determining fair market value) should follow those Federal 
income tax principles.
    The Treasury Department and the IRS agree with these 
recommendations as they relate to the determination of the date stock 
is treated as repurchased and the fair market value of that stock. As 
previously discussed, the proposed regulations generally would use 
Federal income tax principles to determine the date on which stock is 
treated as repurchased or issued. Additionally, under the proposed 
regulations, the fair market value of stock repurchased or issued 
generally would equal the market price of the stock on the date the 
stock is repurchased or issued. See proposed Sec. Sec.  58.4501-2(h)(1) 
and 58.4501-4(e)(1). For a discussion of the application of the netting 
rule to forward contracts or other instruments not in the legal form

[[Page 25991]]

of stock, see part XI.C.9 of this Explanation of Provisions.
6. Stock Issued or Provided to an Employee or Other Service Provider
    For a discussion of the timing rules for stock issued or provided 
to an employee or other service provider, see part XI.G.6 of this 
Explanation of Provisions.

IV. Definitions of ``Covered Corporation,'' ``Established Securities 
Market,'' and ``Specified Affiliate''

A. Becoming or Ceasing To Be a Covered Corporation

1. Overview
    In section 6.02(2) of Notice 2023-2, the Treasury Department and 
the IRS requested comments on when a corporation should be treated as 
becoming or ceasing to be a covered corporation, and how repurchases 
and issuances by a corporation during a taxable year that are prior to 
the date the corporation becomes a covered corporation or after the 
date the corporation ceases to be a covered corporation should be 
treated. For example, the Treasury Department and the IRS have 
considered the extent to which the term ``covered corporation'' should 
apply to a privately held corporation that goes public, or to a 
publicly traded corporation that goes private, during a taxable year.
    One stakeholder recommended that the stock repurchase excise tax 
base of a corporation that becomes a covered corporation during its 
taxable year (for example, because of an initial public offering (IPO)) 
should be increased only for section 317(b) redemptions and 
economically similar transactions occurring on or after the date the 
corporation becomes a covered corporation. The stakeholder further 
recommended that only stock issued by a corporation on or after the 
date it becomes a covered corporation should be taken into account for 
purposes of the netting rule.
    Similarly, another stakeholder recommended that a corporation's 
status as a covered corporation should be determined immediately prior 
to a repurchase transaction. Thus, for example, a public corporation 
that becomes a private corporation in a repurchase would be a covered 
corporation with respect to that transaction.
    In contrast, another stakeholder recommended that any redemption 
that occurs as part of a transaction should be exempt from the 
definition of ``repurchase'' if the corporation's stock no longer is 
traded on an established securities market immediately after the 
transaction. Alternatively, the stakeholder recommended that a 
corporation's status as a covered corporation be determined at the end 
of the repurchase transaction.
2. General Rules
    The Treasury Department and the IRS are of the view that, as a 
general rule, a corporation should be treated as a covered corporation 
starting at the beginning of the corporation's ``initiation date,'' 
which is the date on which stock of the corporation begins to be traded 
on an established securities market. Based on the statutory language, 
the Treasury Department and the IRS are of the view that the traded 
instrument must be stock of the corporation (as opposed to, for 
example, ``when-issued'' trading of interests in to-be-issued shares of 
stock of the corporation). See, for example, section 4501(b) (defining 
a covered corporation as a domestic corporation the stock of which is 
traded on an established securities market). A covered corporation 
generally would cease being treated as a covered corporation at the end 
of the covered corporation's ``cessation date,'' which is the date on 
which stock of the covered corporation ceases to be traded on an 
established securities market.
    The Treasury Department and the IRS are of the view that these 
general rules would be consistent with the statutory language in 
section 4501 and would facilitate the IRS's ability to administer and 
enforce the stock repurchase excise tax. Accordingly, the proposed 
regulations would incorporate these general rules. See proposed Sec.  
58.4501-2(d)(1) and (d)(2)(i).
    Under the proposed regulations, in the case of a privately held 
domestic corporation that goes public, shares issued on or after the 
initiation date would be counted for purposes of the netting rule under 
the proposed regulations. In addition, the proposed regulations would 
provide that any repurchases, issuances, or contributions to an 
employer-sponsored retirement plan on or after that date would be taken 
into account in computing the corporation's stock repurchase excise tax 
base for that taxable year. In contrast, shares issued before the 
initiation date would not be counted for purposes of the netting rule, 
and any repurchases, issuances, or contributions to an employer-
sponsored retirement plan before that date would not be taken into 
account in computing the corporation's stock repurchase excise tax base 
for that taxable year. See proposed Sec.  58.4501-4(b)(2).
    In the case of a publicly traded domestic corporation that goes 
private, repurchases of stock on the cessation date would be subject to 
the stock repurchase excise tax under the proposed regulations, unless 
one of the statutory exceptions applies. However, any repurchases, 
issuances, or contributions to an employer-sponsored retirement plan of 
the corporation's stock after that date generally would not be taken 
into account under the proposed regulations in computing the 
corporation's stock repurchase excise tax base for that year.
3. Exception Regarding Cessation Transactions That Include Repurchases 
Pursuant to the Transaction's Plan
    The proposed regulations would contain an exception to the general 
rule that a corporation should be treated as a covered corporation 
starting at the beginning of its ``initiation date'' and ending at the 
end of its ``cessation date.'' Under the proposed regulations, if a 
corporation ceases to be a covered corporation pursuant to a plan that 
includes a repurchase, and if the corporation's cessation date precedes 
the date on which any repurchase undertaken pursuant to the plan 
occurs, then the corporation would continue to be a covered corporation 
until the end of the date on which the repurchase occurs. See proposed 
Sec.  58.4501-2(d)(2)(ii). For example, under the proposed regulations, 
all repurchases of stock of a target covered corporation in an 
acquisitive reorganization would be subject to the stock repurchase 
excise tax (if no exception applied), even if the target covered 
corporation's stock ceased to be traded on an established securities 
market prior to the repurchase of the target covered corporation's 
stock in the acquisitive reorganization. Under this exception, a 
covered corporation's final repurchase transaction pursuant to the plan 
of reorganization would be included in the stock repurchase excise tax 
base.
4. Inbound and Outbound F Reorganizations
    A stakeholder requested clarification that, consistent with the 
Federal income tax treatment of a foreign corporation that domesticates 
in an F reorganization, such a corporation is not a domestic 
corporation for purposes of the stock repurchase excise tax until the 
day after that reorganization occurs. See Sec.  1.367(b)-2(f)(4) 
(providing that, in the case of an F reorganization in which the 
transferor corporation is a foreign corporation, the taxable year of 
such corporation ends with the close of the date of the transfer). 
According to the

[[Page 25992]]

stakeholder, this clarification is important for foreign special 
acquisition holding companies, which typically domesticate when 
combining with a domestic business.
    The Treasury Department and the IRS agree with the stakeholder. 
Accordingly, these proposed regulations would clarify that, for 
purposes of the stock repurchase excise tax, a foreign corporation that 
transfers its assets to a domestic corporation in an F reorganization 
(as described in Sec.  1.367(b)-2(f)) is not treated as a domestic 
corporation until the day after the reorganization. Similarly, the 
proposed regulations would clarify that, for purposes of the stock 
repurchase excise tax, a domestic corporation that transfers its assets 
to a foreign corporation in an F reorganization (as described in Sec.  
1.367(a)-1(e)) is not treated as a foreign corporation until the day 
after the reorganization. See proposed Sec.  58.4501-2(d)(3).
5. Determination of Timing of Events or Transactions
    The Treasury Department and the IRS have considered rules to 
address uncertainty that could arise from the application of the stock 
repurchase excise tax regulations to a series of transactions or events 
that occurs across multiple time zones.
    The Treasury Department and the IRS request comments on this issue, 
including specific proposals to address the application of the stock 
repurchase excise tax regulations to a series of transactions or events 
that occurs across multiple time zones. The Treasury Department and the 
IRS encourage comments regarding the extent to which a proposed 
approach would facilitate taxpayer certainty and the IRS's ability to 
administer and enforce the stock repurchase excise tax regulations.

B. Determining Specified Affiliate Status

    If a specified affiliate of a covered corporation acquires stock of 
the covered corporation from a person that is not the covered 
corporation or another specified affiliate of the covered corporation, 
the acquisition is treated as a repurchase of the stock of the covered 
corporation by the covered corporation. See section 4501(c)(2)(A); see 
also section 3.05(1) of Notice 2023-2.
    Stakeholders have asked when specified affiliate status should be 
determined. More specifically, stakeholders have asked when valuations 
should be undertaken for purposes of the 50-percent vote-or-value test 
in section 4501(c)(2)(B), and whether fluctuations in the value of the 
(potential) specified affiliate's stock or partnership interests should 
be ignored.
    The Treasury Department and the IRS are of the view that the 
determination of whether a corporation or partnership is a specified 
affiliate should be made whenever such determination is relevant for 
purposes of section 4501. For example, such a determination would be 
relevant when the potential specified affiliate acquires stock of a 
covered corporation or provides stock of the covered corporation to 
employees of the potential specified affiliate. See proposed Sec.  
58.4501-2(f)(2)(i).

C. Involvement Safe Harbor

    As defined in section 4501(b), the term ``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)). The rule described in section 3.02(13) of Notice 2023-2 
further provides that the term ``established securities'' market has 
the meaning provided in Sec.  1.7704-1(b).
    Section 1.7704-1(b) provides, in part, that the term ``established 
securities market'' includes ``[a]n interdealer quotation system that 
regularly disseminates firm buy or sell quotations by identified 
brokers or dealers by electronic means or otherwise'' (interdealer 
system). See Sec.  1.7704-1(b)(5). However, Sec.  1.7704-1(d) provides 
a safe harbor (involvement safe harbor) under which interests in a 
partnership are not treated as traded on an established securities 
market within the meaning of Sec.  1.7704-1(b)(5) (that is, a 
partnership will not be a publicly traded partnership solely due to an 
interdealer system), unless the partnership either (1) ``participates 
in the establishment of the market or the inclusion of its interests 
thereon,'' or (2) ``recognizes any transfers made on the market'' by 
redeeming the transferor or admitting the transferee as a partner or 
otherwise recognizing any rights of the transferee.
    A stakeholder noted that shares of corporations may trade over the 
counter (OTC) or on similar markets, even without the corporation's 
involvement, and that certain of those OTC or similar markets may 
qualify as an interdealer system. As a result, a corporation could be a 
covered corporation due to independent shareholder actions without the 
corporation engaging in an affirmative listing on an exchange. The 
stakeholder requested confirmation that the involvement safe harbor in 
Sec.  1.7704-1(d) applies for purposes of determining whether a 
corporation is a covered corporation due to an interdealer system, with 
adjustments as needed for application of this safe harbor to 
corporations rather than partnerships.
    The Treasury Department and the IRS are of the view that the 
involvement safe harbor should not apply for purposes of the stock 
repurchase excise tax. The Treasury Department and the IRS view the 
relationship between a partnership and its partners (a contractual 
relationship that allows a partnership to set the terms under which 
interests in the partnership may be validly transferred) as different 
from the relationship between a corporation and its shareholders (which 
is determined by the corporate law governing the stock). Accordingly, 
the proposed regulations would not incorporate the involvement safe 
harbor.

D. Indirect Ownership of Specified Affiliates

    As noted in part I.B of the Background section of this preamble, 
section 4501(c)(2)(B) defines the term ``specified affiliate'' to mean, 
with regard to any corporation, ``(i) any corporation more than 50 
percent of the stock of which is owned (by vote or by value), directly 
or indirectly, by such corporation, and (ii) any partnership more than 
50 percent of the capital interests or profits interests of which is 
held, directly or indirectly, by such corporation'' (emphasis added).
    The proposed regulations would provide that, for purposes of 
section 4501(c)(2)(B), ``indirect'' ownership means a corporation's 
proportionate ownership in equity interests through other entities. See 
proposed Sec.  58.4501-2(f)(2)(ii). For example, if P owns 60 percent 
of the stock of Sub 1, which owns 60 percent of the stock of Sub 2, 
then P indirectly owns 36 percent (0.6 x 0.6 = 0.36) of the stock of 
Sub 2.

E. Foreign Securities Markets

    In section 6.02(9) of Notice 2023-2, the Treasury Department and 
the IRS requested comments on whether the definition of ``established 
securities market'' should be revised to clarify the regulatory 
requirements under the Securities Exchange Act of 1934 that are most 
relevant to the determination of whether a foreign securities market is 
treated as an established securities market and, if so, what type of 
U.S. securities exchange (including which tier of a securities exchange 
with multiple tiers) should be the baseline for comparison.
    One stakeholder recommended including an exclusive list of foreign 
securities markets that are treated as established securities markets, 
on the grounds that tax advisors should not be required to determine 
whether foreign securities markets have regulatory

[[Page 25993]]

requirements analogous to those under the Securities Exchange Act of 
1934. See Sec.  1.7704-1(b).
    The Treasury Department and the IRS appreciate the stakeholder's 
recommendation. However, the Treasury Department and the IRS are of the 
view that the development and maintenance of an exclusive list of 
foreign securities markets that are treated as established securities 
markets would be outside the scope of the proposed regulations. As a 
result, the proposed regulations would not include such a list.

F. Depository Receipts

    In section 6.02(10) of Notice 2023-2, the Treasury Department and 
the IRS requested comments on how the trading of stock through 
depository receipts should be treated for purposes of determining 
whether a corporation is a covered corporation or whether repurchased 
stock is traded on an established securities market. In response, one 
stakeholder noted that some applicable foreign corporations with 
domestic specified affiliates have American depository receipts (ADRs) 
listed in the United States. The stakeholder requested guidance to 
clarify that the foreign parent's ADRs would not cause the domestic 
specified affiliate to be treated as if the domestic specified 
affiliate's stock were traded on an established securities market in 
the United States.
    The Treasury Department and the IRS are of the view that no special 
rules are needed in response to this request. Section 4501(b) 
specifically defines the term ``covered corporation'' to mean ``any 
domestic corporation the stock of which is traded on an established 
securities market'' (emphasis added). Moreover, although Notice 2023-2 
does not expressly address ADRs, the definition of ``stock'' is defined 
with respect to an instrument issued by the corporation. See section 
3.02(25) of Notice 2023-2. The proposed regulations would maintain this 
definition of ``stock.'' See proposed Sec.  58.4501-1(b)(29).
    ADRs that provide full voting rights with respect to the underlying 
corporate stock, entitle ADR holders to receive any dividends paid on 
the stock, and permit an ADR holder to surrender an ADR at any time in 
exchange for the underlying stock, may be treated as direct ownership 
of the underlying stock. See Rev. Rul. 65-218, 1965-2 C.B. 566. If an 
ADR is not treated as direct ownership of the underlying stock, it 
would be characterized in accordance with its substance. In either 
case, because ADRs are not issued by a domestic specified affiliate, 
they would not be treated as stock of the domestic specified affiliate.
    Publicly available information indicates that many foreign issuers 
treat ADRs for Federal income tax purposes as direct ownership of their 
stock. On that basis, under the definition of ``stock'' in these 
proposed regulations, ADRs would be treated as stock of the issuer and 
would be relevant to determining whether the issuer has stock that is 
traded on an established securities market. Similarly, global 
depositary receipts (GDRs) for the stock of domestic corporations that 
are traded on foreign exchanges may be relevant in determining whether 
the issuer has stock that is traded on an established securities 
market. Because the ADRs and GDRs are not issued by a domestic 
specified affiliate, they would not be treated as stock of the domestic 
specified affiliate.
    Additionally, Congress specifically wrote rules to address 
situations involving a publicly traded foreign corporation with a 
domestic specified affiliate, and those rules do not include any 
provisions treating the domestic specified affiliate as publicly traded 
as a result of the foreign corporation's stock trading on an 
established securities market in the United States. See section 
4501(d); see also part XVI of this Explanation of Provisions 
(discussion of feedback relating to section 4501(d)).

V. Section 301 Distributions

    Section 301(a) of the Code generally provides that a distribution 
of property (as defined in section 317(a)) made by a corporation to a 
shareholder with respect to its stock is treated in the manner provided 
in section 301(c). Section 301(c)(1) provides that the portion of the 
distribution that is a dividend (as defined in section 316) is included 
in gross income. Section 301(c)(2) provides that the portion of the 
distribution that is not a dividend is applied against and reduces the 
adjusted basis of the stock. Section 301(c)(3) generally provides that 
the portion of the distribution that is not a dividend is treated as 
gain from the sale or exchange of property to the extent that it 
exceeds the adjusted basis of the stock.
    For purposes of this discussion, an actual distribution subject to 
section 301(c)(2) or (3) refers to a distribution of property to a 
shareholder with respect to the corporation's stock that does not 
include an exchange of such stock. In contrast, an ``in-form'' 
redemption treated as a distribution subject to section 301(c)(2) or 
(3) refers to a distribution of property to a shareholder in exchange 
for the corporation's stock.

A. Actual Distributions Subject to Section 301(c)(2) or (3)

    Stakeholders asked whether an actual distribution (that is, a 
distribution that does not involve a redemption in form) to which 
section 301(c)(2) or (3) applies is subject to the stock repurchase 
excise tax. Stakeholders contended that the stock repurchase excise tax 
should not apply to such a distribution, because (i) it is not a 
section 317(b) redemption, and (ii) it is not economically similar to a 
section 317(b) redemption (for example, it does not decrease the number 
of shares outstanding). Instead, such a distribution more closely 
resembles a dividend, which is excluded from the stock repurchase 
excise tax (see section 4501(e)(6)).
    The Treasury Department and the IRS agree that an actual 
distribution subject to section 301(c)(2) or (3) is not a repurchase 
(and, therefore, is not subject to the stock repurchase excise tax) 
because such a distribution is neither a section 317(b) redemption nor 
economically similar to such a redemption. Accordingly, and consistent 
with section 3.04(4)(a) of Notice 2023-2 (which does not include such 
distributions in the list of economically similar transactions), the 
proposed regulations would provide that an actual distribution subject 
to section 301(c)(2) or (3) is not subject to the stock repurchase 
excise tax. See proposed Sec.  58.4501-2(e)(5)(iv).

B. Redemptions Treated as Distributions Subject to Section 301(c)(2) or 
(3)

    Stakeholders also asked whether the stock repurchase excise tax 
applies to an in-form redemption that is treated as a distribution to 
which section 301(c)(2) or (3) applies. See section 302(d). One 
stakeholder recommended applying the stock repurchase excise tax to a 
non-pro rata, in-form redemption that is treated as a distribution to 
which section 301(c)(2) or (3) applies. However, the stakeholder 
contended that the stock repurchase excise tax should not apply to a 
pro rata, in-form redemption that is treated as a distribution to which 
section 301(c)(2) or (3) applies, because such a redemption is more 
akin to an actual section 301 distribution than a typical section 
317(b) redemption. In contrast, another stakeholder recommended that 
the stock repurchase excise tax should apply to such a transaction 
because it is a redemption within the meaning of section 317(b) (for 
example, such a redemption decreases the number of outstanding

[[Page 25994]]

shares even though the redemption is pro rata).
    The Treasury Department and the IRS agree that an in-form section 
317(b) redemption treated as a distribution to which section 301(c)(2) 
or (3) applies is a repurchase based on the plain language of the 
statute, regardless of whether the redemption is pro rata. Accordingly, 
and consistent with section 3.04(3) of Notice 2023-2 (which does not 
include such transactions in the list of section 317(b) redemptions 
that are not repurchases), an in-form section 317(b) redemption treated 
as a distribution to which section 301(c)(2) or (3) applies would be 
subject to the stock repurchase excise tax under the proposed 
regulations. See proposed Sec.  58.4501-2(e)(3) (providing an exclusive 
list of section 317(b) redemptions that are not repurchases).

C. Exclusion for Pro Rata Distributions

    One stakeholder recommended a general exclusion from the stock 
repurchase excise tax for distributions made to all shareholders of a 
covered corporation on a wholly pro rata basis (100 percent pro rata 
distribution), regardless of whether such distributions involve a 
redemption in form. According to the stakeholder, such distributions do 
not implicate most of the policy considerations underlying the tax.
    However, the stakeholder noted that adopting this recommendation 
would require the Treasury Department and the IRS to consider (i) how 
to determine whether a distribution is 100 percent pro rata if the 
covered corporation has multiple classes of stock, and (ii) the impact 
of such distributions on options or convertible debt instruments (to 
the extent such instruments thereby accrete their proportionate 
interests in the covered corporation).
    The Treasury Department and the IRS disagree with the stakeholder's 
recommendation. A redemptive 100 percent pro rata distribution is a 
repurchase because the distribution (i) constitutes a section 317(b) 
redemption or (ii) is an economically similar transaction. Accordingly, 
the proposed regulations would not provide an exclusion for 100 percent 
pro rata distributions, except in the case of pro rata distributions in 
a complete liquidation to which section 331 or 332 (but not both) 
applies.

VI. Complete and Partial Liquidations

A. Complete Liquidations

    Section 331(a) of the Code provides that amounts received by a 
shareholder in a distribution in complete liquidation of a corporation 
are treated as in full payment in exchange for the stock. Section 332 
of the Code provides an exception to the general rule in section 
331(a). If the requirements of section 332 are met, no gain or loss is 
recognized upon the receipt by one corporation of property distributed 
in complete liquidation of another corporation.
    Section 332 applies only if the corporation receiving property in 
the liquidation satisfies the requirements of section 332(b), including 
the requirement that the corporation own stock in the liquidating 
corporation meeting the 80-percent voting and value requirements of 
section 1504(a)(2) of the Code (80-percent distributee). See section 
332(b)(1).
1. Application of Stock Repurchase Excise Tax
    Several stakeholders recommended that a complete liquidation by a 
covered corporation should not be subject to the stock repurchase 
excise tax because the complete liquidation terminates the covered 
corporation's existence. For support, these stakeholders contended that 
a complete liquidation provides no opportunity for the liquidating 
corporation to reinvest cash in the corporation's enterprise, which 
stakeholders stated Congress may have intended to encourage through the 
enactment of section 4501. In addition, these stakeholders emphasized 
that a complete liquidation provides no opportunity for a covered 
corporation to manipulate the corporation's earnings per share (EPS) or 
other similar metrics, which these stakeholders stated Congress may 
have intended to discourage through the enactment of section 4501.
    As reflected in section 3.04(4)(b)(i)(A) of Notice 2023-2, the 
Treasury Department and the IRS are of the view that a distribution in 
complete liquidation of a covered corporation to which either section 
331 or 332 (but not both) applies is not a repurchase. Accordingly, the 
Treasury Department and the IRS are of the view that such distributions 
should not be subject to the stock repurchase excise tax. See proposed 
Sec.  58.4501-2(e)(5).
2. Determination of Complete Liquidation or Dissolution
    Stakeholders also asked whether a distribution is in ``complete 
liquidation'' of a corporation for purposes of section 331 if some 
classes of the liquidating corporation's stock do not receive a 
distribution. Section 331 does not define the term ``complete 
liquidation.'' Instead, this term is defined in section 346(a) of the 
Code, which provides that, for purposes of subchapter C of chapter 1, 
``a distribution shall be treated as in complete liquidation of a 
corporation if the distribution is one of a series of distributions in 
redemption of all of the stock of the corporation pursuant to a plan'' 
(emphasis added).
    Stakeholders have questioned whether the definition of ``complete 
liquidation'' in section 346(a) requires a distribution on all classes 
of stock in order for a dissolution of a corporation to qualify as a 
distribution in complete liquidation to which section 331 applies. 
These stakeholders based their question on the language of section 
332(b)(2), which provides that a distribution is considered in 
``complete liquidation'' within the meaning of section 332 only if 
``the distribution is by [the liquidating corporation] in complete 
cancellation or redemption of all its stock.'' In addition, these 
stakeholders referenced Treasury regulations and judicial opinions. See 
Sec.  1.332-2(b) (``Section 332 applies only to those cases in which 
the recipient corporation receives at least partial payment for the 
stock which it owns in the liquidating corporation.''); Spaulding 
Bakeries Inc. v. Comm'r, 252 F.2d 693, 697 (2d Cir. 1958) (emphasizing 
that ``[s]ection 112(b)(6)(C) [of the Internal Revenue Code of 1939 
(the predecessor statute to section 332)] requires for its application 
a distribution in complete cancellation or redemption of all stock of 
the dissolved corporation''), aff'g 27 T.C. 684 (1957); H.K. Porter Co. 
v. Comm'r, 87 T.C. 689 (1986) (agreeing with the rationale of the 
Second Circuit's decision in H.K. Porter and holding that section 332 
did not apply to a dissolution because a distribution was made on the 
dissolving corporation's preferred stock but not its common stock).
    As stated previously, the Treasury Department and the IRS are of 
the view that a distribution in complete liquidation of a covered 
corporation to which section 331 or 332(a) applies should not be 
treated as a repurchase. In addition, the Treasury Department and the 
IRS are of the view that a redemption by a covered corporation pursuant 
to a corporate dissolution of the covered corporation should not be 
treated as a repurchase. To clarify the intent of Notice 2023-2, the 
proposed regulations would provide that a distribution in complete 
liquidation of a covered corporation to which either section 331 or 
332(a) (but not both) applies, a distribution pursuant to a plan of 
dissolution of a covered

[[Page 25995]]

corporation that is reported on the original (but not a supplemented or 
an amended) IRS Form 966, Corporate Dissolution or Liquidation (or any 
successor form), or a distribution pursuant to a deemed dissolution of 
the covered corporation (for instance, pursuant to a deemed liquidation 
under Sec.  301.7701-3), is not a repurchase and, therefore, is not 
subject to the stock repurchase excise tax. See proposed Sec.  58.4501-
2(e)(5)(i). For the treatment of liquidations to which both sections 
331 and 332 apply, see proposed Sec.  58.4501-2(e)(4)(v)(A) and the 
discussion in part VI.A.3 of this Explanation of Provisions.
3. Liquidations to Which Both Sections 331 and 332 Apply
    The rules described in section 3.04(4)(a)(v) of Notice 2023-2 
provide that, if sections 331 and 332 both apply to a complete 
liquidation, then (i) the distribution to the 80-percent distributee is 
not subject to the stock repurchase excise tax, but (ii) each 
distribution to which section 331 applies (that is, the surrender of 
covered corporation stock by each minority shareholder) is subject to 
the stock repurchase excise tax. The Treasury Department and the IRS 
have arrived at this view because the 80-percent distributee is the 
successor to the transferor corporation (that is, the liquidating 
subsidiary) following the complete liquidation to which section 332 
applies. See section 381(a)(2). In contrast to the 80-percent 
distributee, minority shareholders that receive liquidating 
distributions to which section 331 applies terminate their investment 
in the transferor corporation's business (that is, are not successors 
to the transferor corporation).
    Moreover, a complete liquidation to which sections 331 and 332 both 
apply is substantively similar to an upstream reorganization of the 
liquidating subsidiary into the 80-percent distributee in which the 
minority shareholders receive only non-qualifying property in exchange 
for their stock in the liquidating subsidiary. Because such an exchange 
in an upstream reorganization would constitute a ``repurchase'' under 
the proposed regulations, the Treasury Department and the IRS are of 
the view that the same treatment should apply to liquidating 
distributions to minority shareholders subject to section 331. See 
proposed Sec.  58.4501-2(e)(4)(v)(A).
4. Distributions During Taxable Year of Complete Liquidation or 
Dissolution
    The rule described in section 3.04(4)(b)(i)(B) of Notice 2023-2 
provides that, if a covered corporation or a covered surrogate foreign 
corporation (as appropriate) completely liquidates and dissolves 
(within the meaning of Sec.  1.331-1(d)(1)(ii)) during a taxable year, 
no distribution by that corporation during that taxable year is a 
repurchase. See also proposed Sec.  58.4501-2(e)(5)(ii) (incorporating 
this provision into the proposed regulations). Stakeholders have 
requested clarification regarding how this provision interacts with the 
rule described in section 3.04(4)(a)(v) of Notice 2023-2, which (as 
previously discussed in part VI.A.3 of this Explanation of Provisions) 
provides that, in a complete liquidation to which sections 331 and 332 
both apply, each distribution to which section 331 applies is subject 
to the stock repurchase excise tax. The proposed regulations would 
clarify the intent of Notice 2023-2 by providing that the rule in 
proposed Sec.  58.4501-2(e)(5)(ii) does not apply if the complete 
liquidation or dissolution is a transaction to which sections 331 and 
332 both apply.

B. Partial Liquidations

    Section 302(b)(4) of the Code provides that a distribution in 
redemption of stock held by a shareholder who is not a corporation and 
in partial liquidation of the distributing corporation receives 
exchange treatment under section 302(a). For purposes of section 
302(b)(4), a distribution will be treated as in partial liquidation of 
a corporation if the distribution (i) is not essentially equivalent to 
a dividend (determined at the corporate level rather than at the 
shareholder level), and (ii) is pursuant to a plan and occurs within 
the taxable year in which the plan was adopted or within the succeeding 
taxable year. See section 302(e)(1). A partial liquidation may involve 
a redemption of stock under section 317(b) in which the shareholder 
actually, in-form surrenders stock of the corporation in exchange for 
property (redemptive partial liquidation). A partial liquidation also 
may involve a constructive redemption of stock in which the shareholder 
is deemed to surrender stock of the corporation in exchange for 
property, and that deemed surrender satisfies the redemption 
requirement of sections 302 and 317(b) (constructive partial 
liquidation). See H.R. Conf. Rep. No. 760, 97th Cong., 2nd Sess. 530 
(1982) (``Under present law, a distribution in partial liquidation may 
take place without an actual surrender of stock by the shareholders . . 
. [and a] constructive redemption of stock is deemed to occur in such 
transactions. . . . The conferees intend that the treatment of partial 
liquidations under present law section 346(a)(2) and (b) is to continue 
for such transactions under new section 302(e).'').
1. Partial Liquidations Involving an Actual Redemption of Stock
    Several stakeholders requested guidance on whether a redemptive 
partial liquidation is treated as a repurchase. One stakeholder 
recommended that a redemptive partial liquidation by a covered 
corporation should be subject to the stock repurchase excise tax 
because a non-pro rata redemptive partial liquidation could achieve 
consequences similar to those that the stakeholder hypothesized section 
4501 was intended to counteract. For example, the stakeholder observed 
that, if a corporation distributes proceeds from the sale of one of its 
businesses to its shareholders, the corporation has chosen to make that 
distribution rather than reinvest the proceeds in its business. Another 
stakeholder agreed that non-pro rata redemptive partial liquidations 
should be treated as repurchases but contended that 100-percent pro 
rata redemptive partial liquidations should not be so treated.
    The Treasury Department and the IRS are of the view that redemptive 
partial liquidations should be treated as repurchases because those 
transactions qualify as section 317(b) redemptions. Moreover, as 
discussed in part V.C of this Explanation of Provisions, the Treasury 
Department and the IRS are of the view that no special exception should 
be provided for 100-percent pro rata redemptions, particularly because 
section 4501 does not provide such an exception. In addition, such an 
exception would complicate the IRS's ability to administer and enforce 
the stock repurchase excise tax. Accordingly, the proposed regulations 
would not incorporate these stakeholder recommendations.
2. Partial Liquidations Involving a Constructive Redemption of Stock
    Several stakeholders requested guidance on whether a constructive 
partial liquidation is treated as a repurchase. The stakeholders 
recommended that constructive partial liquidations should not be 
treated as repurchases because such transactions neither have the form 
of an actual redemption nor affect shareholders' proportionate 
interests. In addition, those stakeholders asserted that the treatment 
of constructive partial liquidations as constructive redemptions is 
imputed in revenue rulings to provide beneficial tax treatment to 
individual shareholders.

[[Page 25996]]

The stakeholders further contended that such redemptions are not 
motivated by, and do not produce, the economic effects that they 
contend the stock repurchase excise tax was designed to discourage.
    The Treasury Department and the IRS decline to adopt the 
stakeholders' recommendation in the proposed regulations. Section 
302(b)(4) applies to a distribution ``in redemption of stock,'' and 
section 317(b) defines a ``redemption'' for purposes of section 302. 
Regardless of whether a redemption is constructive rather than actual, 
the redemption comprises a section 317(b) redemption to which section 
302(b)(4) may apply. Therefore, the Treasury Department and the IRS are 
of the view that a constructive partial liquidation is a repurchase 
subject to the stock repurchase excise tax, and the proposed 
regulations would not provide any special exceptions for such 
transactions.
3. Dividend Exception and Partial Liquidation Look-Through Rule
    For a discussion of the dividend exception and the partial 
liquidation look-through rule in section 302(e)(5), see part X.F.3 of 
this Explanation of Provisions.

VII. Taxable Transactions

A. LBOs and Other Taxable ``Take Private'' Transactions

    Under the approach described in Notice 2023-2, unless a statutory 
exception applies, the target-corporation-funded portion of the 
consideration in an LBO or other taxable acquisition of the stock of a 
target corporation would be treated as a repurchase for purposes of 
computing the target corporation's stock repurchase excise tax base. 
See section 3.09(3) and (4) of Notice 2023-2. This approach tracks 
longstanding Federal income tax treatment by the IRS of such 
transactions, particularly that cash received by the minority 
shareholders in such transactions is subject to the provisions and 
limitations of section 302. See, for example, Rev. Rul. 78-250, 1978-1 
C.B. 83 (elimination of minority shareholders' interest in target 
corporation through the merger of a transitory subsidiary into target 
corporation treated as a redemption because target corporation was the 
source of the cash consideration).
    Several stakeholders recommended that payments funded (or deemed 
funded) by the target corporation in a taxable acquisition of target 
corporation stock should not be treated as a repurchase. Another 
stakeholder recommended that any redemption that occurs as part of a 
transaction should be exempt from the definition of ``repurchase'' if, 
immediately after the transaction, the target corporation's stock no 
longer is traded on an established securities market. See part IV.A of 
this Explanation of Provisions (discussing the stakeholder's 
recommendation). Alternatively, the stakeholder recommended that a 
target corporation's status as a covered corporation be determined at 
the end of the repurchase transaction. Similarly, another stakeholder 
recommended that an exemption be created for redemptions undertaken in 
connection with fully taxable stock dispositions in which target 
corporation shareholders completely terminate their interest under 
section 302(b)(3), and as described in Zenz v. Quinlivan, 213 F.2d 914 
(6th Cir. 1954).
    According to the stakeholders, deemed redemptions by a target 
corporation that is a covered corporation in an LBO or other taxable 
``take private'' transaction do not implicate their view of the 
congressional policies underlying the stock repurchase excise tax 
because the purpose of such a transaction is to cash out completely the 
target corporation's existing shareholders. For support, these 
stakeholders highlighted that taxable ``take private'' transactions do 
not present an opportunity to manipulate EPS or other financial 
metrics, which (i) become irrelevant after the target corporation 
ceases to be a publicly traded entity, and (ii) the stakeholders viewed 
as a practice that Congress intended to discourage through enactment of 
the stock repurchase excise tax.
    Moreover, in the stakeholders' view, imposing the stock repurchase 
excise tax on a fully taxable stock acquisition based solely on the 
source of the consideration received by the target corporation's 
shareholders would create arbitrary distinctions driven by factors that 
may be commercially focused, such as the target corporation's desired 
capital structure and its ability to obtain third-party financing. The 
stakeholders further noted that, if the application of the stock 
repurchase excise tax to fully taxable stock acquisitions hinges solely 
on the actual or deemed source of consideration, then parties easily 
may avoid the tax by borrowing at the acquiring-entity level, buying 
the target corporation's shares, and then having the target corporation 
assume or satisfy the debt after the acquisition.
    The Treasury Department and the IRS disagree with the stakeholders' 
recommendations. The treatment of such target corporation-funded 
payments as a redemption within the meaning of section 317(b) follows 
longstanding Federal income tax principles and guidance. The Treasury 
Department and the IRS are of the view that there is no compelling 
reason to deviate from such long-standing principles and guidance or 
from the express language of section 4501(c)(1), which defines a 
repurchase, in part, as ``a redemption within the meaning of section 
317(b) with regard to the stock of a covered corporation.'' The 
Treasury Department and the IRS are of the view that integrating long-
standing Federal income tax principles and guidance into the proposed 
regulations would facilitate taxpayer compliance, as well as the 
ability of the IRS to administer and enforce the stock repurchase 
excise tax. Accordingly, the proposed regulations would not adopt the 
stakeholders' recommendations regarding taxable stock acquisitions.
    Several stakeholders offered alternative recommendations in the 
event the proposed regulations do not exclude taxable stock 
acquisitions from the stock repurchase excise tax. One stakeholder 
agreed with the approach described in Notice 2023-2, under which a 
taxable stock acquisition is treated as a section 317(b) redemption 
only to the extent of the consideration sourced from the target 
corporation. The stakeholder recommended that, for purposes of the 
stock repurchase excise tax, sourcing should be guided by the same 
principles that apply to determine the identity of the borrower for 
Federal income tax purposes. The proposed regulations would retain the 
approach described in Notice 2023-2.
    Another stakeholder recommended that issuances by the target 
corporation in the same taxable year as the ``take private'' 
transaction, including issuances that occur after the ``take private'' 
transaction, should be taken into account for purposes of the netting 
rule. The Treasury Department and the IRS disagree with this 
recommendation. As previously discussed, the Treasury Department and 
the IRS are of the view that, to be consistent with the statutory 
language in section 4501, stock issued by a corporation after it ceases 
to be a covered corporation should not be taken into account under the 
netting rule. See part IV.A of this Explanation of Provisions. 
Accordingly, the proposed regulations would take into account stock 
issued by the target corporation in the same taxable year as the ``take 
private'' transaction only if that stock was issued during the period 
in which the target corporation was a covered corporation, as 
determined under these

[[Page 25997]]

proposed regulations. See proposed Sec. Sec.  58.4501-2(d)(1) and 
58.4501-4(b)(2).

B. Section 304 Transactions

1. Section 304(a)(1) Transactions
    Section 304(a)(1) of the Code applies if one corporation purchases 
stock of another corporation from a shareholder or shareholders in 
control of both corporations in exchange for cash or other property 
(section 304(a)(1) transaction). If section 304(a)(1) applies, the cash 
or other property paid to the controlling shareholder or shareholders 
is treated as a distribution in redemption of the stock of the 
acquiring corporation. To the extent that the distribution is treated 
as a distribution to which section 301 applies, (i) the selling 
shareholder or shareholders are treated in the same manner as if they 
had transferred the acquired stock to the acquiring corporation in a 
transaction to which section 351(a) of the Code applies, and then (ii) 
the acquiring corporation is treated in the same manner as if it had 
redeemed the stock it was treated as issuing in the transaction.
    The approach described in sections 3.04(3)(a) and 3.08(4)(e) of 
Notice 2023-2, respectively, provides that a deemed redemption 
resulting from the application of section 304(a)(1) is neither a 
repurchase nor an issuance for purposes of the stock repurchase excise 
tax. Stakeholders generally agreed with this approach, for several 
reasons.
    First, stakeholders noted that section 304(a)(1) transactions 
involve no actual contraction in the number of shares of acquiring 
corporation stock. Second, stakeholders observed that, to the extent 
the deemed redemption is treated as a distribution to which section 301 
applies, the section 304(a)(1) transaction would consist of an 
offsetting issuance and repurchase of acquiring corporation stock. 
However, those stakeholders correctly noted that the deemed redemption 
would be statutorily excluded from the computation of the acquiring 
corporation's stock repurchase excise tax base under section 4501(e)(6) 
to the extent that the deemed redemption is treated as a dividend under 
section 301(c)(1). As a result, the Federal income tax treatment 
mandated by section 304(a)(1), combined with the statutory exclusion 
for dividends under section 4501(e)(6), would manufacture an automatic 
net issuance.
    Finally, one stakeholder claimed that it could be difficult for 
taxpayers to determine whether section 304(a)(1) applies to public 
company M&A transactions because publicly traded corporations do not 
know the identity of their shareholders. For that reason, the 
stakeholder also contended that it could be difficult for the IRS to 
administer and enforce the stock repurchase excise tax with respect to 
section 304(a)(1) transactions.
    However, several stakeholders expressed concern that an exemption 
for all section 304(a)(1) transactions may exclude transactions that 
(i) satisfy the statutory requirements for section 304 qualification, 
and (ii) are economically similar to a conventional stock repurchase. 
As an illustration, the stakeholders presented the following fact 
pattern. Individual A owns 50 percent of the stock of two public 
corporations. Individual A sells a portion of its stock in one 
corporation (that is, the target corporation) to the other corporation 
(that is, the acquiring corporation). The stakeholders explained that 
section 304(a)(1) would apply to the sale, but individual A may qualify 
for sale or exchange treatment under section 302(a) depending on 
individual A's actual and constructive ownership of the target 
corporation following the transaction. According to the stakeholder, 
applying the stock repurchase excise tax may be appropriate in this 
situation and in other situations in which control of the target and 
acquiring corporations is not widely dispersed and both corporations 
remain publicly traded after the transaction.
    The Treasury Department and the IRS are of the view that the 
complexity of regulations applying the stock repurchase excise tax with 
regard to section 304(a)(1) transactions would outweigh significantly 
any benefit of applying this tax to those transactions. In addition, 
the Treasury Department and the IRS are of the view that applying the 
stock repurchase excise tax to section 304(a)(1) transactions would 
create significant difficulty for the IRS to administer and enforce the 
tax, as well as for taxpayers to calculate and report their tax with 
certainty. Accordingly, the Treasury Department and the IRS are of the 
view that the stock repurchase excise tax should not apply to a 
redemption that is deemed to occur by virtue of section 304(a)(1). See 
proposed Sec. Sec.  58.4501-2(e)(3)(i) and 58.4501-4(f)(4).
2. Section 304(a)(2) Transactions
    Section 304(a)(2) applies if one corporation (that is, the 
acquiring corporation) purchases stock of another corporation (that is, 
the target corporation) from a shareholder of the target corporation in 
exchange for cash or other property and that target corporation 
controls the acquiring corporation (section 304(a)(2) transaction). If 
section 304(a)(2) applies, that property is treated as a distribution 
in redemption of the stock of the target corporation. The approach 
described in Notice 2023-2 does not exempt section 304(a)(2) 
transactions from the application of the stock repurchase excise tax. 
See generally section 3.04(3) of Notice 2023-2 (excepting solely 
section 304(a)(1) transactions).
    One stakeholder noted that the application of the stock repurchase 
excise tax to section 304(a)(2) transactions generally is clear and is 
analogous to the rule treating an acquisition of stock of a covered 
corporation by a specified affiliate as a repurchase to which the stock 
repurchase excise tax applies. The Treasury Department and the IRS 
agree with the stakeholder. Accordingly, the proposed regulations would 
not exempt section 304(a)(2) transactions from the application of the 
stock repurchase excise tax.

VIII. Reorganizations

A. Acquisitive Reorganizations

1. Overview
    The approach described in Notice 2023-2 treats an exchange of 
target corporation stock by the target corporation's shareholders in an 
acquisitive reorganization as an economically similar transaction. See 
section 3.04(4)(a)(i) of Notice 2023-2. The notice defines an 
``acquisitive reorganization'' as a transaction that qualifies as a 
reorganization under section 368(a)(1)(A) of the Code (including by 
reason of section 368(a)(2)(D) or (E)), section 368(a)(1)(C), or 
section 368(a)(1)(D) (D reorganization) (if the reorganization 
satisfies the requirements of section 354(b)(1) of the Code). See 
section 3.02(1) of Notice 2023-2.
    Under the approach described in Notice 2023-2, the effect of an 
acquisitive reorganization on a target corporation's stock repurchase 
excise tax base is computed by first including in that tax base the 
fair market value of all target corporation stock exchanged in the 
transaction, regardless of the type of consideration for which the 
stock is exchanged. The stock repurchase excise tax base then is 
reduced under the statutory exception in section 4501(e)(1) 
(reorganization exception) by the fair market value of the target 
corporation stock exchanged for property permitted to be received by 
the target corporation shareholders without recognition of gain or loss 
under section 354 (that is, qualifying property). Thus, under the 
approach described in Notice 2023-2,

[[Page 25998]]

the target corporation generally is subject to the stock repurchase 
excise tax only to the extent of the fair market value of target 
corporation stock exchanged for property that is non-qualifying 
property.
    For purposes of this preamble, the term ``acquisitive 
reorganization'' includes each transaction described as an acquisitive 
reorganization in Notice 2023-2 as well as a transaction that qualifies 
as a reorganization under section 368(a)(1)(G) (if the reorganization 
satisfies the requirements of section 354(b)(1)).
    Under Federal income tax principles, acquisitive reorganizations 
involve the following two elements. First, the target corporation 
transfers all or a portion of its assets to the acquiring corporation 
in exchange for consideration from the acquiring corporation. Second, 
the target corporation distributes the consideration received from the 
acquiring corporation to the target corporation's shareholders in 
exchange for their target corporation stock in an actual or deemed 
liquidation of the target corporation (target redemptive distribution). 
See, for example, section 361(a) and (c) of the Code (providing for 
nonrecognition of gain or loss for the target corporation's transfer of 
assets in exchange for stock or securities of a party to the 
reorganization and the target corporation's distribution of that stock 
or securities pursuant to a plan of reorganization); section 
368(a)(1)(C) and (a)(2)(G) (to similar effect).
2. Feedback Received
a. In General
    Several stakeholders recommended that acquisitive reorganizations 
should not be subject to the stock repurchase excise tax, to any 
extent. These stakeholders contended that, although a target redemptive 
distribution in an acquisitive reorganization resembles a section 
317(b) redemption, such a transaction should not be subject to the 
stock repurchase excise tax even if non-qualifying property is 
provided. See parts VIII.A.2.b and c of this Explanation of Provisions.
b. Stakeholders Contend Acquisitive Reorganizations Are Not 
Economically Similar Transactions
    Some stakeholders asserted that acquisitive reorganizations are 
economically distinguishable from a section 317(b) redemption and 
therefore should not be treated as economically similar transactions. 
According to these stakeholders, the basic economic nature of an 
acquisitive reorganization (at least in situations in which the parties 
to the transaction are unrelated) is a two-company acquisitive 
transaction in which the target corporation shareholders sell the 
target corporation to the acquiring corporation. In contrast, a section 
317(b) redemption is a transaction in which a single corporation 
acquires its own stock from its shareholders.
    Several stakeholders stated that an acquisitive reorganization 
between unrelated parties is motivated primarily by bona fide 
investment and strategic business purposes and does not give rise to 
any abuse that the stakeholders hypothesized Congress may have intended 
to discourage through enactment of the stock repurchase excise tax. 
These stakeholders acknowledged that the exchange of target corporation 
stock for non-qualifying property in a target redemptive distribution 
either constitutes or resembles a section 317(b) redemption. However, 
the stakeholders questioned whether this exchange under Federal income 
tax principles provides an adequate basis for designating the 
transaction as ``economically similar.'' The stakeholders further 
questioned why a distribution in complete liquidation as part of a 
reorganization (that is, the target redemptive distribution) should 
give rise to an economically similar transaction under the approach 
described in Notice 2023-2 even though a distribution in complete 
liquidation subject to either section 331 or 332 (but not both) would 
not.
    With regard to the latter point, several stakeholders noted that 
the exchange between the target corporation and its shareholders in a 
forward merger that failed to qualify as a reorganization would not be 
subject to the stock repurchase excise tax. See Rev. Rul. 69-6, 1969-1 
C.B. 104 (treating such an exchange as a distribution in complete 
liquidation to which section 331 applies). One stakeholder suggested 
that the application of this tax should be based upon the substantive 
Federal income tax characterization of the steps of the transaction, 
rather than upon the overall Federal income tax characterization of the 
transaction as a reorganization. For support, the stakeholder contended 
that their recommendation would mitigate the potential for a more 
onerous result under the stock repurchase excise tax if the components 
of such a transaction qualify for reorganization treatment.
    Several stakeholders also recommended that transactions that 
qualify as a reorganization described in either section 368(a)(1)(B) (B 
reorganization) or 368(a)(1)(A) by reason of section 368(a)(2)(E) 
(reverse triangular merger) should not be subject to the stock 
repurchase excise tax. The stakeholders contended that those types of 
reorganizations should not be subject to the stock repurchase excise 
tax based on their view that such transactions, both in substance and 
in form, involve an acquisition of stock by a third party rather than a 
repurchase or redemption of target corporation stock.
c. Effect of the Statutory Exception in Section 4501(e)(1)
    Stakeholders acknowledged that the inclusion of the statutory 
exception in section 4501(e)(1) (that is, the reorganization exception) 
is subject to several interpretations. Several stakeholders 
acknowledged that the inclusion of this exception in section 4501 could 
be construed as reflecting congressional intent that all stock 
exchanged for non-qualifying property in a reorganization should be 
treated as economically similar to a section 317(b) redemption. 
However, the stakeholders recommended that the Treasury Department and 
the IRS not adopt that interpretation.
    In contrast, one stakeholder contended that the inclusion of the 
reorganization exception does not necessarily indicate that Congress 
intended all non-qualifying property received in any acquisitive 
reorganization to be subject to the stock repurchase excise tax. 
Rather, the stakeholder asserted that the application of this statutory 
exception requires (i) identifying a transaction as a section 317(b) 
redemption or an economically similar transaction that occurs as part 
of a reorganization, (ii) applying this statutory exception to exempt 
the target corporation stock exchanged for qualifying property, and 
then (iii) subjecting the target corporation stock exchanged for non-
qualifying property to the stock repurchase excise tax to the extent 
gain or loss is recognized. Similarly, several stakeholders contended 
that the reorganization exception could be given effect by applying 
this exception only to reorganizations that most closely resemble 
section 317(b) redemptions, such as split-offs (as defined in part IX 
of this Explanation of Provisions) with non-qualifying property, or E 
reorganizations involving an exchange of the recapitalizing 
corporation's stock for newly issued stock and non-qualifying property.
d. Response to Stakeholder Feedback
    The Treasury Department and the IRS are of the view that the 
recommendations of the stakeholders

[[Page 25999]]

would be contrary to the statutory language of section 4501. The 
reorganization exception provides that section 4501(a) does not apply 
``to 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 under chapter 1 by reason of such 
reorganization.'' Section 4501(e)(1). The Treasury Department and the 
IRS are of the view that the presence of the reorganization exception 
in section 4501(e)(1) indicates that exchanges of target corporation 
stock occurring as part of an acquisitive reorganization are subject to 
the stock repurchase excise tax. Indeed, this statutory exception would 
have no effect if the exchange of target corporation stock for non-
qualifying property in reorganizations were exempt from the stock 
repurchase excise tax. Moreover, the Treasury Department and the IRS 
are of the view that the proposed regulations should not reduce the 
statutorily mandated scope of the reorganization exception, but rather 
should give full effect to its language mandating that the 
reorganization exception applies to all reorganizations ``within the 
meaning of section 368(a).''
    The Treasury Department and the IRS also are of the view that 
implementation of the reorganization exception by reliance on sections 
354 and 356 of the Code would provide bright-line rules that taxpayers 
could apply and the IRS could administer and enforce with certainty. 
Specifically, every acquisitive reorganization involves a target 
redemptive distribution to a target corporation shareholder to which 
section 354 or 356 is applied.
    Accordingly, the proposed regulations would treat acquisitive 
reorganizations as economically similar transactions. See proposed 
Sec.  58.4501-2(e)(4)(i); see also proposed Sec.  58.4501-3(c) 
(reorganization exception); part X.A of this Explanation of Provisions 
(discussion of reorganization exception). However, the proposed 
regulations would not subject B reorganizations to the stock repurchase 
excise tax. See proposed Sec. Sec.  58.4501-1(b)(1) and 58.4501-
2(e)(4)(i).
    Lastly, the Treasury Department and the IRS view the distinction 
between taxable forward mergers and forward mergers qualifying as 
reorganizations as appropriate because there is a successor to the 
target corporation in an acquisitive asset reorganization (see section 
381(a)). In contrast, the target corporation in a complete liquidation 
subject to section 331 ceases to exist for Federal income tax purposes.

B. Sourcing Approach to Acquisitive Reorganizations

    Several stakeholders recommended that, if the proposed regulations 
do not wholly exempt acquisitive reorganizations from the stock 
repurchase excise tax, this tax should apply to acquisitive 
transactions solely to the extent that any non-qualifying property is 
sourced from the target corporation (sourcing approach). According to 
the stakeholders, to the extent that the consideration used to 
repurchase target corporation stock is attributable to the acquiring 
corporation or another third party, the transaction does not represent 
the target corporation's redemption of its own stock and therefore 
should not be subject to the stock repurchase excise tax.
    However, another stakeholder contended that the approach in Notice 
2023-2 arguably facilitates the administration of the stock repurchase 
excise tax by treating all exchanges of target corporation stock in a 
reorganization as a repurchase, irrespective of the type of 
reorganization, and regardless of the source of consideration. 
Nonetheless, for the reasons previously discussed in this part VIII.B, 
the stakeholder contended that a sourcing approach strikes a better 
balance with the statutory language and with the stakeholder's opinion 
that Congress enacted the stock repurchase excise tax to curtail 
single-entity corporate contractions.
    Another stakeholder acknowledged that a sourcing approach could 
raise issues of administrability, particularly due to the fungible 
nature of cash and the fact that the operations of the target 
corporation and the acquiring corporation often are integrated 
following an acquisition. The stakeholder noted that these difficulties 
arguably would be compounded in situations in which a target operating 
corporation is merged directly into an acquiring operating corporation, 
although other forms of post-merger integration could present similar 
challenges.
    Notwithstanding these administrative difficulties, these 
stakeholders contended that a sourcing approach could be administered 
effectively. One stakeholder stated that the challenges presented by a 
sourcing approach are not meaningfully different from other issues that 
have been addressed by longstanding authorities concerning 
reorganizations. For instance, a sourcing approach is used to determine 
whether funds distributed to the target corporation's shareholders 
prior to a B reorganization are properly treated as non-qualifying 
property. See, for example, Rev. Rul. 70-172, 1970-1 C.B. 77 (dividend 
distribution of property sourced from the target corporation treated as 
separate and distinct from an immediately subsequent B reorganization). 
With regard to reverse triangular mergers, these stakeholders noted 
that funds sourced from the target corporation are taken into account 
for purposes of the ``substantially all'' test in section 
368(a)(2)(E)(i), but not for purposes of measuring the acquisition of 
``control'' under section 368(a)(2)(E)(ii). See Sec.  1.368-2(j)(3)(i) 
and (iii).
    The stakeholders also questioned the different treatment under 
Notice 2023-2 of acquisitive reorganizations and taxable stock 
acquisitions. These stakeholders observed that, under Notice 2023-2, 
the stock repurchase excise tax would apply to all consideration 
consisting of non-qualifying property in an acquisitive reorganization. 
In contrast, the rules described in Notice 2023-2 provides that the 
stock repurchase excise tax is imposed in a taxable stock acquisition 
only to the extent of the consideration sourced from the target 
corporation. In the stakeholders' view, this inconsistent treatment is 
difficult to justify as a policy matter because taxable and tax-free 
transactions may be economically similar.
    The Treasury Department and the IRS are of the view that the 
stakeholders' recommendation is not supported by the statutory language 
of the reorganization exception. The plain language of the 
reorganization exception contains no reference to the source of the 
consideration for which the target corporation shareholders exchange 
their stock in a target redemptive distribution. Instead, the 
application of the reorganization exception to a target redemptive 
distribution in an acquisitive reorganization depends only on whether 
``gain or loss is recognized on such repurchase by the shareholder 
under chapter 1 by reason of such reorganization.'' In other words, 
under the reorganization exception, the source of the consideration for 
which the target corporation shareholders exchange their stock in a 
target redemptive distribution is irrelevant in determining the 
application of the stock repurchase excise tax to acquisitive 
reorganizations. Lastly, the Treasury Department and the IRS are of the 
view that an extra-statutory sourcing rule recommended by the 
stakeholders would be neither necessary nor appropriate to carry out 
the purposes of the stock repurchase excise tax.

[[Page 26000]]

    For the foregoing reasons, the proposed regulations would not 
incorporate a sourcing approach to determine the application of the 
stock repurchase excise tax to acquisitive reorganizations. Rather, 
under the proposed regulations, the stock repurchase excise tax would 
apply to a repurchase that is part of a reorganization to the extent a 
shareholder exchanges their stock for non-qualifying property.

C. Commissioner v. Clark

    One stakeholder recommended that the stock repurchase excise tax 
should not apply to any hypothetical deemed issuance and redemption 
under Clark v. Commissioner, 489 U.S. 726 (1989), because such a 
transaction either (i) is a fictional transaction that is not within 
the scope of the tax, or (ii) results in a net zero adjustment pursuant 
to the netting rule in the case of domestic covered corporations. 
Another stakeholder also noted that the deemed issuance under Clark 
would offset the deemed redemption.
    The Treasury Department and the IRS are of the view that Clark 
should not apply in determining the applicability of the stock 
repurchase excise tax to non-qualifying property furnished in a 
reorganization, other than to determine the applicability of the 
dividend exception (see the discussion in part VIII.F of this 
Explanation of Provisions). This view was incorporated into Notice 
2023-2, and the proposed regulations likewise would not provide any 
special rules based on an analogical application of Clark.

D. E Reorganizations

1. Treatment of E Reorganizations Under Notice 2023-2
    Under the approach described in Notice 2023-2, E reorganizations 
are treated as economically similar transactions in the same manner as 
other reorganizations for purposes of the stock repurchase excise tax. 
Accordingly, a recapitalizing corporation has a repurchase to the 
extent of the fair market value of the shares exchanged by its 
shareholders in the transaction. See section 3.04(4)(a)(ii) of Notice 
2023-2. However, the fair market value of the repurchased shares that 
are exchanged for qualifying property reduces the corporation's stock 
repurchase excise tax base. See section 3.07(2)(b) of Notice 2023-2 
(applying the statutory exception in section 4501(e)(1) to E 
reorganizations). As a result, the recapitalizing corporation is 
subject to the stock repurchase excise tax only to the extent of the 
fair market value of its shares that are repurchased with non-
qualifying property (if any).
    Additionally, the stock issued by the recapitalizing corporation in 
the transaction is disregarded for purposes of the netting rule under 
the ``no double benefit rule.'' See section 3.08(4)(d) of Notice 2023-
2; see also part XI.C.2 of this Explanation of Provisions for a 
discussion of the no double benefit rule.
2. Feedback Received
    Several stakeholders recommended that an exchange of stock for 
qualifying property in an E reorganization should not be subject to the 
stock repurchase excise tax. However, the stakeholders recommended that 
shares that are repurchased with non-qualifying property in an E 
reorganization should be subject to the stock repurchase excise tax 
because the exchange is substantially similar to the redemption of 
stock for cash, unless the receipt of non-qualifying property is 
treated as a separate transaction under Sec.  1.301-1(j).
3. Exchange of Stock for Qualifying Property in an E Reorganization
    The Treasury Department and the IRS disagree with the stakeholders' 
recommendation that an exchange of stock for qualifying property in an 
E reorganization should not be included in the recapitalizing 
corporation's stock repurchase excise tax base. As discussed in part 
VIII.A.2.d of this Explanation of Provisions, the Treasury Department 
and the IRS are of the view that the reorganization exception would be 
most appropriately implemented by (i) treating all exchanges of stock 
between a corporation and its shareholders occurring as part of a 
reorganization as an economically similar transaction, and then (ii) 
removing from the corporation's stock repurchase excise tax base the 
amount of target corporation stock for which the target corporation 
shareholders receive qualifying property. The Treasury Department and 
the IRS also are of the view that adopting uniform treatment for 
reorganizations would implement the reorganization exception in a 
manner most consistent with its statutory language (as set forth in 
section 4501(e)(1)). Lastly, the Treasury Department and the IRS are of 
the view that this approach would facilitate the IRS's ability to 
administer and enforce the stock repurchase excise tax and enable 
taxpayers to apply the tax with greater certainty.
    Accordingly, the proposed regulations would include the stock-for-
qualifying property portion of an exchange occurring as part of an E 
reorganization in the stock repurchase excise tax base, and then 
exclude that portion in a later step of the stock repurchase excise tax 
base computation. See proposed Sec. Sec.  58.4501-2(e)(4)(ii) and 
58.4501-3(c). The Treasury Department and the IRS request comments on 
the proposed treatment of E reorganizations.

E. F Reorganizations

1. Treatment of F Reorganizations Under Notice 2023-2
    Under the approach described in Notice 2023-2, F reorganizations 
are treated as economically similar transactions in the same manner as 
other reorganizations for purposes of the stock repurchase excise tax. 
Accordingly, the transferor corporation has a repurchase to the extent 
of the fair market value of the shares exchanged by its shareholders in 
the transaction. See section 3.04(4)(a)(iii) of Notice 2023-2. However, 
the fair market value of the repurchased shares that are exchanged for 
qualifying property reduces the corporation's stock repurchase excise 
tax base. See section 3.07(2)(c) of Notice 2023-2 (applying the 
statutory exception in section 4501(e)(1) to F reorganizations). As a 
result, the transferor corporation is subject to the stock repurchase 
excise tax only to the extent of the fair market value of its shares 
that are repurchased with non-qualifying property (if any).
    A distribution of non-qualifying property by the transferor 
corporation in an F reorganization is treated as a separate transaction 
(for example, under section 302). See Sec.  1.368-2(m)(1)(iii) 
(providing that any distribution of money or other property from either 
the transferor corporation or the resulting corporation, including any 
money or other property exchanged for shares, in an F reorganization is 
treated as an unrelated, separate transaction from the reorganization).
2. Feedback Received
    Several stakeholders recommended that F reorganizations should not 
be subject to the stock repurchase excise tax because the stock issued 
in an F reorganization does not qualify as ``property'' within the 
meaning of section 317(a). These stakeholders contended that no 
``redemption'' could occur within the meaning of section 317(b), and 
therefore the stock repurchase excise tax should not apply.
    For the same rationale as other reorganizations, the Treasury 
Department and the IRS continue to be of the view that F 
reorganizations should be treated as economically similar transactions 
for purposes of the stock repurchase excise tax. See parts

[[Page 26001]]

VIII.A and D of this Explanation of Provisions (discussing acquisitive 
reorganizations and E reorganizations). Moreover, the Treasury 
Department and the IRS are of the view that adopting uniform treatment 
for reorganizations would reduce complexity for taxpayers and 
facilitate the IRS's ability to administer and enforce the stock 
repurchase excise tax. The proposed regulations reflect this view. See 
proposed Sec. Sec.  58.4501-2(e)(4)(iii) and 58.4501-3(c). The Treasury 
Department and the IRS request comments on the proposed treatment of F 
reorganizations.

F. Downstream Reorganizations and Other Related-Party Reorganizations

    Several stakeholders recommended that, if reorganizations generally 
are not subject to the stock repurchase excise tax under the proposed 
regulations, related-party reorganizations (such as an acquisition of a 
publicly traded parent corporation's stock by a specified affiliate, or 
a reorganization between two covered corporations under common control) 
nonetheless should be subject to the stock repurchase excise tax to the 
extent of the non-qualifying property received by shareholders. One 
stakeholder suggested that the receipt of non-qualifying property in 
such transactions is economically identical to a conventional stock 
repurchase.
    The Treasury Department and the IRS agree with stakeholders that 
such transactions should be subject to the stock repurchase excise tax. 
However, because reorganizations generally would be subject to the 
stock repurchase excise tax under the proposed regulations, no special 
rules are needed to address related-party reorganizations. Accordingly, 
the proposed regulations would not adopt the stakeholders' 
recommendation.

G. Reverse Acquisitions Involving Investment Companies

    One stakeholder suggested that, if the proposed regulations 
generally do not apply the stock repurchase excise tax to acquisitive 
reorganizations, the proposed regulations should apply this tax to 
certain reverse acquisitions involving a publicly traded acquiring 
corporation. According to the stakeholder, if the historical business 
of a publicly traded acquiring corporation has declined in value to the 
point that the corporation's stock is trading based on the net value of 
its cash and other investment assets, and if the target corporation 
shareholders as a group will obtain more than 50 percent of the fair 
market value of the acquiring corporation's stock in an acquisitive 
reorganization, then any non-qualifying property received by the target 
corporation shareholders in the reorganization may resemble a 
repurchase. Although the stakeholder noted that such transactions are 
rare, the stakeholder recommended that the Treasury Department and the 
IRS consider designating such transactions as economically similar.
    The Treasury Department and the IRS are of the view that no special 
rules are required to address these types of transactions because the 
proposed regulations would not exclude acquisitive reorganizations from 
the stock repurchase excise tax. Accordingly, the proposed regulations 
do not incorporate the stakeholder's suggested provision.

IX. Section 355 Transactions

    Under the approach described in Notice 2023-2, a section 355 
transaction in which a distributing corporation (within the meaning of 
section 355(a)(1)(A) of the Code) distributes stock of a controlled 
corporation (within the meaning of section 355(a)(1)(A)) and, if 
applicable, other property or money to the distributing corporation's 
shareholders in exchange for a portion of the shareholders' stock in 
the distributing corporation (split-off) is treated as an economically 
similar transaction. Accordingly, the distributing corporation has made 
a repurchase to the extent of the fair market value of the distributing 
corporation shares exchanged by its shareholders in the transaction. 
See section 3.04(4)(a)(iv) of Notice 2023-2.
    However, the fair market value of the repurchased shares that are 
exchanged for qualifying property reduces the distributing 
corporation's stock repurchase excise tax base, regardless of whether 
the distribution was carried out as part of a D reorganization. See 
section 3.07(2) of Notice 2023-2. As a result, the distributing 
corporation is subject to the stock repurchase excise tax only to the 
extent of the fair market value of its shares that are repurchased with 
non-qualifying property (if any). A distribution by a distributing 
corporation of stock of a controlled corporation qualifying under 
section 355 that is not a split-off is not a repurchase subject to the 
stock repurchase excise tax. See section 3.04(4)(b)(ii) of Notice 2023-
2.

A. In General

    Several stakeholders recommended that a spin-off (that is, a 
distribution of stock of a controlled corporation (Controlled) by the 
distributing corporation (Distributing) to Distributing's shareholders) 
to which section 355 applies should not be treated as a repurchase 
because spin-offs do not involve an exchange of Controlled stock for 
Distributing stock. The stakeholders also recommended that a split-up 
(that is, a liquidating distribution in which Distributing distributes 
the stock of more than one Controlled) or split-off to which section 
355 applies, and in which only Controlled stock (and no non-qualifying 
property) is distributed, should not be treated as a repurchase. For 
example, one stakeholder found it significant that a split-off without 
non-qualifying property generally would not reduce the number of shares 
outstanding or enhance the EPS of Distributing.
    In contrast, stakeholders recommended that any non-qualifying 
property distributed in a split-off to which section 355 applies should 
be treated as a repurchase to the same extent as if that non-qualifying 
property were distributed in a redemption under section 302(a), because 
the source of the cash and the form of the transaction frequently are 
the same as in a conventional stock buyback. One stakeholder also 
recommended treating a split-up with non-qualifying property as a 
repurchase in the same manner.
    The Treasury Department and the IRS are of the view that spin-offs 
and split-ups should not be subject to the stock repurchase excise tax. 
See proposed Sec.  58.4501-2(e)(5)(iii)(A). With regard to a spin-off, 
the Treasury Department and the IRS are of this view because 
Distributing does not provide consideration to Distributing's 
shareholders in exchange for their Distributing stock (that is, no 
repurchase could be treated as having occurred). With regard to a 
split-up, the Treasury Department and the IRS are of this view because 
Distributing completely liquidates as a result of Distributing's 
distribution of consideration to its shareholders in exchange for their 
Distributing stock. The proposed treatment of spin-offs and split-ups 
is consistent with the proposed treatment of non-redemptive 
distributions under section 301 and distributions in complete 
liquidation, which are analogous to spin-offs and split-ups, 
respectively. Cf. proposed Sec. Sec.  58.4501-2(e)(5)(iv) (exempting 
certain non-redemptive distributions under section 301 from the stock 
repurchase excise tax); 58.4501-2(e)(5)(i) (exempting distributions in 
complete liquidation that are exclusively under section 331 or 332 from 
the stock repurchase excise tax).
    However, the proposed regulations would clarify that a distribution 
by Distributing of non-qualifying property

[[Page 26002]]

in exchange for Distributing stock in pursuance of a spin-off or a 
split-up would be a repurchase. See proposed Sec.  58.4501-
2(e)(5)(iii)(B).
    The Treasury Department and the IRS also continue to be of the view 
that split-offs should be subject to the stock repurchase excise tax. 
See proposed Sec.  58.4501-2(e)(4)(iv). Accordingly, Distributing would 
have a repurchase to the extent of the fair market value of the 
Distributing stock exchanged by Distributing's shareholders in the 
transaction. However, the fair market value of the repurchased 
Distributing stock that is exchanged for qualifying property would be 
subject to the reorganization exception, regardless of whether the 
split-off occurred as part of a D reorganization. See proposed Sec.  
58.4501-3(c). As a result, Distributing would be subject to the stock 
repurchase excise tax only to the extent of the fair market value of 
its stock that is repurchased with non-qualifying property (if any).

B. Exchange of Controlled Securities in a Split-Off to Which Section 
355 Applies

    Notice 2023-2 does not explicitly address whether a distribution by 
Distributing of Controlled securities to Distributing shareholders in 
exchange for their Distributing stock in a split-off is treated as a 
repurchase. However, Controlled securities that are exchanged for 
Distributing stock would not constitute qualifying property under the 
rules described in Notice 2023-2. As a result, the exchange of 
Controlled securities for Distributing stock in a split-off would be 
subject to the stock repurchase excise tax under the rules described in 
Notice 2023-2.
    A stakeholder recommended that, to the extent the Treasury 
Department and the IRS view a distribution of Controlled securities as 
a substitute for cash, the distribution of Controlled securities in 
exchange for Distributing stock in a split-off to which section 355 
applies should be treated as a repurchase.
    The Treasury Department and the IRS continue to be of the view that 
Controlled securities that are exchanged for Distributing stock should 
not constitute qualifying property for purposes of the stock repurchase 
excise tax. The Treasury Department and the IRS have reached this 
position based on the rationale that, unlike an exchange of 
Distributing stock for Controlled stock, an exchange of Distributing 
stock for Controlled securities generally would achieve an outcome more 
analogous to an exchange of Distributing stock for non-qualifying 
property. Accordingly, the Treasury Department and the IRS are of the 
view that no special rules are needed to address this issue.

C. Clarification of Examples 13 and 14 in Notice 2023-2

    Section 3.09 of Notice 2023-2 contains Examples 13 and 14. These 
examples are based on Example 11 of Notice 2023-2, in which 
Distributing distributes Controlled stock and cash to Distributing's 
shareholders in exchange for their Distributing stock. The facts in 
Example 13 are the same as in Example 11, except that Example 13 
provides that ``Distributing distributes the Controlled stock to its 
shareholders pro rata without the shareholders exchanging any 
Distributing stock (Spin-Off).'' The facts in Example 14 are the same 
as in Example 13, except that the ``Spin-Off is carried out as part of 
a transaction qualifying as a D reorganization.''
    A stakeholder recommended that the proposed regulations incorporate 
revisions to Examples 13 and 14 to clarify whether the cash 
distribution described in those examples constitutes a distribution in 
exchange for Distributing stock. The stakeholder interpreted Examples 
13 and 14 to provide clearly that no Distributing stock is surrendered 
by Distributing's shareholders in the ``Spin-Off'' in both examples, 
but nonetheless questioned whether any Distributing stock could have 
been surrendered for the cash distributed by Distributing with the 
Controlled stock. Therefore, the stakeholder recommended that Examples 
13 and 14 explicitly state whether or not Distributing stock is 
surrendered in exchange for the cash distributed as well as the stock 
distributed.
    The Treasury Department and the IRS have revised Example 13 to 
explicitly state that no stock of Distributing is exchanged in the 
``Spin-Off'' for distributed cash or distributed Controlled stock. This 
clarification would confirm the interpretation of stakeholders and the 
intent of the Treasury Department and the IRS. See proposed Sec.  
58.4501-5(b)(13).
    Additionally, the Treasury Department and the IRS have modified the 
facts of Example 14 to clarify the treatment of an exchange of 
Distributing stock for non-qualifying property in pursuance of a spin-
off. See proposed Sec.  58.4501-5(b)(14). For the treatment of the 
exchange of Distributing stock in pursuance of a spin-off, see proposed 
Sec.  58.4501-2(e)(5)(iii)(B) and the discussion in part IX.A of this 
Explanation of Provisions.

X. Statutory Exceptions

A. Repurchase as Part of a Reorganization

1. In General
    Section 4501(e)(1) provides an exception (that is, the 
reorganization exception) to the application of the stock repurchase 
excise tax ``to 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.'' To facilitate the IRS's ability to 
administer and enforce the stock repurchase excise tax, and to enable 
taxpayers to apply the tax with greater certainty, Notice 2023-2 adopts 
a consideration-based approach to the reorganization exception. As 
described in section 3.07(2) of Notice 2023-2, the fair market value of 
stock repurchased by a covered corporation in transactions listed in 
that section is a reduction for purposes of computing the covered 
corporation's stock repurchase excise tax base, to the extent that the 
repurchase is in exchange for property permitted by section 354 or 355 
to be received without the recognition of gain or loss (that is, 
qualifying property). These transactions consist of a repurchase by: 
(i) a target corporation as part of an acquisitive reorganization; (ii) 
a recapitalizing corporation as part of an E reorganization; (iii) a 
transferor corporation as part of an F reorganization; and (iv) a 
distributing corporation as part of a split-off (whether or not part of 
a D reorganization).
    Stakeholders have suggested three general approaches to implement 
the reorganization exception. Under the stakeholders' first approach, 
the reorganization exception would apply only if no gain or loss is 
recognized by a shareholder on a repurchase that occurs as part of a 
reorganization under section 368(a). As a result, if a shareholder 
receives both qualifying property and non-qualifying property in an 
actual or deemed redemption that occurs as part of a reorganization, 
the reorganization exception would not apply to any of the 
consideration received if the shareholder recognized any built-in gain 
or loss in the target corporation stock exchanged for that 
consideration.
    Under the stakeholders' second approach, the reorganization 
exception would exclude an actual or deemed redemption that occurs as 
part of a reorganization under section 368(a) to the extent a 
shareholder does not recognize gain or loss. At least one

[[Page 26003]]

stakeholder recommended this approach because the stakeholder found it 
significant that a target corporation shareholder's non-taxable receipt 
of acquiring corporation stock (that is, qualifying property) does not 
result in the termination or ``cashing out'' of the target corporation 
shareholder's proprietary interest in the target corporation.
    Another stakeholder provided a variation to this second approach 
that would incorporate a rebuttable presumption. Under this variation, 
the reorganization exception would apply to a repurchase solely to the 
extent that stock of the target corporation is exchanged by target 
corporation shareholders for qualifying property. In other words, all 
shareholders of the target corporation that receive non-qualifying 
property in exchange for target corporation stock would be presumed to 
recognize gain or loss to the full extent of the non-qualifying 
property received. The stakeholder recommended allowing a target 
corporation to rebut this presumption to the extent the target 
corporation could demonstrate that its shareholders did not recognize 
gain or loss in the reorganization. However, the stakeholder found it 
questionable as a policy matter that, under this variation of the 
second approach, a target corporation that provides solely non-
qualifying property to the target corporation shareholders in exchange 
for target corporation stock would not be treated as repurchasing the 
target corporation shareholders' stock if the target corporation rebuts 
the presumption of gain or loss recognition.
    Under the stakeholders' third approach, the reorganization 
exception would apply to a repurchase solely to the extent that stock 
of the target corporation is exchanged by target corporation 
shareholders for qualifying property, regardless of whether the target 
corporation shareholder recognizes any gain or loss. One stakeholder 
recommended this third approach based on the stakeholder's rationale 
that shareholder-level gain should not be taken into account for 
determining whether a repurchase occurred for purposes of the stock 
repurchase excise tax. In addition, the stakeholder contended that any 
approach that requires computation of each shareholder's gain or loss 
would be difficult for the IRS to administer, and for taxpayers to 
apply with certainty, because the shareholder-level data necessary to 
determine such gain or loss would be difficult to obtain.
    The Treasury Department and the IRS continue to be of the view that 
the third approach recommended by stakeholders would strike the most 
appropriate balance between implementing the plain language of the 
reorganization exception and providing a rule that facilitates the 
ability of the IRS to administer and enforce the stock repurchase 
excise tax. Under this approach, the touchstone consideration of 
whether a target corporation shareholder receives qualifying or non-
qualifying property in exchange for target corporation stock will 
enable target corporations to readily determine the extent to which the 
reorganization exception applies to the exchange. Moreover, the 
Treasury Department and the IRS are of the view that only in rare 
instances would such a shareholder not recognize gain or loss if the 
shareholder received non-qualifying property in exchange for target 
corporation stock. Accordingly, the proposed regulations would retain 
the approach described in Notice 2023-2. See proposed Sec.  58.4501-
3(c).
2. Section 355 Transactions That are Not Part of a D Reorganization
    Stakeholders recommended applying the reorganization exception to 
split-offs and split-ups without regard to whether the section 355 
transaction occurs as part of a D reorganization. According to the 
stakeholders, Congress intended to convey through the reorganization 
exception that transactions that qualify for non-recognition treatment 
should not be subject to the stock repurchase excise tax, and that the 
same treatment should extend to all section 355 transactions--
regardless of whether carried out as part of a D reorganization.
    The Treasury Department and the IRS continue to be of the view that 
the exception in section 4501(e)(1) should apply to split-offs to which 
section 355 applies without regard to whether such transactions occur 
as part of a D reorganization. See proposed Sec.  58.4501-3(c). As 
previously discussed in part IX.A of this Explanation of Provisions, 
split-ups are not treated as repurchases. Consequently, the exception 
in section 4501(e)(1) is not relevant to split-ups.

B. Contributions to Employer-Sponsored Retirement Plans

    In general, under section 3.07(3)(a) of Notice 2023-2, the fair 
market value of stock repurchased by a covered corporation is a 
reduction for purposes of computing the covered corporation's stock 
repurchase excise tax base if the stock that is repurchased, or an 
amount of stock equal to the fair market value of the stock 
repurchased, is contributed to an employer-sponsored retirement plan.
1. Timing of Contributions Under Section 4501(e)(2)
    Section 4501(e)(2) provides that the stock repurchase excise tax 
does not apply in any case in which the stock repurchased, or an amount 
of stock equal to the value of the stock repurchased, is contributed to 
an employer-sponsored retirement plan, ESOP, or similar plan (stock 
contribution exception).
    Under section 3.07(3)(d) of Notice 2023-2, a covered corporation 
may treat stock contributions to an employer-sponsored retirement plan 
under the stock contribution exception as having been made in the prior 
taxable year if the stock is contributed by the filing deadline for the 
IRS Form 720, Quarterly Federal Excise Tax Return, that is due for the 
first full quarter after the close of the taxpayer's taxable year and 
on account of that taxable year within the meaning of section 404(a)(6) 
of the Code. The rule described in section 3.07(3)(d) of Notice 2023-2 
also provides stock contributions that are treated as having been 
contributed in the taxable year to which the Form 720 applies may not 
be treated as having been contributed for any other taxable year.
    One stakeholder indicated that the reference to the stock 
contribution being ``on account of'' the taxable year within the 
meaning of section 404(a)(6) raises questions about the timing of the 
offset for the stock repurchase excise tax and the income tax deduction 
under section 404(a). Specifically, the stakeholder requested 
clarification as to whether a covered corporation is required to deduct 
a stock contribution to a plan under section 404(a) in the same taxable 
year for which the contribution is taken into account for purposes of 
the stock contribution exception.
    The Treasury Department and the IRS are of the view that a stock 
contribution is not required to be treated as ``on account of'' the 
preceding taxable year within the meaning of section 404(a)(6). Thus, 
for example, a covered corporation may claim the income tax deduction 
in the taxable year in which the stock is contributed to the employer-
sponsored retirement plan but claim an offset for the stock 
contribution to the plan for purposes of the stock repurchase excise 
tax in the preceding taxable year (provided that the rules in these 
proposed regulations are satisfied).
    Accordingly, these proposed regulations would provide that, for 
purposes of the reduction in the stock repurchase excise tax base, a 
covered corporation may treat stock

[[Page 26004]]

contributions to an employer-sponsored retirement plan made after the 
close of the covered corporation's taxable year as having been 
contributed during that taxable year if two conditions are satisfied. 
First, the stock must be contributed to the employer-sponsored 
retirement plan by the filing deadline for the form on which the stock 
repurchase excise tax must be reported that is due for the first full 
quarter after the close of the taxpayer's taxable year. Second, the 
stock must be treated by the employer-sponsored retirement plan in the 
same manner that the plan would treat a contribution received on the 
last day of the preceding taxable year. See proposed Sec.  58.4501-
3(d)(4)(ii).
2. Definition of ``Employer-Sponsored Retirement Plan''
    For purposes of Notice 2023-2, the term ``employer-sponsored 
retirement plan'' means a retirement plan maintained by a covered 
corporation that is qualified under section 401(a) of the Code, 
including an ESOP (as defined in section 4975(e)(7) of the Code). See 
section 3.02(12) of Notice 2023-2. In section 6.01(4) of Notice 2023-2, 
the Treasury Department and the IRS requested comments regarding 
whether the definition of an ``employer-sponsored retirement plan'' 
should include plans other than plans that are qualified under section 
401(a). In response, one stakeholder recommended expanding this 
definition to include foreign-based plans and plans funded through a 
secular trust. The stakeholder reasoned that the statutory language of 
section 4501(e)(2), along with the underlying policy considerations, 
support expanding the definition to these types of plans. However, the 
stakeholder did not specify which types of foreign-based plans or plans 
funded through a secular trust should be included in the definition of 
an ``employer-sponsored retirement plan.''
    The Treasury Department and the IRS are of the view that certain 
broad-based foreign plans that are funded through a secular trust or 
another type of funded arrangement may be considered ``similar plans,'' 
and thus may be included in the definition of an ``employer-sponsored 
retirement plan'' for purposes of the stock contribution exception. 
However, the Treasury Department and the IRS have not yet determined 
which types of broad-based foreign plans should be included in this 
definition. Accordingly, the Treasury Department and the IRS request 
comments regarding the types of foreign-based plans that should be 
included in the definition of an ``employer-sponsored retirement 
plan.''
    Another stakeholder expressed concern that the stock contribution 
exception could be used to encourage excessive executive compensation 
and requested that the definition of ``similar plan'' be defined to 
specifically exclude executive compensation arrangements. The Treasury 
Department and the IRS agree that the stock contribution exception 
should not be used to encourage executive compensation arrangements. 
The definition of an ``employer-sponsored retirement plan'' described 
in Notice 2023-2 is limited to plans that are qualified under section 
401(a) (including ESOPs). The Treasury Department and IRS are of the 
view that this definition is sufficient to exclude executive 
compensation arrangements from the stock contribution exception. Thus, 
these proposed regulations similarly would limit the definition of 
``employer-sponsored retirement plan'' to plans that are qualified 
under section 401(a).
    However, these proposed regulations would expand the definition of 
``employer-sponsored retirement plan'' described in Notice 2023-2 to 
include qualified plans under section 401(a) that are maintained by 
specified affiliates of covered corporations. Section 3.02(12) of 
Notice 2023-2 defined ``employer-sponsored retirement plan'' with 
regard to qualified plans maintained by covered corporations. These 
proposed regulations would provide that the definition of ``employer-
sponsored retirement plan'' includes not only qualified plans 
maintained by covered corporations, but also qualified plans maintained 
by a specified affiliate of a covered corporation. See proposed Sec.  
58.4501-1(b)(11).
3. Valuation of Stock Contributions
    As noted previously, the stock contribution exception in section 
4501(e)(2) provides that the stock repurchase excise tax will not apply 
in any case in which (i) the stock repurchased (first clause), or (ii) 
an amount of stock equal to the value of the stock repurchased (second 
clause), is contributed to an employer-sponsored retirement plan, ESOP, 
or similar plan.
    Section 3.07(3)(c)(i) of Notice 2023-2 addressed the first clause 
by providing that, if a covered corporation repurchases stock and 
contributes to an employer-sponsored retirement plan stock of the same 
class, then the amount of the reduction under the stock contribution 
exception is equal to the aggregate fair market value of the stock 
repurchased during the taxable year, divided by the number of shares 
repurchased, and multiplied by the number of shares contributed. 
However, the amount of the reduction may not exceed the aggregate fair 
market value of stock of the same class repurchased during the taxable 
year.
    Section 3.07(3)(c)(ii) of Notice 2023-2 addressed the second clause 
by providing that, if a covered corporation contributes to an employer-
sponsored retirement plan stock of a different class than the class of 
stock that was repurchased, then the amount of the reduction under the 
stock contribution exception is equal to the fair market value of the 
stock at the time the stock is contributed to the employer-sponsored 
retirement plan. However, the amount of the reduction may not exceed 
the aggregate fair market value of stock of a different class 
repurchased during the taxable year.
    One stakeholder requested that the value of stock for purposes of 
the stock contribution exception be based on the greater of the value 
at the time of repurchase or at the time of contribution to an 
employer-sponsored retirement plan. The stakeholder stated that the 
word ``or'' between the first clause and the second clause offers 
statutory support for allowing covered corporations to choose between 
using the first clause or the second clause for any given year.
    The Treasury Department and the IRS disagree with the stakeholder. 
With regard to the first clause, the focus of the language is on the 
stock repurchased. Because the stock repurchase excise tax does not 
apply to the repurchase of the stock that is contributed, the amount of 
the offset is the fair market value of the shares of stock at the time 
of the repurchase. Any change in value after the date of repurchase is 
irrelevant for purposes of determining the amount of the repurchase 
under section 4501(a) and, thus, the offset amount under the stock 
contribution exception.
    Moreover, if covered corporations contribute stock of a different 
class than the stock repurchased, the contribution will not reflect a 
contribution of the stock repurchased. For this reason, it is 
inconsistent with the statutory language of section 4501(e)(2) to allow 
covered corporations to apply the first clause if contributing a 
different class of stock to an employer-sponsored retirement plan.
    With regard to the second clause, because the statutory language 
focuses on an amount of stock equal to the value of the stock 
repurchased, and not on the shares of stock themselves, the value of 
the offset amount is determined by the value of the stock contributed 
to the retirement plan, instead of the value of the stock at the time 
of the repurchase.
    Accordingly, these proposed regulations would incorporate the

[[Page 26005]]

valuation provisions described in section 3.07(3)(c) of Notice 2023-2, 
including the rule that the reduction cannot exceed the aggregate fair 
market value of the stock repurchased. Additionally, these proposed 
regulations would add language to coordinate the application of the 
stock contribution exception with the application of other statutory 
exceptions. See proposed Sec.  58.4501-3(d)(3).
4. Special Rule for Leveraged ESOPs
    As defined in section 4975(e)(7), an ESOP is a type of defined 
contribution plan that is qualified under section 401(a) and is 
designed to invest primarily in qualifying employer securities (within 
the meaning of section 409(l) of the Code). An ESOP also must meet 
other applicable requirements described in section 409.
    An ESOP may be leveraged or non-leveraged. Leveraged ESOPs use the 
proceeds of an exempt loan (as defined in section 4975(d)(3)) from the 
sponsoring employer or another party (typically with the employer's 
guarantee) to purchase qualifying employer securities from the 
sponsoring employer or shareholders or on a securities market. The 
purchased securities are held in a suspense account (within the trust 
that forms a part of the plan) as collateral for the loan. The 
sponsoring employer makes cash contributions to the ESOP, which in turn 
uses the cash to make loan repayments. Dividends paid on shares held as 
collateral in the ESOP loan suspense account and on shares allocated to 
participants' accounts also may be used to repay an exempt loan. As 
loan repayments are made, securities are released from the suspense 
account and allocated to ESOP participants' accounts in accordance with 
the terms of the plan, which must comply with plan qualification and 
fiduciary requirements.
    Non-leveraged ESOPs do not have a loan and, thus, do not have a 
suspense account that releases securities to ESOP participants' 
accounts as contributions of cash are used to repay a loan. Rather, 
employers contribute employer securities directly to the non-leveraged 
ESOP, and the contributed shares are allocated to ESOP participants' 
accounts as of the plan year to which the contribution applies.
    Employer contributions to a non-leveraged ESOP fit squarely within 
the stock contribution exception because employer contributions to a 
non-leveraged ESOP are made in shares of stock. Although employer 
contributions of cash to a leveraged ESOP are not described in section 
4501(e)(2), such contributions result in the allocation of shares of 
stock from a suspense account to ESOP participants' accounts. In other 
words, contributions of stock to a non-leveraged ESOP and contributions 
of cash to a leveraged ESOP that is used to repay an exempt loan 
produce a comparable result--namely, the allocation of employer stock 
to participants' accounts. Accordingly, the Treasury Department and the 
IRS are of the view that leveraged ESOPs and non-leveraged ESOPs should 
be treated similarly for purposes of the stock contribution exception.
    Thus, these proposed regulations would provide that, if a covered 
corporation maintains a leveraged ESOP, stock that is released from a 
suspense account (as a result of cash contributions by the employer 
maintaining the plan) and allocated to ESOP participants' accounts is 
treated as a stock contribution for purposes of the stock contribution 
exception as of the date stock attributable to repayment of the exempt 
loan is released from the suspense account and allocated to 
participants' accounts. Because dividends on employer stock held in the 
ESOP and used to repay an exempt loan are not employer contributions, 
stock released from the suspense account that is attributable to 
repayment of the loan with dividends would not be treated as a stock 
contribution for purposes of the stock contribution exception. See 
proposed Sec.  58.4501-3(d)(1)(ii).

C. De Minimis Exception

    Section 4501(e)(3) provides an exception (that is, the de minimis 
exception) to the application of the stock repurchase excise tax with 
regard to a taxable year ``in any case in which the total value of the 
stock repurchased during the taxable year does not exceed $1,000,000.'' 
See section 4501(e)(3); see also section 3.03(2)(a) of Notice 2023-2. 
Under section 3.03(2)(b) of Notice 2023-2, the determination of whether 
the de minimis exception applies with regard to a taxable year is made 
before applying any other statutory exception or any adjustments under 
the netting rule. As discussed in part XIV.A.3 of this Explanation of 
Provisions, the Treasury Department and the IRS are of the view that 
applying the de minimis exception before the other statutory exceptions 
is consistent with the statutory language and structure of section 
4501.
    The proposed regulations would retain the approach described in 
Notice 2023-2. See proposed Sec.  58.4501-2(c)(3). Additionally, for 
the same rationale underlying the approach described in Notice 2023-2, 
the proposed regulations would clarify that repurchases prior to 
January 1, 2023, are not taken into account for purposes of the stock 
repurchase excise tax (including for purposes of applying the de 
minimis exception). See proposed Sec.  58.4501-2(c)(4); see also part 
I.A of this Explanation of Provisions (discussion of repurchases by a 
fiscal-year taxpayer prior to the effective date).

D. Repurchases by Dealers in Securities

    Section 4501(e)(4) provides an exception to the application of the 
stock repurchase excise tax ``under regulations prescribed by the 
Secretary, in cases in which the repurchase is by a dealer in 
securities in the ordinary course of business.'' Pursuant to the 
authority granted in section 4501(e)(4), section 3.07(4) of Notice 
2023-2 describes an exception to the application of the stock 
repurchase excise tax for certain repurchases by a dealer in securities 
in the ordinary course of the dealer's business of dealing in 
securities.
    More specifically, section 3.07(4)(a) of Notice 2023-2 describes, 
in part, that the fair market value of stock repurchased by a covered 
corporation that is a dealer in securities (within the meaning of 
section 475(c)(1) of the Code) is a reduction for purposes of computing 
the covered corporation's stock repurchase excise tax base to the 
extent the stock is acquired in the ordinary course of the dealer's 
business of dealing in securities. However, under section 3.07(4)(b) of 
Notice 2023-2, this reduction applies solely to the extent that: (i) 
the dealer accounts for the stock as securities held primarily for sale 
to customers in the dealer's ordinary course of business; (ii) the 
dealer disposes of the stock within a period of time that is consistent 
with the holding of the stock for sale to customers in the dealer's 
ordinary course of business, taking into account the terms of the stock 
and the conditions and practices prevailing in the markets for similar 
stock during the period in which the stock is held; and (iii) the 
dealer does not sell or otherwise transfer the stock to certain 
specified persons other than in a sale or transfer to a dealer that 
also satisfies the requirements of section 3.07(4) of Notice 2023-2.
    No feedback was received on this exception in Notice 2023-2. The 
proposed regulations would retain the approach described in Notice 
2023-2. See proposed Sec.  58.4501-3(e).

E. Repurchases by RICs and REITs

    Section 4501(e)(5) provides an exception to the application of the 
stock

[[Page 26006]]

repurchase excise tax for ``repurchases by a regulated investment 
company (as defined in section 851) or a real estate investment 
trust.'' Under section 3.07(5) of Notice 2023-2, a repurchase by a 
covered corporation that is a RIC or a REIT is a reduction for purposes 
of computing the covered corporation's stock repurchase excise tax 
base. The proposed regulations would retain the approach described in 
Notice 2023-2.
    A stakeholder recommended that the exception for RICs be extended 
to all funds registered under the Investment Company Act of 1940, even 
if those funds do not qualify as RICs for tax purposes. The stakeholder 
suggested that the organizational structure, operations, applicable 
securities laws, and accounting standards are the same for those funds 
as for funds that are RICs for tax purposes.
    The Treasury Department and the IRS disagree with the stakeholder's 
recommendation. Section 4501(e)(5) provides a specific and limited 
exception for RICs as defined in section 851, and nothing in the 
statutory language of section 4501 suggests that entities that do not 
qualify as RICs are intended to be exempt from the stock repurchase 
excise tax. Accordingly, the proposed regulations would not adopt this 
recommendation.

F. Dividend Exception

    Section 4501(e)(6) provides an exception (dividend exception) to 
the application of the stock repurchase excise tax ``to the extent that 
the repurchase is treated as a dividend for purposes of [the Code].'' 
To implement section 4501(e)(6), the rule described in section 
3.07(6)(a) of Notice 2023-2 generally provides that the fair market 
value of stock repurchased by a covered corporation is a reduction for 
purposes of computing the covered corporation's stock repurchase excise 
tax base to the extent the repurchase is treated as a distribution of a 
dividend under section 301(c)(1) or 356(a)(2). Under the notice, there 
is a rebuttable presumption that a repurchase to which section 302 or 
356(a) applies is subject to section 302(a) or 356(a)(1), respectively 
(and, therefore, is ineligible for the foregoing exception). See 
section 3.07(6)(b)(i) of Notice 2023-2. A covered corporation may rebut 
this presumption with regard to a specific shareholder solely by 
establishing with sufficient evidence that the shareholder treats the 
repurchase as a dividend on the shareholder's Federal income tax 
return. See section 3.07(6)(b)(ii) of Notice 2023-2.
1. Substantiation for Dividend Exception
    Stakeholders provided several recommendations regarding 
substantiation for the dividend exception in section 4501(e)(6).
a. Reliance on Filings With the U.S. Securities and Exchange Commission
    One stakeholder requested guidance as to how corporations should 
apply the constructive ownership rules of section 318(a) of the Code in 
determining the extent to which redemptions are treated as in part or 
full payment in exchange for stock under section 302(a) or as 
distributions to which section 301 applies. The stakeholder recommended 
that such guidance: (i) should permit corporations to rely on filings 
with the U.S. Securities and Exchange Commission (SEC) and similar 
filings to determine ownership (as in the case of determining whether 
an ownership change has occurred for purposes of section 382 of the 
Code (see Sec.  1.382-2T(k)(1)(i))); (ii) should clarify the requisite 
level of due diligence to determine the constructive ownership of any 
shareholders not required to report their ownership in SEC filings; and 
(iii) should address whether any safe harbors or presumptions are 
available.
    The Treasury Department and the IRS are of the view that the 
rebuttable presumption approach described in Notice 2023-2 would 
provide a more accurate determination of whether a covered corporation 
qualifies for the dividend exception. In addition, the Treasury 
Department and the IRS are of the view that the rebuttable presumption 
approach would better facilitate the IRS's ability to administer and 
enforce the stock repurchase excise tax and enable taxpayers to apply 
the tax with greater certainty. Therefore, the proposed regulations 
would not permit covered corporations to rely on filings with the SEC 
and similar filings to determine the extent to which redemptions may be 
treated as qualifying for the dividend exception.
b. Rebuttable Presumption and Substantiation Requirements
    Another stakeholder contended that a covered corporation generally 
would not have access to information to determine with certainty 
whether a section 317(b) redemption should be treated as a dividend 
with respect to a particular shareholder. For support, the stakeholder 
asserted that a covered corporation may not possess information 
specifying the identity of its shareholders, which complicates the 
ability of the covered corporation to determine whether a repurchase is 
properly treated as a sale or exchange under section 302(a) or as a 
section 301 distribution under section 302(d) (which depends on 
shareholder-specific facts). As a result, the stakeholder recommended a 
safe harbor under which the dividend exception would apply if the 
covered corporation: (i) provides information reporting to the redeemed 
shareholder providing that the repurchase constitutes a dividend; (ii) 
obtains certification from the shareholder that the repurchase 
constitutes a section 302(d) redemption; (iii) has no knowledge of 
facts that would indicate that the certification is incorrect; and (iv) 
demonstrates that the corporation has sufficient earnings and profits 
(E&P) to treat the deemed section 301 distribution as a dividend.
    As reflected in section 3.07(6) of Notice 2023-2, the Treasury 
Department and the IRS are of the view that repurchases should be 
presumed not to be dividend-equivalent (that is, the dividend exception 
is presumed to be inapplicable), but that taxpayers should be permitted 
to rebut this presumption by providing sufficient evidence. The 
substantiation requirements described in section 3.07(6)(b)(iii) of 
Notice 2023-2 are substantially similar to the stakeholder's 
recommended safe harbor, with the additional requirement that the 
shareholder must provide evidence that applicable withholding occurred, 
if required.
    Coupled with the shareholder certification requirement, the 
Treasury Department and the IRS provided the information reporting 
requirement to ensure that covered corporations and their shareholders 
treat repurchases consistently for purposes of the dividend exception. 
However, it is the understanding of the Treasury Department and the IRS 
that publicly traded stock typically is held by shareholders through a 
broker, and the broker (rather than the issuer of the stock) provides 
any information reporting to the shareholder. Under current law, 
brokers are not required to inform the issuer of the stock what 
information reporting the brokers have provided to shareholders, and 
the Treasury Department and the IRS understand that brokers generally 
do not provide such information to issuers. Consequently, in such 
cases, there is no assurance that the information reporting provided to 
the shareholder would be consistent with the covered corporation's 
treatment of a repurchase. Therefore, the proposed regulations would 
replace the information reporting requirement with a requirement that 
the covered corporation treat the repurchase

[[Page 26007]]

consistent with the shareholder certification.
c. Coordination With Withholding Tax Rules
    In section 6.01(7) of Notice 2023-2, the Treasury Department and 
the IRS requested comments on whether there should be modifications to 
the method described in section 3.07(6) of Notice 2023-2, or whether 
additional methods to rebut the presumption should be permitted.
    In response, one stakeholder observed that, although Notice 2023-2 
includes a rebuttable presumption that a share repurchase by a covered 
corporation constitutes a sale or exchange, the withholding tax rules 
generally presume that such share repurchases from foreign persons are 
dividends subject to withholding tax. See Sec.  1.1441-3(c)(1). In the 
absence of coordination, the stakeholder contended that each of these 
presumptions might apply to the same transaction, and therefore would 
require (i) the repurchasing corporation to pay the stock repurchase 
excise tax as if the payment gave rise to a sale or exchange, and (ii) 
a withholding agent to withhold as if the payment gave rise to a 
dividend. Accordingly, the stakeholder requested that the proposed 
regulations provide rules to coordinate these differing presumptions.
    The Treasury Department and the IRS are of the view that no special 
rules are needed to coordinate the foregoing presumptions, particularly 
because these presumptions serve different purposes. In addition, if 
the proposed regulations were to provide rules to coordinate these 
presumptions, then the following would result: (i) covered corporations 
making repurchases would not have any stock repurchase excise tax 
liability (if the presumption were that all repurchases are dividends); 
or (ii) corporations making section 302 distributions to foreign 
persons would not have any withholding tax liability (if the 
presumption were that all repurchases are sales or exchanges).
    However, the proposed regulations would include rules to coordinate 
the proposed shareholder certification requirements under the dividend 
exception with the proposed section 302 payment certification 
requirements under proposed Sec.  1.1441-3(c)(5)(iii)(D). See proposed 
Sec.  58.4501-3(g)(3).
d. Certification From Foreign Shareholders
    Another stakeholder contended that the requirement that U.S. 
companies obtain certification from a foreign shareholder who does not 
file a U.S. tax return, and who does not otherwise have a U.S. tax 
connection, is excessively burdensome. The stakeholder recommended 
replacing the certification requirement with the requirement that a 
U.S. company provide a Form 1042-S showing payment of a dividend.
    The Treasury Department and the IRS are of the view that reliance 
solely on the Form 1042-S is not an appropriate replacement for the 
shareholder certification requirement, because the Form 1042-S is based 
on the presumption that share repurchases are dividends subject to 
withholding tax. Consequently, reliance solely on the Form 1042-S for 
purposes of substantiating the dividend exception could overstate the 
amount of repurchases that qualify for this exception. Accordingly, the 
proposed regulations would not adopt this recommendation.
2. Substantiation of Dividend Exception for E Reorganizations
    As discussed in part VIII.D of this Explanation of Provisions, the 
proposed regulations would provide that a covered corporation's 
acquisition of its stock as part of an E reorganization would 
constitute a repurchase, subject to the reorganization exception. 
Stakeholders have asked whether a covered corporation may establish its 
eligibility for the dividend exception by demonstrating that (i) Sec.  
1.301-1(j) applies to the non-qualifying property in the transaction, 
and (ii) the corporation has sufficient E&P for dividend treatment.
    Section 1.301-1(j) provides, in relevant part, that a distribution 
to shareholders with respect to their stock is a section 301 
distribution, even if the distribution occurs at the same time as 
another transaction, if the distribution is in substance a separate 
transaction (whether or not connected in a formal sense). Section 
1.301-1(j) further provides that this situation is most likely to occur 
in the case of a recapitalization and certain other corporate 
reorganizations. For example, if a corporation with only common stock 
outstanding exchanges one share of newly issued common stock and one 
bond for each share of outstanding common stock, the distribution of 
the bond is a distribution of property (to the extent of its fair 
market value) to which section 301 applies even if the stock-for-stock 
exchange is pursuant to an E reorganization.
    Notice 2023-2 does not expressly address the interaction of Sec.  
1.301-1(j) and the dividend exception. However, the presumption that a 
repurchase by a covered corporation constitutes a sale or exchange 
applies only to a repurchase to which section 302 or 356(a) applies. 
See section 3.07(6)(b)(i) of Notice 2023-2.
    The Treasury Department and the IRS are of the view that no special 
rules are needed in response to the stakeholders' query. In other 
words, because a distribution of non-qualifying property that is 
treated as a section 301 distribution pursuant to Sec.  1.301-1(j) is 
not subject to section 302 or 356(a), the Treasury Department and the 
IRS are of the view that such a distribution should qualify for the 
dividend exception (if the covered corporation has sufficient E&P) 
without the need for the covered corporation to rebut the presumption 
that the repurchase is a sale or exchange. The proposed regulations 
would reflect this position. See proposed Sec.  58.4501-3(g)(2).
3. Dividend Exception and Partial Liquidation Look-Through Rule
    A stakeholder requested that the proposed regulations provide the 
manner in which covered corporations should apply the look-through rule 
of section 302(e)(5) in determining the extent to which redemptions in 
partial liquidation are made to corporate shareholders (and, therefore, 
are potentially eligible for the dividend exception). Under section 
302(b)(4), a redemption in partial liquidation to noncorporate 
shareholders is treated as a sale or exchange rather than as a section 
301 distribution. However, section 302(b)(4) does not apply to 
shareholders that are not corporations. As a result, such shareholders 
potentially are eligible for exclusion under the dividend exception.
    Section 302(e)(5) provides that, for purposes of determining under 
section 302(b)(4) whether any stock is held by a shareholder that is 
not a corporation, any stock held by a partnership, estate, or trust is 
treated as if it were held proportionately by its partners or 
beneficiaries. For purposes of applying this rule, the stakeholder 
recommended that the proposed regulations permit covered corporations 
to rely on SEC filings and similar filings. For support, the 
stakeholder contended that covered corporations generally cannot 
ascertain the identity of their shareholders unless the shareholders 
are required to disclose their ownership under applicable securities 
law.
    For the reasons previously discussed in part X.F.1 of this 
Explanation of Provisions, the Treasury Department and the IRS are of 
the view that corporations should not be permitted to rely solely on 
SEC filings or similar filings for purposes of determining whether the 
dividend exception in

[[Page 26008]]

section 4501(e)(6) applies. Accordingly, the proposed regulations would 
not adopt this recommendation. Instead, the proposed regulations would 
provide that covered corporations must obtain certifications from their 
shareholders, which must take section 302(e)(5) into account for 
purposes of making the certification. See proposed Sec.  58.4501-
3(g)(2)(ii).

XI. Netting Rule

A. Overview

    Section 4501(c)(3) allows an adjustment for stock issued by a 
covered corporation, including stock issued or provided to employees of 
a covered corporation or its specified affiliate. Section 3.08 of 
Notice 2023-2 describes rules regarding the adjustment under section 
4501(c)(3) (that is, the netting rule).
    In general, under section 3.08(1) of Notice 2023-2, the stock 
repurchase excise tax base with regard to a taxable year of a covered 
corporation is reduced by the aggregate fair market value of stock of 
the covered corporation (i) issued or provided to employees of the 
covered corporation or employees of a specified affiliate during the 
covered corporation's taxable year, and (ii) issued by the covered 
corporation to other persons during the covered corporation's taxable 
year. For these purposes, stock is treated as issued or provided by a 
covered corporation at the time at which, for Federal income tax 
purposes, ownership of the stock transfers to the recipient. See 
section 3.08(2) of Notice 2023-2.
    Section 3.08(3) of Notice 2023-2 describes additional rules 
regarding stock issued or provided to an employee of a covered 
corporation or specified affiliate as compensation for services 
performed as an employee. Such arrangements include transfers of stock 
in connection with the performance of services described in section 83, 
including pursuant to a nonqualified stock option, or pursuant to a 
stock option described in section 421 of the Code.

B. Treasury Stock

    A stakeholder requested confirmation that the transfer of treasury 
stock is treated as an issuance for purposes of the netting rule to the 
same extent as the transfer of newly issued stock. The stakeholder 
contended that treasury stock generally is treated in the same manner 
as the issuance of new stock for Federal income tax purposes, and that 
there is no countervailing policy reason for treating treasury stock 
differently than newly issued stock for purposes of the netting rule. 
Notice 2023-2 does not expressly address the treatment of treasury 
stock because the Treasury Department and the IRS are of the view that 
treasury stock constitutes stock for Federal income tax purposes.
    The Treasury Department and the IRS continue to be of the view that 
treasury stock constitutes stock for Federal income tax purposes. For 
the avoidance of doubt, the proposed regulations would provide 
explicitly that transfers of treasury stock (within the meaning of 
section 317(b)) are taken into account for purposes of the netting rule 
to the same extent as transfers of newly issued stock. See proposed 
Sec.  58.4501-1(b)(29).

C. Transactions Not Treated as Issuances for Purposes of the Netting 
Rule

    Under section 3.08(4) of Notice 2023-2, the following stock is not 
treated as issued for purposes of the netting rule: (i) stock of a 
covered corporation distributed by the covered corporation to its 
shareholders with respect to its stock; (ii) stock issued by a covered 
corporation to a specified affiliate of the covered corporation; (iii) 
stock treated as issued by the acquiring corporation by reason of the 
application of section 304(a)(1) to a transaction; (iv) certain 
fractional shares (see the discussion in part XIV.B of this Explanation 
of Provisions); (v) stock issued by a covered corporation that is a 
dealer in securities (to the extent the stock is issued, or otherwise 
is used to satisfy obligations to customers arising, in the ordinary 
course of the dealer's (or an applicable acquiror's) business of 
dealing in securities); and (vi) stock issued by the target corporation 
to the merged corporation in exchange for consideration that includes 
the stock of the controlling corporation in a reverse triangular 
merger. See sections 3.08(4)(b), (c), (e), (f), (g), and (h), 
respectively, of Notice 2023-2.
    Additionally, under section 3.08(4)(d) of Notice 2023-2, stock 
issued as part of a transaction qualifying as a reorganization under 
section 368(a) or a distribution under section 355 is not treated as 
issued by the issuing corporation if (i) the stock constitutes 
qualifying property, (ii) the stock is used by a covered corporation to 
repurchase its stock in a transaction that is a repurchase under 
section 3.04(4)(a)(i), (ii), (iii), or (iv) of Notice 2023-2 (see the 
discussion in parts VIII.A, D, and E and IX of this Explanation of 
Provisions), and (iii) the repurchase is not included in the covered 
corporation's stock repurchase excise tax base because that repurchase 
is a qualifying property repurchase (within the meaning of section 
3.07(2) of Notice 2023-2).
    Under section 3.07(3)(e) of Notice 2023-2, stock contributions to 
an employer-sponsored retirement plan under the stock contribution 
exception are not treated as issued or provided to employees of the 
covered corporation or a specified affiliate under the netting rule.
1. Issuances to Specified Affiliates
    Stakeholders generally recommended that issuances of stock to a 
specified affiliate should not be taken into account for purposes of 
the netting rule, for several reasons. First, respecting such issuances 
might lead to double counting if the stock is treated as ``issued'' to 
a specified affiliate and subsequently ``provided'' to that specified 
affiliate's employees. See section 4501(c)(3). Second, because section 
4501(c)(2) treats the acquisition of stock of a covered corporation by 
a specified affiliate (from a person who is not the covered corporation 
or a specified affiliate of such covered corporation) as a repurchase 
of stock of the covered corporation, allowing such a repurchase to be 
offset by acquisitions of the covered corporation's stock by the 
specified affiliate from the covered corporation itself would be 
incongruous. Third, issuances of stock to a specified affiliate do not 
promote what the stakeholder considered to be the congressional 
policies underlying section 4501 (for example, promoting investment in 
productive capital or labor).
    Under section 3.08(4)(c) of Notice 2023-2, stock issued by a 
covered corporation to a specified affiliate is not treated as issued. 
Stakeholders found this exception to the netting rule to be sensible 
insofar as it prevents covered corporations from eroding their stock 
repurchase excise tax base by creating ``hook stock'' (that is, issuing 
corporation stock held by an entity that is owned, directly or 
indirectly, by the issuing corporation).
    However, stakeholders also suggested that the scope of this 
exception is overbroad. Under a strict reading, this exception would 
permanently prevent the issued stock from being taken into account 
under the netting rule (for example, if provided to an employee of the 
specified affiliate), because any subsequent transfer by the specified 
affiliate would not technically constitute an ``issuance.'' 
Stakeholders recommended that issuances of stock by a covered 
corporation to its specified affiliate be disregarded only to the 
extent the covered corporation stock is not subsequently transferred to 
a party

[[Page 26009]]

other than the covered corporation or another specified affiliate.
    The Treasury Department and the IRS agree with the stakeholders. 
Accordingly, the proposed regulations would clarify that stock issued 
by a covered corporation to a specified affiliate is treated as issued 
for purposes of the netting rule if and when that stock is transferred 
by the specified affiliate during the same taxable year to a person who 
is not the covered corporation or a specified affiliate of that 
corporation, so long as (1) the covered corporation does not otherwise 
reduce its stock repurchase excise tax base for the issuing year with 
respect to the stock, and (2) the subsequent transfer by the specified 
affiliate is not in connection with the performance of services 
provided to the specified affiliate. See proposed Sec.  58.4501-
4(f)(2). The first requirement is intended to ensure that the stock is 
not double counted if, for example, the stock is ``issued'' to the 
specified affiliate and subsequently ``provided'' to the specified 
affiliate's employees. The second requirement is intended to ensure 
that stock transferred to a non-employee service provider of a 
specified affiliate would not qualify under this rule. See part XI.G of 
this Explanation of Provisions (explaining the interpretation in the 
proposed regulations of section 4501(c)(3)'s ``issued or provided'' 
language). Unless specifically identified, the shares of stock of the 
covered corporation treated as subsequently transferred by the 
specified affiliate are the earliest shares issued by the covered 
corporation to the specified affiliate. See proposed Sec.  58.4501-
4(f)(2)(iii).
    Under the proposed regulations, stock issued by a covered 
corporation in connection with the performance of services for a 
specified affiliate would not be treated as ``issued'' for purposes of 
the netting rule. However, a transfer of stock of a covered corporation 
described in Sec.  1.83-6(d) by a specified affiliate to an employee 
(but not a non-employee service provider) of the specified affiliate 
would be treated as ``provided'' by the specified affiliate. See 
proposed Sec.  58.4501-4(f)(2)(iv).
    Thus, under the proposed regulations, stock issued by a covered 
corporation to its specified affiliate (or stock that is treated as so 
issued under Sec.  1.83-6(d)) would be counted for purposes of the 
netting rule under two different provisions depending on whether the 
subsequent transfer by the specified affiliate is in connection with 
the performance of services. First, if the subsequent transfer is not 
in connection with the performance of services, then the stock 
transferred would be counted as stock ``issued'' by the covered 
corporation if and when the stock is transferred, during the same 
taxable year as the original issuance, to a person who is not the 
covered corporation or a specified affiliate of the corporation. 
Second, if the subsequent transfer (or deemed transfer under Sec.  
1.83-6(d)) is in connection with the performance of services, then the 
stock transferred would be counted as stock ``provided'' by the 
specified affiliate, but only if the stock is transferred to an 
employee of the specified affiliate. Stock transferred to a non-
employee service provider of a specified affiliate would not be counted 
for purposes of the netting rule. See part XI.G.2 of this Explanation 
of Provisions.
2. Issuances in Acquisitive Reorganizations and Split-Offs (No Double 
Benefit Rule)
    The Treasury Department and the IRS are of the view that stock 
issued by the acquiring corporation to the target corporation as part 
of an acquisitive reorganization should not be treated as an issuance 
for purposes of the netting rule. See section 3.08(4)(d) of Notice 
2023-2. It is the position of the Treasury Department and the IRS that 
allowing such an issuance to be taken into account for purposes of the 
netting rule would create a ``double benefit'' (that is, two reductions 
to the stock repurchase excise tax base with respect to the same 
stock). In other words, (i) one reduction would be provided to the 
target corporation under the reorganization exception (see section 
3.07(2) of Notice 2023-2) for the use of acquiring corporation stock to 
repurchase target corporation stock, and (ii) a second reduction would 
be provided to the acquiring corporation for the issuance of that 
acquiring corporation stock under the netting rule. The Treasury 
Department and the IRS observe that the identical concern arises with 
regard to stock issued by Controlled to Distributing in a D 
reorganization occurring as part of a split-off under section 355.
    One stakeholder asserted that, if the proposed regulations adopt 
the stakeholders' recommendation to exclude acquisitive reorganizations 
from the stock repurchase excise tax, no ``double benefit'' would occur 
because the issuance of qualifying property by the acquiring 
corporation would not be offset against the target corporation's stock 
repurchase excise tax base. However, the proposed regulations would not 
adopt the recommendation to exclude acquisitive reorganizations from 
the stock repurchase excise tax. See part VIII.A.2 of this Explanation 
of Provisions.
    Based on the foregoing, the proposed regulations would provide that 
stock issued as part of a transaction qualifying as a reorganization 
under section 368(a) or as a distribution under section 355 is 
disregarded for purposes of the netting rule if (i) the stock 
constitutes qualifying property, (ii) the stock is used by a covered 
corporation to repurchase its stock in a transaction qualifying as a 
reorganization under section 368(a) or a split-off under section 355 
(whether or not the split-off is part of a D reorganization), and (iii) 
that repurchase is not included in that corporation's stock repurchase 
excise tax base because the repurchase is a qualifying property 
repurchase. See proposed Sec.  58.4501-4(f)(3).
3. Issuances in Spin-Offs and Split-Ups
    A stakeholder also recommended that issuances by Controlled to 
Distributing in a D reorganization occurring as part of a section 355 
distribution should not be treated as issuances for purposes of the 
netting rule if the section 355 distribution is either a split-off or a 
spin-off. The stakeholder noted that, under Notice 2023-2, the no 
double benefit rule does not disregard the Controlled stock issued to 
Distributing in a D reorganization occurring as part of a spin-off 
because, unlike in a split-off, Distributing does not use the 
Controlled stock to repurchase its own stock. However, the stakeholder 
found no policy justification for the disparate treatment of spin-offs 
and split-offs that qualify under section 355 with respect to the 
netting rule. The stakeholder also questioned the propriety of allowing 
a recently distributed Controlled to begin its life as a covered 
corporation with a positive ``reserve'' of issuances equal to its net 
value for purposes of the netting rule.
    The Treasury Department and the IRS agree with the stakeholder and 
are of the view that Controlled stock issued to Distributing in a 
section 355 transaction should be disregarded for purposes of the 
netting rule. Thus, the proposed regulations would provide that any 
stock issued by Controlled in a distribution qualifying under section 
355 (or so much of section 356 as relates to section 355) is not 
treated as an issuance for purposes of the netting rule. See proposed 
Sec.  58.4501-4(f)(9).
4. Section 305 Distributions
    Under section 3.08(4)(b) of Notice 2023-2, stock of a covered 
corporation distributed by the covered corporation to its shareholders 
with respect to its stock is not treated as issued for

[[Page 26010]]

purposes of the netting rule. Several stakeholders recommended that 
stock issued by a covered corporation in a distribution to which 
section 305(a) of the Code applies (for example, a pro rata stock 
distribution) should not be taken into account for purposes of the 
netting rule. These stakeholders reasoned that, if their recommendation 
were not adopted, a covered corporation could avoid the stock 
repurchase excise tax by engaging in transactions that create share 
issuances for the netting rule but have no meaningful dilutive effect 
on the covered corporation's equity capital. In support of this 
recommendation, one stakeholder analogized a section 305(a) 
distribution to a circular flow of cash (that is, the distribution of 
cash by a corporation to its shareholders, followed by the reinvestment 
of all the distributed cash in the corporation) that is disregarded for 
Federal income tax purposes. The stakeholder contended that such a 
transaction should not be treated as creating a stock issuance for 
purposes of the netting rule.
    With regard to distributions by a covered corporation that are 
described in section 305(b), stakeholders recommended that issuances of 
stock by the covered corporation should be taken into account for 
purposes of the netting rule if the receipt of that stock is taxable to 
the shareholder under section 305(b). As one example, stakeholders 
suggested that such distributions should be treated as share issuances 
for purposes of the netting rule if any distributee shareholder can 
elect to be paid either in stock or in property under section 
305(b)(1). The stakeholders asserted that the ability of distributee 
shareholders to elect to receive stock or cash (or other property) in a 
section 305(b)(1) distribution should be viewed as economically 
equivalent to (i) the distribution of cash or other property to the 
distributee shareholders, followed by (ii) the use of that cash or 
other property by some distributee shareholders to purchase stock from 
the covered corporation.
    According to the stakeholders, the use of cash or other property by 
some distributee shareholders to purchase stock from the covered 
corporation in a section 305(b)(1) distribution presumably would be 
treated as an issuance for purposes of the netting rule. Therefore, the 
stakeholders concluded that stock issued in a section 305(b)(1) 
distribution should not be disregarded solely because the covered 
corporation does not receive money or services in exchange for that 
stock.
    As reflected in section 3.08(4)(b) of Notice 2023-2, the Treasury 
Department and the IRS are of the view that distributions by a covered 
corporation of its own stock should not be taken into account for 
purposes of the netting rule, regardless of whether the distributions 
are taxable to the covered corporation's shareholders under section 
305(b). Although the recipients of stock distributions under section 
305(a) and (b) are subject to different Federal income tax 
consequences, the Treasury Department and the IRS are of the view that 
this distinction should not affect the application of the stock 
repurchase excise tax because the statutory language of section 
4501(c)(3) does not focus on treatment of shareholders. Therefore, the 
Treasury Department and IRS are of the view that disparate treatment 
should not be provided under the netting rule for different types of 
section 305 distributions.
    For the foregoing reasons, and to facilitate the ability for the 
IRS to administer and enforce the stock repurchase excise tax, the 
proposed regulations would not accept the stakeholders' recommendation. 
Instead, distributions by a covered corporation of its own stock would 
not be taken into account for purposes of the netting rule. See 
proposed Sec.  58.4501-4(f)(1).
5. Stock-for-Stock Exchanges
    A stakeholder recommended that stock issued in an E reorganization 
should not be treated as an issuance for purposes of the netting rule. 
For support, the stakeholder contended that the proposed regulations 
should preclude covered corporations from avoiding the stock repurchase 
excise tax by engaging in transactions with no meaningful dilutive 
effect on the corporation's equity capital. In other words, the 
stakeholder presented the same rationale as the stakeholder's rationale 
for recommending that stock issued in a distribution to which section 
305(a) applies should not be treated as an issuance for purposes of the 
netting rule. For similar reasons, the stakeholder also recommended 
that stock issued in an exchange under section 1036 of the Code should 
not be treated as an issuance for purposes of the netting rule.
    The Treasury Department and the IRS continue to be of the view that 
stock issued in an E reorganization should not be treated as an 
issuance for purposes of the netting rule because such stock already is 
taken into account under the reorganization exception. Under that 
exception (see section 3.07(2) of Notice 2023-2 and the discussion in 
part X.A of this Explanation of Provisions), the fair market value of 
stock repurchased by the covered corporation in an E reorganization 
using qualifying property is a reduction for purposes of computing the 
covered corporation's stock repurchase excise tax base. Therefore, if 
the issuance of such qualifying property were treated as an issuance 
for purposes of the netting rule, the covered corporation's stock 
repurchase excise tax base would be reduced twice as a result of a 
single stock issuance. The proposed regulations reflect this view. See 
proposed Sec.  58.4501-4(f)(3); see also part XI.C.2 of this 
Explanation of Provisions (discussion of no double benefit rule).
    Similarly, the Treasury Department and the IRS agree with the 
stakeholder that stock issued in a section 1036 exchange should not be 
treated as an issuance for purposes of the netting rule. Accordingly, 
the proposed regulations would provide that stock issued in a section 
1036 exchange is not treated as an issuance for purposes of the netting 
rule. See proposed Sec.  58.4501-4(f)(8).
6. Issuances in F Reorganizations
    A stakeholder recommended that stock issued in an F reorganization 
should not be treated as an issuance for purposes of the netting rule. 
The Treasury Department and the IRS continue to be of the view that 
stock issued in an F reorganization should not be treated as an 
issuance for purposes of the netting rule because that stock already is 
taken into account to reduce the covered corporation's stock repurchase 
excise tax base under the reorganization exception. Therefore, if the 
issuance of such qualifying property were treated as an issuance for 
purposes of the netting rule, the covered corporation's stock 
repurchase excise tax base would be reduced twice as a result of a 
single stock issuance. The proposed regulations reflect this view. See 
proposed Sec.  58.4501-4(f)(3); see also part XI.C.2 of this 
Explanation of Provisions (discussion of no double benefit rule).
    In addition, the proposed regulations would articulate explicitly 
the view of the Treasury Department and the IRS that F reorganizations 
should be treated for stock repurchase excise tax purposes in the same 
manner in which they are treated under the Code and Treasury 
regulations. In particular, the proposed regulations would reflect the 
view of the Treasury Department and the IRS that, for purposes of the 
netting rule, the transferor corporation and the resulting corporation 
in an F reorganization should be treated as the same corporation. See 
Sec.  1.381(b)-1(a)(2) (providing that, in the case of a transaction 
qualifying as an F reorganization, the acquiring

[[Page 26011]]

corporation is treated just as the transferor corporation would have 
been treated had there been no reorganization). As a result, the 
transferor corporation's issuances in the portion of the taxable year 
preceding an F reorganization may offset the resulting corporation's 
repurchases in the portion of the taxable year following the F 
reorganization. Likewise, the resulting corporation's issuances in the 
portion of the taxable year following an F reorganization may offset 
the transferor corporation's repurchases in the portion of the taxable 
year preceding the F reorganization. See proposed Sec.  58.4501-
4(b)(4).
7. Issuances by a Dealer in Securities
    Under section 3.08(4)(g) of Notice 2023-2, any stock issued by a 
covered corporation that is a dealer in securities is not treated as 
issued to the extent the stock is issued, or otherwise is used to 
satisfy obligations to customers arising, in the ordinary course of the 
dealer's business of dealing in securities. No feedback was received on 
the treatment described in Notice 2023-2 of issuances by a dealer in 
securities, and the proposed regulations would retain the approach 
described in Notice 2023-2. See proposed Sec.  58.4501-4(f)(6).
8. Amounts Excluded Under the Stock Contribution Exception
    Covered corporation stock contributed to or purchased by an 
employer-sponsored retirement plan is not treated as issued or provided 
for purposes of the netting rule. See part XI.G.3 of this Explanation 
of Provisions for further discussion.
9. Instruments Not in the Legal Form of Stock
    Because taxpayers generally can choose the form of the instruments 
that they issue, the Treasury Department and the IRS are concerned that 
allowing taxpayers to immediately offset their current repurchases by 
issuing instruments not in the legal form of stock that are treated as 
stock for Federal income tax purposes at issuance (non-stock 
instruments) may create the potential for abuse. For example, a 
taxpayer seeking to avoid the application of the stock repurchase 
excise tax might issue deep-in-the-money call options, which the 
taxpayer takes the position are treated as stock for Federal income tax 
purposes, to accommodation parties with the mutual understanding that 
such options would never be exercised. While a taxpayer could in 
principle similarly issue stock to an accommodation party in order to 
reduce its stock repurchase excise tax base, the issuance of stock by a 
publicly traded corporation is subject to legal, regulatory, and 
practical restrictions that do not or may not apply to an instrument 
that is not in the legal form of stock. In such a case, respecting the 
issuance of the option as an issuance of stock at the time of issuance 
for purposes of the netting rule could allow taxpayers to unduly reduce 
their stock repurchase excise tax liability.
    Accordingly, pursuant to section 4501(f), the proposed regulations 
provide an anti-avoidance rule to address this concern. Under proposed 
Sec.  58.4501-4(f)(13), the issuance of a non-stock instrument, 
including certain deep-in-the money options, would not be treated as an 
issuance of stock for purposes of the netting rule until the instrument 
is repurchased, and that the amount of the issuance under the netting 
rule would be limited to the lesser of the fair market value of the 
non-stock instrument at the time of its issuance or repurchase. The 
taxpayer would be entitled to regard the issuance for purposes of the 
netting rule for the repurchased non-stock instrument only if it timely 
reports the repurchase as a repurchase of a non-stock instrument. In 
order to prevent taxpayers from taking inconsistent positions with 
respect to comparable non-stock instruments, a taxpayer that fails to 
timely report a repurchase of a non-stock instrument as such will not 
be entitled to regard any issuances for purposes of the netting rule 
for comparable non-stock instruments repurchased within the five 
taxable years ending on the last day of the repurchase year, unless the 
failure to timely report the earlier repurchase was due to reasonable 
cause. See proposed Sec.  58.4501-4(f)(13)(ii)(D). Under the proposed 
regulations, a comparable non-stock instrument is a non-stock 
instrument that has substantially similar economic terms as the 
repurchased non-stock instrument, regardless of whether the comparable 
non-stock instrument and the repurchased non-stock instrument have the 
same legal form. See id.
    Notwithstanding the rules described above for issuances, the 
Treasury Department and IRS are of the view that the repurchase of an 
instrument that meets the definition of stock at issuance should be 
treated as a repurchase, regardless of the legal form of such 
instrument. Given the potential for abuses of the netting rule 
involving non-stock instruments, the Treasury Department and the IRS 
are of the view that the different treatment for non-stock instruments 
under the netting rule as compared to the rule for repurchases is 
justified because a taxpayer generally can control whether to issue a 
particular instrument in the form of stock.

D. Carryovers and Carrybacks of Issuances of Preferred Stock

    Several stakeholders raised concerns regarding regulated financial 
institutions that issue additional tier 1 preferred stock to comply 
with regulatory requirements. In particular, stakeholders noted that, 
although regulated financial institutions often must replace redeemed 
additional tier 1 preferred stock with new additional tier 1 preferred 
stock, timing considerations and the regulatory approval process often 
prevents such issuances from occurring during the same taxable year as 
the repurchases. As a result, regulated financial institutions may not 
be able to match their redemptions of additional tier 1 preferred stock 
with their issuances of replacement additional tier 1 preferred stock 
under the netting rule.
    The stakeholders recommended that the proposed regulations permit 
covered corporations to carry forward or carry back for one taxable 
year the aggregate amount of issuances by the covered corporation of 
additional tier 1 preferred stock that exceed the aggregate amount of 
repurchases of additional tier 1 preferred stock by that covered 
corporation for a taxable year. One stakeholder suggested that the 
proposed regulations incorporate such a carryforward and carryback rule 
for all types of preferred stock.
    The Treasury Department and the IRS are of the view that the 
stakeholder's recommended carryforward and carryback provision is 
inconsistent with the plain language of the statute. Section 4501 
provides clearly that the stock repurchase excise tax must be 
determined for a covered corporation on a taxable-year-by-taxable-year 
basis, and the amount of repurchases for a taxable year may be adjusted 
solely to take into account issuances by the covered corporation during 
that same taxable year. See section 4501(a) (imposing the stock 
repurchase excise tax on ``stock of the corporation which is 
repurchased by such corporation during the taxable year''); section 
4501(c)(3) (reducing the amount of repurchases for a taxable year ``by 
the fair market value of any stock issued by the covered corporation 
during the taxable year''). In this regard, under section 3.03(3)(c) of 
Notice 2023-2, any reductions in the stock repurchase excise tax base 
under the statutory exceptions or the netting rule in excess of the 
aggregate fair market value of all repurchases during the taxable year 
are not carried forward or backward to preceding or succeeding

[[Page 26012]]

taxable years of the covered corporation. Accordingly, the proposed 
regulations would not adopt this recommendation.

E. Fair Market Value of Shares Issued Pursuant to the Conversion of a 
Convertible Debt Instrument

    A stakeholder recommended that, for purposes of the netting rule, 
the fair market value of shares issued pursuant to the conversion of a 
convertible debt instrument should be the market price of the shares on 
the date of issuance, rather than the consideration actually paid by 
the holder to acquire the instrument. The stakeholder recommended this 
approach based in part on the plain language of section 4501(c)(3), 
which refers to ``the fair market value of any stock issued by the 
covered corporation during the taxable year'' (emphasis added).
    The Treasury Department and the IRS agree with the stakeholder. 
Consistent with section 3.08(5) of Notice 2023-2, the Treasury 
Department and the IRS are of the view that, for purposes of the 
netting rule, the fair market value of stock issued generally should be 
the market price of the stock on the date the stock is issued. See 
proposed Sec.  58.4501-4(e)(1). Although the proposed regulations do 
not expressly address stock issued upon the conversion of a convertible 
debt instrument, such stock would fall within the scope of this general 
rule. For special rules for valuing stock issued or provided to an 
employee or other service provider in connection with the performance 
of services, see proposed Sec.  58.4501-4(e)(5) and part XI.G.7 of this 
Explanation of Provisions.

F. Net Share Settlement

    A stakeholder noted that, if stock is transferred in connection 
with the performance of services, an employer may withhold some of the 
stock to cover the exercise price, tax withholding obligations, or 
other withholding obligations. The stakeholder noted that the stock 
withheld could be viewed either as transferred to the service provider 
and then repurchased by the covered corporation, or as never having 
been issued.
    Under section 3.08(3)(a)(ii) of Notice 2023-2, stock withheld by a 
covered corporation or a specified affiliate to satisfy an employer's 
income tax withholding obligation described in section 3402 of the 
Code, or an employer's employment tax withholding obligation described 
in section 3102 of the Code, is not treated as stock issued or provided 
to an employee by the covered corporation or specified affiliate. Under 
section 3.08(3)(a)(iii) of Notice 2023-2, stock withheld by a covered 
corporation or a specified affiliate to satisfy the exercise price of a 
stock option also is not treated as stock issued or provided by the 
covered corporation or specified affiliate to an employee.
    As reflected in section 3.08(3)(a)(ii) and (iii) of Notice 2023-2, 
the Treasury Department and IRS are of the view that stock withheld to 
satisfy an employer's withholding obligation under section 3102 or 
3402, or to satisfy the exercise price of a stock option, is not issued 
or provided by the covered corporation or a specified affiliate. This 
position is consistent with the section 83 rules.
    Stakeholders noted that stock is withheld in other situations (such 
as State or foreign tax withholding) and requested clarification on 
whether those situations also would not result in the issuance or 
provision of stock. To provide greater clarity regarding the treatment 
of net share settlements, these proposed regulations would expand 
Notice 2023-2 to cover all situations involving net share settlements. 
Accordingly, the proposed regulations would provide that stock withheld 
by the covered corporation or specified affiliate to satisfy the 
exercise price of a stock option or to cover any withholding obligation 
is not treated as issued or provided under the netting rule. See 
proposed Sec.  58.4501-4(f)(11).
    A similar result would apply to the delivery of stock under an 
option not issued in connection with the performance of services, 
including pursuant to an option embedded in a convertible bond. See 
part XIV.B of this Explanation of Provisions (discussion of the 
treatment of cash paid in lieu of a fractional share).

G. Special Rules for Stock Issued or Provided to Service Providers

1. Issuances to Service Providers Other Than Employees
    Stakeholders requested clarification that the netting rule applies 
to a covered corporation's issuances of its stock to service providers 
other than employees. The Treasury Department and the IRS agree that 
the same rules for determining whether covered corporation stock is 
issued, the amount of stock issued, and the timing of an issuance 
should apply to both employee and non-employee service providers of a 
covered corporation for purposes of the netting rule. The Treasury 
Department and the IRS are of the view that applying the same rules to 
all compensatory stock transfers by a covered corporation would improve 
administrability of the stock repurchase excise tax because the timing 
and value of stock issued or provided in connection with the 
performance of services is determined under section 83 for both 
employee and non-employee service providers.
    Accordingly, these proposed regulations would clarify that the 
netting rule applies to issuances by a covered corporation to both 
employee and non-employee service providers of the covered corporation. 
See proposed Sec.  58.4501-4(b)(1)(i). However, as discussed in part 
XI.G.2 of this Explanation of Provisions, covered corporation stock 
provided by a specified affiliate in connection with the performance of 
services by a non-employee of the specified affiliate would not qualify 
for the netting rule.
2. Meaning of Stock ``Issued or Provided'' in Section 4501(c)(3)
    A stakeholder noted that section 4501 neither defines the term 
``provided'' nor explains the distinction between the terms ``issued'' 
and ``provided'' in section 4501(c)(3). The stakeholder suggested that 
one way the distinction between these terms could be explained is by 
construing stock ``issued'' to mean a transfer of newly issued stock, 
and stock ``provided'' to mean a transfer of treasury shares. However, 
the stakeholder recommended against this interpretation because there 
is no policy reason for treating newly issued shares and treasury 
shares differently. As discussed in part XI.B of this Explanation of 
Provisions, the Treasury Department and IRS are of the view that newly 
issued shares and treasury shares should be treated the same way for 
purposes of the netting rule. See proposed Sec.  58.4501-1(b)(29).
    Instead, the stakeholder recommended that stock ``issued'' should 
be interpreted to mean covered corporation stock issued directly by the 
covered corporation to its employees or other service providers. In 
contrast, stock ``provided'' should be interpreted to mean covered 
corporation stock transferred by a specified affiliate (which cannot 
issue covered corporation stock) to its employees.
    The Treasury Department and IRS agree with the foregoing 
interpretation. A specified affiliate may provide stock in the covered 
corporation, rather than the specified affiliate's own stock, as 
compensation for services provided by the specified affiliate's 
employees. Thus, this interpretation would not interfere with existing 
stock-based compensation arrangements. Moreover, because section 
4501(c)(3) applies to transfers by a specified affiliate to its 
employees, stock provided by the

[[Page 26013]]

specified affiliate in connection with the performance of services by 
its employees (but not by its non-employee service providers) would 
qualify for the netting rule under these proposed regulations.
    Under Sec.  1.83-6(d), if a covered corporation transfers its stock 
in connection with the performance of services for a specified 
affiliate, then (i) the covered corporation is treated as having 
contributed the stock to the capital of the specified affiliate, and 
(ii) the specified affiliate is treated as immediately transferring the 
covered corporation stock to the service provider. Thus, under the 
proposed regulations, if the transfer is to an employee of the 
specified affiliate in connection with the performance of services for 
the specified affiliate, the specified affiliate would be treated as 
transferring the stock to an employee in connection with the 
performance of services for the specified affiliate and the transfer 
would be regarded for purposes of the netting rule. See proposed Sec.  
58.4501-4(f)(2)(iv).
3. Amounts Excluded Under the Stock Contribution Exception
    A stakeholder noted that section 4501 does not explicitly preclude 
a covered corporation from reducing the amount of its stock repurchase 
excise tax under the netting rule using repurchased stock that was 
excluded from the stock repurchase excise tax under the statutory 
exception for contributions to employer-sponsored retirement plans. See 
section 4501(e)(2) and the discussion in part X.B of this Explanation 
of Provisions. The stakeholder requested clarification that stock that 
is excluded from the stock repurchase excise tax under the stock 
contribution exception may not then be used to reduce the stock 
repurchase excise tax base under the netting rule.
    The Treasury Department and the IRS agree that permitting an offset 
against the stock repurchase excise tax base under both the stock 
contribution exception and the netting rule would be inconsistent with 
the statute. Further, stock contributed to or purchased by an employer-
sponsored retirement plan is issued or provided to the plan, not a 
service provider. Thus, consistent with section 3.07(3)(e) of Notice 
2023-2, these proposed regulations would provide that stock contributed 
to or purchased by an employer-sponsored retirement plan does not 
reduce the stock repurchase excise tax base under the netting rule. See 
proposed Sec.  58.4501-4(f)(10).
4. Net Share Settlement of Options Issued in Connection With the 
Performance of Services
    A stakeholder requested guidance explaining how to determine the 
amount of the offset under the netting rule for options settled in 
stock. The stakeholder recommended that, if an option is ``in the 
money'' (that is, if the exercise price is less than the fair market 
value of the stock on the date of exercise), then the stock repurchase 
excise tax base should be reduced by the full fair market value of the 
stock, and not merely the exercise price.
    The Treasury Department and the IRS agree with the stakeholder. The 
Treasury Department and the IRS are of the view that, for purposes of 
the stock repurchase excise tax, the net share settlement of options 
issued in connection with the performance of services should be treated 
in the same manner as the settlement of other options issued in 
connection with the performance of services. See proposed Sec.  
58.4501-4(e)(5) and (f)(11).
5. ``Sell to Cover'' Arrangements
    A stakeholder described a ``sell to cover'' arrangement for stock-
based compensation as a transaction in which a third party (usually a 
broker) facilitates the issuance of stock-based compensation by 
providing amounts necessary to cover a withholding obligation (for 
example, to cover Federal income taxes that must be withheld on the 
transferred shares). The stakeholder suggested that this transaction 
should be treated as an issuance or provision of stock for purposes of 
the netting rule.
    The Treasury Department and the IRS agree with the stakeholder. In 
these arrangements, stock is issued or provided to the service 
provider, or to a third party on behalf of the service provider, and 
then immediately sold to cover a withholding obligation, and the fair 
market value of the amounts necessary to cover the withholding 
obligation is included in the service provider's gross income under 
section 83. Therefore, as reflected in section 3.08(3)(a)(iv) of Notice 
2023-2, these proposed regulations would provide that stock transferred 
in these arrangements is treated as issued or provided for purposes of 
the netting rule. See proposed Sec.  58.4501-4(c)(2).
6. Time When Stock Is Considered Issued or Provided to an Employee or 
Other Service Provider
a. In General
    Consistent with section 3.08(3)(b)(i) of Notice 2023-2, these 
proposed regulations would provide that stock is treated as issued or 
provided to an employee or other service provider when beneficial 
ownership transfers for tax purposes. See proposed Sec.  58.4501-
4(d)(2). Beneficial ownership ordinarily transfers when the service 
recipient initiates the transfer or when the stock is vested. However, 
if the service provider makes a valid election under section 83(b), 
beneficial ownership transfers on the date the property was 
transferred. See section 83. Stock transferred to a grantor trust (for 
example, a Rabbi trust) is not treated as issued or provided until 
beneficial ownership transfers to the service provider for tax 
purposes.
b. Restricted Stock
    Several stakeholders requested clarification as to when restricted 
stock is treated as issued for purposes of the netting rule. The 
stakeholders recommended treating restricted stock as issued when the 
stock is treated as beneficially owned under the section 83 rules. 
Thus, such stock would be treated as issued only if and when the shares 
become substantially vested, unless the recipient makes a section 83(b) 
election with respect to the shares.
    The Treasury Department and the IRS agree that restricted stock 
should be treated as issued for purposes of the netting rule when the 
service provider recipient of the stock is treated as the beneficial 
owner for Federal income tax purposes under the section 83 rules. Under 
section 3.08(3)(b)(i) of Notice 2023-2, stock is issued or provided by 
a covered corporation or a specified affiliate to an employee as of the 
date the employee is treated as the beneficial owner of the stock for 
Federal income tax purposes, and that an employee generally is treated 
as the beneficial owner of the stock when the stock is transferred by 
the covered corporation (or the specified affiliate) to the employee 
and the stock is substantially vested within the meaning of Sec.  1.83-
1(b). Thus, stock transferred pursuant to a vested stock award or 
restricted stock unit is issued or provided when the covered 
corporation or specified affiliate initiates payment of the stock. See 
section 3.08(3)(b)(i) of Notice 2023-2.
    Stock that is not substantially vested within the meaning of Sec.  
1.83-3(b) generally is not issued or provided to the employee until the 
employee vests in the stock, unless the employee makes a valid election 
under section 83(b), in which case the stock is treated as issued or 
provided to the employee as of the transfer date. See sections 
3.08(3)(b)(i) and (iii) of Notice 2023-2. Stock transferred to an 
employee pursuant to an option described in Sec.  1.83-7 or

[[Page 26014]]

section 421 or a stock appreciation right is issued or provided to the 
employee as of the date the employee exercises the option or stock 
appreciation right. See section 3.08(3)(b)(ii) of Notice 2023-2.
    Consistent with section 3.08(3)(b)(i) of Notice 2023-2, the 
proposed regulations would provide that stock that is not substantially 
vested within the meaning of Sec.  1.83-3(b) generally is not treated 
as issued or provided to the employee until the stock vests. See 
proposed Sec.  58.4501-4(d)(2)(i). However, if the employee makes a 
valid election under section 83(b), the stock would be treated as 
issued or provided to the employee as of the transfer date. See 
proposed Sec.  58.4501-4(d)(2)(iii).
    Alternatively, one stakeholder recommended treating restricted 
stock as issued at the time the award is granted (that is, when the 
stock is treated as outstanding for securities law purposes). However, 
the Treasury Department and the IRS are of the view that applying the 
section 83 rules to determine when restricted stock is treated as 
issued is appropriate, and that applying the section 83 rules 
consistently would decrease the compliance burden on taxpayers and the 
administrative burdens on the IRS. Accordingly, the proposed 
regulations would not adopt this alternative recommendation.
7. Valuing Stock Issued or Provided to an Employee or Other Service 
Provider
    A stakeholder requested guidance on how to determine the fair 
market value of stock issued or provided to an employee for purposes of 
the netting rule. The stakeholder recommended using the market price on 
the date of the issuance or provision, with specific rules to determine 
fair market value for certain kinds of stock.
    The Treasury Department and IRS generally agree with the 
stakeholder. Consistent with section 3.08(3)(c) of Notice 2023-2, these 
proposed regulations would cross-reference the section 83 rules to 
determine the fair market value of stock issued or provided to an 
employee or other service provider under the netting rule. See proposed 
Sec.  58.4501-4(e)(5). Under the section 83 rules, the fair market 
value of the stock is determined as of the date that beneficial 
ownership transfers to the service provider.
    The Treasury Department and the IRS are of the view that applying 
the section 83 valuation rules should reduce the compliance burden on 
taxpayers and the administrative burden on the IRS, as taxpayers also 
apply the section 83 rules for other tax purposes. Under the proposed 
regulations, the section 83 valuation rules also would apply if the 
covered corporation or specified affiliate issues or provides stock 
pursuant to the service provider exercising an option (including an 
option described in section 421) or making a valid section 83(b) 
election on restricted stock. See proposed Sec.  58.4501-4(e)(5).
    A stakeholder also requested clarification on valuing stock that is 
not included in United States income, such as stock issued to a non-
resident employee who provides services outside the United States. The 
proposed regulations would provide that, under the netting rule, the 
fair market value of stock is determined under the section 83 rules, 
regardless of whether the income inclusion is governed by section 83. 
Thus, for example, the fair market value of stock issued pursuant to a 
stock option described in section 421 and stock issued to a non-
resident alien for services performed outside the United States is 
determined using the section 83 rules. See proposed Sec.  58.4501-
4(e)(5).

XII. Mergers and Acquisitions With Post-Closing Price Adjustments

A. Overview

    A stakeholder provided recommendations regarding post-closing price 
adjustments in M&A transactions. This stakeholder explained that 
adjustments may include additional payments to the target corporation's 
shareholders based on achievement by the target corporation's business 
of certain milestones or fluctuations in value of the acquiring 
corporation's stock (earnout), or the forfeiture of consideration by 
the target corporation's shareholders to compensate the acquiring 
corporation for breaches of representations and warranties or for other 
indemnification obligations (indemnification payment).
    This stakeholder also noted that consideration provided at closing 
in a tax-free reorganization may include shares that are issued as part 
of an earnout (earnout shares) or that are subject to forfeiture to 
satisfy indemnification obligations. Alternatively, the acquiring 
corporation may have a right to repurchase certain shares for a price 
that is below the stock's fair market value (below-market repurchase). 
Despite being subject to forfeiture or a below-market repurchase, the 
stakeholder explained that such shares potentially could be treated as 
owned by the former target corporation shareholders for Federal income 
tax purposes at the time of issuance.

B. When Shares Issued as Part of an Earnout or Potentially Subject to 
an Indemnification Payment Are Treated as Issued

    The stakeholder recommended that shares issued by an acquiring 
corporation should be treated as issued for purposes of the netting 
rule regardless of whether those shares are subject to forfeiture or a 
below-market repurchase. Essentially, the stakeholder recommended that 
the proposed regulations should permit an acquiring corporation to 
offset the fair market value of that corporation's repurchases during 
the taxable year by the fair market value of all shares issued by that 
corporation in an M&A transaction during that taxable year if those 
shares are treated as issued for Federal income tax purposes.
    The Treasury Department continue to be of the view that stock 
should be treated as issued when ownership of the stock transfers to 
the recipient for Federal income tax purposes. See section 3.08(2) of 
Notice 2023-2. This treatment is consistent with the stakeholder's 
recommendation, and therefore the Treasury Department and the IRS have 
provided no special rule in the proposed regulations. See proposed 
Sec.  58.4501-4(d)(1); see also part III.B.1 of this Explanation of 
Provisions (discussion of timing of issuances and repurchases).

C. Fair Market Value of Shares Issued as Part of an Earnout or 
Potentially Subject to an Indemnification Payment

    A stakeholder recommended that, for purposes of the netting rule, 
the fair market value of shares that potentially are subject to 
forfeiture or a below-market repurchase should be the trading price of 
such shares on the date of issuance (rather than on the date of 
forfeiture or repurchase). For support, the stakeholder contended that 
(i) the parties generally do not expect the acquiring corporation to 
make significant claims for indemnification payments, and (ii) 
discounting the fair market value to reflect the likelihood of 
forfeiture or a below-market repurchase would be administratively 
cumbersome for the IRS and taxpayers.
    Although Notice 2023-2 does not expressly address this issue, it 
does reflect the stakeholder's recommendation. Under Notice 2023-2, if 
the shares were not disregarded under the no double benefit rule, the 
fair market value of the shares would be determined using their market 
price on the date of issuance, consistent with the stakeholder's 
recommendation regarding the treatment of shares

[[Page 26015]]

potentially subject to an indemnification payment. The proposed 
regulations would maintain this treatment and would not include special 
rules to determine the fair market value of such shares.
    In contrast, the stakeholder also recommended that the fair market 
value of earnout shares should be discounted to reflect the present 
value and likelihood of payment. The Treasury Department and the IRS 
are of the view that incorporation of the stakeholder's recommendation 
into the proposed regulations would introduce uncertainty and 
complexity into stock valuation for purposes of the netting rule. 
Furthermore, the stakeholder's recommendation would be inconsistent 
with the statutory language of section 4501(c)(3), which simply 
references the ``fair market value'' of stock issued or provided. As a 
result, the proposed regulations would not include special rules to 
determine the fair market value of earnout shares.

D. Forfeiture of Shares Received as Part of an Earnout or Potentially 
Subject to an Indemnification Payment

    One stakeholder generally recommended that the forfeiture of 
earnout shares should not be treated as a repurchase. The stakeholder 
asserted that such a forfeiture would not constitute a section 317(b) 
redemption because the corporation would have exchanged no property for 
the earnout shares. Similarly, the stakeholder also contended that the 
forfeiture should not be treated as an economically similar transaction 
because no capital would have left the corporation.
    In contrast, the stakeholder recommended that the forfeiture of 
earnout shares as part of an indemnification payment should be treated 
as a repurchase of those shares, because the target corporation's 
former shareholders would have economically benefited from the 
forfeiture by not needing to use cash or other property to make the 
indemnification payment. Therefore, in the stakeholder's view, the 
acquiring corporation should be treated as repurchasing the shares in 
an amount equal to the value of the indemnification claim, as 
determined based on the documents governing the transaction.
    Under Notice 2023-2, a forfeiture of shares would not be treated as 
a repurchase, because the forfeiture is neither a section 317(b) 
redemption nor treated as an economically similar transaction. However, 
there would be an issuance for purposes of the netting rule when 
ownership of those shares transfers to the recipient for Federal income 
tax purposes, even though those shares potentially are still subject to 
forfeiture.
    For the same reasons discussed in part II.D of this Explanation of 
Provisions, the Treasury Department and the IRS are of the view that a 
forfeiture of shares should count as a repurchase if an issuance of 
such shares would be counted under the netting rule (in other words, 
those shares should be treated consistently for purposes of repurchases 
and issuances). Consequently, because the issuance of earnout shares or 
shares subject to an indemnification payment would be taken into 
account for purposes of the netting rule when those shares transfer to 
the recipient for Federal income tax purposes, the proposed regulations 
would treat the forfeiture of those shares as a repurchase at the time 
of forfeiture. See proposed Sec.  58.4501-2(e)(4)(vi). To facilitate 
the ability for the IRS to administer and enforce the stock repurchase 
excise tax, the amount of the repurchase would equal the market price 
of the forfeited stock on the date of forfeiture under the general rule 
in proposed Sec.  58.4501-2(h)(1) and would not be determined by the 
underlying transaction documents.

E. Below-Market Repurchase of Shares Received as Part of an Earnout or 
Potentially Subject to an Indemnification Payment

    A stakeholder recommended that, if the acquiring corporation 
repurchases earnout shares in a below-market repurchase, only the 
amount paid should be reflected in the acquiring corporation's stock 
repurchase excise tax base. According to the stakeholder, proposed 
regulations adopting that approach would be appropriate because the 
negotiated price of the earnout shares would reflect the restrictions 
applicable to those shares and the circumstances in which that stock is 
repurchased. In contrast, the market price of those earnout shares 
would reflect an inaccurate price--that is, the market price would fail 
to reflect the same restrictions to which the earnout shares would be 
subject.
    The Treasury Department and the IRS continue to be of the view that 
the fair market value of stock issued by a covered corporation should 
be the market price on the date of issuance. See section 3.08(5) of 
Notice 2023-2. The Treasury Department and the IRS incorporated this 
position in Notice 2023-2 to reduce unnecessary complexity for 
taxpayers and facilitate the ability for the IRS to administer and 
enforce the stock repurchase excise tax. In addition, the Treasury 
Department and the IRS observe that the approach described in Notice 
2023-2 ensures that repurchases and issuances would be valued based on 
identical methodologies, thereby ensuring symmetrical treatment. 
Accordingly, the proposed regulations would adopt the approach 
described in Notice 2023-2, including with regard to stock that is 
subject to a below-market repurchase.

XIII. Troubled Companies

    In section 6.02(3) of Notice 2023-2, the Treasury Department and 
the IRS requested comments on whether special rules should be provided 
for bankrupt or troubled companies. For example, the Treasury 
Department and the IRS asked whether a section 317(b) redemption 
occurring as part of a restructuring of a bankrupt or troubled company 
should be excluded from the definition of ``repurchase.''
    One stakeholder recommended that troubled companies generally 
should not be subject to the stock repurchase excise tax. According to 
the stakeholder, application of the stock repurchase excise tax would 
further burden troubled companies and would provide troubled companies 
with an incremental incentive to reject otherwise equitable 
restructuring plans to the extent those plans would implicate the stock 
repurchase excise tax. The stakeholder recommended that an exemption 
apply to exchanges of equity for other property by a corporation that 
either is in a title 11 case or is insolvent (within the meaning of 
section 108(d)(3) of the Code) immediately prior to the exchange. The 
stakeholder further recommended that the proposed regulations confirm 
that the stock repurchase excise tax does not apply to acquisitive 
reorganizations under section 368(a)(1)(G) (acquisitive G 
reorganizations) and exchanges of distressed debt.
    In contrast, another stakeholder recommended that no special rules 
be provided for troubled companies, other than a modification of the 
valuation rule for repurchases occurring as part of a restructuring. 
The stakeholder also recommended that the definition of ``acquisitive 
reorganization'' include acquisitive G reorganizations. According to 
the stakeholder, if a troubled company distributes value to existing 
shareholders, there is no reason to exempt such a distribution from the 
stock repurchase excise tax if the distribution otherwise is a 
repurchase within the scope of the stock repurchase excise tax. The 
stakeholder also stated that, in most situations, the value of stock 
issued to creditors in exchange for their claims will significantly 
exceed

[[Page 26016]]

the value of any recovery received by existing shareholders, such that 
the netting rule would prevent any stock repurchase excise tax from 
being owed.
    With respect to the valuation rule for repurchases, the stakeholder 
stated that the general rule for valuing repurchased stock (by 
reference to the ``market price'' of repurchased stock) could lead to 
inappropriate outcomes for troubled companies undergoing a 
restructuring. According to the stakeholder, the recovery amount 
received by a shareholder in exchange for its stock may be 
significantly less than the market price of the stock determined 
immediately after such repurchase. For support, the stakeholder 
asserted that the recovery amount will be determined when the stock is 
worth very little, but the market price (if determined immediately 
after the restructuring) may be much higher.
    The Treasury Department and the IRS are of the view that special 
rules for troubled companies are neither necessary nor appropriate to 
carry out the purposes of the stock repurchase excise tax. In reaching 
this view, the Treasury Department and the IRS observe that a troubled 
company generally would not be treated as repurchasing its stock in 
either a title 11 restructuring or an out-of-court debt restructuring. 
In each type of transaction, it is the understanding of the Treasury 
Department and the IRS that the troubled company's stock typically 
would be cancelled solely as a result of the title 11 restructuring or 
the out-of-court debt restructuring, rather than as any redemption or 
repurchase. Accordingly, such cancellation would not constitute a 
redemption within the meaning of section 317(b). See section 317(b) 
(defining a redemption as a corporation's acquisition of its stock from 
a shareholder in exchange for ``property'' (within the meaning of 
section 317(a))). For the same reason, the Treasury Department and the 
IRS are of the view that such a transaction should not constitute an 
economically similar transaction under the proposed regulations. See 
proposed Sec.  58.4501-2(e)(4).
    The Treasury Department and the IRS agree that the definition of an 
``acquisitive reorganization'' should include acquisitive G 
reorganizations. See part VIII.A of this Explanation of Provisions 
(discussion of acquisitive reorganizations). The Treasury Department 
and the IRS are of the view that an exchange between a target 
corporation and its shareholders pursuant to an acquisitive G 
reorganization should be subject to the stock repurchase excise tax to 
the same extent as in other acquisitive reorganizations. That is, a 
stock repurchase excise tax liability should arise from an exchange in 
an acquisitive G reorganization to the extent the target corporation 
shareholders exchange their target corporation stock for non-qualifying 
property. Accordingly, the proposed regulations would include 
acquisitive G reorganizations in the definition of ``acquisitive 
reorganization.'' See proposed Sec.  58.4501-1(b)(1).

XIV. Additional Miscellaneous Issues

A. Ordering Rule for Statutory Exceptions and Netting Rule

1. Overview
    Stakeholders requested a rule to clarify the order in which 
taxpayers should apply the de minimis exception, the other statutory 
exceptions, the netting rule, and any other exceptions set forth in 
regulations. Under Notice 2023-2, a covered corporation computes its 
stock repurchase excise tax base for a taxable year by (i) determining 
the aggregate fair market value of all repurchases, (ii) reducing that 
amount to the extent any statutory exceptions apply, and then (iii) 
reducing that amount under the netting rule. The determination whether 
the de minimis exception applies is made before applying any statutory 
exceptions or adjustments under the netting rule (that is, after step 
(i)).
    One stakeholder recommended an approach involving the following 
steps. First, a taxpayer should compute its gross repurchases for the 
taxable year, taking into account any exclusions from the definitions 
of ``stock'' and ``repurchase.'' Second, the taxpayer should determine 
whether the de minimis exception applies. (If so, no further 
computations would be necessary.) Third, the taxpayer should apply the 
other statutory exceptions to reduce the amount computed in the first 
step. Finally, the taxpayer should apply the netting rule to the amount 
computed in the third step, thereby arriving at the net repurchase 
amount subject to the stock repurchase excise tax.
    The stakeholder's recommendation generally is consistent with 
section 3.03(3)(a) of Notice 2023-2. The proposed regulations would 
maintain the ordering rules described in Notice 2023-2. See proposed 
Sec.  58.4501-2(c)(1).
2. Section 4501(e)
    One stakeholder contended that the plain meaning of the lead-in 
language in section 4501(e)--which states that ``Subsection (a) shall 
not apply'' in the situations described in section 4501(e)(1) through 
(6)--is that an amount excluded under one of these statutory exceptions 
should not first be treated as part of a share repurchase. In other 
words, the stakeholder interpreted that lead-in language to provide 
that taxpayers should not be required to include all repurchases in the 
stock repurchase excise tax base and then reduce the amount of that 
base by the amount of those repurchases that qualify for a statutory 
exception.
    The Treasury Department and the IRS are of the view that the lead-
in language in section 4501(e) does not affect the definition of 
``repurchase'' under section 4501(c) (in other words, that lead-in 
language applies solely to section 4501(a)). The lead-in language in 
section 4501(e) states that section 4501(a), which imposes a one 
percent excise tax on repurchases, does not apply in certain specified 
situations. The lead-in language in section 4501(e) does not state that 
those specified situations are not ``repurchases'' within the meaning 
of section 4501(c). Indeed, each of the statutory exceptions in section 
4501(e) expressly involves a repurchase. See, for example, section 
4501(e)(1) (``to the extent that the repurchase is part of a 
reorganization. . .'') and (6) (``to the extent that the repurchase is 
treated as a dividend. . .'') (emphasis added). Therefore, the Treasury 
Department and the IRS are of the view that Notice 2023-2 properly 
implements the lead-in language in section 4501(e), and the proposed 
regulations would not incorporate the stakeholder's recommendation.
3. De Minimis Rule
    Several stakeholders objected to the approach described in Notice 
2023-2 that the determination of whether the de minimis exception 
applies be made before the application of any other statutory 
exceptions or adjustments under the netting rule. One stakeholder 
contended that this approach imposes a compliance burden by requiring 
taxpayers to consider the application of the stock repurchase excise 
tax whenever taxpayers engage in a transaction that may involve a 
deemed exchange of stock. Stakeholders also contended that this 
approach would have the effect of eliminating the de minimis exception 
or rendering its application arbitrary in certain circumstances.
    For example, one stakeholder noted that, if a covered corporation 
repurchases $2 million of its stock and contributes $1.5 million of 
that stock to an ESOP, the incidence of the stock repurchase excise tax 
would depend on

[[Page 26017]]

the order in which the statutory exceptions are applied. If the de 
minimis exception were to be applied before the stock contribution 
exception, the stock repurchase excise tax would be imposed on $0.5 
million. Conversely, if the de minimis exception were to be applied 
after the stock contribution exception, then the stock repurchase 
excise tax would not apply at all because the corporation's $0.5 
million of repurchases would not exceed the $1 million de minimis 
threshold.
    As another example, the stakeholder assumed that a covered 
corporation changes the par value of its stock with a fair market value 
of $1 billion. For Federal income tax purposes, the change in par value 
would be treated as an E reorganization in which the corporation's 
shareholders are deemed to exchange their old stock for newly issued 
stock. The stakeholder noted that, under the approach described in 
Notice 2023-2, (i) this exchange would be included in the stock 
repurchase excise tax base computation as a $1 billion repurchase, and 
(ii) although this amount wholly would be offset under the 
reorganization exception, the inclusion of the transaction in the stock 
repurchase excise tax base would completely exhaust the allowance under 
the de minimis exception.
    The Treasury Department and the IRS are of the view that applying 
the de minimis exception before the other statutory exceptions is 
consistent with the statutory language and structure of section 4501. 
By its terms, the de minimis exception applies ``in any case in which 
the total value of the stock repurchased during the taxable year does 
not exceed $1,000,000 . . .'' (emphasis added). The determination of 
whether a transaction is a repurchase under section 4501(c) is 
independent of the statutory exceptions in section 4501(e). Therefore, 
the Treasury Department and the IRS are of the view that the de minimis 
exception should be measured against a covered corporation's gross 
repurchases (that is, a covered corporation's repurchases before 
reduction under another statutory exception or the netting rule).
    The proposed regulations would provide that a covered corporation 
would compute its stock repurchase excise tax base for a taxable year 
by (i) determining the aggregate fair market value of all repurchases, 
(ii) reducing that amount to the extent any statutory exceptions apply, 
and then (iii) reducing that amount under the netting rule. See 
proposed Sec.  58.4501-2(c)(1). The determination of whether the de 
minimis exception applies would be made before applying any other 
statutory exceptions or adjustments under the netting rule (that is, 
after step (i)). See proposed Sec.  58.4501-2(b)(2).
4. Reporting Requirements
    The Treasury Department and the IRS also are of the view that any 
covered corporation that makes a repurchase must comply with the 
applicable reporting requirements for the stock repurchase excise tax, 
even if all the covered corporation's repurchases are eligible for a 
statutory exception or are offset by issuances. See proposed Sec.  
58.6011-1 as proposed elsewhere in this issue of the Federal Register; 
see also part XVII of this Explanation of Provisions.

B. Fractional Shares

    If cash is paid to shareholders in lieu of fractional shares in 
connection with a reorganization under section 368(a), the payment of 
cash could be treated as an issuance of stock immediately followed by 
an offsetting repurchase of a fractional share. See, for example, Rev. 
Rul. 66-35, 1966-2 C.B. 116 (applying this ``deemed issuance and 
repurchase'' treatment to cash paid in lieu of a fractional share to 
conclude that the receipt of such cash does not violate the ``solely 
for voting stock'' requirement of section 368(a)(1)(B) and (C)); Rev. 
Rul. 69-34, 1969-1 C.B. 105 (applying such treatment to cash paid in 
lieu of a fractional share in an E reorganization); Rev. Rul. 74-46, 
1974-1 C.B. 85 (same, for an F reorganization).
    Under section 3.04(3)(b) of Notice 2023-2, a payment by a covered 
corporation of cash in lieu of a fractional share is not a repurchase 
if (i) the payment is carried out as part of a transaction that 
qualifies as a reorganization under section 368(a) or as a distribution 
to which section 355 applies, or pursuant to the settlement of an 
option or similar financial instrument (for example, a convertible debt 
instrument or convertible preferred share), (ii) the cash is not 
separately bargained-for consideration, (iii) the payment is carried 
out solely for administrative convenience, and (iv) the amount of cash 
paid to the shareholder in lieu of a fractional share does not exceed 
the value of one full share of the stock of the covered corporation.
    Several stakeholders recommended that the stock repurchase excise 
tax should not apply to any such payments, so long as the cash paid 
represents solely a mechanical rounding-off of fractional shares that 
otherwise would be issued and is not separately bargained-for 
consideration.
    The Treasury Department and the IRS continue to be of the view that 
the deemed issuance and repurchase of fractional shares pursuant to a 
section 368(a) reorganization, section 355 distribution, or settlement 
of an option or similar financial instrument should be disregarded for 
purposes of section 4501, so long as the general criteria described in 
Notice 2023-2 are satisfied. Accordingly, the proposed regulations 
would retain this rule with the clarification that the value of one 
share of stock is determined on a class-by-class basis. See proposed 
Sec.  58.4501-2(e)(3)(ii).

C. Cash Paid to Dissenting Shareholders

    If a target corporation shareholder exercises dissenters' rights 
with respect to a reorganization, the shareholder's shares typically 
are cancelled as a matter of corporate law. Upon the ultimate 
resolution of the shareholder's claim, those shares typically are 
deemed to have been acquired for cash in connection with the 
reorganization.
    The Federal income tax treatment of payments to dissenting 
shareholders generally depends upon the source of the cash. If the cash 
is sourced from the target corporation, the acquisition generally is 
treated as occurring as part of a redemption separate from the 
reorganization. See, for example, Rev. Rul. 68-285 (holding that the 
acquisition of target corporation stock for acquiring corporation 
voting stock is a B reorganization notwithstanding the creation of an 
escrow account to pay dissenting shareholders for their stock). In 
contrast, if the cash is sourced from the acquiring corporation, the 
acquisition of the dissenting shareholders' stock may be treated as 
acquired by the acquiring corporation in connection with the 
reorganization. See, for example, Rev. Rul. 73-102, 1973-1 C.B. 186 
(holding that the ``solely for voting stock'' requirement of section 
368(a)(1)(C) is satisfied even though the acquiring corporation makes 
cash payments to dissenting shareholders for their target corporation 
stock).
    A stakeholder recommended that cash paid to dissenting shareholders 
should not be treated as a repurchase, regardless of the source of the 
cash, and regardless of whether the dissenting shareholders' rights are 
exercised in the context of a taxable or tax-free transaction. 
According to the stakeholder, a shareholder's decision to exercise 
dissenters' rights is outside the control of the target corporation, 
which has no influence over how much cash ultimately may be paid to 
dissenters.
    Notice 2023-2 does not expressly address the treatment of payments 
to dissenting shareholders. Thus, under Notice 2023-2, whether cash 
paid to

[[Page 26018]]

dissenting shareholders is treated as a repurchase depends on whether 
the transaction is treated as a section 317(b) redemption under Federal 
income tax principles (namely, whether the target corporation is 
treated as the source of the cash). The Treasury Department and the IRS 
continue to be of the view that the determination of whether cash paid 
to dissenting shareholders is treated as a repurchase should be made 
based upon Federal income tax principles. Accordingly, the proposed 
regulations would not adopt the stakeholder's recommendation.

D. Constructive Specified Affiliate Acquisition

    The Treasury Department and the IRS have considered whether the 
acquisition by a covered corporation of a corporation or partnership 
that owns stock in the covered corporation should be treated as a 
repurchase. For example, assume that an acquiring corporation (which is 
a covered corporation) enters into an agreement to purchase all the 
stock of a privately held target corporation. Prior to the acquisition, 
the target corporation uses cash on hand to purchase stock of the 
acquiring corporation on an established securities market. After the 
acquisition, the target corporation becomes a specified affiliate of 
the acquiring corporation.
    The foregoing transaction is not a section 317(b) redemption by the 
acquiring corporation, which does not directly acquire its stock for 
``property'' within the meaning of section 317(a). The transaction also 
is not an acquisition of the acquiring corporation's stock by an entity 
that is a specified affiliate at the time of the acquisition. See part 
IV.B of this Explanation of Provisions (discussion of the determination 
of specified affiliate status). However, if the target corporation had 
purchased the acquiring corporation's stock after becoming a specified 
affiliate of the acquiring corporation, that purchase would have been 
treated as a repurchase by the acquiring corporation under section 
4501(c)(2) (regarding the treatment of purchases by specified 
affiliates). Therefore, by purchasing the stock of the target 
corporation, the acquiring corporation has gained the economic benefits 
of repurchasing its stock without incurring a stock repurchase excise 
tax liability.
    The Treasury Department and the IRS are of the view that the 
foregoing transaction should be treated as a repurchase. Accordingly, 
the proposed regulations would provide that a constructive specified 
affiliate acquisition of stock by a covered corporation is treated as a 
repurchase to the extent that: (i) the target corporation or 
partnership becomes a specified affiliate of the covered corporation; 
(ii) at the time the target corporation or partnership becomes a 
specified affiliate, it owns stock of the covered corporation that 
represents more than one percent of the fair market value of the target 
corporation or partnership as determined at such time; and (iii) the 
target corporation or partnership acquired such stock after December 
31, 2022 (constructive specified affiliate acquisition rule). See 
proposed Sec.  58.4501-2(f)(3)(i). Stock that is treated as repurchased 
in a constructive specified affiliate acquisition is treated as being 
repurchased at the time the corporation or partnership becomes a 
specified affiliate of the covered corporation. See proposed Sec.  
58.4501-2(g)(4).
    However, the constructive specified affiliate acquisition rule 
would not apply to shares of covered corporation stock identified as 
previously having been treated as repurchased by the covered 
corporation under the constructive specified affiliate acquisition 
rule. See proposed Sec.  58.4501-2(f)(3)(ii).
    If the corporation or partnership is unable to specifically 
identify which shares of stock of the covered corporation the 
corporation or partnership is treated as holding at the time it becomes 
a specified affiliate, the covered corporation must treat the 
corporation or partnership as holding the most recently acquired shares 
of the stock of the covered corporation. See proposed Sec.  58.4501-
2(f)(3)(iii).
    The constructive specified affiliate acquisition rule would apply 
regardless of whether the acquisition is a taxable transaction or a 
tax-free acquisition. Additionally, a transaction in which a target 
corporation's redemption of its shares causes the target corporation to 
become a specified affiliate of the covered corporation would be 
treated as an acquisition of the target corporation by the covered 
corporation for purposes of the constructive specified affiliate 
acquisition rule.

E. Carryover of Stock Repurchase Excise Tax Base

    A stakeholder requested clarification as to whether a positive or 
negative balance in a target corporation's stock repurchase excise tax 
base (that is, an excess of issuances over repurchases, or vice-versa) 
may carry over to the acquiring corporation following an acquisitive 
reorganization for purposes of determining the acquiring corporation's 
stock repurchase excise tax base for the taxable year that includes the 
acquisition. The stakeholder recommended against applying a carryover 
approach if the Treasury Department and the IRS exempt acquisitive 
reorganizations from the stock repurchase excise tax or limit its 
application to non-qualifying property sourced from the target 
corporation. See parts VIII.A.2 and VIII.B of this Explanation of 
Provisions (discussion of acquisitive reorganizations and the sourcing 
approach to such reorganizations). The stakeholder also contended that 
a non-carryover approach may be more consistent with the taxable year 
determination described in section 3.03(c) of Notice 2023-2.
    However, the stakeholder expressed a view that if, under the 
proposed regulations, the stock repurchase excise tax continues to 
apply to non-qualifying property sourced from the acquiring 
corporation, then permitting the balance in a target corporation's 
stock repurchase excise tax base to carry over to the acquiring 
corporation may be reasonable, at least to the extent of any positive 
balance created in connection with the transaction. The stakeholder 
also contended that a carryover approach may be appropriate for 
complete liquidations to which both sections 331 and 332 apply, if the 
subsidiary and parent corporations are both publicly traded at the time 
of the liquidation.
    For the reasons discussed in part XI.D of this Explanation of 
Provisions (discussion of carryovers and carrybacks of issuances of 
preferred stock), the Treasury Department and the IRS are of the view 
that a carryover approach is not appropriate for purposes of the stock 
repurchase excise tax. Accordingly, the proposed regulations would not 
adopt a carryover approach.

F. Exclusive List of Economically Similar Transactions

    One stakeholder recommended that the Treasury Department and the 
IRS incorporate into the proposed regulations the approach described in 
Notice 2023-2, which provided an exclusive list of economically similar 
transactions. The stakeholder further recommended that any transactions 
added to this list in future guidance should be subject to the stock 
repurchase excise tax only on a prospective basis. Another stakeholder 
also recommended that guidance classifying instruments or transactions 
as economically similar should apply prospectively, except for any 
transactions deemed abusive that may warrant retroactive application.

[[Page 26019]]

    The Treasury Department and the IRS continue to be of the view that 
economically similar transactions should be clearly identified in an 
exclusive list on which taxpayers may rely. Accordingly, the proposed 
regulations would retain the exclusive list described in Notice 2023-2, 
as modified to account for other changes in these proposed regulations. 
See proposed Sec.  58.4501-2(e)(4).
    The Treasury Department and the IRS also are of the view that 
additional transactions added to the list of economically similar 
transactions should not be required to be apply solely on a prospective 
basis. Although the Treasury Department and the IRS anticipate that 
most transactions treated as economically similar transactions would be 
treated as such only on a prospective basis, there may be transactions 
that warrant retroactive application, as noted by the other 
stakeholder. Accordingly, the proposed regulations would not adopt this 
recommendation.

G. SPACs

1. Overview
    SPACs are companies that raise equity in an IPO in order to seek 
out and acquire an operating business in a business combination (de-
SPAC transaction). A SPAC typically will issue stock to the public in 
the IPO and deposit the cash received in a trust. The stock is 
redeemable at the option of the holder, including in connection with a 
de-SPAC transaction. If a business combination is not completed within 
a specified period of time (typically, two years), the SPAC liquidates 
and the cash is returned to the public shareholders.
2. SPAC Redemptions and Economically Similar Transactions
    Several stakeholders requested clarification regarding the 
application of the stock repurchase excise tax to SPAC-related section 
317(b) redemptions and economically similar transactions. For example, 
stakeholders recommended that non-liquidating redemptions of stock by a 
SPAC should be wholly excepted from the stock repurchase excise tax. 
According to one stakeholder, a redemption of stock by a SPAC pursuant 
to the terms of the stock differs from a conventional stock buyback, in 
that the SPAC redemption effectively amounts to a return of a 
shareholder's capital and does not result in either stock price 
manipulation or accretion to other shareholders (considerations that 
the stakeholder hypothesized to be relevant to Congress in enacting the 
stock repurchase excise tax). According to another stakeholder, an 
exemption for non-liquidating redemptions by SPACs could be implemented 
by either (i) an exception to the stock repurchase excise tax for 
redemptions pursuant to a mandatory redemption right or a unilateral 
holder put option, or (ii) a broad-based exception for SPAC-related 
redemptions.
    The Treasury Department and the IRS are of the view that adopting 
special rules for SPACs in the proposed regulations would not be 
necessary or appropriate to carry out the stock repurchase excise tax. 
As discussed in part II.A.1 of this Explanation of Provisions, the 
proposed regulations would not exempt redemptions of stock pursuant to 
a mandatory redemption right or a unilateral holder put option. These 
proposed rules would apply to SPACs as well as other taxpayers.
    Several stakeholders also recommended that distributions in 
complete liquidation of a SPAC should not be subject to the stock 
repurchase excise tax, even if there is not a distribution in 
cancellation or redemption of all classes of stock. The stakeholders 
stated that this issue arises because a SPAC sponsor typically waives 
with respect to their shares any redemption rights in connection with a 
de-SPAC transaction and any rights to liquidating distributions. 
Consequently, when a SPAC winds up and liquidates, the shares owned by 
the SPAC sponsor typically will not receive a liquidating distribution.
    As discussed in part VI.A.2 of this Explanation of Provisions, the 
proposed regulations would clarify that a distribution pursuant to a 
plan of complete liquidation or dissolution of a covered corporation 
(or an applicable foreign corporation or a covered surrogate foreign 
corporation) generally is not a repurchase and, thus, generally is not 
subject to the stock repurchase excise tax. See proposed Sec.  58.4501-
2(e)(5)(i).
3. Netting Rule
    In certain de-SPAC transactions, the SPAC is not the acquiring 
corporation. Therefore, the SPAC does not issue any stock in the 
transaction. Stakeholders recommended that, in such transactions, the 
SPAC should be allowed to offset its repurchases against (i) issuances 
by the post-combination entity (which could be viewed as a successor to 
the SPAC), or (ii) issuances of exchange rights to acquire covered 
corporation stock issued to the owners of target partnership interests 
(if the de-SPAC transaction is executed through a transaction commonly 
referred to as an ``Up-SPAC'' transaction).
    According to stakeholders, such issuances are functionally 
equivalent to issuances by the SPAC. Stakeholders also recommended 
similar expansions of the netting rule for acquisitions other than de-
SPAC transactions. Alternatively, a stakeholder recommended that SPACs 
be permitted a one-year carryback or carryforward of excess issuances.
    Notice 2023-2 addresses the foregoing issues but does not provide 
SPAC-specific rules. For example, if a de-SPAC transaction were to 
qualify as a reorganization under section 368(a), the no double benefit 
rule would disallow any netting rule offset for stock issued by the 
acquiring corporation. See section 3.08(4)(d) of Notice 2023-2. 
However, the Treasury Department and the IRS are of the view that the 
netting rule should not be expanded in the manner recommended by 
stakeholders. By its terms, the netting rule adjusts the amount of a 
covered corporation's stock repurchases solely by the fair market value 
of covered corporation stock issued or provided during the taxable 
year. Accordingly, the proposed regulations would not adopt these 
recommendations. See also parts XI.D (regarding a request for a one-
year carryback and carryforward period for issuances of preferred 
stock) and XIV.F (discussion of a recommendation for a carryover 
approach in the context of acquisitive reorganizations and complete 
liquidations) of this Explanation of Provisions.

H. Treatment of Disregarded Entities

    Section 301.7701-2(c)(2)(i) provides that, for Federal tax 
purposes, a business entity that has a single owner and that is not a 
corporation under Sec.  301.7701-2(b) is disregarded as an entity 
separate from its owner (disregarded entity). Section 301.7701-
2(c)(2)(v) provides that Sec.  301.7701-2(c)(2)(i) does not apply for 
purposes of certain excise taxes set forth in Sec.  301.7701-
2(c)(2)(v)(A). Section 4501 is not included among the excise taxes set 
forth in Sec.  301.7701-2(c)(2)(v)(A). Thus, the treatment of an entity 
as a disregarded entity under Sec.  301.7701-2(c)(2)(i) is respected 
for purposes of section 4501. See proposed Sec.  58.4501-5(b)(18).

I. Form 7208

    In connection with the publication of Notice 2023-2, the IRS 
released a proposed draft of Form 7208, which it is intended that a 
covered corporation would use to calculate the amount of its stock 
repurchase excise tax. In

[[Page 26020]]

connection with the publication of these proposed regulations, the IRS 
will release an updated draft Form 7208 along with draft instructions 
to the Form 7208.

XV. Applicability Dates for Proposed Sec. Sec.  58.4501-1 Through 
58.4501-5

    Proposed Sec.  58.4501-6(a) generally would provide that proposed 
Sec. Sec.  58.4501-1 through 58.4501-5 apply to repurchases of stock of 
a covered corporation occurring after December 31, 2022, and during 
taxable years ending after December 31, 2022, and to issuances and 
provisions of stock of a covered corporation occurring during taxable 
years ending after December 31, 2022. See section 7805(b)(1)(C). 
However, certain rules in proposed Sec. Sec.  58.4501-1 through 
58.4501-5 that were not described in Notice 2023-2 would apply to 
repurchases, issuances, or provisions of stock of a covered corporation 
occurring after April 12, 2024, and during taxable years ending April 
12, 2024 See proposed Sec.  58.4501-6(b)(1).
    Except as described in the following paragraph, so long as a 
covered corporation consistently follows the provisions of proposed 
Sec. Sec.  58.4501-1 through 58.4501-5, the covered corporation may 
rely on these proposed regulations with respect to (1) repurchases of 
stock of the covered corporation occurring after December 31, 2022, and 
on or before the date of publication of final regulations in the 
Federal Register, and (2) issuances and provisions of stock of the 
covered corporation occurring during taxable years ending after 
December 31, 2022, and on or before the date of publication of final 
regulations in the Federal Register.
    In addition, so long as a covered corporation consistently follows 
the provisions of Notice 2023-2 corresponding to the rules in proposed 
Sec. Sec.  58.4501-1 through 58.4501-5, the covered corporation may 
choose to rely on Notice 2023-2 with respect to (1) repurchases of 
stock of a covered corporation occurring after December 31, 2022, and 
on or before April 12, 2024, and (2) issuances and provisions of stock 
of a covered corporation occurring during taxable years ending after 
December 31, 2022, and on or before April 12, 2024.
    A covered corporation that relies on the provisions of Notice 2023-
2 corresponding to the rules in proposed Sec. Sec.  58.4501-1 through 
58.4501-5 with respect to (1) repurchases occurring after December 31, 
2022, and on or before April 12, 2024, and (2) issuances and provisions 
of stock of a covered corporation occurring during taxable years ending 
after December 31, 2022, and on or before April 12, 2024, may also 
choose to rely on the provisions of proposed Sec. Sec.  58.4501-1 
through 58.4501-5 with respect to (1) repurchases occurring after April 
12, 2024, and on or before the date of publication of final regulations 
in the Federal Register, and (2) issuances and provisions of stock of a 
covered corporation occurring after April 12, 2024, and on or before 
the date of publication of final regulations in the Federal Register.

XVI. Section 4501(d)

A. In General

    As noted in part I.D of the Background section of this preamble, 
section 4501(d) provides rules for the application of the stock 
repurchase excise tax to acquisitions of stock of applicable foreign 
corporations and repurchases and acquisitions of stock of covered 
surrogate foreign corporations (section 4501(d) excise tax). Section 
4501(f) authorizes the Secretary to prescribe regulations and other 
guidance as are necessary or appropriate to carry out, and to prevent 
the avoidance of, the purposes of section 4501, including rules for the 
application of section 4501(d).
    Proposed Sec.  58.4501-7 would provide rules specifically relating 
to the application of section 4501(d) (section 4501(d) proposed 
regulations). The section 4501(d) proposed regulations generally follow 
related rules in proposed Sec. Sec.  58.4501-2 through 58.4501-4, with 
modifications as appropriate solely to reflect differences in the 
operation of section 4501(d). See part I.D of the Background section of 
this preamble. Among other differences, the section 4501(d) excise tax 
is imposed on an applicable specified affiliate treated as a covered 
corporation under section 4501(d)(1)(A) or an expatriated entity 
treated as a covered corporation under section 4501(d)(2)(A) (each, a 
section 4501(d) covered corporation). In addition, the netting rule 
applies only to stock issued or provided by the applicable specified 
affiliate or expatriated entity, as applicable, to its employees under 
section 4501(d)(1)(C) and (d)(2)(C), respectively.
    Terms used in the section 4501(d) proposed regulations but not 
defined therein have the meaning provided in proposed Sec.  58.4501-1, 
except that: (i) references to a ``covered corporation'' are treated as 
references to a ``section 4501(d) covered corporation,'' an 
``applicable foreign corporation,'' or a ``covered surrogate foreign 
corporation,'' as the context may require; and (ii) references to a 
``covered corporation'' or ``specified affiliate'' in respect of the 
definitions of ``employee'' and ``employer-sponsored retirement plan'' 
are treated solely as references to a ``section 4501(d) covered 
corporation.'' See proposed Sec.  58.4501-7(b)(1).
    Terms specifically defined in the section 4501(d) proposed 
regulations are solely applicable for purposes of those regulations. 
See proposed Sec.  58.4501-7(b)(2). In particular, the section 4501(d) 
proposed regulations would provide definitions relevant to the section 
4501(d) excise tax computation, the funding rule of proposed Sec.  
58.4501-7(e), and the application of the statutory exceptions in 
section 4501(e) to section 4501(d) covered corporations. See part XVI.D 
of this Explanation of Provisions (discussion of proposed funding 
rule).

B. Computation of Section 4501(d) Excise Tax Liability of a Section 
4501(d) Covered Corporation

1. Basic Computational Rules
    The section 4501(d) excise tax liability of a section 4501(d) 
covered corporation would be computed under rules based on the 
computational rules for computing the stock repurchase excise tax 
liability of a covered corporation, as set forth in proposed Sec.  
58.4501-2(c)(1), with certain modifications to reflect the differences 
relating to, among other items: (i) the application of the section 
4501(d) excise tax at the level of the section 4501(d) covered 
corporation; (ii) the application of certain statutory exceptions in 
section 4501(e); and (iii) the application of the netting rule solely 
to stock of the applicable foreign corporation or covered surrogate 
foreign corporation, as applicable, issued or provided by the section 
4501(d) covered corporation to its employees.
    The section 4501(d) proposed regulations would provide that the 
amount of section 4501(d) excise tax imposed on a section 4501(d) 
covered corporation equals the product obtained by multiplying the 
applicable percentage by the section 4501(d) excise tax base. See 
proposed Sec.  58.4501-7(c)(1). The ``section 4501(d) excise tax base'' 
would be equal to the aggregate fair market value of all section 
4501(d)(1) repurchases (as defined in proposed Sec.  58.4501-
7(b)(2)(xxii)) or section 4501(d)(2) repurchases (as defined in 
proposed Sec.  58.4501-7(b)(2)(xxiii)), as applicable, during the 
section 4501(d) covered corporation's taxable year, reduced by (i) the 
fair market value of stock repurchased or

[[Page 26021]]

acquired during the taxable year to the extent any statutory exceptions 
in section 4501(e) apply, and (ii) the aggregate fair market value of 
stock of the applicable foreign corporation or stock of the covered 
surrogate foreign corporation, as applicable, to the extent the netting 
rule applies under section 4501(d)(1)(C) or (d)(2)(C), respectively. 
See proposed Sec.  58.4501-7(c)(3) (section 4501(d) excise tax base), 
(m) (section 4501(d) statutory exceptions), and (n) (section 4501(d) 
netting rule).
    For purposes of the section 4501(d) excise tax base, the fair 
market value of a section 4501(d)(1) repurchase or section 4501(d)(2) 
repurchase, as applicable, during the section 4501(d) covered 
corporation's taxable year generally would be determined in the same 
manner as in proposed Sec.  58.4501-2(h). However, the section 4501(d) 
covered corporation, rather than the covered corporation, would be 
required to determine the value of the stock of the applicable foreign 
corporation or covered surrogate foreign corporation, as applicable, by 
applying one of the acceptable methods of valuation set forth in 
proposed Sec.  58.4501-7(l)(2)(ii), for stock traded on an established 
securities market, or under the principles of Sec.  1.409A-
1(b)(5)(iv)(B)(1), for stock not so traded.
    In either case, the section 4501(d) covered corporation must be 
consistent in its application of the valuation methodology. For 
example, the market price of stock of an applicable foreign corporation 
or a covered surrogate foreign corporation, as applicable, that is 
traded on an established securities market must be determined by 
consistently applying one, but not more than one, of the acceptable 
methods to all section 4501(d)(1) repurchases with respect to an 
applicable foreign corporation or all section 4501(d)(2) repurchases 
with respect to a covered surrogate foreign corporation, in the same 
taxable year of the applicable foreign corporation or covered surrogate 
foreign corporation, as applicable. See proposed Sec.  58.4501-
7(l)(2)(iv). If an applicable foreign corporation or a covered 
surrogate foreign corporation, as applicable, does not have a taxable 
year for Federal income tax purposes, the calendar year would be 
treated as the taxable year for this purpose.
2. Section 4501(d) De Minimis Exception
    The section 4501(d) proposed regulations would provide that a 
section 4501(d) covered corporation is not subject to the section 
4501(d) excise tax with regard to a taxable year of the section 4501(d) 
covered corporation if, during that taxable year, the aggregate fair 
market value of all section 4501(d)(1) repurchases with respect to all 
applicable specified affiliates or all section 4501(d)(2) repurchases 
with respect to an expatriated entity, as applicable, does not exceed 
$1,000,000 (section 4501(d) de minimis exception). See proposed Sec.  
58.4501-7(c)(2)(i). The determination of whether the section 4501(d) de 
minimis exception applies is made before applying any section 4501(d) 
statutory exception or the section 4501(d) netting rule, which are 
discussed in parts XVI.I and J of this Explanation of Provisions, 
respectively.
    In applying the section 4501(d) de minimis exception to applicable 
specified affiliates of an applicable foreign corporation in cases in 
which the applicable specified affiliates have different taxable years, 
each applicable specified affiliate (tested affiliate) would be 
required to aggregate section 4501(d)(1) repurchases that occur during 
its taxable year (tested taxable year), including section 4501(d)(1) 
repurchases by other applicable specified affiliates of the same 
applicable foreign corporation that occur during the tested affiliate's 
taxable year, regardless of the taxable year ends of the other 
applicable specified affiliates. In other words, the section 4501(d) de 
minimis exception would be applied to the overlapping portion of the 
taxable years of all applicable specified affiliates of an applicable 
foreign corporation.
    The Treasury Department and the IRS are of the view that applying 
the section 4501(d) de minimis exception to the overlapping portion of 
the taxable years of all applicable specified affiliates is consistent 
with the statute, which applies the de minimis exception to the total 
value of the stock repurchased during the taxable year without regard 
to the identity of the person effecting the repurchase, and also 
precludes the use or formation of multiple applicable specified 
affiliates for the purpose of improperly manipulating the application 
of the de minimis exception.
    For example, assume that an applicable foreign corporation, FX, has 
a taxable year end of June 30 and owns the stock of two domestic 
corporations, US1 and US2, that are applicable specified affiliates. 
US1 has a taxable year end of June 30, and US2 has a taxable year end 
of December 31. In applying the section 4501(d) de minimis exception to 
US1 in its taxable year ending June 30, 2026, the aggregate fair market 
value of all section 4501(d)(1) repurchases with respect to all 
applicable specified affiliates during its taxable year ending June 30, 
2026, is taken into account. Consequently, any acquisition of stock of 
FX that occurs from July 1, 2025, through June 30, 2026, whether by US1 
or US2, would be included in applying the section 4501(d) de minimis 
exception to US1's taxable year ending June 30, 2026.

C. Certain Rules for Section 4501(d)(2) Repurchases

1. Coordination Rules for Section 4501(d)(2) Repurchases
    The section 4501(d) proposed regulations would provide certain 
coordination rules relating to section 4501(d)(2) repurchases. In 
particular, the section 4501(d) proposed regulations would provide a 
priority rule for a transaction that is otherwise both a section 
4501(d)(1) repurchase and a section 4501(d)(2) repurchase, and a 
coordination rule for multiple expatriated entities with respect to a 
covered surrogate foreign corporation.
    With respect to the priority rule, one stakeholder recommended 
that, if both section 4501(d)(1) and (2) could apply to a transaction, 
only section 4501(d)(1) should be applied. The Treasury Department and 
the IRS recognize that, in certain limited situations, acquisitions of 
stock of a covered surrogate foreign corporation could be subject to 
the section 4501(d) excise tax under both section 4501(d)(1) and (2). 
The Treasury Department and the IRS agree that a coordination rule is 
appropriate but are of the view that section 4501(d)(2) should take 
priority over section 4501(d)(1). Section 4501(d)(2) is specifically 
targeted to the repurchase of stock of a covered surrogate foreign 
corporation by the covered surrogate foreign corporation or the 
acquisition of the stock of a covered surrogate foreign corporation by 
a specified affiliate of such corporation. Accordingly, it is 
appropriate to give primacy to section 4501(d)(2) in that context.
    Further, the proposed approach accords with the statutory regime 
that bifurcates between the operation of section 4501(d)(1) and (2) 
because this approach would apply section 4501(d)(2) consistently to 
such repurchases or acquisitions instead of applying a mix of section 
4501(d)(1) or (d)(2) depending on the circumstances of a particular 
acquisition. This mixed application of section 4501(d)(1) and (d)(2) 
could also present difficulties from a computational perspective. 
Accordingly, to the extent any repurchase or acquisition of stock of a 
covered surrogate foreign corporation would be both a section 
4501(d)(1) repurchase and a section 4501(d)(2)

[[Page 26022]]

repurchase, the repurchase or acquisition would be only a section 
4501(d)(2) repurchase. See proposed Sec.  58.4501-7(d)(1).
    With respect to the coordination rule, section 6.02(5) of Notice 
2023-2 requested comments on how the section 4501(d) excise tax 
liability should be allocated in circumstances in which there are 
multiple expatriated entities, each of which is treated as a covered 
corporation with respect to a covered surrogate foreign corporation. A 
stakeholder recommended that the parties be permitted to contractually 
allocate liability for the section 4501(d) excise tax in this 
circumstance. The stakeholder stated that permitting the parties to 
determine their own allocation of section 4501(d) excise tax liability, 
rather than mandating an allocation scheme, would allow taxpayers to 
consider a number of ancillary factors relevant to the allocation, such 
as the cash flow needs of particular entities. The stakeholder 
suggested that the government's interest in the payment and collection 
of the section 4501(d) excise tax could be protected through imposing 
joint and several liability for the tax liability with respect to each 
relevant expatriated entity, notwithstanding the privately contracted 
liability allocation, and through coordination of the reporting of the 
stock repurchase excise tax on Form 720.
    The Treasury Department and the IRS are of the view that, under the 
plain language of section 4501(d)(2), if there are multiple expatriated 
entities with respect to a covered surrogate foreign corporation, each 
expatriated entity is separately liable for the section 4501(d) excise 
tax with respect to all section 4501(d)(2) repurchases with respect to 
the covered surrogate foreign corporation's stock. In particular, under 
the language of the statute, each expatriated entity is liable for the 
section 4501(d) excise tax on the full amount of stock repurchases by a 
covered surrogate foreign corporation and its specified affiliates, and 
the statute does not provide any method of allocation among multiple 
expatriated entities. For example, if there are two expatriated 
entities with respect to the same covered surrogate foreign 
corporation, and the covered surrogate foreign corporation repurchases 
$100x of stock during the year, then under the statute's plain 
language, both expatriated entities would be liable for any section 
4501(d) excise tax with respect to the $100x repurchase.
    Accordingly, the section 4501(d) proposed regulations would follow 
the statute by providing the default rule that multiple expatriated 
entities are each liable for the full amount of section 4501(d) excise 
tax with respect to the covered surrogate foreign corporation. However, 
the section 4501(d) proposed regulations would provide procedures to 
allow one of those multiple expatriated entities to report and pay its 
full excise tax obligation and thereby relieve the remaining 
expatriated entities of their obligations to report and pay the same 
amount of section 4501(d) excise tax with respect to the section 
4501(d)(2) repurchases during the paying expatriated entity's taxable 
year. See proposed Sec.  58.4501-7(d)(2)(ii); see also proposed Sec.  
58.4501-7(q)(3) (Example 3) for an illustration of this rule.
    The Treasury Department and the IRS are of the view that allowing 
multiple expatriated entities to pay different portions of the section 
4501(d) excise tax liability would be too complex and that the most 
straightforward and administrable approach would be to require one 
expatriated entity to pay its full section 4501(d) excise tax liability 
for the taxable year and thereby relieve each other expatriated 
entity's liability for the section 4501(d) excise tax. Further, as 
relevant to the stakeholders' recommendations, multiple expatriated 
entities still could choose the expatriated entity that fully reports 
and pays its section 4501(d) excise tax liability, and they could 
provide for payments or reimbursements among themselves by private 
contract.
2. Example for Entity Subject to Section 7874(b)
    One stakeholder requested that the proposed regulations clarify 
that an entity described in section 7874(b) is treated as a domestic 
corporation for purposes of applying section 4501, and so is subject to 
section 4501(a) as a covered corporation (and is not a covered 
surrogate foreign corporation under section 4501(d)(2)). The Treasury 
Department and the IRS agree with this request because this result 
follows from the plain language of sections 4501(d) and 7874. See 
proposed Sec.  58.4501-5(b)(40) (Example 40) for an illustration of 
this result.
3. Transfers Among the Covered Surrogate Foreign Corporation and Its 
Specified Affiliates
    One stakeholder requested clarification of whether section 
4501(d)(2) applies to transfers of stock of a covered surrogate foreign 
corporation among related entities (in particular, among a covered 
surrogate foreign corporation and its specified affiliates). Those 
transactions are section 4501(d)(2) repurchases because, unlike section 
4501(d)(1), section 4501(d)(2) is not limited to repurchases or 
acquisitions of stock from persons who are not the covered surrogate 
foreign corporation or a specified affiliate of the covered surrogate 
foreign corporation. See proposed Sec.  58.4501-7(q)(2) (Example 2) for 
an illustration of this result.

D. The Proposed Funding Rule

1. The Notice Funding Rule
    Section 3.05(2)(a)(ii) of Notice 2023-2 provides that an applicable 
specified affiliate is treated as acquiring stock of an applicable 
foreign corporation if (i) the applicable specified affiliate funds by 
any means (including through distributions, debt, or capital 
contributions) the repurchase or acquisition of stock of the applicable 
foreign corporation by the applicable foreign corporation or a 
specified affiliate that is not also an applicable specified affiliate, 
and (ii) such funding is undertaken with a principal purpose of 
avoiding the stock repurchase excise tax (Notice funding rule). The 
Notice funding rule also provides that such a principal purpose is 
deemed to exist if the funding (other than through distributions) 
occurs within two years of the funded entity's repurchase or 
acquisition of stock of the applicable foreign corporation (per se 
rule).
    Numerous stakeholders provided feedback on the Notice funding rule. 
Stakeholders generally asserted that the Notice funding rule and, in 
particular, the per se rule were overbroad for various reasons. This 
feedback was considered in drafting and revising the version of the 
funding rule in the section 4501(d) proposed regulations (proposed 
funding rule) and is discussed in part XVI.D.2 of this Explanation of 
Provisions.
2. The Proposed Funding Rule
a. General Structure and the Rebuttable Presumption
    The proposed funding rule would retain the general structure of the 
Notice funding rule, but with substantial modifications that include 
replacing the per se rule with a rebuttable presumption that applies in 
limited circumstances. Under the proposed funding rule, an applicable 
specified affiliate of an applicable foreign corporation would be 
treated as acquiring stock of the applicable foreign corporation to the 
extent the applicable specified affiliate (i) funds by any means 
(including through distributions, debt, or capital contributions), 
directly or indirectly, an AFC repurchase or an

[[Page 26023]]

acquisition of stock of an applicable foreign corporation by a 
specified affiliate of an applicable foreign corporation that is not an 
applicable specified affiliate of the applicable foreign corporation 
(such entity, a relevant entity, and such repurchase or acquisition, a 
covered purchase) (ii) with a principal purpose of avoiding the section 
4501(d) excise tax (a funding with such a principal purpose, a covered 
funding). If a principal purpose of a funding is to fund, directly or 
indirectly, a covered purchase, then with respect to that funding, 
there is a principal purpose of avoiding the section 4501(d) excise 
tax. See proposed Sec.  58.4501-7(e)(1); see also proposed Sec.  
58.4501-7(j) (definition of ``AFC repurchase''). Proposed Sec.  
58.4501-7(p)(3) (Example 3), (p)(4) (Example 4), and (p)(7) (Example 7) 
would illustrate the application of the proposed funding rule.
    The section 4501(d) proposed regulations would not include the per 
se rule. Instead, a principal purpose described in proposed Sec.  
58.4501-7(e)(1) would be presumed to exist if the applicable specified 
affiliate funds by any means, directly or indirectly, a downstream 
relevant entity, and the funding occurs within two years of a covered 
purchase by or on behalf of the downstream relevant entity (rebuttable 
presumption). A covered purchase ``on behalf of'' a downstream relevant 
entity would include an acquisition by an agent or nominee of the 
downstream relevant entity for the downstream relevant entity's 
account. The term ``downstream relevant entity'' would be defined as a 
relevant entity (i) 25 percent or more of the stock of which is owned 
(by vote or by value), directly or indirectly, by, individually or in 
aggregate, one or more applicable specified affiliates of an applicable 
foreign corporation, or (ii) 25 percent or more of the capital or 
profits interests in which are held, directly or indirectly, by, 
individually or in aggregate, one or more applicable specified 
affiliates of an applicable foreign corporation. The rebuttable 
presumption may be rebutted only if facts and circumstances clearly 
establish that there was not a principal purpose described in proposed 
Sec.  58.4501-7(e)(1).
    Thus, the rebuttable presumption would apply only to ``downstream'' 
fundings (that is, fundings of, and covered purchases by or on behalf 
of, relevant entities in which one or more applicable specified 
affiliates have a material direct or indirect ownership interest). The 
rebuttable presumption would not otherwise apply. Proposed Sec.  
58.4501-7(p)(5) (Example 5) and (p)(6) (Example 6) would illustrate the 
application of the rebuttable presumption.
b. Timing and Allocation Rules
    The proposed funding rule would provide rules for determining the 
date that an applicable specified affiliate is treated, by reason of a 
covered funding, as acquiring stock of an applicable foreign 
corporation. More specifically, the proposed funding rule would provide 
that stock of an applicable foreign corporation that is treated as 
acquired by an applicable specified affiliate by reason of a covered 
funding is treated as acquired on the later of the date of the covered 
funding or the covered purchase to which the covered funding is 
allocated.
    The proposed funding rule also would provide specific rules 
allocating covered fundings to covered purchases to determine the 
amount of a deemed acquisition pursuant to the proposed funding rule. 
The proposed funding rule would provide that the amount of stock of an 
applicable foreign corporation acquired in a covered purchase that is 
treated as acquired by an applicable specified affiliate is equal to 
the amount of the applicable specified affiliate's covered fundings 
that are allocated to a covered purchase. To the extent covered 
fundings are allocated to a covered purchase, those fundings would not 
be allocated to any other covered purchases.
    The proposed funding rule would provide that a covered purchase is 
treated as made first from covered fundings such that, to the extent 
there is both a covered funding and a covered purchase subject to the 
proposed funding rule, such covered purchase is treated as funded by 
the covered funding before fundings received from other sources.
    The proposed funding rule would further provide that, if there is a 
single covered funding, the covered funding is allocated to a covered 
purchase to the extent of the lesser of the amount of the covered 
funding or the amount of the covered purchase. If there are multiple 
covered fundings, and if the aggregate amount of those fundings exceeds 
the amount of the covered purchase, then covered fundings would be 
allocated to the covered purchase in the order in which the covered 
fundings occur (a ``first in, first out'' approach). If multiple 
covered fundings occur simultaneously, those covered fundings would be 
allocated to the covered purchase on a pro rata basis.
    If there are multiple covered purchases, then covered fundings 
would be allocated to the covered purchases in the order in which the 
covered purchases occur. If multiple covered purchases occur 
simultaneously, then covered fundings would be allocated to those 
simultaneous covered purchases on a pro rata basis.
3. Response to Feedback on the Notice Funding Rule
a. Authority for the Notice Funding Rule
    Stakeholders requested that the Notice funding rule be withdrawn 
for various reasons, including that, in the stakeholders' view, the 
Notice funding rule is not supported by the statutory language and is 
contrary to congressional intent.
    Stakeholders asserted that the Notice funding rule is contrary to 
the statutory language in section 4501(d)(1) because that language 
requires the applicable specified affiliate to acquire the stock of the 
applicable foreign corporation, as opposed to merely funding a separate 
entity's acquisition of such stock. Several stakeholders also alleged 
that section 4501(f) does not provide sufficient authority for the 
Notice funding rule because the Notice funding rule does not 
appropriately target the avoidance of section 4501(d)(1) and does not 
carry out, or prevent the avoidance of, the purposes of section 4501.
    Stakeholders also asserted that the Notice funding rule and the per 
se rule are otherwise overbroad, particularly given that section 
4501(d)(1) only applies to a set of transactions--certain acquisitions 
by applicable specified affiliates of stock of an applicable foreign 
corporation--that stakeholders alleged occur rarely, if ever (for 
example, because foreign law prohibits a subsidiary from owning stock 
of its ultimate parent entity).
    As a threshold matter, the Treasury Department and the IRS continue 
to be of the view that, for several reasons, a version of the funding 
rule is necessary to carry out the purposes of, and to prevent 
avoidance of, the section 4501(d) excise tax. As acknowledged by 
stakeholders, an applicable specified affiliate potentially could avoid 
the section 4501(d) excise tax with relative ease absent a funding 
rule. Accordingly, the Treasury Department and the IRS are of the view 
that a version of the funding rule is necessary to prevent such 
avoidance of the section 4501(d) excise tax.
    The Treasury Department and the IRS are also of the view that the 
proposed funding rule is an appropriate and permissible exercise of the 
broad grant of authority in section 4501(f) to prescribe regulations 
and other

[[Page 26024]]

guidance as necessary or appropriate to carry out, and to prevent the 
avoidance of, the purposes of the stock repurchase excise tax, 
including guidance for the application of the rules of section 4501(d). 
As one stakeholder noted, statutory grants of regulatory authority like 
section 4501(f) generally are understood to be broad. For example, see 
H.R. Rep. No. 100-795, at 54 (1988) (stating that the Treasury 
Department has, under section 382(m) of the Code, ``broad regulatory 
authority to prescribe any regulations necessary or appropriate to 
carry out the purposes of the loss limitation provisions''). Further, 
longstanding rules in other Treasury regulations provide that, if a 
taxpayer funds an acquisition of property by a relevant related party 
rather than acquiring the property itself, the taxpayer can be treated 
in appropriate circumstances as acquiring the property for certain 
Federal income tax purposes if the funding satisfies a principal 
purpose requirement. See Sec. Sec.  1.304-4(b)(1); 1.956-1(b)(1)(iii). 
The Treasury Department and the IRS therefore are of the view that the 
statutory language of section 4501, including section 4501(f), 
authorizes the proposed funding rule.
    The Treasury Department and the IRS also are of the view that the 
alleged rarity of relevant acquisitions by applicable specified 
affiliates does not address the concern that an applicable specified 
affiliate potentially could, with relative ease, fund another entity's 
repurchase or acquisition of the stock of an applicable foreign 
corporation. One stakeholder noted survey results indicating that some 
respondents do have acquisitions of parent stock by subsidiaries in 
their multinational groups. The enactment of section 4501(d)(1) 
indicates congressional intent to address acquisitions of stock of an 
applicable foreign corporation by applicable specified affiliates. In 
addition, other provisions in the Code and Treasury regulations 
recognize and address the Federal income tax consequences of a 
subsidiary's acquisition of a parent entity's stock. For example, 
Treasury regulations specifically address certain transactions 
undertaken by taxpayers involving a subsidiary's acquisition of parent 
stock. See Sec.  1.367(b)-10 (providing treatment of certain 
transactions in which a foreign subsidiary acquires stock of a parent 
corporation).
    In addition, as discussed in part XVI.D.2.a of this Explanation of 
Provisions, the proposed funding rule would not include the per se 
rule. Instead, the proposed funding rule would provide a more targeted 
rebuttable presumption that applies only with respect to downstream 
relevant entities. The rebuttable presumption would apply over the same 
timeframe as the per se rule; however, unlike the per se rule, the 
rebuttable presumption would apply only to a limited category of 
fundings and could be rebutted. This replacement of the per se rule 
with the rebuttable presumption would materially narrow the scope of 
the proposed funding rule relative to the Notice funding rule. The 
Treasury Department and the IRS are of the view that this narrower 
scope of the proposed funding rule further addresses concerns raised by 
stakeholders related to the Notice funding rule and the per se rule.
b. Principal Purpose Standard
    Certain stakeholders questioned how to determine whether a taxpayer 
has a principal purpose of avoiding the stock repurchase excise tax 
under the Notice funding rule. The proposed funding rule would clarify 
that, if a principal purpose of the covered funding is to fund, 
directly or indirectly, a covered purchase, then there is a principal 
purpose of avoiding the section 4501(d) excise tax.
    In addition, one stakeholder recommended that the Notice funding 
rule provide specific factors to be considered in determining whether a 
taxpayer has a principal purpose of avoiding the stock repurchase 
excise tax. The proposed funding rule would not add such specific 
factors because the relevant factors may vary depending on the 
particular facts and circumstances in each case. The Treasury 
Department and the IRS are of the view that this approach is in 
accordance with other statutory and regulatory rules involving or 
requiring a principal purpose, as those rules typically do not provide 
specific factors for determining whether a principal purpose is 
present. However, the proposed funding rule would clarify that whether 
a covered funding is described in proposed Sec.  58.4501-7(e)(1) is 
determined based on all the facts and circumstances.
    Further, another stakeholder recommended that the principal purpose 
standard be changed from requiring ``a'' principal purpose of avoidance 
to requiring ``the'' principal purpose of avoidance (akin to the 
standard in section 269 of the Code). The proposed funding rule would 
not change its principal purpose standard in this manner. The Treasury 
Department and the IRS are of the view that requiring ``a'' principal 
purpose is common in existing rules analogous to the proposed funding 
rule. The Treasury Department and the IRS are of the view that, if the 
other requirements to apply the proposed funding rule are met, then it 
would be appropriate for the proposed funding rule to apply if ``a'' 
principal purpose of the funding is described in proposed Sec.  
58.4501-7(e)(1).
c. Limitation to Certain Relevant Entities
    Several stakeholders recommended that the per se rule be limited to 
acquisitions by certain persons other than the applicable foreign 
corporation, such as subsidiaries of an applicable specified affiliate. 
Another stakeholder similarly recommended limiting the application of 
the Notice funding rule to subsidiaries of the applicable specified 
affiliate by interpreting the term ``acquisition'' to include indirect 
acquisitions by applicable specified affiliates through domestic 
subsidiaries, domestic and foreign partnerships, and controlled foreign 
corporations (CFCs) owned (within the meaning of section 958(a) of the 
Code) by applicable specified affiliates. (Note that such intermediate 
domestic entities also would be applicable specified affiliates, so 
their acquisitions would separately be subject to section 4501(d)(1)).
    The Treasury Department and the IRS are of the view that the 
application of the proposed funding rule should not be limited in this 
manner. This type of limitation on the scope of the funding rule 
potentially would allow the rule to be avoided with relative ease 
through funding to whichever related entities are excluded from the 
scope of the proposed funding rule. Accordingly, the proposed funding 
rule could apply regardless of whether the funded entity is an 
applicable foreign corporation, brother-sister entity, or subsidiary of 
the applicable specified affiliate.
    However, the Treasury Department and the IRS are of the view that 
applying the rebuttable presumption solely to fundings of downstream 
relevant entities is appropriate. In line with observations from 
certain stakeholders, these ``downstream'' fundings--in which one or 
more applicable specified affiliates have a material ownership stake in 
the relevant entity that receives a funding and by or on behalf of whom 
the covered purchase is made--strongly implicate the anti-avoidance 
concerns that motivate the proposed funding rule. Accordingly, the 
Treasury Department and the IRS are of the view that the rebuttable 
presumption would appropriately be applied in that context.

[[Page 26025]]

d. Recommended Exclusions From the Notice Funding Rule
    Stakeholders suggested that, if the Notice funding rule is 
retained, then certain ordinary-course fundings should be excluded from 
the meaning of a ``funding,'' such as arm's-length payments (including 
payments for inventory, services, or treasury functions) or payments of 
royalties or interest. In addition, one stakeholder requested that a 
``funding'' should not include payments made pursuant to a so-called 
``recharge agreement'' in which an applicable specified affiliate 
reimburses the applicable foreign corporation for providing stock to 
the applicable specified affiliate's employees.
    Several stakeholders also requested that certain types of 
taxpayers, such as foreign banks or financial institutions, should be 
exempt from the Notice funding rule because they frequently engage in 
intercompany financing transactions as part of their ordinary course of 
business (and such intercompany activity should not be viewed as 
abusive or as avoidance of the section 4501(d) excise tax).
    The section 4501(d) proposed regulations would not adopt exclusions 
from the rebuttable presumption or the proposed funding rule for 
specific types of fundings or for taxpayers in specific industries. The 
targeted scope of the rebuttable presumption means that only a limited 
category of fundings would be subject to the rebuttable presumption. 
The Treasury Department and the IRS are of the view that the 
elimination of the per se rule and the targeted nature of the 
rebuttable presumption appropriately address the concerns reflected in 
the feedback requesting these exclusions. Further, the Treasury 
Department and the IRS are of the view that exclusions for taxpayers in 
specific industries are not appropriate in this context as a general 
matter. The Treasury Department and the IRS also are of the view that 
the manner in which the exception for repurchases or acquisitions by a 
dealer in securities would apply with respect to covered purchases 
further addresses these concerns. See proposed Sec.  58.4501-7(m)(4).
e. Treaty and Extraterritoriality Concerns
    Stakeholders also asserted that the Notice funding rule, including 
the per se rule, overrides arm's-length transfer pricing principles, is 
contrary to bilateral income tax treaties and Organisation for Economic 
Co-operation and Development (OECD) efforts involving extraterritorial 
taxation, and creates the risk of other countries imposing an analogous 
rule with respect to fundings provided to a U.S. corporation to 
repurchase its own stock.
    The Treasury Department and the IRS are of the view that the Notice 
funding rule generally does not implicate these concerns. The section 
4501(d) excise tax is imposed on an applicable specified affiliate or 
expatriated entity, and not the applicable foreign corporation or 
covered surrogate foreign corporation, as applicable. The section 
4501(d) excise tax is also an excise tax and not an income tax. In any 
event, the Treasury Department and the IRS also are of the view that 
the tailoring of the proposed funding rule--including the elimination 
of the per se rule and the other limits described previously--would 
appropriately address the concerns motivating this feedback.
f. Funding From Multiple Sources
    Stakeholders also requested guidance on how to apply the funding 
rule if a funded entity receives funding from multiple sources. In 
those cases, different ordering rules or conventions could result in 
differences in the potential section 4501(d) excise tax liability after 
application of the funding rule.
    The Treasury Department and the IRS agree that guidance on ordering 
rules or conventions would be helpful in applying the proposed funding 
rule. Accordingly, the proposed fund rule would include the allocation 
and timing rules previously described in part XVI.D.2.b of this 
Explanation of Provisions.
    The Treasury Department and the IRS considered other timing and 
allocation rules in developing the proposed funding rule, such as 
allocation rules that allocate a specific funding amount to a covered 
purchase if the particular funds or assets can be ``traced'' to a 
covered purchase, or allocation rules that base the allocation on a 
proration of fundings received from all sources. The Treasury 
Department and the IRS are of the view that proposed ordering rules 
should: (i) recognize the typically fungible nature of liquid assets; 
(ii) take into account that transactions subject to the proposed 
funding rule have a principal purpose of funding a stock repurchase or 
acquisition; and (iii) be administrable.
    The Treasury Department and the IRS are of the view that the 
allocation method in the proposed funding rule is both reasonable and 
administrable. As previously described, the proposed funding rule would 
provide that a covered purchase is treated as made first from covered 
fundings such that, to the extent there is both a covered funding and a 
covered purchase subject to the proposed funding rule, such covered 
purchase is treated as funded by the covered funding before fundings 
received from other sources. The Treasury Department and the IRS are of 
the view that treating a funding made with a relevant principal purpose 
as actually being used for that purpose is appropriate.
    Further, the proposed allocation rules would be more administrable 
than other allocation rules (such as a pure ``tracing'' approach, or a 
proration of fundings from all sources) because the proposed rules 
would not require taxpayers to track or order fundings other than 
covered fundings. Additionally, a pure ``tracing'' rule potentially 
would permit avoidance of the funding rule with relative ease given the 
fungible nature of liquid assets that often may be most relevant to the 
proposed funding rule.

E. Status as an Applicable Foreign Corporation, Covered Surrogate 
Foreign Corporation, Applicable Specified Affiliate, Relevant Entity, 
Specified Affiliate

1. Status as an Applicable Foreign Corporation or a Covered Surrogate 
Foreign Corporation
    The rules for determining when a corporation becomes or ceases to 
be an applicable foreign corporation or a covered surrogate foreign 
corporation are provided in proposed Sec.  58.4501-7(f). These rules 
are based on the rules in proposed Sec.  58.4501-2(d) (duration of 
covered corporation status) for determining when a corporation becomes 
or ceases to be a covered corporation. Under proposed Sec.  58.4501-
7(f)(2), in general, a corporation becomes an applicable foreign 
corporation or a covered surrogate foreign corporation, as applicable, 
at the beginning of the initiation date (as defined in proposed Sec.  
58.4501-1(b)(15)), and a corporation ceases to be an applicable foreign 
corporation or a covered surrogate foreign corporation, as applicable, 
at the end of the cessation date (as defined in proposed Sec.  58.4501-
1(b)(2)). Proposed Sec.  58.4501-7(f)(2) and (3), respectively, would 
provide additional rules for when (i) a corporation transfers its 
assets in an inbound or outbound F reorganization, or (ii) a foreign 
corporation ceases to be an applicable foreign corporation or a covered 
surrogate foreign corporation as part of a transaction that includes a 
section 4501(d)(1) repurchase or section 4501(d)(2) repurchase, as 
applicable.

[[Page 26026]]

2. Status as an Applicable Specified Affiliate, Relevant Entity, or 
Specified Affiliate
    The rules for determining whether a corporation or a partnership is 
an applicable specified affiliate or a relevant entity of an applicable 
foreign corporation or a specified affiliate of a covered surrogate 
foreign corporation, as applicable, are provided in proposed Sec.  
58.4501-7(g). These rules are based on the rules in proposed Sec.  
58.4501-2(f)(2) (determination of specified affiliate status). Under 
proposed Sec.  58.4501-7(g)(1), the determination of whether a 
corporation or partnership is an applicable specified affiliate or a 
relevant entity of an applicable foreign corporation or a specified 
affiliate of a covered surrogate foreign corporation, as applicable, is 
made whenever such determination is relevant. In the case of tiered 
ownership structures, the rules for determining indirect ownership are 
consistent with the rules provided in Sec.  58.4501-2(f)(2)(ii), except 
for a special rule (described in part XVI.F of this Explanation of 
Provisions) that applies for purposes of determining whether a domestic 
entity is a direct or indirect partner in a partnership. See proposed 
Sec.  58.4501-7(g)(2).
    Finally, similar to proposed Sec.  58.4501-2(f)(3), proposed Sec.  
58.4501-7(g)(3) describes the tax consequences if a corporation or 
partnership becomes a specified affiliate and owns stock of the 
applicable foreign corporation or covered surrogate foreign 
corporation, as applicable, that was acquired after December 31, 2022. 
In this case, for purposes of applying the section 4501(d) proposed 
regulations, the corporation or partnership is generally treated as 
acquiring such stock immediately after the corporation or partnership 
becomes a specified affiliate.

F. Foreign Partnerships That are Applicable Specified Affiliates

1. In General
    Section 4501(d)(1) provides that, if a foreign partnership that is 
a specified affiliate of an applicable foreign corporation has a direct 
or indirect partner that is a domestic entity, then the foreign 
partnership is an applicable specified affiliate of the application 
foreign corporation. The rules for determining if a foreign partnership 
is an applicable specified affiliate are in proposed Sec.  58.4501-
7(h).
2. Direct and Indirect Partners
    In section 6 of Notice 2023-2, the Treasury Department and the IRS 
requested comments regarding the factors that should be considered in 
determining whether a domestic entity is an indirect partner of a 
foreign partnership for purposes of section 4501(d)(1).
    One stakeholder recommended that indirect domestic partners not be 
taken into account if they hold their interests in the foreign 
partnership through an intermediate foreign corporation or an 
intermediate domestic corporation or partnership. (In the latter case, 
the intermediate domestic corporation or partnership itself already 
would be a direct or indirect domestic partner.) The stakeholder argued 
that this recommendation is consistent with general Federal income tax 
principles and would simplify the determination of whether a domestic 
entity is an indirect partner of a foreign partnership. Another 
stakeholder recommended that the stock repurchase excise tax apply to 
acquisitions by a foreign partnership in which a domestic entity owns 
(within the meaning of section 958(a)) its interest directly or 
indirectly through a CFC.
    The Treasury Department and the IRS do not agree with the first 
recommendation because the statute does not limit indirect ownership to 
indirect ownership solely through a foreign partnership. Moreover, 
limiting the scope of indirect ownership in this manner for purposes of 
determining whether a foreign partnership is an applicable specified 
affiliate could facilitate avoidance of the statute. For instance, a 
domestic entity could form a wholly owned foreign corporation to hold 
the domestic entity's interest in a foreign partnership in which the 
domestic entity otherwise would be a domestic entity partner for 
purposes of section 4501(d)(1). The Treasury Department and the IRS are 
of the view that this type of transaction should not alter whether a 
foreign partnership is an applicable specified affiliate for purposes 
of section 4501(d)(1). Accordingly, section 4501(d) proposed 
regulations would not follow this approach.
    With respect to the second recommendation, although the stakeholder 
made this suggestion in the context of interpreting the term 
``acquisition,'' the Treasury Department and the IRS agree that a 
domestic entity that owns its interest in a foreign partnership through 
a CFC generally should be an indirect partner for purposes of 
determining whether a foreign partnership is an applicable specified 
affiliate.
    The section 4501(d) proposed regulations would, in part, follow a 
similar approach. Specifically, the section 4501(d) proposed 
regulations would provide that a domestic entity is an indirect partner 
with respect to a foreign partnership if the domestic entity owns an 
interest in the foreign partnership through: (i) one or more foreign 
partnerships; (ii) one or more foreign corporations controlled by one 
or more domestic entities (domestic control requirement), or (iii) an 
ownership chain with one or more entities described in the preceding 
clauses (i) and (ii). See proposed Sec.  58.4501-7(h)(2)(ii).
    For this purpose, a foreign corporation is controlled by one or 
more domestic entities if more than 50 percent of the total combined 
voting power of all classes of stock of such corporation entitled to 
vote or the total value of the stock of such corporation is owned, 
directly or indirectly, in aggregate by one or more domestic entities. 
See proposed Sec.  58.4501-7(h)(3). These domestic entities do not need 
to be related to each other.
    However, the section 4501(d) proposed regulations would provide 
that a domestic entity is not treated as indirectly owning stock in a 
foreign corporation or an interest in a foreign partnership solely by 
reason of owning, directly or indirectly, stock of the applicable 
foreign corporation. See proposed Sec.  58.4501-7(h)(4). For example, 
assume that a U.S. corporation (USX) directly owns stock of an 
applicable foreign corporation (FP), which directly owns 100 percent of 
the stock of two foreign corporations, FS1 and FS2. FS1 and FS2, in 
aggregate, own all the interests in a foreign partnership (FPS). Under 
these facts, USX would not be treated as indirectly owning stock of FS1 
or FS2 or an interest in FPS.
    The Treasury Department and the IRS are of the view that, absent 
the domestic control requirement, look-through for indirect ownership 
for this purpose under the statute would require full, proportionate 
look-through of all foreign corporations. See part XVI.E.2 of this 
Explanation of Provisions. The Treasury Department and the IRS are of 
the view that it is appropriate to narrow the application of this 
statutory rule in this context to address compliance and 
administrability concerns.
3. The Proposed De Minimis Rule for Domestic Entity Ownership
    Several stakeholders recommended that the Treasury Department and 
the IRS: (i) adopt a de minimis threshold for direct or indirect 
domestic ownership of a foreign partnership before the foreign 
partnership is treated as an applicable specified affiliate; and (ii) 
limit the

[[Page 26027]]

applicability of section 4501(d)(1) to foreign partnerships to 
situations in which the domestic entity partner is related to the 
relevant applicable foreign corporation. Although the plain language of 
the statute does not provide for either of these limitations, the 
stakeholders contended that a de minimis exception or a relatedness 
requirement (or both) are appropriate in light of the statute's focus 
on entities with a meaningful U.S. connection and the potential 
diligence issues with determining indirect domestic ownership for 
foreign partnerships potentially subject to the section 4501(d) excise 
tax.
    One stakeholder recommended a de minimis threshold of one or two 
percent, analogizing to de minimis exceptions under other Code 
provisions (see Sec. Sec.  1.351-1(c)(7), Example 1 (treating a less-
than-one percent interest as de minimis for purposes of section 
351(e)), and 1.1202-2(a)(2) (applying a two percent de minimis 
threshold for purposes of section 1202 of the Code)). Another 
stakeholder recommended a 10 percent de minimis threshold, analogizing 
to Sec.  1.59A-7(d)(2) (exception for base erosion tax benefits for 
certain small partners). A stakeholder also suggested that the section 
4501(d) proposed regulations should require the domestic entity partner 
to be related (within the meaning of section 267 of the Code) to the 
applicable foreign corporation in order to be consistent with the 
purpose of the stock repurchase excise tax, which (in the stakeholder's 
view) was to impose a tax on repurchases or acquisitions of stock of 
publicly traded corporations and persons related to them.
    The Treasury Department and the IRS are of the view that a de 
minimis threshold would be appropriate to address compliance and 
administrability concerns regarding the determination of when direct or 
indirect ownership by domestic entity partners causes a foreign 
partnership to be an applicable specified affiliate. Accordingly, the 
section 4501(d) proposed regulations would provide that a foreign 
partnership with one or more direct or indirect domestic entity 
partners is not considered an applicable specified affiliate if the 
domestic entities hold, directly or indirectly, in aggregate, less than 
five percent of the capital and profits interests in the foreign 
partnership. See proposed Sec.  58.4501-7(h)(5).
    The Treasury Department and the IRS also are of the view that, 
because the statute does not require any relationship between the 
direct or indirect domestic entity partner and the applicable foreign 
corporation of which the foreign partnership is a specified affiliate, 
no such relationship is required. The addition of such a relatedness 
requirement in the section 4501(d) proposed regulations would be a 
departure from the statutory structure. However, the de minimis rule 
would provide a minimum threshold of direct or indirect domestic 
ownership required for treating a foreign partnership as an applicable 
specified affiliate.
4. Domestic Entity
    A stakeholder recommended that a domestic entity that is a 
disregarded entity and holds an interest in a partnership should not 
itself be treated as a partner. The statute does not treat a ``true'' 
U.S. branch as a domestic entity; therefore, the Treasury Department 
and the IRS agree with this recommendation. See proposed Sec.  58.4501-
7(b)(2)(x) (definition of ``domestic entity'').
5. Filing Requirements
    Section 6.02(6) of Notice 2023-2 requested comments on whether the 
foreign partnership or the domestic entity partner should be required 
to file the Form 720 and pay the stock repurchase excise tax. Several 
stakeholders recommended that the domestic entity partner be required 
to file the stock repurchase excise tax return and pay the stock 
repurchase excise tax. One stakeholder requested guidance regarding the 
level of diligence required to determine whether a foreign partnership 
has a direct or indirect domestic entity as a partner. The stakeholder 
recommended that the diligence process should not impose undue burdens 
and expense on taxpayers given the limited application of the stock 
repurchase excise tax to acquisitions of applicable foreign corporation 
stock by foreign entities.
    The stakeholder therefore recommended that, assuming a 10 percent 
de minimis partner threshold and a related-party requirement (discussed 
in part XVI.F.2 of this Explanation of Provisions), the domestic entity 
partner(s), rather than the foreign partnership, should be required (i) 
to determine the applicability of the stock repurchase excise tax, and 
(ii) to report and pay the stock repurchase excise tax on the full 
amount of the stock acquisition. The stakeholder noted that imposing 
the reporting and payment obligation on domestic entities does not 
raise the jurisdictional, enforcement, and collectability challenges 
that arise when such obligations are imposed on the foreign 
partnership, and that regulations could impose joint and several 
liability on the domestic entity partner(s). The stakeholder also 
recommended that the section 4501(d) proposed regulations provide 
procedures describing how a domestic entity may determine whether it 
holds the requisite ownership interest in a foreign partnership and 
whether the stock repurchase excise tax applies, and suggested rules 
similar to the safe harbor rules for determining whether a domestic 
entity holds an interest in a CFC in Rev. Proc. 2019-40, 2019-43 I.R.B. 
982.
    However, the stakeholder acknowledged that, if the 10 percent de 
minimis threshold and related-party requirements were not adopted, then 
a relatively small indirect domestic partner would not be able to file 
the stock repurchase excise tax return as it would be unlikely to have 
the requisite information. In the stakeholder's view, imposing the full 
excise tax on such partners would be unfair. Accordingly, the 
stakeholder recommended that, in this scenario, domestic partners only 
should be required to pay their allocable share of stock repurchase 
tax, although the stakeholder acknowledged that this approach could be 
complex and impracticable.
    The Treasury Department and the IRS do not agree that the domestic 
entity partner should be required to file Form 720 and pay the section 
4501(d) excise tax. Under the statute, the foreign partnership is the 
entity that is the applicable specified affiliate, which, in turn, is 
the entity that is liable for the section 4501(d) excise tax. The 
Treasury Department and the IRS continue to evaluate adding items 
relevant to the section 4501(d) excise tax to other existing tax return 
forms, including forms that at least certain domestic entity partners 
may otherwise be required to file.
    Consequently, the section 4501(d) proposed regulations would not 
provide special filing or liability rules with respect to an applicable 
specified affiliate that is a foreign partnership with a direct or 
indirect domestic entity partner. Rather, such an applicable specified 
affiliate would be subject to the general requirements that apply to 
all entities that are section 4501(d) covered corporations.
    The section 4501(d) proposed regulations also would not include 
diligence procedures for determining an entity's status as an 
applicable specified affiliate. The Treasury Department and the IRS are 
of the view that relevant diligence considerations may vary based on 
the particular facts and circumstances, and so specific

[[Page 26028]]

guidelines would be neither appropriate nor practical.

G. AFC Repurchases and CSFC Repurchases

    Proposed Sec.  58.4501-7(j) would provide rules for determining 
whether an acquisition by an applicable foreign corporation of its 
stock is an ``AFC repurchase'' and whether an acquisition by a covered 
surrogate foreign corporation of its stock is a ``CSFC repurchase'' for 
purposes of proposed Sec.  58.4501-7. These rules are based on the 
rules in proposed Sec.  58.4501-2(e) for determining whether a 
transaction is a repurchase for purposes of proposed Sec.  58.4501-2. 
These rules are relevant for purposes of determining whether there is a 
covered purchase that could be subject to the proposed funding rule and 
whether a covered surrogate foreign corporation's repurchase of its 
stock is subject to section 4501(d)(2).

H. Date of Section 4501(d)(1) or Section 4501(d)(2) Repurchase; Fair 
Market Value of Stock

    Proposed Sec.  58.4501-7(k) would provide rules for determining the 
date on which a section 4501(d)(1) repurchase or a section 4501(d)(2) 
repurchase occurs. These proposed rules generally reflect the rules in 
proposed Sec.  58.4501-2(g), except that the rule in proposed Sec.  
58.4501-7(k)(4) would provide that stock subject to a covered purchase 
to which the funding rule applies is treated as acquired by the 
applicable specified affiliate on the later of the date of the covered 
funding or the covered purchase. See part XVI.D.2.b of this Explanation 
of Provisions.
    Proposed Sec.  58.4501-7(l) would provide rules for determining the 
fair market value of stock of an applicable foreign corporation or a 
covered surrogate foreign corporation, as applicable, that is subject 
to a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase. 
These rules generally follow the rules in proposed Sec.  58.4501-2(h) 
for determining the fair market value of stock of a covered corporation 
that is repurchased.

I. Section 4501(d) Statutory Exceptions

1. In General
    Section 4501(d) operates by modifying the general rules in section 
4501(a) and (c). Because section 4501(d) operates in this manner, the 
section 4501(e) exceptions can be relevant to transactions subject to 
section 4501(d), except in one respect described in part XVI.I.2 of 
this Explanation of Provisions.
    Proposed Sec.  58.4501-7(m) would provide rules for determining the 
applicability of the statutory exceptions (section 4501(d) statutory 
exceptions), other than the section 4501(d) de minimis exception, to 
transactions that are subject to section 4501(d). The rules in proposed 
Sec.  58.4501-7(m) are based on the rules in proposed Sec.  58.4501-3, 
with certain modifications discussed in part XVI.I.2 of this 
Explanation of Provisions. For a discussion of the section 4501(d) de 
minimis exception, see part XVI.B.2 of this Explanation of Provisions.
2. Application of Section 4501(d) Statutory Exceptions
    The section 4501(d) reorganization exception would apply only with 
respect to stock of an applicable foreign corporation repurchased in an 
AFC repurchase that is a section 4501(d)(1) repurchase and to stock of 
a covered surrogate foreign corporation repurchased in a CSFC 
repurchase that is a section 4501(d)(2) repurchase. See proposed Sec.  
58.4501-7(m)(2). The Treasury Department and the IRS are of the view 
that, based on the statutory language and the operation of section 
4501(d), the relevant ``stock'' for purposes of applying the section 
4501(d) reorganization exception is the stock of the applicable foreign 
corporation or the covered surrogate foreign corporation, as 
applicable. The references to ``stock'' in section 4501 refer to stock 
of the types of corporations subject to the excise tax that is 
repurchased or acquired--that is, covered corporations, applicable 
foreign corporations, and covered surrogate foreign corporations. Thus, 
the plain language of the statute demonstrates that ``stock'' for 
purposes of the section 4501(d) reorganization exception can only be 
stock of the applicable foreign corporation or covered surrogate 
corporation, as applicable. In accordance with this plain meaning, the 
Treasury Department and the IRS are of the view that the section 
4501(d) reorganization exception only applies to repurchases and 
acquisitions of the equity of the corporation that is traded on an 
established securities market.
    The stock contribution exception would apply only with respect to 
contributions of stock of an applicable foreign corporation or a 
covered surrogate foreign corporation, as applicable, to an employer-
sponsored retirement plan of the section 4501(d) covered corporation. 
See proposed Sec.  58.4501-7(m)(3). The section 4501(d) proposed 
regulations would limit the employer-sponsored retirement plan 
exception to contributions to the employer-sponsored retirement plans 
of the section 4501(d) covered corporation to be consistent with the 
scope of the section 4501(d) netting rule, which only allows netting of 
stock provided by an applicable specified affiliate or an expatriated 
entity to its respective employees.
    The section 4501(d) proposed regulations would apply the section 
4501(e)(4) exception for certain repurchases by a dealer in securities 
in the ordinary course of the dealer's business based on the rules in 
proposed Sec.  58.4501-3(e). See proposed Sec.  58.4501-7(m)(4). For 
this purpose, the exception would apply to any repurchasing or 
acquiring entity that is a dealer in securities, whether such entity is 
an applicable foreign corporation, covered surrogate foreign 
corporation, or a specified affiliate of either.
    The section 4501(d) proposed regulations would provide that the 
exception for RICs and REITs does not apply to a section 4501(d) 
repurchase or section 4501(d)(2) repurchase because each of an 
applicable foreign corporation or a covered surrogate foreign 
corporation will not qualify as a RIC or a REIT. See proposed Sec.  
58.4501-7(m)(5).
    The dividend equivalence exception in proposed Sec.  58.4501-
7(m)(6) generally reflects the exception in proposed Sec.  58.4501-
3(g), including that the exception would apply to repurchases (as 
defined in proposed Sec. Sec.  58.4501-2(e) and 58.4501-7(j)) but not 
to acquisitions by specified affiliates. However, with respect to the 
rebuttable presumption of no dividend equivalence, proposed Sec.  
58.4501-7(m)(6)(ii) would differ regarding how a section 4501(d) 
covered corporation may rebut the presumption, because section 4501(d) 
covered corporations are not the entities that are engaging in the 
repurchase for purposes of determining dividend equivalence. Further, 
unlike covered corporations, certain applicable foreign corporations or 
covered surrogate foreign corporations may not have relevant Federal 
income tax return filing requirements.
3. Feedback Received
    One stakeholder requested clarification that the exceptions in 
section 4501(e) apply with respect to stock acquisitions or repurchases 
under section 4501(d). The section 4501(d) proposed regulations would 
implement that request in the manner described in part XVI.I.2 of this 
Explanation of Provisions.
    One stakeholder recommended that, if an applicable specified 
affiliate uses stock of the applicable foreign corporation as 
consideration in a transaction, its acquisition of the

[[Page 26029]]

applicable foreign corporation stock should not be subject to section 
4501(d)(1) as a matter of policy because the total amount of 
outstanding equity of the applicable foreign corporation would not be 
changed as a result of the two transactions taken together. The 
Treasury Department and the IRS are of the view that this 
recommendation is contrary to the plain language and statutory 
structure of section 4501(d)(1). However, in appropriate cases, 
transfers of applicable foreign corporation stock may qualify for a 
section 4501(d) statutory exception.

J. Section 4501(d) Netting Rule

1. Overview
    Section 4501(d)(1)(C) and (d)(2)(C) provide that the adjustment in 
section 4501(c)(3) is determined only with respect to stock issued or 
provided by the section 4501(d) covered corporation to employees of the 
section 4501(d) covered corporation. Proposed Sec.  58.4501-7(n) would 
provide rules for applying the section 4501(d) netting rule. Proposed 
Sec.  58.4501-7(n) would clarify that the section 4501(d) netting rule 
applies only to stock of the applicable foreign corporation or covered 
surrogate foreign corporation, as applicable, that is issued or 
provided by a section 4501(d) covered corporation to an employee in 
connection with the employee's performance of services in the 
employee's capacity as an employee of the section 4501(d) covered 
corporation.
    These proposed rules are generally based on the rules in proposed 
Sec.  58.4501-4, except that proposed Sec.  58.4501-7(n) generally 
would incorporate the provisions of proposed Sec.  58.4501-5 relating 
to the issuance or provision of stock to employees in connection with 
the performance of services.
2. Feedback Received
a. Relevant Stock
    Section 6 of Notice 2023-2 requested comments on whether, for 
purposes of the section 4501(d) netting rule, there are any 
circumstances in which stock of the applicable specified affiliate or 
expatriated entity should be taken into account in addition to, or in 
lieu of, the stock of the applicable foreign corporation or covered 
surrogate foreign corporation, respectively.
    One stakeholder recommended that, because the statute uses the term 
``issued by,'' and an applicable specified affiliate or expatriated 
entity can issue only its own stock, stock of the applicable specified 
affiliate or expatriated entity, as applicable, should be taken into 
account for purposes of the section 4501(d) netting rule. The 
stakeholder also recognized that an applicable specified affiliate 
could provide the stock of the applicable foreign corporation to its 
employees, or an expatriated entity could provide the stock of the 
covered surrogate foreign corporation to its employees.
    The Treasury Department and the IRS are of the view that, based on 
the statutory language, the relevant ``stock'' referenced in section 
4501(d)(1)(C) and (d)(2)(C) is stock of the applicable foreign 
corporation and covered surrogate foreign corporation. All antecedent 
references to ``stock'' in section 4501(d) refer to stock of the 
applicable foreign corporation and covered surrogate foreign 
corporation. More broadly, all other references to ``stock'' in section 
4501 refer to stock of the types of corporations subject to the excise 
tax that is repurchased or acquired--that is, covered corporations, 
applicable foreign corporations, and covered surrogate foreign 
corporations. Further, if an applicable specified affiliate or 
expatriated entity transfers to an employee treasury stock of an 
applicable foreign corporation or a covered surrogate foreign 
corporation, that transfer could be interpreted to constitute an 
issuance of that stock within the meaning of the statutory language.
    Thus, the plain language of the statute demonstrates that ``stock'' 
for purposes of the section 4501(d) netting rule only can be stock of 
the applicable foreign corporation or covered surrogate corporation, as 
relevant. In accordance with this plain meaning, the Treasury 
Department and the IRS are of the view that the section 4501(d) netting 
rule functions to tailor the section 4501(d) excise tax base to the net 
reduction of the equity of the corporation that is traded on an 
established securities market.
    Further, the stakeholder acknowledged that, under its 
recommendation, a partnership that is a section 4501(d) covered 
corporation would be unable to qualify for the section 4501(d) netting 
rule with respect to its equity because partnership interests are not 
``stock.'' However, this discontinuity in the application of the 
section 4501(d) netting rule would be avoided if ``stock'' is 
interpreted to refer to stock of an applicable foreign corporation or a 
covered surrogate foreign corporation.
    The stakeholder further acknowledged that allowing netting under 
the section 4501(d) netting rule for stock of a section 4501(d) covered 
corporation would permit the section 4501(d) covered corporation to 
redeem any such issued stock without application of section 4501 
(assuming the applicable specified affiliate or expatriated entity is 
not itself a covered corporation). The Treasury Department and the IRS 
are of the view that it is not appropriate to allow stock issuances by 
section 4501(d) covered corporations to reduce the section 4501(d) 
excise tax base if the repurchase or acquisition of that stock would 
not be subject to section 4501.
    Accordingly, the section 4501(d) proposed regulations would provide 
that only stock of the applicable foreign corporation or covered 
surrogate foreign corporation, as appropriate, is taken into account 
for purposes of the section 4501(d) netting rule. See proposed Sec.  
58.4501-7(n)(1).
b. Stock Issued or Provided by Specified Affiliates
    The section 4501(d) netting rule would apply only with respect to 
stock issued or provided by the section 4501(d) covered corporation to 
employees (in connection with the performance of services) of the 
section 4501(d) covered corporation. See proposed Sec.  58.4501-
7(n)(1). However, stakeholders recommended that, if the Notice funding 
rule applies to treat an applicable specified affiliate as acquiring 
the stock of the applicable foreign corporation when it funds the 
applicable foreign corporation's repurchase, the proposed regulations 
also should provide that the section 4501(d) netting rule applies at 
least to some degree with respect to stock issued or provided by the 
applicable foreign corporation to employees of the applicable foreign 
corporation.
    The Treasury Department and the IRS are of the view that such a 
modification would be inappropriate. The proposed funding rule is 
intended to prevent an applicable specified affiliate from avoiding the 
section 4501(d) excise tax through funding transactions. Therefore, the 
section 4501(d) proposed regulations should not provide for such an 
expansion of the section 4501(d) netting rule if the funding rule 
applies. Furthermore, the Treasury Department and the IRS are of the 
view that this requested modification to the section 4501(d) netting 
rule is unwarranted given the narrower scope of the proposed funding 
rule relative to the Notice funding rule.
    One stakeholder also requested clarification as to whether the 
section 4501(d) netting rule is applied on an entity-by-entity basis or 
on an aggregate basis. Under an entity-by-entity approach, the section 
4501(d) netting

[[Page 26030]]

rule would be applied separately to each section 4501(d) covered 
corporation. In contrast, under an aggregate approach, the modified 
netting rule would be applied on an aggregate basis to all section 
4501(d) covered corporations. The stakeholder expressed the view that 
the entity-by-entity approach arguably is more consistent with the 
statutory language of the section 4501(d) netting rule, but that the 
aggregate approach would better achieve the anti-dilutive policy focus 
of the stock repurchase excise tax and simplify compliance.
    The Treasury Department and the IRS agree with the stakeholder that 
the entity-by-entity approach follows the statutory language of the 
section 4501(d) netting rule. Section 4501(d)(1)(C) and (d)(2)(C) 
require the section 4501(d) netting rule to apply ``only'' with respect 
to stock issued or provided by ``such'' applicable specified affiliate 
or expatriated entity. Therefore, the Treasury Department and the IRS 
are of the view that the statute provides for an entity-by-entity 
approach. Furthermore, the Treasury Department and the IRS are of the 
view that it is not appropriate to expand the section 4501(d) netting 
rule beyond that statutory scope.
c. Employee-Related Issues
    One stakeholder recommended that, for purposes of applying the 
section 4501(d) netting rule, employee status alone should be 
sufficient, and there should be no requirement that the stock be issued 
or provided to the employee in connection with the performance of 
services.
    The Treasury Department and the IRS do not agree with the 
stakeholder. The reference in the statue to ``employees'' is most 
naturally read to refer to employees in their capacity as employees 
providing services to their employer. The requirement that the stock be 
issued in connection with the performance of services also would 
prevent potential abuse in situations in which a company could make an 
individual into a nominal employee and then allow the individual to 
acquire stock of the applicable foreign corporation or covered 
surrogate foreign corporation, as applicable.
    In addition, the issuance or provision of an instrument that is not 
in the legal form of stock generally is disregarded for purposes of the 
section 4501(d) netting rule. An exception is provided if such an 
instrument is repurchased or acquired in a section 4501(d)(1) 
repurchase or section 4501(d)(2) repurchase, as applicable, but only if 
such instrument is issued or provided by the section 4501(d) covered 
corporation to its employees. The Treasury Department and the IRS are 
of the view that it is unlikely that an applicable specified affiliate 
would issue or provide an instrument that is not in the legal form of 
stock to its employees in connection with the employee's performance of 
services in its capacity as an employee. The Treasury Department and 
the IRS request comments on whether this provision should be retained, 
deleted, or modified to reflect actual practices of applicable 
specified affiliate issuing or providing instruments that are not in 
the legal form of stock as compensation for an employee's performance 
of services.
    In section 6 of Notice 2023-2, the Treasury Department and the IRS 
also requested comments on whether, in cases in which a foreign 
partnership is the applicable specified affiliate, stock issued or 
provided to any employees of the foreign partnership should be taken 
into account, or whether the section 4501(d) netting rule should be 
applied to stock issued or provided only to employees of the domestic 
entity that is a direct or indirect partner.
    One stakeholder recommended against adopting an approach that would 
distinguish between the treatment of domestic and foreign partnerships 
that are applicable specified affiliates because that approach would be 
inconsistent with the statute, which does not make that type of 
distinction.
    The Treasury Department and the IRS agree with the stakeholder that 
the section 4501(d) proposed regulations should not distinguish between 
the treatment of domestic partnership and foreign partnerships in this 
respect for purposes of the section 4501(d) netting rule. Furthermore, 
section 4501(d)(1)(C) and (d)(2)(C) apply the section 4501(d) netting 
rule to ``employees of the specified affiliate'' and ``employees of the 
expatriated entity'' (emphasis added). The statute thus provides for 
netting with respect to stock issued or provided to employees of the 
applicable specified affiliate or the expatriated entity itself, and 
not to employees of partners or shareholders of the applicable 
specified affiliate or expatriated entity.

K. Rules Applicable Before April 13, 2024

    Proposed Sec.  58.4501-7(o) would provide rules that track section 
3.05(2) of Notice 2023-2 and that would apply to transactions occurring 
on or after December 31, 2022, and before April 12, 2024. See proposed 
Sec.  58.4501-7(r)(2). A section 4501(d) covered corporation may 
generally choose, in lieu of applying proposed Sec.  58.4501-7(o) to 
this period, to apply the section 4501(d) proposed regulations (other 
than proposed Sec. Sec.  58.4501-7(o) and (r)(1)-(2)), as finalized. 
See proposed Sec.  58.4501-7(r)(3). Thus, a section 4501(d) covered 
corporation would have this option not to apply the rules in proposed 
Sec.  58.4501-7(o) to any period. See part XVI.L of this Explanation of 
Provisions (discussion of applicability dates for proposed Sec.  
58.4501-7).

L. Applicability Dates

    Proposed Sec.  58.4501-7(r)(1) would provide that the section 
4501(d) proposed regulations (other than proposed Sec.  58.4501-7(o)) 
generally apply to transactions occurring after April 12, 2024. See 
section 7805(b)(1)(B) of the Code. Transactions would include a covered 
purchase after that date to which a covered funding that occurred on or 
after December 27, 2022, and on or before April 12, 2024 is allocated. 
See proposed Sec.  58.4501-7(e)(1).
    Proposed Sec.  58.4501-7(r)(2) would provide that proposed Sec.  
58.4501-7(o) applies to transactions occurring on or after December 31, 
2022, and on or before April 12, 2024. See section 7805(b)(1)(C). 
Transactions would include a covered purchase during this period that 
is funded by a funding that occurred on or after December 27, 2022, and 
on or before April 12, 2024. See proposed Sec.  58.4501-7(o)(2).
    Proposed Sec.  58.4501-7(r)(3) would provide that a section 4501(d) 
covered corporation may generally choose instead to apply the section 
4501(d) proposed regulations (other than proposed Sec. Sec.  58.4501-
7(o) and (r)(1)-(2)), as finalized, with respect to transactions 
occurring after December 31, 2022, subject to a consistency 
requirement. Transactions would include a covered purchase after 
December 31, 2022, to which a covered funding that occurred on or after 
December 27, 2022, is allocated. See proposed Sec.  58.4501-7(e)(1).

XVII. Procedure and Administration

    Subpart B of part 58, as proposed elsewhere in this issue of the 
Federal Register, would add rules on procedure and administration under 
sections 6001, 6011, 6060, 6061, 6065, 6071, 6091, 6107, 6109, 6151, 
6694, 6695, and 6696 of the Code to prescribe the manner and method of 
reporting and paying the stock repurchase excise tax.

Effect on Other Documents

    Notice 2023-2, 2023-3 I.R.B. 374, is obsoleted for repurchases, 
issuances, and provisions of stock of a covered

[[Page 26031]]

corporation occurring after April 12, 2024.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) 
requires that a Federal agency obtain the approval of the Office of 
Management and Budget (OMB) before collecting information from the 
public, whether such collection of information is mandatory, voluntary, 
or required to obtain or retain a benefit.
    The collections of information in these proposed regulations 
contain reporting, third-party disclosure, and recordkeeping 
requirements in Sec. Sec.  58.4501-2(j)(6) and 58.4501-7(e)(2). This 
information is necessary for the IRS to accurately determine the stock 
repurchase excise tax due and is required by law to comply with the 
provisions of section 4501 of the Code as enacted by section 10201 of 
the Inflation Reduction Act of 2022. A Federal agency may not conduct 
or sponsor, and a person is not required to respond to, a collection of 
information unless the collection of information displays a valid 
control number.
    The recordkeeping requirements mentioned within these proposed 
regulations are considered general tax records under section 6001. 
These records are required for the IRS to validate that taxpayers have 
met the regulatory requirements and are required as proof of their 
qualification for an exception to the stock repurchase excise tax. For 
PRA purposes, general tax records are already approved by OMB under 
1545-0123 for business filers and 1545-0074 for individual filers.
    The reporting and third-party disclosure requirements will be 
covered within Form 7208 and its instructions. The IRS is seeking OMB 
approval and requesting a new OMB control number for Form 7208 in 
accordance with the procedures outlined in 5 CFR 1320.10.

III. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that these proposed regulations will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that these proposed regulations 
apply only to publicly traded corporations, which tends to consist of 
larger businesses. Specifically, based on data available to the IRS, 
for tax year 2021, 4,366 corporations reported publicly traded common 
stock. Of those corporations, 2,407 (over 55 percent) reported gross 
receipts over $100 million, and 3,272 (approximately 75 percent) 
reported gross receipts over $10 million. Meanwhile, for tax year 2021, 
the IRS received 7,464,790 Corporation Income Tax Returns and 4,710,457 
U.S. Returns of Partnership Income. IRS Publication 6292, Fiscal Year 
Projections for the United States: 2022-2029, Fall 2022, Table 2. Of 
these corporation and partnership returns for tax year 2021, 11,685,207 
reported total assets below $10 million. Thus, the number of 
corporations affected by these proposed regulations that reported total 
assets below $10 million is less than one hundredth of one percent of 
the total number of businesses that reported total assets below $10 
million for tax year 2021. Therefore, these proposed regulations will 
not create additional obligations for, or impose an economic impact on, 
a substantial number of small entities. Accordingly, the Secretary 
certifies that the proposed regulations will not have a significant 
economic impact on a substantial number of small entities and a 
regulatory flexibility analysis under the Regulatory Flexibility Act is 
not required.

IV. Section 7805(f)

    Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking has been submitted to the Chief Counsel for the Office of 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

V. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a State, 
local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation.
    These proposed regulations do not include any Federal mandate that 
may result in expenditures by State, local, or Tribal governments, or 
by the private sector in excess of that threshold.

VI. Executive Order 13132: Federalism

    Executive Order 13132 (Federalism) prohibits an agency from 
publishing any rule that has federalism implications if the rule either 
imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. These proposed regulations do not 
have federalism implications and do not impose substantial direct 
compliance costs on State and local governments or preempt State law 
within the meaning of the Executive order.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed regulations, including on forms related to the proposed 
regulations. In addition, the Treasury Department and the IRS request 
comments on the specific requests made in the Explanation of 
Provisions. All commenters are strongly encouraged to submit comments 
electronically. The Treasury Department and the IRS will publish for 
public availability any comment submitted electronically or on paper to 
its public docket on https://www.regulations.gov.
    A public hearing will be scheduled if requested in writing by any 
person who timely submits electronic or written comments. Requests for 
a public hearing are encouraged to be made electronically. If a public 
hearing is scheduled, a notice of the date and time for the public 
hearing will be published in the Federal Register.

Statement of Availability of IRS Documents

    Any IRS Revenue Procedure, Revenue Ruling, Notice, or other 
guidance cited in this document is published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and is available from the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

Drafting Information

    The principal authors of these proposed regulations are Samuel G. 
Trammell of the Office of Associate Chief Counsel (Corporate), Naomi 
Lehr of the Office of Associate Chief Counsel

[[Page 26032]]

(Employee Benefits, Exempt Organizations, and Employment Taxes), 
Jonathan A. LaPlante of the Office of Associate Chief Counsel 
(Financial Institutions and Products), and Brittany N. Dobi of the 
Office of Associate Chief Counsel (International). However, other 
personnel from the Treasury Department and the IRS participated in 
their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 58

    Excise taxes, Stock repurchase excise tax, Reporting and 
recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and the IRS propose to amend 
26 CFR chapter 1 as follows:

PART 1--INCOME TAX

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 2. Section 1.1275-6 is amended by adding paragraph (f)(12)(iii) to 
read as follows:


Sec.  1.1275-6  Integration of qualifying debt instruments.

* * * * *
    (f) * * *
    (12) * * *
    (iii) Excise tax on repurchase of corporate stock. If a taxpayer 
enters into an integrated transaction (for example, a convertible debt 
instrument integrated with one or more Sec.  1.1275-6 hedges consisting 
of an option on the taxpayer's own stock), then, solely for purposes of 
section 4501 of the Code and the stock repurchase excise tax 
regulations (as defined in Sec.  58.4501-1(b)(30) of this chapter), the 
taxpayer must apply the rules that would apply on a separate basis to 
the components of the integrated transaction rather than the rules that 
otherwise would apply to the integrated transaction under this section. 
Notwithstanding paragraph (j) of this section, this paragraph 
(f)(12)(iii) applies to an integrated transaction outstanding after 
December 31, 2022 (regardless of when such integrated transaction was 
entered into by the taxpayer).
* * * * *
0
Par. 3. Add part 58 to read as follows:

PART 58--STOCK REPURCHASE EXCISE TAX

Subpart A--Excise Tax on Stock Repurchases
Sec.
58.4501-0 Table of contents.
58.4501-1 Excise tax on stock repurchases.
58.4501-2 General rules regarding excise tax on stock repurchases.
58.4501-3 Statutory exceptions.
58.4501-4 Application of netting rule.
58.4501-5
58.4501-6 Applicability dates.
58.4501-7 Special rules for acquisitions or repurchases of stock of 
certain foreign corporations.

Subpart B [Reserved]

    Authority:  26 U.S.C. 4501(f) and 7805.

Subpart A--Excise Tax on Stock Repurchases


Sec.  58.4501-0  Table of contents.

    This section lists the major captions that appear in Sec. Sec.  
58.4501-1 through 58.4501-7.

Sec.  58.4501-1 Excise tax on stock repurchases.

    (a) Excise tax imposed.
    (b) Definitions.
    (1) Acquisitive reorganization.
    (2) Applicable percentage.
    (3) Cessation date.
    (4) Clawback.
    (5) Controlled corporation.
    (6) Covered corporation.
    (7) De minimis exception.
    (8) Distributing corporation.
    (9) Economically similar transaction.
    (10) Employee.
    (11) Employer-sponsored retirement plan.
    (i) In general.
    (ii) ESOPs included.
    (12) E reorganization.
    (13) Established securities market.
    (14) F reorganization.
    (15) Forfeiture.
    (16) Initiation date.
    (17) IRS.
    (18) Netting rule.
    (19) Qualifying property repurchase.
    (20) REIT.
    (21) Reorganization exception.
    (22) Repurchase.
    (23) RIC.
    (24) Section 317(b) redemption.
    (25) Specified affiliate.
    (26) Split-off.
    (27) Statutory exception.
    (28) Statutory references.
    (i) Chapter 1.
    (ii) Code.
    (29) Stock.
    (i) In general.
    (ii) Additional tier 1 capital.
    (30) Stock repurchase excise tax.
    (31) Stock repurchase excise tax base.
    (32) Stock repurchase excise tax regulations.
    (33) Taxable year.
    (34) Treasury stock.
    (c) No application for any purposes of chapter 1.
    (d) Status as a domestic or foreign corporation.

Sec.  58.4501-2 General rules regarding excise tax on stock 
repurchases.

    (a) Scope.
    (b) Computation of excise tax liability.
    (1) Imposition of tax.
    (2) De minimis exception.
    (i) In general.
    (ii) Determination.
    (c) Stock repurchase excise tax base.
    (1) In general.
    (2) Taxable year determination.
    (3) Repurchases before January 1, 2023.
    (d) Duration of covered corporation status.
    (1) Initiation date.
    (2) Cessation date.
    (i) In general.
    (ii) Repurchases after cessation date.
    (3) Inbound and outbound F reorganizations.
    (i) Inbound F reorganization.
    (ii) Outbound F reorganization.
    (e) Repurchase.
    (1) Overview.
    (2) Scope of repurchase.
    (3) Certain section 317(b) redemptions that are not repurchases.
    (i) Section 304(a)(1) transactions.
    (ii) Payment by a covered corporation of cash in lieu of 
fractional shares.
    (4) Economically similar transactions.
    (i) Acquisitive reorganizations.
    (ii) E reorganizations.
    (iii) F reorganizations.
    (iv) Split-offs.
    (v) Complete liquidations to which both sections 331 and 332 
apply.
    (vi) Certain forfeitures and clawbacks of stock.
    (5) Transactions that are not repurchases.
    (i) Complete liquidations generally.
    (ii) Distributions during taxable year of complete liquidation 
or dissolution.
    (iii) Divisive transactions under section 355 other than split-
offs.
    (iv) Non-redemptive distributions subject to section 301(c)(2) 
or (3).
    (v) Net cash settlement of an option contract or other 
derivative financial instrument.
    (f) Acquisitions by specified affiliates.
    (1) Acquisitions of stock of a covered corporation by a 
specified affiliate treated as a repurchase.
    (2) Determination of specified affiliate status.
    (i) Timing of determination.
    (ii) Indirect ownership.
    (3) Constructive specified affiliate acquisition.
    (i) General rule.
    (ii) Stock previously treated as repurchased not subject to 
deemed repurchase more than once.
    (iii) Specific identification.
    (g) Date of repurchase.
    (1) General rule.
    (2) Regular-way sale.
    (3) Repurchase pursuant to certain economically similar 
transactions.
    (4) Constructive specified affiliate acquisition.
    (h) Fair market value of repurchased stock.
    (1) In general.
    (2) Stock traded on an established securities market.

[[Page 26033]]

    (i) In general.
    (ii) Acceptable methods.
    (iii) Date of repurchase not a trading day.
    (iv) Consistency requirement.
    (v) Stock traded on multiple exchanges.
    (3) Stock not traded on an established securities market.
    (i) General rule.
    (ii) Consistency requirement.
    (4) Market price of stock denominated in non-U.S. currency.

Sec.  58.4501-3 Statutory exceptions.

    (a) Scope.
    (b) Reduction of covered corporation's stock repurchase excise 
tax base.
    (c) Reorganization exception.
    (d) Stock contributions to an employer-sponsored retirement 
plan.
    (1) Reductions in computing covered corporation's stock 
repurchase excise tax base.
    (i) General rule.
    (ii) Special rule for leveraged ESOPs.
    (2) Classes of stock contributed to an employer-sponsored 
retirement plan.
    (3) Same class of stock repurchased and contributed.
    (4) Different class of stock repurchased and contributed.
    (i) In general.
    (ii) Maximum reduction permitted.
    (5) Timing of contributions.
    (i) In general.
    (ii) Treatment of contributions after close of taxable year.
    (iii) No duplicate reductions.
    (6) Contributions before January 1, 2023.
    (e) Repurchases or acquisitions by a dealer in securities in the 
ordinary course of business.
    (1) In general.
    (2) Applicability.
    (f) Repurchases by a RIC or a REIT.
    (g) Repurchase treated as a dividend.
    (1) Reduction of covered corporation's stock repurchase excise 
tax base.
    (2) Rebuttable presumption of no dividend equivalence.
    (i) Presumption.
    (ii) Condition to rebut presumption.
    (iii) Sufficient evidence requirement.
    (3) Content of shareholder certification.
    (4) Agreement to shareholder certification.
    (5) Documentation of sufficient evidence.

Sec.  58.4501-4 Application of netting rule.

    (a) Scope.
    (b) Issuances and provisions of stock that are a reduction in 
computing stock repurchase excise tax base.
    (1) General rule.
    (2) Stock issued or provided outside period of covered 
corporation status.
    (3) Issuances or provisions before January 1, 2023.
    (4) F reorganizations.
    (c) Stock issued or provided in connection with the performance 
of services.
    (1) In general.
    (2) Sale of shares to cover exercise price and withholding.
    (i) Payment or advance by third party equal to exercise price.
    (ii) Advance by third party equal to withholding obligation.
    (d) Date of issuance.
    (1) In general.
    (2) Stock issued or provided in connection with the performance 
of services.
    (e) Fair market value of issued or provided stock.
    (1) In general.
    (2) Stock traded on an established securities market.
    (i) In general.
    (ii) Acceptable methods.
    (iii) Date of issuance not a trading day.
    (iv) Consistency requirement.
    (v) Stock traded on multiple exchanges.
    (3) Stock not traded on an established securities market.
    (i) General rule.
    (ii) Consistency requirement.
    (4) Market price of stock denominated in non-U.S. currency.
    (5) Stock issued or provided in connection with the performance 
of services.
    (f) Issuances that are disregarded for purposes of applying the 
netting rule.
    (1) Distributions by a covered corporation of its own stock.
    (2) Issuances to a specified affiliate.
    (i) In general.
    (ii) Subsequent transfer by a specified affiliate.
    (iii) Specific identification.
    (iv) Subsequent transfers in connection with the performance of 
services for a specified affiliate.
    (3) No double benefit for issuances that are part of a 
transaction to which the reorganization exception applies.
    (4) Deemed issuances under section 304(a)(1).
    (5) Deemed issuance of a fractional share.
    (6) Issuance by a covered corporation that is a dealer in 
securities.
    (7) Issuance by the target corporation in a reverse triangular 
merger.
    (8) Issuance as part of a section 1036(a) exchange.
    (9) Issuance as part of a distribution under section 355.
    (10) Stock contributions to an employer-sponsored retirement 
plan.
    (11) Net exercises and share withholding.
    (i) In general.
    (ii) Net share settlement not in connection with performance of 
services.
    (12) Settlement other than in stock.
    (13) Instrument not in the legal form of stock.
    (i) Generally disregarded.
    (ii) Certain instruments treated as issued.

Sec.  58.4501-5 Examples.

    (a) Scope.
    (b) In general.
    (1) Example 1: Redemption of preferred stock.
    (2) Example 2: Valuation of repurchase.
    (3) Example 3: Acquisition partially funded by the target 
corporation.
    (4) Example 4: Leveraged buyout.
    (5) Example 5: Pro rata stock split.
    (6) Example 6: Acquisition of a target corporation in an 
acquisitive reorganization.
    (7) Example 7: Cash paid in lieu of fractional shares.
    (8) Example 8: Two-step asset acquisition.
    (9) Example 9: E Reorganization.
    (10) Example 10: F Reorganization.
    (11) Example 11: Section 355 split-off.
    (12) Example 12: Section 355 split-off as part of a D 
reorganization.
    (13) Example 13: Spin-off.
    (14) Example 14: Section 355 spin-off as part of a D 
reorganization.
    (15) Example 15: Repurchase pursuant to an accelerated share 
repurchase agreement.
    (16) Example 16: Distribution in complete liquidation of a 
covered corporation.
    (17) Example 17: Complete liquidation of a covered corporation 
to which sections 331 and 332(a) both apply.
    (18) Example 18: Acquisition by disregarded entity.
    (19) Example 19: Reverse triangular merger.
    (20) Example 20: Multiple repurchases and contributions of same 
class of stock.
    (21) Example 21: Multiple repurchases and contributions of 
different classes of stock.
    (22) Example 22: Treatment of contributions after the taxable 
year.
    (23) Example 23: Becoming a covered corporation.
    (24) Example 24: Actual redemption in partial liquidation.
    (25) Example 25: Constructive redemption in partial liquidation.
    (26) Example 26: Physical settlement of call option contract.
    (27) Example 27: Net cash settlement of call option contract.
    (28) Example 28: Physical settlement of put option contract.
    (29) Example 29: Net cash settlement of put option contract.
    (30) Example 30: Indirect ownership.
    (31) Example 31: Constructive specified affiliate acquisition.
    (32) Example 32: Restricted stock provided to a service 
provider.
    (33) Example 33: Restricted stock provided to a service provider 
with section 83(b) election.
    (34) Example 34: Vested stock provided to a service provider 
with share withholding.
    (35) Example 35: Stock option net exercise.
    (36) Example 36: Net share settlement not in connection with the 
performance of services.
    (37) Example 37: Broker-assisted net exercise.
    (38) Example 38: Stock provided by a specified affiliate to an 
employee.
    (39) Example 39: Stock provided by a specified affiliate to a 
nonemployee.
    (40) Example 40: Corporation treated as a domestic corporation 
under section 7874(b).

Sec.  58.4501-6 Applicability date.

    (a) In general.
    (b) Exceptions.
    (1) Applicability date for certain rules.
    (2) Special rules for acquisitions or repurchases of stock of 
certain foreign corporations.

Sec.  58.4501-7 Special rules for acquisitions or repurchases of 
stock of certain foreign corporations.

    (a) Scope.
    (b) Definitions.
    (1) Application of definitions in Sec.  58.4501-1(b).
    (2) Section 4501(d) definitions.
    (i) AFC repurchase.
    (ii) Allocable amount of a covered purchase.

[[Page 26034]]

    (iii) Applicable foreign corporation.
    (iv) Applicable specified affiliate.
    (v) CSFC repurchase.
    (vi) Covered funding.
    (vii) Covered purchase.
    (viii) Covered surrogate foreign corporation.
    (ix) Direct partner.
    (x) Domestic entity.
    (xi) Downstream relevant entity.
    (xii) Expatriated entity.
    (xiii) Indirect partner.
    (xiv) Relevant entity.
    (xv) Section 4501(d) covered corporation.
    (xvi) Section 4501(d) de minimis exception.
    (xvii) Section 4501(d) economically similar transaction.
    (xviii) Section 4501(d) excise tax.
    (xix) Section 4501(d) excise tax base.
    (xx) Section 4501(d) netting rule.
    (xxi) Section 4501(d) reorganization exception.
    (xxii) Section 4501(d)(1) repurchase.
    (xxiii) Section 4501(d)(2) repurchase.
    (xxiv) Section 4501(d) statutory exception.
    (c) Computation of section 4501(d) excise tax liability for a 
section 4501(d) covered corporation.
    (1) Imposition of tax.
    (2) Section 4501(d) de minimis exception.
    (i) In general.
    (ii) Determination.
    (3) Section 4501(d) excise tax base.
    (i) In general.
    (ii) Taxable year determination.
    (4) Section 4501(d)(1) repurchases or section 4501(d)(2) 
repurchases before January 1, 2023.
    (d) Section 4501(d)(2) coordination rules.
    (1) Coordination rule for section 4501(d)(1) repurchases and 
section 4501(d)(2) repurchases.
    (2) Coordination rule for multiple section 4501(d) covered 
corporations.
    (i) In general.
    (ii) Full payment and reporting by a section 4501(d) covered 
corporation.
    (e) Acquisitions and AFC repurchases of stock funded by 
applicable specified affiliates.
    (1) Principal purpose rule.
    (2) Rebuttable presumption.
    (3) Date stock of applicable foreign corporation is treated as 
acquired.
    (4) Amount of stock of applicable foreign corporation treated as 
acquired.
    (5) Rules for determining the allocable amount of a covered 
purchase.
    (6) Priority rule for covered fundings.
    (7) Rules for allocating covered fundings to allocable amounts 
of covered purchases.
    (i) In general.
    (ii) Multiple covered purchases.
    (iii) Single covered funding.
    (iv) Multiple covered fundings.
    (f) Status as applicable foreign corporation or covered 
surrogate foreign corporation.
    (1) Initiation date.
    (2) Cessation date.
    (i) In general.
    (ii) Repurchases after cessation date.
    (3) Inbound and outbound F reorganizations.
    (i) Inbound F reorganization.
    (ii) Outbound F reorganization.
    (g) Status as applicable specified affiliate, a relevant entity 
of an applicable foreign corporation, or a specified affiliate of a 
covered surrogate foreign corporation.
    (1) Timing of determination.
    (2) Determination of indirect ownership.
    (3) Consequences of becoming a specified affiliate.
    (i) General rule.
    (ii) Stock previously treated as acquired not subject to deemed 
acquisition more than once.
    (iii) Specific identification.
    (h) Foreign partnerships that are applicable specified 
affiliates.
    (1) In general.
    (2) Direct or indirect partner.
    (3) Control of a foreign corporation.
    (4) Indirect interests held through applicable foreign 
corporations.
    (5) De minimis domestic entity (direct or indirect) partner.
    (i) [Reserved]
    (j) AFC repurchase or CSFC repurchase.
    (1) Overview.
    (2) Scope of AFC repurchases and CSFC repurchases.
    (3) Certain section 317(b) redemptions not AFC repurchases or 
CSFC repurchases.
    (i) Section 304(a)(1) transactions.
    (ii) Payment by an applicable foreign corporation or a covered 
surrogate foreign corporation of cash in lieu of fractional shares.
    (4) Section 4501(d) economically similar transactions.
    (i) Acquisitive reorganizations.
    (ii) E Reorganizations.
    (iii) F Reorganizations.
    (iv) Split-offs.
    (v) Complete liquidations to which both sections 331 and 332 
apply.
    (vi) Certain forfeitures and clawbacks of stock.
    (5) Transactions that are not AFC repurchases or CSFC 
repurchases.
    (i) Complete liquidations generally.
    (ii) Distributions during taxable year of complete liquidation 
or dissolution.
    (iii) Divisive transactions under section 355 other than split-
offs.
    (iv) Non-redemptive distributions subject to section 301(c)(2) 
or (3).
    (v) Net cash settlement of an option contract.
    (k) Date of section 4501(d)(1) repurchase or section 4501(d)(2) 
repurchase.
    (1) General rule.
    (2) Regular-way sale.
    (3) AFC repurchase or CSFC repurchase pursuant to certain 
section 4501(d) economically similar transactions.
    (4) Section 4501(d)(1) repurchase pursuant to a covered funding.
    (l) Fair market value of stock of an applicable foreign 
corporation or a covered surrogate foreign corporation that is 
repurchased or acquired.
    (1) In general.
    (2) Stock traded on an established securities market.
    (i) In general.
    (ii) Acceptable methods.
    (iii) Date of section 4501(d)(1) repurchase or section 
4501(d)(2) repurchase not a trading day.
    (iv) Consistency requirement.
    (v) Stock traded on multiple exchanges.
    (3) Stock not traded on an established securities market.
    (i) General rule.
    (ii) Consistency requirement.
    (4) Market price of stock denominated in non-U.S. currency.
    (m) Section 4501(d) statutory exceptions.
    (1) In general.
    (i) Overview.
    (ii) Reduction of section 4501(d) excise tax base.
    (2) Section 4501(d) reorganization exception.
    (3) Stock contributions to an employer-sponsored retirement 
plan.
    (i) Reductions to section 4501(d) excise tax base.
    (ii) Classes of stock contributed to an employer-sponsored 
retirement plan.
    (iii) Determining amount of reduction to section 4501(d) excise 
tax base.
    (iv) Timing of contributions.
    (v) Contributions before January 1, 2023.
    (4) Repurchases or acquisitions by a dealer in securities in the 
ordinary course of business.
    (i) In general.
    (ii) Applicability.
    (5) Repurchases by a RIC or REIT.
    (6) AFC repurchase or CSFC repurchase treated as a dividend.
    (i) In general.
    (ii) Rebuttable presumption of no dividend equivalence.
    (n) Application of section 4501(d) netting rule.
    (1) In general.
    (2) Stock issued or provided outside period of applicable 
foreign corporation or covered surrogate foreign corporation status.
    (3) Issuances or provisions before January 1, 2023.
    (4) F reorganizations.
    (5) Stock Issued or provided in connection with the performance 
of services.
    (i) In general.
    (ii) Sale of shares to cover exercise price or withholding.
    (6) Date of issuance or provision for section 4501(d) netting 
rule.
    (i) In general.
    (ii) Stock options and stock appreciation rights.
    (iii) Stock on which a section 83(b) election is made.
    (7) Fair market value of stock of an applicable foreign 
corporation or a covered surrogate foreign corporation that is 
issued or provided to employees.
    (i) In general.
    (ii) Market price of stock denominated in non-U.S. currency.
    (8) Issuances that are disregarded for purposes of applying the 
section 4501(d) netting rule.
    (i) In general.
    (ii) Stock contributions to an employer-sponsored retirement 
plan.
    (iii) Net exercises and share withholding.
    (iv) Settlement other than in stock.
    (v) Instrument not in the legal form of stock.
    (o) Rules applicable before April 13, 2024.
    (1) Section 4501(d)(1) repurchase.

[[Page 26035]]

    (2) Funding rule.
    (3) Per se rule.
    (4) Section 4501(d)(2) repurchase.
    (5) Definitions solely for purposes of paragraph (o).
    (i) Application of definitions in Sec.  58.4501-1(b) and Sec.  
58.4501-7(b)(2).
    (ii) Definition of applicable specified affiliate.
    (p) Section 4501(d)(1) examples.
    (1) Example 1: The section 4501(d) netting rule with respect to 
a single applicable specified affiliate.
    (2) Example 2: The section 4501(d) netting rule with respect to 
multiple applicable specified affiliates.
    (3) Example 3: A single covered funding and covered purchase.
    (4) Example 4: Multiple covered fundings and a single covered 
purchase.
    (5) Example 5: The rebuttable presumption.
    (6) Example 6: Indirect funding subject to rebuttable 
presumption.
    (7) Example 7: Indirect funding.
    (8) Example 8: A foreign partnership that is an applicable 
specified affiliate.
    (9) Example 9: A foreign partnership that is not an applicable 
specified affiliate.
    (10) Example 10: A foreign partnership that is directly owned by 
foreign corporations and is an applicable specified affiliate.
    (q) Section 4501(d)(2) examples.
    (1) Example 1: The section 4501(d) netting rule with respect to 
an expatriated entity.
    (2) Example 2: Section 4501(d)(2) repurchase from the covered 
surrogate foreign corporation or another specified affiliate of the 
covered surrogate foreign corporation.
    (3) Example 3: Liability with respect to multiple expatriated 
entities.
    (r) Applicability dates.
    (1) In general.
    (2) Rules applicable before April 13, 2024.
    (3) Early application.

Sec.  58.4501-1  Excise tax on stock repurchases.

    (a) Excise tax imposed. Section 4501(a) of the Code imposes on each 
covered corporation an excise tax (stock repurchase excise tax) equal 
to the applicable percentage of the fair market value of any stock of 
the corporation that is repurchased by the corporation during the 
taxable year. This section and Sec.  58.4501-2 provide generally 
applicable definitions and operating rules regarding the application of 
the stock repurchase excise tax and the computation of the stock 
repurchase excise tax liability of a covered corporation. Section 
58.4501-3 provides rules regarding the application of the exceptions in 
section 4501(e) (other than the de minimis exception described in 
section 4501(e)(3), which is addressed in Sec.  58.4501-2(b)(2)), and 
Sec.  58.4501-4 provides rules regarding the application of section 
4501(c)(3). Section 58.4501-5 provides examples that illustrate the 
application of section 4501 and the stock repurchase excise tax 
regulations. Section 58.4501-6 provides applicability dates for the 
stock repurchase excise tax regulations (other than Sec.  58.4501-7). 
For special rules and examples regarding the application of section 
4501(d) to acquisitions or repurchases of stock of certain foreign 
corporations, see Sec.  58.4501-7.
    (b) Definitions. The following definitions apply for purposes of 
this section and 58.4501-2 through 58.4501-6, and, to the extent 
provided in Sec.  58.4501-7, for purposes of Sec.  58.4501-7:
    (1) Acquisitive reorganization. The term acquisitive reorganization 
means a transaction that qualifies as a reorganization under--
    (i) Section 368(a)(1)(A) of the Code (A reorganization) (including 
by reason of section 368(a)(2)(D) or section 368(a)(2)(E) (reverse 
triangular merger));
    (ii) Section 368(a)(1)(C);
    (iii) Section 368(a)(1)(D) (D reorganization) (if the D 
reorganization satisfies the requirements of section 354(b)(1) of the 
Code); or
    (iv) Section 368(a)(1)(G) (if the reorganization satisfies the 
requirements of section 354(b)(1)).
    (2) Applicable percentage. The term applicable percentage means the 
percentage provided in section 4501(a).
    (3) Cessation date. The term cessation date means the date on which 
all stock of a covered corporation ceases to be traded on an 
established securities market.
    (4) Clawback. The term clawback means a surrender of stock pursuant 
to a contractual provision that requires an employee to return vested 
stock.
    (5) Controlled corporation. The term controlled corporation has the 
meaning given the term in section 355(a)(1)(A) of the Code.
    (6) Covered corporation. The term covered corporation means any 
domestic corporation (including within the meaning of paragraph (f) of 
this section) the stock of which is traded on an established securities 
market.
    (7) De minimis exception. The term de minimis exception has the 
meaning given the term in Sec.  58.4501-2(b)(2)(i).
    (8) Distributing corporation. The term distributing corporation has 
the meaning given the term in section 355(a)(1)(A).
    (9) Economically similar transaction. The term economically similar 
transaction means a transaction described in Sec.  58.4501-2(e)(4).
    (10) Employee. The term employee means an employee as defined in 
section 3401(c) of the Code and Sec.  31.3401(c)-1 of this chapter, or 
a former employee, of the covered corporation or specified affiliate 
(as appropriate).
    (11) Employer-sponsored retirement plan--(i) In general. The term 
employer-sponsored retirement plan means a retirement plan that is 
qualified under section 401(a) of the Code and maintained by a covered 
corporation or a specified affiliate of the covered corporation.
    (ii) ESOPs included. The term employer-sponsored retirement plan 
includes an employee stock ownership plan described in section 
4975(e)(7) of the Code (ESOP) that is maintained by a covered 
corporation or a specified affiliate of the covered corporation.
    (12) E reorganization. The term E reorganization means a 
transaction that qualifies as a reorganization under section 
368(a)(1)(E).
    (13) Established securities market. The term established securities 
market has the meaning given the term in Sec.  1.7704-1(b) of this 
chapter.
    (14) F reorganization. The term F reorganization means a 
transaction that qualifies as a reorganization under section 
368(a)(1)(F).
    (15) Forfeiture. The term forfeiture means a surrender of stock to 
the issuing corporation for no consideration.
    (16) Initiation date. The term initiation date means the date on 
which stock of a corporation begins to be traded on an established 
securities market.
    (17) IRS. The term IRS means the Internal Revenue Service.
    (18) Netting rule. The term netting rule has the meaning given the 
term in Sec.  58.4501-4(a).
    (19) Qualifying property repurchase. The term qualifying property 
repurchase has the meaning given the term in Sec.  58.4501-3(c).
    (20) REIT. The term REIT has the meaning given the term real estate 
investment trust in section 856(a) of the Code.
    (21) Reorganization exception. The term reorganization exception 
has the meaning given the term in Sec.  58.4501-3(c).
    (22) Repurchase. The term repurchase has the meaning given the term 
in Sec.  58.4501-2(e)(2).
    (23) RIC. The term RIC has the meaning given the term regulated 
investment company in section 851 of the Code.
    (24) Section 317(b) redemption. The term section 317(b) redemption 
means a redemption within the meaning of section 317(b) of the Code 
with regard to the stock of a covered corporation.
    (25) Specified affiliate. The term specified affiliate means, with 
regard to any corporation--

[[Page 26036]]

    (i) Any corporation more than 50 percent of the stock of which is 
owned (by vote or by value), directly or indirectly, by the 
corporation; and
    (ii) Any partnership more than 50 percent of the capital interests 
or profits interests of which is held, directly or indirectly, by the 
corporation.
    (26) Split-off. The term split-off means a distribution qualifying 
under section 355 (or so much of section 356 of the Code as relates to 
section 355) by a distributing corporation pursuant to which the 
shareholders of the distributing corporation exchange stock of the 
distributing corporation for stock of the controlled corporation and, 
if applicable, other property (including securities of the controlled 
corporation) or money.
    (27) Statutory exception. The term statutory exception has the 
meaning given the term in Sec.  58.4501-3(a).
    (28) Statutory references. For purposes of this part--
    (i) The term chapter 1 means chapter 1 of the Code; and
    (ii) The term Code means the Internal Revenue Code.
    (29) Stock--(i) In general. The term stock means any instrument 
issued by a corporation that is stock (including treasury stock) or 
that is treated as stock for Federal tax purposes at the time of 
issuance, regardless of whether the instrument is traded on an 
established securities market.
    (ii) Additional tier 1 capital. The term stock does not include 
preferred stock that--
    (A) Qualifies as additional tier 1 capital (within the meaning of 
12 CFR 3.20(c), 217.20(c), or 324.20(c)); and
    (B) Does not qualify as common equity tier 1 capital (within the 
meaning of 12 CFR 3.20(b), 217.20(b), or 324.20(b)).
    (30) Stock repurchase excise tax. The term stock repurchase excise 
tax has the meaning given the term in paragraph (a) of this section.
    (31) Stock repurchase excise tax base. The term stock repurchase 
excise tax base has the meaning given the term in Sec.  58.4501-
2(c)(1).
    (32) Stock repurchase excise tax regulations. The term stock 
repurchase excise tax regulations means the following provisions of 26 
CFR chapter I:
    (i) Subpart A of this part, which consists of this section and 
Sec. Sec.  58.4501-2 through 58.4501-7.
    (ii) Subpart B of this part.
    (iii) Section 1.1275-6(f)(12)(iii) of this chapter, which provides 
that the integration of a qualifying debt instrument with a hedge 
pursuant to Sec.  1.1275-6 of this chapter is not taken into account in 
determining whether and when stock is repurchased or issued.
    (33) Taxable year. The term taxable year has the meaning given the 
term in section 7701(a)(23) of the Code.
    (34) Treasury stock. The term treasury stock means treasury stock 
within the meaning of section 317(b).
    (c) No application for any purposes of chapter 1. The rules of this 
part have no application for purposes of chapter 1.
    (d) Status as a domestic or foreign corporation. If a corporation 
is, or is treated as, a domestic corporation for purposes of the Code 
or for purposes that include chapter 37 of the Code, then the 
corporation is a domestic corporation for purposes of the stock 
repurchase excise tax regulations. A corporation that is not a domestic 
corporation for purposes of the stock repurchase excise tax regulations 
is a foreign corporation for such purposes.


Sec.  58.4501-2  General rules regarding excise tax on stock 
repurchases.

    (a) Scope. This section provides general rules regarding the 
application of the stock repurchase excise tax and the computation of 
the stock repurchase excise tax liability of a covered corporation. 
Paragraphs (b) and (c) of this section provide rules for computing a 
covered corporation's stock repurchase excise tax liability. Paragraph 
(d) of this section provides rules for determining whether a 
corporation is a covered corporation. Paragraph (e) of this section 
provides rules for determining whether a transaction is a repurchase. 
Paragraph (f) of this section provides rules for acquisitions of stock 
of a covered corporation by a specified affiliate of the covered 
corporation. Paragraph (g) of this section provides rules for 
determining when stock is repurchased. Paragraph (h) of this section 
provides rules for determining the fair market value of repurchased 
stock.
    (b) Computation of excise tax liability--(1) Imposition of tax. 
Except as provided in paragraph (b)(2) of this section (regarding the 
de minimis exception), the amount of stock repurchase excise tax 
imposed on a covered corporation for a taxable year equals the product 
obtained by multiplying--
    (i) The applicable percentage; by
    (ii) The stock repurchase excise tax base of the covered 
corporation for the taxable year determined in accordance with 
paragraph (c)(1) of this section.
    (2) De minimis exception--(i) In general. A covered corporation is 
not subject to the stock repurchase excise tax with regard to a taxable 
year if, during that taxable year, the aggregate fair market value of 
the stock described in paragraphs (b)(2)(i)(A) and (B) of this section 
does not exceed $1,000,000 (de minimis exception):
    (A) The stock of the covered corporation that is repurchased by the 
covered corporation.
    (B) The stock of the covered corporation that is acquired by a 
specified affiliate of the covered corporation.
    (ii) Determination. A determination of whether the de minimis 
exception applies with regard to a taxable year is made before 
applying--
    (A) Any statutory exception under Sec.  58.4501-3; and
    (B) Any adjustments pursuant to the netting rule under Sec.  
58.4501-4.
    (c) Stock repurchase excise tax base--(1) In general. With regard 
to a covered corporation, the term stock repurchase excise tax base 
means the dollar amount (not less than zero) that is obtained by--
    (i) Determining (in accordance with paragraphs (e) through (h) of 
this section) the aggregate fair market value of--
    (A) The stock of the covered corporation that is repurchased by the 
covered corporation during the covered corporation's taxable year; and
    (B) The stock of the covered corporation that is acquired by a 
specified affiliate of the covered corporation during the covered 
corporation's taxable year;
    (ii) Reducing the amount determined under paragraph (c)(1)(i) of 
this section by the fair market value of the stock of the covered 
corporation repurchased by the covered corporation or acquired by a 
specified affiliate of the covered corporation during the covered 
corporation's taxable year to the extent any statutory exceptions apply 
in accordance with Sec.  58.4501-3; and then
    (iii) Reducing the amount determined under paragraphs (c)(1)(i) and 
(ii) of this section by the aggregate fair market value of stock of the 
covered corporation issued by the covered corporation, or provided by a 
specified affiliate of the covered corporation, during the covered 
corporation's taxable year under the netting rule in accordance with 
Sec.  58.4501-4.
    (2) Taxable year determination--(i) In general. The determinations 
under paragraph (c)(1)(i) of this section are made separately for each 
covered corporation and for each taxable year of the covered 
corporation.
    (ii) No carrybacks or carryforwards. Reductions under paragraphs 
(c)(1)(ii) and (iii) of this section in excess of the amount determined 
under paragraph (c)(1)(i) of this section with regard to a

[[Page 26037]]

covered corporation are not carried forward or backward to preceding or 
succeeding taxable years of the covered corporation.
    (3) Repurchases before January 1, 2023. Stock of a covered 
corporation repurchased by the covered corporation or acquired by a 
specified affiliate of the covered corporation before January 1, 2023 
(as determined under paragraphs (e) through (g) of this section) is 
neither--
    (i) Included in the stock repurchase excise tax base of the covered 
corporation; nor
    (ii) Taken into account in determining the applicability of the de 
minimis exception.
    (d) Duration of covered corporation status--(1) Initiation date. A 
corporation becomes a covered corporation at the beginning of the 
corporation's initiation date.
    (2) Cessation date--(i) In general. Except as provided in paragraph 
(d)(2)(ii) of this section, a corporation ceases to be a covered 
corporation at the end of the corporation's cessation date.
    (ii) Repurchases after cessation date. If a corporation ceases to 
be a covered corporation pursuant to a plan that includes a repurchase, 
and if the cessation date precedes the date on which any repurchase 
undertaken pursuant to the plan occurs (for example, if stock of a 
covered corporation ceases trading prior to completion of an 
acquisitive reorganization), then the corporation will continue to be a 
covered corporation with regard to each repurchase pursuant to the plan 
until the end of the date on which the last repurchase pursuant to the 
plan occurs.
    (3) Inbound and outbound F reorganizations--(i) Inbound F 
reorganization. In the case of a foreign corporation that transfers its 
assets or that is treated as transferring its assets to a domestic 
corporation in an F reorganization (as described in Sec.  1.367(b)-2(f) 
of this chapter), the corporation is not treated as a domestic 
corporation until the day after the reorganization.
    (ii) Outbound F reorganization. In the case of a domestic 
corporation that transfers its assets or that is treated as 
transferring its assets to a foreign corporation in an F reorganization 
(as described in Sec.  1.367(a)-1(e) of this chapter), the corporation 
is not treated as a foreign corporation until the day after the 
reorganization.
    (e) Repurchase--(1) Overview. This paragraph (e) provides rules for 
determining whether a transaction is a repurchase. Paragraph (e)(2) of 
this section provides a general rule regarding the scope of the term 
repurchase. Paragraph (e)(3) of this section provides an exclusive list 
of transactions that are treated as a section 317(b) redemption but are 
not a repurchase. Paragraph (e)(4) of this section provides an 
exclusive list of transactions that are economically similar 
transactions. Paragraph (e)(5) of this section provides a non-exclusive 
list of transactions that are not repurchases. Paragraph (f) of this 
section provides rules regarding acquisitions of covered corporation 
stock by specified affiliates.
    (2) Scope of repurchase. A repurchase means solely--
    (i) A section 317(b) redemption, except as provided in paragraph 
(e)(3) of this section; or
    (ii) An economically similar transaction described in paragraph 
(e)(4) of this section.
    (3) Certain section 317(b) redemptions that are not repurchases. 
This paragraph (e)(3) provides an exclusive list of transactions that 
are section 317(b) redemptions but are not repurchases.
    (i) Section 304(a)(1) transactions--(A) Rule regarding deemed 
distributions. If section 304(a)(1) of the Code applies to an 
acquisition of stock by an acquiring corporation (within the meaning of 
section 304(a)(1)), the acquiring corporation's deemed distribution in 
redemption of the acquiring corporation's stock (resulting from the 
application of section 304(a)(1)) is not a repurchase.
    (B) Scope of rule. The rule described in paragraph (e)(3)(i)(A) of 
this section applies to a transaction described in paragraph 
(e)(3)(i)(A) of this section regardless of whether section 302(a) or 
(d) of the Code applies to the acquiring corporation's deemed 
distribution in redemption of its stock.
    (C) Rule regarding deemed issuances. For the rule addressing the 
treatment of any stock deemed to be issued by the acquiring corporation 
as a result of the application of section 304(a)(1), see Sec.  58.4501-
4(f)(4).
    (ii) Payment by a covered corporation of cash in lieu of fractional 
shares. A payment by a covered corporation of cash in lieu of a 
fractional share of the covered corporation's stock is not a repurchase 
if--
    (A) The payment is carried out as part of a transaction that 
qualifies as a reorganization under section 368(a) or a distribution to 
which section 355 applies, or pursuant to the settlement of an option 
or similar financial instrument (for example, a convertible debt 
instrument or convertible preferred share);
    (B) The cash received by the shareholder entitled to the fractional 
share is not separately bargained-for consideration (that is, the cash 
paid by the covered corporation in lieu of the fractional share 
represents a mere rounding off of the shares issued in the exchange or 
settlement);
    (C) The payment is carried out solely for administrative 
convenience (and, therefore, solely for non-tax reasons); and
    (D) The amount of cash paid to the shareholder in lieu of a 
fractional share does not exceed the fair market value of one full 
share of the class of stock of the covered corporation with respect to 
which the payment of cash in lieu of a fractional share is made.
    (4) Economically similar transactions. This paragraph (e)(4) 
provides an exclusive list of transactions that are economically 
similar transactions. For rules regarding the statutory exceptions, see 
Sec.  58.4501-3.
    (i) Acquisitive reorganizations. In the case of an acquisitive 
reorganization in which the target corporation is a covered 
corporation, the exchange by the target corporation shareholders of 
their target corporation stock pursuant to the plan of reorganization 
is a repurchase by the target corporation.
    (ii) E reorganizations. In the case of an E reorganization in which 
the recapitalizing corporation is a covered corporation, the exchange 
by the recapitalizing corporation shareholders of their recapitalizing 
corporation stock pursuant to the plan of reorganization is a 
repurchase by the recapitalizing corporation.
    (iii) F reorganizations. In the case of an F reorganization in 
which the transferor corporation (as defined in Sec.  1.368-2(m)(1) of 
this chapter) is a covered corporation, the exchange by the transferor 
corporation shareholders of their transferor corporation stock pursuant 
to the plan of reorganization is a repurchase by the transferor 
corporation.
    (iv) Split-offs. In the case of a split-off by a distributing 
corporation that is a covered corporation, the exchange by the 
distributing corporation shareholders of their distributing corporation 
stock is a repurchase by the distributing corporation.
    (v) Complete liquidations to which both sections 331 and 332 apply. 
In the case of a complete liquidation of a covered corporation to which 
sections 331 and 332(a) of the Code respectively apply to component 
distributions of the complete liquidation--
    (A) Each distribution to which section 331 applies is a repurchase 
by the covered corporation; and
    (B) The distribution to which section 332(a) applies is not a 
repurchase by the

[[Page 26038]]

covered corporation (see paragraph (e)(5)(i)(A) of this section).
    (vi) Certain forfeitures and clawbacks of stock--(A) In general. In 
the case of a forfeiture or clawback of stock of a covered corporation 
pursuant to a legal or contractual obligation, the forfeiture or 
clawback is a repurchase by the covered corporation or acquisition by a 
specified affiliate of the covered corporation (as appropriate) on the 
date of forfeiture or clawback (as appropriate) if the stock was 
treated as issued or provided under Sec.  58.4501-4(b) and the 
forfeiture or clawback of the stock (as appropriate) is described in 
paragraph (e)(4)(vi)(B), (C), or (D) of this section.
    (B) Stock subject to post-closing price adjustments. The stock was 
issued pursuant to an acquisition of a target entity or its business, 
and the forfeiture of the stock was in accordance with the terms of the 
documents governing the transaction (for example, to compensate the 
acquiring corporation for breaches of representations or warranties 
made by the target entity, or because the business of the target entity 
did not achieve certain performance benchmarks agreed upon in the 
transaction documents).
    (C) Stock for which a section 83(b) election was made. The stock 
was subject to a substantial risk of forfeiture within the meaning of 
section 83(a) of the Code on the date the stock was issued or provided, 
the service provider made a valid election under section 83(b) with 
regard to the stock, and the forfeiture resulted from the service 
provider failing to meet the vesting condition.
    (D) Clawbacks. On the date the stock was issued or provided, the 
stock was subject to a clawback agreement, and a clawback of the stock 
resulted from the occurrence of an event specified in the clawback 
agreement.
    (5) Transactions that are not repurchases. This paragraph (e)(5) 
provides a non-exclusive list of transactions that are not repurchases.
    (i) Complete liquidations generally. Except as provided in 
paragraph (e)(4)(v)(A) of this section, the following is not a 
repurchase by a covered corporation:
    (A) A distribution in complete liquidation of the covered 
corporation to which section 331 or 332(a) applies.
    (B) A distribution pursuant to the resolution or plan of 
dissolution of the covered corporation that is reported on the original 
(but not a supplemented or an amended) IRS Form 966, Corporate 
Dissolution or Liquidation (or any successor form).
    (C) A distribution pursuant to a deemed dissolution of the covered 
corporation (for instance, pursuant to a deemed liquidation under Sec.  
301.7701-3 of this chapter).
    (ii) Distributions during taxable year of complete liquidation or 
dissolution. Unless paragraph (e)(4)(v) of this section applies, no 
distribution by a covered corporation during a taxable year of the 
covered corporation is a repurchase by the covered corporation if the 
covered corporation--
    (A) Completely liquidates during the taxable year (that is, has a 
final distribution during the taxable year in a complete liquidation to 
which section 331 applies);
    (B) Dissolves during the taxable year pursuant to the resolution or 
plan of dissolution as reported on the original (but not a supplemented 
or an amended) IRS Form 966, Corporate Dissolution or Liquidation (or 
any successor form); or
    (C) Is deemed to dissolve during the taxable year (for instance, 
pursuant to a deemed liquidation under Sec.  301.7701-3 of this 
chapter).
    (iii) Divisive transactions under section 355 other than split-
offs--(A) In general. Subject to paragraph (e)(5)(iii)(B) of this 
section, a distribution by a distributing corporation that is a covered 
corporation of stock of a controlled corporation qualifying under 
section 355 that is not a split-off is not a repurchase by the 
distributing corporation.
    (B) Exception regarding non-qualifying property in spin-offs. A 
distribution by a distributing corporation that is a covered 
corporation of other property or money in exchange for stock of the 
distributing corporation is a repurchase by the distributing 
corporation if it occurs in pursuance of a transaction qualifying under 
section 355 in which the distribution by the distributing corporation 
of stock of the controlled corporation is with respect to stock of the 
distributing corporation.
    (iv) Non-redemptive distributions subject to section 301(c)(2) or 
(3). A distribution to which section 301 of the Code applies by a 
covered corporation to a distributee is not a repurchase by the covered 
corporation if the distribution--
    (A) Is subject to section 301(c)(2) or (3); and
    (B) The distributee does not exchange stock of the covered 
corporation (and is not treated as exchanging stock of the covered 
corporation for Federal income tax purposes).
    (v) Net cash settlement of an option contract or other derivative 
financial instrument. The net cash settlement of an option contract or 
other derivative financial instrument with respect to stock of a 
covered corporation is not a repurchase by the covered corporation. The 
net cash settlement of an instrument in the legal form of an option 
contract or other derivative financial instrument that is treated as 
stock for Federal tax purposes at the time of issuance is treated as a 
repurchase of that instrument, and therefore a repurchase by the 
covered corporation.
    (f) Acquisitions by specified affiliates--(1) Acquisitions of stock 
of a covered corporation by a specified affiliate treated as a 
repurchase. If a specified affiliate of a covered corporation acquires 
stock of the covered corporation from a person that is not the covered 
corporation or another specified affiliate of the covered corporation, 
the acquisition is treated as a repurchase of the stock of the covered 
corporation by the covered corporation.
    (2) Determination of specified affiliate status--(i) Timing of 
determination. A covered corporation must determine if another 
corporation or a partnership is a specified affiliate of the covered 
corporation if the determination is relevant for purposes of computing 
the stock repurchase excise tax with regard to the covered corporation.
    (ii) Indirect ownership. For purposes of determining whether a 
corporation or a partnership is a specified affiliate of a covered 
corporation, the covered corporation is treated as indirectly owning 
stock in the corporation or holding capital or profits interests in the 
partnership in the percentage equal to the covered corporation's 
proportionate percentage of stock owned, or capital or profits 
interests held, through other entities.
    (3) Constructive specified affiliate acquisition--(i) General rule. 
Except as provided in paragraph (f)(3)(ii) of this section, shares of 
stock of a covered corporation are treated as repurchased by the 
covered corporation if--
    (A) A corporation or a partnership becomes a specified affiliate of 
the covered corporation;
    (B) At the time the corporation or partnership becomes a specified 
affiliate of the covered corporation, the corporation or partnership 
owns such shares, and such shares represent more than one percent of 
the fair market value of the assets of the corporation or partnership 
as determined at such time; and
    (C) The corporation or partnership acquired such shares after 
December 31, 2022.
    (ii) Stock previously treated as repurchased not subject to deemed 
repurchase more than once. Paragraph

[[Page 26039]]

(f)(3)(i) of this section does not apply with regard to any shares of 
stock of a covered corporation--
    (A) Held by the corporation or partnership described in paragraph 
(f)(3)(i) of this section at the time that it becomes a specified 
affiliate of the covered corporation; and
    (B) That the covered corporation identifies as previously having 
been treated as repurchased by the covered corporation under paragraph 
(f)(3)(i) of this section when held by the corporation or partnership.
    (iii) Specific identification. For purposes of paragraphs (f)(3)(i) 
and (ii) of this section, if the corporation or partnership described 
in paragraph (f)(3)(i) of this section is unable to specifically 
identify which shares of stock of the covered corporation the 
corporation or partnership is treated as holding at the time it becomes 
a specified affiliate of the covered corporation, the covered 
corporation must treat the corporation or partnership as holding the 
most recently acquired shares of the stock of the covered corporation.
    (g) Date of repurchase--(1) General rule. In general, stock of a 
covered corporation is treated as repurchased by the covered 
corporation or acquired by a specified affiliate of the covered 
corporation on the date on which ownership of the stock transfers to 
the covered corporation or specified affiliate (as appropriate) for 
Federal income tax purposes. To determine the date of repurchase in 
particular situations, see paragraphs (g)(2), (3), and (4) of this 
section.
    (2) Regular-way sale. A regular-way sale of stock of a covered 
corporation (that is, a transaction in which a trade order is placed on 
the trade date, and settlement of the transaction, including payment 
and delivery of the stock, occurs a standardized number of days after 
the trade date that is set by a regulator) is treated as a repurchase 
by the covered corporation or an acquisition by a specified affiliate 
of the covered corporation on the trade date.
    (3) Repurchase pursuant to certain economically similar 
transactions. Stock of a covered corporation repurchased in an 
economically similar transaction described in paragraph (e)(4) of this 
section is treated as repurchased on the date the shareholders of the 
covered corporation exchange their stock in the covered corporation.
    (4) Constructive specified affiliate acquisition. Stock of a 
covered corporation that is treated as repurchased by the covered 
corporation under paragraph (f)(3)(i) of this section is treated as 
acquired by a specified affiliate on the date on which the other 
corporation or partnership described in paragraph (f)(3)(i) of this 
section becomes a specified affiliate of the covered corporation.
    (h) Fair market value of repurchased stock--(1) In general. The 
fair market value of stock of a covered corporation that is repurchased 
by the covered corporation or acquired by a specified affiliate of the 
covered corporation is the market price of the stock on the date the 
stock is repurchased or acquired (as determined under paragraph (g) of 
this section). That is, if the price at which the repurchased or 
acquired stock is purchased differs from the market price of the stock 
on the date the stock is repurchased or acquired, the fair market value 
of the stock is the market price on the date the stock is repurchased 
or acquired.
    (2) Stock traded on an established securities market--(i) In 
general. If stock of a covered corporation that is repurchased by the 
covered corporation or acquired by a specified affiliate of the covered 
corporation is traded on an established securities market, the covered 
corporation must determine the market price of the repurchased or 
acquired stock by applying one of the methods provided in paragraph 
(h)(2)(ii) of this section. For purposes of this paragraph (h)(2), 
repurchased or acquired stock of a covered corporation is treated as 
traded on an established securities market if any stock of the same 
class and issue of stock is so traded, regardless of whether the shares 
repurchased or acquired are so traded.
    (ii) Acceptable methods. The following are acceptable methods for 
determining the market price of repurchased or acquired stock of a 
covered corporation traded on an established securities market:
    (A) The daily volume-weighted average price as determined on the 
date the stock is repurchased by the covered corporation or acquired by 
a specified affiliate of the covered corporation.
    (B) The closing price on the date the stock is repurchased by the 
covered corporation or acquired by a specified affiliate of the covered 
corporation.
    (C) The average of the high and low prices on the date the stock is 
repurchased by the covered corporation or acquired by a specified 
affiliate of the covered corporation.
    (D) The trading price at the time the stock is repurchased by the 
covered corporation or acquired by a specified affiliate of the covered 
corporation.
    (iii) Date of repurchase not a trading day. For purposes of each 
method provided in paragraph (h)(2)(ii) of this section, if the date 
the stock of a covered corporation is repurchased by the covered 
corporation or acquired by a specified affiliate of the covered 
corporation is not a trading day, the date on which the market price is 
determined is the immediately preceding trading day.
    (iv) Consistency requirement--(A) Solely one method permitted for 
determining market price of repurchased or acquired stock. The market 
price of repurchased or acquired stock of a covered corporation that is 
traded on an established securities market must be determined by 
consistently applying one (but not more than one) of the methods 
provided in paragraph (h)(2)(ii) of this section to all stock of the 
covered corporation repurchased by the covered corporation or acquired 
by a specified affiliate of the covered corporation throughout the 
covered corporation's taxable year.
    (B) Application to netting rule. Except as provided in the second 
sentence of this paragraph (h)(2)(iv)(B), the method used by the 
covered corporation under paragraph (h)(2)(iv)(A) of this section must 
be consistently applied to determine the market price of all stock of 
the covered corporation issued or provided under the netting rule 
throughout the covered corporation's taxable year. The consistency rule 
set forth in the first sentence of this paragraph (h)(2)(iv)(B) does 
not apply to the determination of the fair market value of stock of a 
covered corporation that the covered corporation issues, or that a 
specified affiliate of the covered corporation provides, in connection 
with the performance of services. See Sec.  58.4501-4(e)(5).
    (v) Stock traded on multiple exchanges--(A) In general. A covered 
corporation the stock of which is traded on multiple established 
securities markets must determine the market price of the stock of the 
covered corporation by reference to trading on the established 
securities market in the country in which the covered corporation is 
organized, including a regional established securities market that 
trades in that country.
    (B) Stock traded on multiple exchanges in country where covered 
corporation is organized. If a covered corporation's stock is traded on 
multiple established securities markets in the country in which the 
covered corporation is organized, the covered corporation must 
determine the market price of the stock by reference to trading on the 
established securities market in that country with the highest trading 
volume in that stock in the prior taxable year.

[[Page 26040]]

    (C) Other cases in which stock is traded on multiple exchanges. If 
stock of a covered corporation is traded on multiple established 
securities markets and neither paragraph (h)(2)(v)(A) nor (B) of this 
section applies, the covered corporation must determine the fair market 
value of its traded stock in a manner that is reasonable under the 
facts and circumstances.
    (3) Stock not traded on an established securities market--(i) 
General rule. If repurchased or acquired stock of a covered corporation 
is not traded on an established securities market, the market price of 
the stock is determined as of the date the stock is repurchased by the 
covered corporation or acquired by a specified affiliate of the covered 
corporation under the principles of Sec.  1.409A-1(b)(5)(iv)(B)(1) of 
this chapter.
    (ii) Consistency requirement--(A) Solely one method permitted for 
determining market price of repurchased or acquired stock. The 
valuation method for determining the market price of repurchased or 
acquired stock of a covered corporation that is not traded on an 
established securities market must be used for all repurchases of stock 
of the covered corporation or acquisitions by a specified affiliate of 
the covered corporation of the same class throughout the covered 
corporation's taxable year, unless the application of that method to a 
particular repurchase or acquisition would be unreasonable under the 
facts and circumstances as of the valuation date within the meaning of 
Sec.  1.409A-1(b)(5)(iv)(B)(1).
    (B) Application to netting rule. Except as provided in the second 
sentence of this paragraph (h)(3)(ii)(B), the method used by the 
covered corporation under paragraph (h)(3)(ii)(A) of this section also 
must be consistently applied to determine the market price of all stock 
of the covered corporation of the same class issued under the netting 
rule throughout the covered corporation's taxable year. The consistency 
rule set forth in the first sentence of this paragraph (h)(3)(ii)(B) 
does not apply to the determination of the market price of stock of the 
covered corporation that is issued in connection with the performance 
of services or if the application of that method to a particular 
issuance would be unreasonable under the facts and circumstances as of 
the valuation date.
    (4) Market price of stock denominated in non-U.S. currency. The 
market price of any stock of a covered corporation that is denominated 
in a currency other than the U.S. dollar is converted into U.S. dollars 
at the spot rate (as defined in Sec.  1.988-1(d)(1) of this chapter) on 
the date the stock is repurchased by the covered corporation or 
acquired by a specified affiliate of the covered corporation.


Sec.  58.4501-3  Statutory exceptions.

    (a) Scope. This section provides rules regarding the application of 
each statutory exception (that is, each exception set forth in section 
4501(e) of the Code), other than the de minimis exception described in 
section 4501(e)(3) and subject to Sec.  58.4501-2(b)(2), to a 
repurchase of stock of a covered corporation by the covered corporation 
or an acquisition of stock of a covered corporation by a specified 
affiliate of the covered corporation (as appropriate). For rules 
regarding the application of the statutory exceptions in the context of 
section 4501(d), see Sec.  58.4501-7(m).
    (b) Reduction of covered corporation's stock repurchase excise tax 
base. The fair market value of stock of a covered corporation 
repurchased by the covered corporation or acquired by a specified 
affiliate of the covered corporation in a repurchase or acquisition 
described in this section is a reduction for purposes of computing the 
covered corporation's stock repurchase excise tax base. See Sec.  
58.4501-2(c)(1)(ii).
    (c) Reorganization exception. The fair market value of stock of a 
covered corporation repurchased by the covered corporation in a 
repurchase described in any of paragraphs (c)(1) through (4) of this 
section is a reduction for purposes of computing the covered 
corporation's stock repurchase excise tax base (that is, the 
reorganization exception) to the extent that the repurchase is for 
property permitted by section 354 or 355 to be received without the 
recognition of gain or loss (each, a qualifying property repurchase):
    (1) A repurchase by a target corporation in an acquisitive 
reorganization pursuant to the plan of reorganization.
    (2) A repurchase by a recapitalizing corporation in an E 
reorganization pursuant to the plan of reorganization.
    (3) A repurchase by a transferor corporation in an F reorganization 
pursuant to the plan of reorganization.
    (4) A repurchase by a distributing corporation in a split-off 
(whether or not part of a D reorganization).
    (d) Stock contributions to an employer-sponsored retirement plan--
(1) Reductions in computing covered corporation's stock repurchase 
excise tax base--(i) General rule. The fair market value of stock of a 
covered corporation that is repurchased by the covered corporation or 
acquired by a specified affiliate of the covered corporation is a 
reduction for purposes of computing the covered corporation's stock 
repurchase excise tax base if the stock that is repurchased or 
acquired, or an amount of stock equal to the fair market value of the 
stock repurchased or acquired, is contributed to an employer-sponsored 
retirement plan. The amount of the reduction under this paragraph 
(d)(1) is determined as provided in paragraph (d)(3) or (4) of this 
section.
    (ii) Special rule for leveraged ESOPs. If a covered corporation or 
a specified affiliate of the covered corporation maintains an ESOP with 
an exempt loan (as defined in section 4975(d)(3)), allocations of 
qualifying employer securities from the ESOP suspense account to ESOP 
participants' accounts that are attributable to employer contributions 
(and not to dividends) are treated as contributions of stock under this 
paragraph (d) as of the date stock attributable to repayment of the 
exempt loan is released from the suspense account and allocated to ESOP 
participants' accounts.
    (2) Classes of stock contributed to an employer-sponsored 
retirement plan. This paragraph (d) applies to contributions of any 
class of covered corporation stock to an employer-sponsored retirement 
plan, regardless of the class of stock that was repurchased or 
acquired.
    (3) Same class of stock repurchased and contributed. If stock of a 
covered corporation is repurchased by the covered corporation or 
acquired by a specified affiliate of the covered corporation, and stock 
of the covered corporation of the same class is contributed to an 
employer-sponsored retirement plan, the amount of the reduction under 
paragraph (d)(1) of this section is equal to the lesser of--
    (i) The aggregate fair market value of the stock of the same class 
that was repurchased or acquired (as determined under Sec.  58.4501-
2(h)) during the covered corporation's taxable year; or
    (ii) The amount obtained by--
    (A) Determining the aggregate fair market value of all stock of 
that class repurchased or acquired (as determined under Sec.  58.4501-
2(h)) during the covered corporation's taxable year, reduced by the 
fair market value of shares of that class of stock that is a reduction 
to the stock repurchase excise tax base for the taxable year under a 
statutory exception other than the exception in this paragraph (d);
    (B) Dividing the amount determined under paragraph (d)(3)(ii)(A) of 
this section by the number of shares of that class repurchased or 
acquired, reduced by the number of shares of that class of

[[Page 26041]]

stock the fair market value of which is a reduction to the stock 
repurchase excise tax base for the taxable year under a statutory 
exception other than the exception in this paragraph (d); and
    (C) Multiplying the amount determined under paragraph (d)(3)(ii)(B) 
of this section by the number of shares of that class contributed to an 
employer-sponsored retirement plan for the taxable year.
    (4) Different class of stock repurchased and contributed--(i) In 
general. Subject to paragraph (d)(4)(ii) of this section, if stock of a 
covered corporation is repurchased by the covered corporation or 
acquired by a specified affiliate of the covered corporation, and stock 
of the covered corporation of a different class is contributed to an 
employer-sponsored retirement plan, then the amount of the reduction 
under paragraph (d)(1) of this section is equal to the fair market 
value of the contributed stock at the time the stock is contributed to 
the employer-sponsored retirement plan.
    (ii) Maximum reduction permitted. The amount of the reduction under 
paragraph (d)(4)(i) of this section must not exceed the aggregate fair 
market value of stock repurchased or acquired during the covered 
corporation's taxable year, reduced by the fair market value of any 
stock that is a reduction to the stock repurchase excise tax base for 
the taxable year under a statutory exception other than the exception 
in this paragraph (d).
    (5) Timing of contributions--(i) In general. The reduction in the 
stock repurchase excise tax base, in accordance with paragraph (d)(1) 
of this section (that is, the reduction in computing the stock 
repurchase excise tax base), for a taxable year applies to 
contributions of covered corporation stock to an employer-sponsored 
retirement plan during the covered corporation's taxable year.
    (ii) Treatment of contributions after close of taxable year. For 
purposes of paragraph (d)(1) of this section, a covered corporation may 
treat stock contributions to an employer-sponsored retirement plan made 
after the close of the covered corporation's taxable year as having 
been contributed during that taxable year if the following two 
requirements are satisfied:
    (A) The stock must be contributed to the employer-sponsored 
retirement plan by the filing deadline for the form on which the stock 
repurchase excise tax must be reported (applicable form) that is due 
for the first full quarter after the close of the covered corporation's 
taxable year.
    (B) The stock must be treated by the employer-sponsored retirement 
plan in the same manner that the plan would treat a contribution 
received on the last day of that taxable year.
    (iii) No duplicate reductions. Stock contributions that are treated 
under paragraph (d)(5)(ii) of this section as having been contributed 
in the taxable year to which the applicable form applies may not be 
treated as having been contributed for any other taxable year for 
purposes of the stock repurchase excise tax.
    (6) Contributions before January 1, 2023. A covered corporation 
with a taxable year that both begins before January 1, 2023, and ends 
after December 31, 2022, may include the fair market value of all 
contributions of its stock to an employer-sponsored retirement plan 
during the entirety of that taxable year for purposes of applying this 
paragraph (d).
    (e) Repurchases or acquisitions by a dealer in securities in the 
ordinary course of business--(1) In general. Subject to paragraph 
(e)(2) of this section, the fair market value of stock of a covered 
corporation repurchased by the covered corporation or acquired by a 
specified affiliate of the covered corporation (as appropriate) that is 
a dealer in securities (within the meaning of section 475(c)(1) of the 
Code) is a reduction for purposes of computing the covered 
corporation's stock repurchase excise tax base to the extent the stock 
is acquired in the ordinary course of the dealer's business of dealing 
in securities.
    (2) Applicability. The reduction described in paragraph (e)(1) of 
this section applies solely to the extent that--
    (i) The dealer accounts for the stock as securities held primarily 
for sale to customers in the dealer's ordinary course of business;
    (ii) The dealer disposes of the stock within a period of time that 
is consistent with the holding of the stock for sale to customers in 
the dealer's ordinary course of business, taking into account the terms 
of the stock and the conditions and practices prevailing in the markets 
for similar stock during the period in which the stock is held; and
    (iii) The dealer (if it is a covered corporation) does not sell or 
otherwise transfer the stock to a specified affiliate of the covered 
corporation, or the dealer (if it is a specified affiliate of the 
covered corporation) does not sell or otherwise transfer the stock to 
the covered corporation or to another specified affiliate of the 
covered corporation, in each case other than in a sale or transfer to a 
dealer that also satisfies the requirements of this paragraph (e)(2).
    (f) Repurchases by a RIC or REIT. The fair market value of stock of 
a covered corporation that is a RIC or a REIT that is repurchased by 
the covered corporation or acquired by a specified affiliate of the 
covered corporation is a reduction for purposes of computing the 
covered corporation's stock repurchase excise tax base.
    (g) Repurchase treated as a dividend--(1) Reduction of covered 
corporation's stock repurchase excise tax base. Except as provided in 
paragraph (g)(2)(ii) of this section, the fair market value of stock of 
a covered corporation repurchased by the covered corporation (excluding 
stock treated as repurchased under Sec.  58.4501-2(f)(1) and (3)) is a 
reduction for purposes of computing the covered corporation's stock 
repurchase excise tax base to the extent the repurchase is treated as a 
distribution of a dividend under section 301(c)(1) or 356(a)(2).
    (2) Rebuttable presumption of no dividend equivalence--(i) 
Presumption. A repurchase to which section 302 or 356(a) applies is 
presumed to be subject to section 302(a) or 356(a)(1), respectively 
(and, therefore, is presumed ineligible for the exception in paragraph 
(g)(1) of this section).
    (ii) Rebuttal of presumption. A covered corporation may rebut the 
presumption described in paragraph (g)(2)(i) of this section with 
regard to a specific shareholder solely by establishing with sufficient 
evidence that the shareholder treats the repurchase as a dividend on 
the shareholder's Federal income tax return.
    (iii) Sufficient evidence requirement. To provide sufficient 
evidence under paragraph (g)(2)(ii) of this section to establish that 
the shareholder treats the repurchase as a dividend on the 
shareholder's Federal income tax return, the covered corporation must--
    (A) Obtain certification from the shareholder, in accordance with 
paragraph (g)(3) of this section, that the repurchase constitutes a 
redemption treated as a distribution to which section 301 applies by 
reason of section 302(d), or that the repurchase has the effect of the 
distribution of a dividend under section 356(a)(2), including evidence 
that applicable withholding occurred if required;
    (B) Treat the repurchase consistent with the shareholder 
certification required under paragraph (g)(2)(iii)(A) of this section;
    (C) Have no knowledge of facts that would indicate that the 
shareholder certification required under paragraph

[[Page 26042]]

(g)(2)(iii)(A) of this section is incorrect; and
    (D) Demonstrate sufficient earnings and profits to treat as a 
dividend either the redemption under section 302 or the receipt of 
money or other property under section 356.
    (3) Content of shareholder certification. The shareholder 
certification required under paragraph (g)(2)(iii)(A) of this section 
must include the following information:
    (i) The name of the shareholder.
    (ii) The name of the covered corporation.
    (iii) The total number of shares of the covered corporation 
outstanding immediately before and immediately after the repurchase.
    (iv) A certification from the shareholder that either--
    (A) The repurchase is a payment in exchange for stock because the 
shareholder's proportionate interest in the corporation has been 
reduced but not completely terminated;
    (B) The repurchase is a payment in exchange for stock because the 
shareholder's interest in the corporation is completely terminated; or
    (C) The repurchase is a dividend.
    (v) With respect to the certification described in paragraph 
(g)(3)(iv) of this section--
    (A) The number of shares actually and constructively owned by the 
shareholder before and after the repurchase; and
    (B) The shareholder's percentage ownership before and after the 
repurchase.
    (vi) With respect to the certification described in paragraph 
(g)(3)(iv)(C) of this section, if the shareholder is not a United 
States person (within the meaning of section 7701(a)(30)) and the 
shares are held through a broker (within the meaning of section 6045(c) 
of the Code), the certification also must include a statement that a 
copy of the certification has been provided to the shareholder's 
broker.
    (vii) Any other information required by the IRS in forms or 
instructions or in publications or guidance published in the Internal 
Revenue Bulletin (see Sec. Sec.  601.601(d)(2) and 601.602 of this 
chapter).
    (viii) A penalties of perjury statement.
    (ix) The signature of the shareholder and date of signature.
    (4) Agreement to shareholder certification. After receiving the 
shareholder certification required under paragraph (g)(2)(iii)(A) of 
this section, the covered corporation must include on the shareholder 
certification a statement signed by the covered corporation under 
penalties of perjury that the covered corporation--
    (i) Agrees to treat the repurchase consistent with the shareholder 
certification required under paragraph (g)(2)(iii)(A) of this section; 
and
    (ii) Has no knowledge of facts that would indicate that the 
shareholder certification required under paragraph (g)(2)(iii)(A) of 
this section is incorrect.
    (5) Documentation of sufficient evidence--(i) Retention and 
availability of evidence. A covered corporation must retain the 
evidence described in paragraph (g)(2)(iii) of this section and make 
that evidence available for inspection to the IRS if any of the 
evidence becomes material in the administration of any internal revenue 
law.
    (ii) Retention of supporting records. The covered corporation must 
retain records of all information necessary to document and 
substantiate all content of the shareholder certification described in 
paragraph (g)(2)(iii)(A) of this section.


Sec.  58.4501-4  Application of netting rule.

    (a) Scope. This section provides rules regarding the application of 
section 4501(c)(3) of the Code. Paragraph (b) of this section provides 
general rules regarding the adjustment to a covered corporation's stock 
repurchase excise tax base with respect to stock that is issued by the 
covered corporation or provided by a specified affiliate of the covered 
corporation (netting rule). Paragraph (c) of this section provides 
special rules for stock issued or provided in connection with the 
performance of services. Paragraph (d) of this section provides rules 
for determining the date on which stock is issued or provided. 
Paragraph (e) of this section provides rules for determining the fair 
market value of stock that is issued or provided. Paragraph (f) of this 
section sets forth the sole circumstances under which an issuance or 
provision of stock is disregarded for purposes of the netting rule. For 
rules regarding the application of the netting rule in the context of 
section 4501(d), see Sec.  58.4501-7(n).
    (b) Issuances and provisions of stock that are a reduction in 
computing the stock repurchase excise tax base--(1) General rule. Under 
the netting rule provided by this paragraph (b)(1), the aggregate fair 
market value of stock of a covered corporation is a reduction for 
purposes of computing the covered corporation's stock repurchase excise 
tax base for a taxable year if the stock is issued by the covered 
corporation or provided by a specified affiliate of the covered 
corporation in the following circumstances:
    (i) Issued by the covered corporation during the covered 
corporation's taxable year in connection with the performance of 
services for the covered corporation by an employee or other service 
provider of the covered corporation.
    (ii) Provided by a specified affiliate of the covered corporation 
in connection with the performance of services for the specified 
affiliate by an employee of the specified affiliate during the covered 
corporation's taxable year.
    (iii) Issued by the covered corporation during the covered 
corporation's taxable year not in connection with the performance of 
services.
    (2) Stock issued or provided outside period of covered corporation 
status. Any stock of a covered corporation issued by the covered 
corporation or provided by a specified affiliate of the covered 
corporation before the initiation date or after the cessation date is 
not taken into account under paragraph (b)(1) of this section. See 
Sec.  58.4501-2(d).
    (3) Issuances or provisions before January 1, 2023. Except as 
provided in paragraph (b)(2) of this section, a covered corporation 
with a taxable year that begins before January 1, 2023, and ends after 
December 31, 2022, must include the fair market value of all issuances 
or provisions of its stock during the entirety of that taxable year for 
purposes of applying paragraph (b)(1) of this section to that taxable 
year.
    (4) F reorganizations. For purposes of this section, the transferor 
corporation and the resulting corporation (as defined in Sec.  1.368-
2(m)(1) of this chapter) in an F reorganization are treated as the same 
corporation.
    (c) Stock issued or provided in connection with the performance of 
services--(1) In general. For purposes of this section, stock of a 
covered corporation is transferred by the covered corporation or a 
specified affiliate of the covered corporation in connection with the 
performance of services only if the transfer is described in section 
83, including pursuant to a nonqualified stock option described in 
Sec.  1.83-7 of this chapter, or is pursuant to a stock option 
described in section 421 of the Code. A specified affiliate of the 
covered corporation is not a service provider for purposes of this 
section.
    (2) Sale of shares to cover exercise price and withholding--(i) 
Payment or advance by third party equal to exercise price. If a third 
party pays the exercise price of a stock option on behalf of a service 
provider or advances to a service provider an amount equal to the 
exercise price of a stock option that the service provider uses to 
exercise the option, then any stock transferred by the

[[Page 26043]]

covered corporation to the service provider, by a specified affiliate 
to the specified affiliate's employee, or by the covered corporation or 
specified affiliate to the third party upon exercise of the option in 
connection with exercising the option is treated as issued or provided 
in connection with the performance of the services.
    (ii) Advance by third party equal to withholding obligation. If a 
third party advances an amount equal to the withholding obligation of a 
service provider, then any stock transferred by the covered corporation 
to the service provider, by a specified affiliate to the specified 
affiliate's employee, or by the covered corporation or specified 
affiliate to the third party in connection with this arrangement is 
treated as issued or provided in connection with the performance of 
services.
    (d) Date of issuance--(1) In general. Except as provided in 
paragraph (d)(2) of this section, stock of a covered corporation is 
treated as issued by the covered corporation or provided by a specified 
affiliate of the covered corporation on the date on which ownership of 
the stock transfers to the recipient for Federal income tax purposes.
    (2) Stock issued or provided in connection with the performance of 
services--(i) In general. Stock of a covered corporation is issued by 
the covered corporation or provided by a specified affiliate of the 
covered corporation in connection with the performance of services as 
of the date the recipient of the stock is treated as the beneficial 
owner of the stock for Federal income tax purposes. In general, a 
recipient is treated as the beneficial owner of the stock when the 
stock is both transferred by the covered corporation (or a specified 
affiliate of the covered corporation) and substantially vested within 
the meaning of Sec.  1.83-3(b) of this chapter. Thus, stock transferred 
pursuant to a vested stock award or restricted stock unit is issued or 
provided when the covered corporation or a specified affiliate of the 
covered corporation initiates payment of the stock. Stock transferred 
that is not substantially vested within the meaning of Sec.  1.83-3(b) 
of this chapter is not issued or provided until it vests, except as 
provided in paragraph (d)(2)(iii) of this section.
    (ii) Stock options and stock appreciation rights. Stock of a 
covered corporation transferred by the covered corporation or a 
specified affiliate of the covered corporation pursuant to an option 
described in Sec.  1.83-7 of this chapter or section 421 or a stock 
appreciation right is issued by the covered corporation or provided by 
the specified affiliate of the covered corporation (as applicable) as 
of the date the option or stock appreciation right is exercised.
    (iii) Stock on which a section 83(b) election is made. Stock of a 
covered corporation transferred by the covered corporation or a 
specified affiliate of the covered corporation when it is not 
substantially vested within the meaning of Sec.  1.83-3(b) of this 
chapter, but as to which a valid election under section 83(b) is made, 
is treated as issued by the covered corporation or provided by the 
specified affiliate of the covered corporation (as applicable) as of 
the transfer date.
    (e) Fair market value of issued or provided stock--(1) In general. 
Except as provided in paragraph (e)(5) of this section, the fair market 
value of stock of a covered corporation issued by the covered 
corporation or provided by a specified affiliate of the covered 
corporation is the market price of the stock on the date the stock is 
issued or provided.
    (2) Stock traded on an established securities market--(i) In 
general. If stock of a covered corporation that is issued by the 
covered corporation is traded on an established securities market, the 
covered corporation must determine the market price of the stock by 
applying one of the methods provided in paragraph (e)(2)(ii) of this 
section.
    (ii) Acceptable methods. The following are acceptable methods for 
determining the market price of stock of a covered corporation traded 
on an established securities market:
    (A) The daily volume-weighted average price as determined on the 
date the stock is issued by the covered corporation.
    (B) The closing price on the date the stock is issued by the 
covered corporation.
    (C) The average of the high and low prices on the date the stock is 
issued by the covered corporation.
    (D) The trading price at the time the stock is issued by the 
covered corporation.
    (iii) Date of issuance not a trading day. For purposes of each 
method provided in paragraph (e)(2)(ii) of this section, if the date 
the stock of a covered corporation is issued by the covered corporation 
is not a trading day, the date on which the market price is determined 
is the immediately preceding trading day.
    (iv) Consistency requirement--(A) Solely one method permitted for 
determining market price of issued stock. The market price of stock of 
a covered corporation that is traded on an established securities 
market must be determined by consistently applying solely one of the 
methods provided in paragraph (e)(2)(ii) of this section to all stock 
of the covered corporation issued by the covered corporation throughout 
the covered corporation's taxable year.
    (B) Application to repurchased stock. The method used by the 
covered corporation under paragraph (e)(2)(ii)(A) of this section must 
be consistently applied to determine the market price of all stock of 
the covered corporation repurchased by the covered corporation or 
acquired by a specified affiliate of the covered corporation throughout 
the covered corporation's taxable year. See Sec.  58.4501-2(h)(2)(iv).
    (v) Stock traded on multiple exchanges. See Sec.  58.4501-
2(h)(2)(v) for rules regarding the valuation of stock of a covered 
corporation traded on multiple established securities markets.
    (3) Stock not traded on an established securities market--(i) 
General rule. If stock of a covered corporation is not traded on an 
established securities market, the market price of the stock is 
determined as of the date the stock is issued by a covered corporation 
under the principles of Sec.  1.409A-1(b)(5)(iv)(B)(1) of this chapter.
    (ii) Consistency requirement. In determining the market price of 
stock of a covered corporation that is not traded on an established 
securities market, the same valuation method must be used for all 
issuances of stock of the covered corporation belonging to the same 
class throughout the covered corporation's taxable year, unless the 
application of that method to a particular issuance would be 
unreasonable under the facts and circumstances as of the valuation 
date. That same method also must be consistently applied to determine 
the market price of all stock of the covered corporation of the same 
class repurchased by the covered corporation or acquired by a specified 
affiliate of the covered corporation throughout the covered 
corporation's taxable year, unless the application of that method to a 
particular issuance would be unreasonable under the facts and 
circumstances as of the valuation date. See Sec.  58.4501-2(h)(3)(ii).
    (4) Market price of stock denominated in non-U.S. currency. The 
market price of any stock of a covered corporation that is denominated 
in a currency other than the U.S. dollar is converted into U.S. dollars 
at the spot rate (as defined in Sec.  1.988-1(d)(1) of this chapter) on 
the date the stock is issued by the covered corporation or provided by 
a specified affiliate of the covered corporation (as applicable).

[[Page 26044]]

    (5) Stock issued or provided in connection with the performance of 
services. The fair market value of stock of a covered corporation 
issued by the covered corporation or provided by a specified affiliate 
of the covered corporation (as applicable) in connection with the 
performance of services is the fair market value of the stock, as 
determined under section 83, as of the date the stock is issued by the 
covered corporation or provided by the specified affiliate of the 
covered corporation (as applicable). For purposes of this section, the 
fair market value of the stock is determined under the rules provided 
in section 83 regardless of whether an amount is includible in the 
service provider's income under section 83 or otherwise. For example, 
the fair market value of stock issued by a covered corporation pursuant 
to a stock option described in section 421 and stock issued by a 
covered corporation to a nonresident alien for services performed 
outside of the United States is determined using the rules provided in 
section 83.
    (f) Issuances that are disregarded for purposes of applying the 
netting rule. This paragraph (f) lists the sole circumstances in which 
an issuance of stock of a covered corporation is disregarded for 
purposes of the netting rule.
    (1) Distributions by a covered corporation of its own stock. Stock 
of a covered corporation distributed by the covered corporation to its 
shareholders with respect to the covered corporation's stock is 
disregarded for purposes of the netting rule.
    (2) Issuances to a specified affiliate--(i) In general. Subject to 
paragraphs (f)(2)(ii) through (iv) of this section, stock of a covered 
corporation issued by the covered corporation to a specified affiliate 
of the covered corporation, or issued by the covered corporation in 
connection with the performance of services by an employee or other 
service provider for a specified affiliate of the covered corporation, 
is disregarded for purposes of the netting rule.
    (ii) Subsequent transfer by specified affiliate. Stock of a covered 
corporation issued by the covered corporation to a specified affiliate 
of the covered corporation that is subsequently transferred by the 
specified affiliate of the covered corporation to a person that is not 
a specified affiliate of the covered corporation is regarded for 
purposes of the netting rule, and is treated as issued by the covered 
corporation on the date of the subsequent transfer, only if--
    (A) The subsequent transfer by the specified affiliate occurs 
within the same taxable year that the specified affiliate receives the 
stock from the covered corporation (applicable year);
    (B) The covered corporation does not otherwise reduce its stock 
repurchase excise tax base for the applicable year with respect to the 
stock under this section; and
    (C) The subsequent transfer by the specified affiliate is not in 
connection with the performance of services provided to the specified 
affiliate.
    (iii) Specific identification. For purposes of paragraph (f)(2)(ii) 
of this section, unless specifically identified, the shares of stock of 
the covered corporation treated as subsequently transferred by the 
specified affiliate are the earliest shares issued by the covered 
corporation to the specified affiliate.
    (iv) Subsequent transfers in connection with the performance of 
services for a specified affiliate. Stock issued by a covered 
corporation in connection with the performance of services for a 
specified affiliate is not treated as issued by the covered 
corporation. However, a transfer of stock of a covered corporation 
described in Sec.  1.83-6(d) of this chapter (in addition to an actual 
provision of stock by a specified affiliate described in paragraph 
(b)(1)(ii) of this section) by a specified affiliate of the covered 
corporation to an employee of the specified affiliate is treated as a 
provision of stock described in paragraph (b)(1)(ii) of this section.
    (3) No double benefit for issuances that are part of a transaction 
to which the reorganization exception applies. Stock of a covered 
corporation issued by the covered corporation as part of a transaction 
qualifying as a reorganization under section 368(a) or a distribution 
under section 355 is disregarded for purposes of the netting rule if--
    (i) The stock constitutes property permitted to be received under 
section 354 or 355 without the recognition of gain;
    (ii) The stock is used by another covered corporation (second 
covered corporation) to repurchase stock of the second covered 
corporation in a transaction that is a repurchase under Sec.  58.4501-
2(e)(4)(i), (ii), (iii), or (iv); and
    (iii) The repurchase described in paragraph (f)(3)(ii) of this 
section is not included in the second covered corporation's stock 
repurchase excise tax base because that repurchase is a qualifying 
property repurchase.
    (4) Deemed issuances under section 304(a)(1). Any stock treated as 
issued by the acquiring corporation by reason of the application of 
section 304(a)(1) to a transaction (as more fully described in Sec.  
58.4501-2(e)(3)(i)) is disregarded for purposes of the netting rule.
    (5) Deemed issuance of a fractional share. Any fractional share of 
a covered corporation's stock deemed to be issued for Federal income 
tax purposes (in a payment described in Sec.  58.4501-2(e)(3)(ii)) is 
disregarded for purposes of the netting rule.
    (6) Issuance by a covered corporation that is a dealer in 
securities. Any stock of a covered corporation issued by the covered 
corporation that is a dealer in securities is disregarded for purposes 
of the netting rule to the extent the stock is issued, or otherwise is 
used to satisfy obligations to customers arising, in the ordinary 
course of the dealer's business of dealing in securities.
    (7) Issuance by the target corporation in a reverse triangular 
merger. Any target corporation stock that is issued by the target 
corporation to the merged corporation (within the meaning of section 
368(a)(2)(E)) in exchange for consideration that includes the stock of 
the controlling corporation (within the meaning of section 
368(a)(2)(E)) in a transaction qualifying as a reverse triangular 
merger is disregarded for purposes of the netting rule.
    (8) Issuance as part of a section 1036(a) exchange. Any stock of a 
covered corporation issued by the covered corporation in exchange for 
stock of the covered corporation in a transaction that qualifies under 
section 1036(a) of the Code is disregarded for purposes of the netting 
rule.
    (9) Issuance as part of a distribution under section 355. Any stock 
issued by a controlled corporation in a distribution qualifying under 
section 355 (or so much of section 356 as relates to section 355) that 
is not a split-off is disregarded for purposes of the netting rule.
    (10) Stock contributions to an employer-sponsored retirement plan. 
Any stock of a covered corporation contributed to an employer-sponsored 
retirement plan, any stock of a covered corporation treated as 
contributed to an employer-sponsored retirement plan under Sec.  
58.4501-3(d)(1)(ii) and (d)(5)(ii), and any stock of a covered 
corporation sold to a leveraged or non-leveraged ESOP, is disregarded 
for purposes of the netting rule.
    (11) Net exercises and share withholding--(i) In general. Stock of 
a covered corporation withheld by the covered corporation or a 
specified affiliate of the covered corporation to satisfy the exercise 
price of a stock option issued in connection with the performance of 
services, or to pay any withholding obligation, is disregarded for 
purposes of the netting rule. For

[[Page 26045]]

example, stock of a covered corporation withheld by a covered 
corporation or a specified affiliate of the covered corporation to pay 
the exercise price of a stock option, to satisfy an employer's income 
tax withholding obligation under section 3402 of the Code, to satisfy 
an employer's withholding obligation under section 3102 of the Code, or 
to satisfy an employer's withholding obligation for State, local, or 
foreign taxes, is disregarded for purposes of the netting rule.
    (ii) Net share settlement not in connection with the performance of 
services. Settlement in net shares of an option or other derivative 
financial instrument that is not issued in connection with the 
performance of services is treated as an issuance of the net shares 
delivered.
    (12) Settlement other than in stock. Settlement of an option 
contract with respect to stock of a covered corporation using any 
consideration other than stock of the covered corporation (including 
cash) is disregarded for purposes of the netting rule.
    (13) Instrument not in the legal form of stock--(i) Generally 
disregarded. Except as provided in paragraph (f)(13)(ii) of this 
section, the issuance by a covered corporation or provision by a 
specified affiliate of the corporation of an instrument that is not in 
the legal form of stock of the covered corporation but is treated as 
stock for Federal income tax purposes (non-stock instrument) is 
disregarded for purposes of the netting rule.
    (ii) Certain instruments treated as issued--(A) In general. Subject 
to paragraphs (f)(13)(ii)(B), (C), and (D) of this section, if a non-
stock instrument is repurchased by a covered corporation or acquired by 
a specified affiliate of the covered corporation, the issuance or 
provision of the instrument is regarded for purposes of the netting 
rule at the time of such repurchase or acquisition. For purposes of the 
stock repurchase excise tax regulations, the delivery of stock pursuant 
to the terms of a non-stock instrument is treated as a repurchase of 
the non-stock instrument in exchange for an issuance or provision of 
the stock that is delivered.
    (B) Issuance or provision before the initiation date or after the 
cessation date. Any non-stock instrument issued by the covered 
corporation or provided by a specified affiliate of the covered 
corporation before the initiation date or after the cessation date is 
not regarded for purposes of the netting rule.
    (C) Identification of an instrument not in the legal form of stock. 
The covered corporation must identify the repurchase or acquisition of 
a non-stock instrument as the repurchase or acquisition of a non-stock 
instrument on the return on which the stock repurchase excise tax must 
be reported for the covered corporation's taxable year in which the 
repurchase or acquisition occurs (repurchase year) in order for the 
issuance or provision to be regarded under paragraph (f)(13)(ii)(A) of 
this section.
    (D) Consistency requirement. In the repurchase year of a non-stock 
instrument (tested non-stock instrument), the issuance or provision of 
the non-stock instrument is not regarded under paragraph (f)(13)(ii)(A) 
of this section unless the covered corporation reports or has reported 
the repurchase or acquisition of all other comparable non-stock 
instruments repurchased or acquired within the five taxable years 
ending on the last day of the repurchase year in a consistent manner. A 
comparable non-stock instrument is a non-stock instrument that has 
substantially similar economic terms as the tested non-stock 
instrument, regardless of whether the comparable non-stock instrument 
and the tested non-stock instrument have the same legal form. A 
comparable non-stock instrument is reported in a consistent manner if 
it is or was timely reported on the return on which the stock 
repurchase excise tax must be reported that is or was due for the first 
full quarter after the close of the repurchase year for such comparable 
non-stock instrument. Notwithstanding the first sentence of this 
paragraph (f)(13)(ii)(D), the issuance or provision of the tested non-
stock instrument will be regarded if the covered corporation 
demonstrates to the satisfaction of the IRS that the covered 
corporation's failure to timely report the repurchase or acquisition of 
the comparable non-stock instruments was due to reasonable cause 
(within the meaning of Sec.  1.6664-4 of this chapter) and not willful 
neglect. In determining whether this failure to report was due to 
reasonable cause and not willful neglect, the IRS will consider all the 
facts and circumstances, including the steps the covered corporation 
took to comply with its Federal tax reporting and payment obligations.
    (E) Fair market value of the instrument. The amount of the 
reduction for purposes of computing the covered corporation's stock 
repurchase excise tax base for a taxable year under this section for 
the issuance or provision of a non-stock instrument is equal to the 
lesser of the fair market value of the instrument when the instrument 
was issued or provided within the meaning of paragraph (e) of this 
section or the fair market value of the instrument at the time of the 
repurchase by the covered corporation or acquisition by the specified 
affiliate of the covered corporation.


Sec.  58.4501-5  Examples.

    (a) Scope. This examples in this section illustrate the application 
of section 4501 of the Code and the stock repurchase excise tax 
regulations other than the provisions of section 4501(d) and Sec.  
58.4501-7. See Sec.  58.4501-7(p) and (q) for examples that illustrate 
the application of the rules in Sec.  58.4501-7 related to section 
4501(d)(1) and (2), respectively.
    (b) In general. For purposes of the examples in this section, 
unless otherwise stated: each of Corporation X and unrelated Target is 
a covered corporation that is a calendar-year taxpayer; the only 
outstanding stock of each of Corporation X and Target is a single class 
of common stock that is traded on an established securities market; any 
shareholder whose stock is redeemed in a section 317(b) redemption 
qualifies for sale or exchange treatment under section 302(a); the de 
minimis exception does not apply; the receipt of money or other 
property by any shareholder whose stock is repurchased in an 
acquisitive reorganization or an E reorganization is not treated as 
having the effect of a distribution of a dividend under section 
356(a)(2); the covered corporation determines the fair market value of 
its stock repurchased or issued based on the trading price of the stock 
at the time it is repurchased or issued; and any instrument that is not 
in the legal form of stock is not treated as stock for Federal income 
tax purposes.

    (1) Example 1: Redemption of preferred stock--(i) Facts. 
Corporation X has outstanding common stock that is traded on an 
established securities market. Corporation X also has outstanding 
mandatorily redeemable preferred stock that is stock for Federal tax 
purposes but that is neither additional tier 1 capital nor traded on 
an established securities market. On January 1, 2024, Corporation X 
redeems the preferred stock pursuant to its terms.
    (ii) Analysis. The redemption by Corporation X of its 
mandatorily redeemable preferred stock is a repurchase because 
Corporation X redeemed an instrument that is stock for Federal tax 
purposes (that is, mandatorily redeemable preferred stock issued by 
Corporation X) and the redemption is a section 317(b) redemption. 
See Sec. Sec.  58.4501-1(b)(29) and 58.4501-2(e)(2)(i).
    (2) Example 2: Valuation of repurchase--(i) Facts. On April 15, 
2024, when the stock of Corporation X is trading at $0.70x per 
share, Corporation X purchases 50 shares of its stock for $35x from 
one of its shareholders on an established securities market. The 
shareholder is required to deliver the stock

[[Page 26046]]

to Corporation X within the standard settlement cycle for the stock 
(a regular-way sale), which is one business day after execution of 
the sale (that is, the trade date of April 15, 2024). On April 17, 
2024, the 50 shares are delivered to Corporation X.
    (ii) Analysis. Corporation X's purchase of 50 shares of 
Corporation X stock is a repurchase because the transaction is a 
section 317(b) redemption. See Sec.  58.4501-2(e)(2)(i). For 
purposes of computing Corporation X's stock repurchase excise tax 
base, the trade date of April 15, 2024, is the date of repurchase. 
See Sec.  58.4501-2(g)(1). The fair market value of the 50 shares of 
stock repurchased on April 15, 2024, is the aggregate market price 
of those shares on the date of repurchase, or $35x ($0.70x per share 
x 50 shares = $35x). See Sec.  58.4501-2(h)(1). Accordingly, the 
repurchase by Corporation X increases its stock repurchase excise 
tax base for the 2024 taxable year by $35x.
    (iii) Application of netting rule. The facts are the same as in 
paragraph (b)(2)(i) of this section (Example 2), except that, on 
August 1, 2024, Corporation X issues 20 shares of its stock to an 
unrelated party, at which time ownership of the stock transfers to 
the unrelated party for Federal income tax purposes. On that date, 
the stock of Corporation X is trading at $0.50x per share. For 
purposes of computing Corporation X's stock repurchase excise tax 
base, Corporation X is treated as issuing the 20 shares of its stock 
on August 1, 2024 (that is, the date on which ownership of the stock 
transfers to the recipient for Federal income tax purposes). See 
Sec.  58.4501-4(d)(1). The fair market value of that issued stock is 
its aggregate market price on the date of issuance by Corporation X, 
or $10x ($0.50x per share x 20 shares = $10x). See Sec.  58.4501-
4(e)(1). Accordingly, the net increase in Corporation X's stock 
repurchase excise tax base for its 2024 taxable year is $25x ($35x 
repurchase-$10x issuance = $25x). See Sec.  58.4501-2(c)(1).
    (3) Example 3: Acquisition partially funded by the target 
corporation--(i) Facts. On May 30, 2024, Corporation X acquires all 
of Target's outstanding stock (Target Stock Acquisition). To 
effectuate the Target Stock Acquisition, Corporation X causes the 
following transactions steps to occur. First, Corporation X 
contributes $40x to a newly formed corporation (Merger Sub). Second, 
Merger Sub merges into Target, with Target surviving the merger 
(Subsidiary Merger). At the time of the Subsidiary Merger, the stock 
of Target has an aggregate fair market value of $100x. In the 
Subsidiary Merger, Target's shareholders exchange all their Target 
stock for $100x of cash, of which $60x is funded by Target and $40x 
is funded by Corporation X. For Federal income tax purposes, the 
transitory existence of Merger Sub is disregarded, and Target is 
treated as if Target redeemed 60 percent of its outstanding stock 
for $60x as part of the Subsidiary Merger. (This treatment results 
from the fact that Target funded $60x of the consideration received 
by Target's shareholders in exchange for their Target stock.) All of 
Target's stock ceases to trade on an established securities market 
upon completion of the Target Stock Acquisition.
    (ii) Analysis. Target ceases to be a covered corporation at the 
end of the day on May 30, 2024 (that is, the cessation date of 
Target). See Sec.  58.4501-2(d)(2). Target's redemption of 60 
percent of its outstanding stock is a redemption within the meaning 
of section 317(b) with regard to the stock of a covered corporation. 
See Sec.  58.4501-1(b)(24). In addition, Target's redemption is not 
included in the exclusive list of transactions under Sec.  58.4501-
2(e)(3) that are treated as a section 317(b) redemption but are not 
a repurchase. Accordingly, the redemption is a repurchase. See Sec.  
58.4501-2(e)(2). Therefore, as a result of the Target Stock 
Acquisition, Target's stock repurchase excise tax base for its 2024 
taxable year is increased by $60x. See Sec.  58.4501-2(c)(1).
    (4) Example 4: Leveraged buyout--(i) Facts. The facts are the 
same as in paragraph (b)(3)(i) of this section (Example 3), except 
that $60x of the consideration received by Target's shareholders in 
exchange for their Target stock is funded by a $60x loan to Merger 
Sub from an unrelated lender. In the Subsidiary Merger, Target 
assumes Merger Sub's obligation on the $60x loan. As a result of the 
disregarded transitory existence of Merger Sub, the Target Stock 
Acquisition is treated for Federal income tax purposes as though 
Target directly borrowed $60x from the unrelated lender and then 
used the loan proceeds to redeem $60x of its stock from the Target 
shareholders.
    (ii) Analysis. The analysis is the same as in paragraph 
(b)(3)(ii) of this section (Example 3).
    (5) Example 5: Pro rata stock split--(i) Facts. On October 1, 
2024, Corporation X distributes three shares of Corporation X stock 
with respect to each existing share of its outstanding stock 
(Corporation X Stock Split).
    (ii) Analysis. The stock distributed by Corporation X to its 
shareholders through the Corporation X Stock Split is disregarded 
for purposes of the netting rule because Corporation X distributed 
the stock to its shareholders with respect to its outstanding stock. 
See Sec.  58.4501-4(f)(1). Accordingly, the Corporation X Stock 
Split is not taken into account in computing Corporation X's stock 
repurchase excise tax base for its 2024 taxable year. See Sec.  
58.4501-2(c)(1) (regarding the computation of the stock repurchase 
excise tax base).
    (6) Example 6: Acquisition of a target corporation in an 
acquisitive reorganization--(i) Facts. On October 1, 2024, Target 
merges into Corporation X in a transaction that qualifies as an A 
reorganization (Target Merger). On the date of the Target Merger, 
the fair market value of Target's outstanding stock is $100x. In the 
Target Merger, Target's shareholders exchange $60x of their Target 
stock for Corporation X stock and $40x of their Target stock for 
$40x of cash.
    (ii) Analysis regarding repurchase treatment, timing, and 
amount. The exchange by the Target shareholders of their Target 
stock for the consideration received in the Target Merger is a 
repurchase by Target because the exchange is an economically similar 
transaction. See Sec.  58.4501-2(e)(2)(ii) and (e)(4)(i). This 
repurchase occurs on October 1, 2024 (that is, the date on which the 
Target shareholders exchange their Target shares as part of the 
Target Merger). See Sec.  58.4501-2(g)(2). The amount of this 
repurchase by Target is $100x, which equals the aggregate fair 
market value of the Target stock on the date the stock is exchanged 
by the Target shareholders as part of the Target Merger (that is, 
October 1, 2024). See Sec.  58.4501-2(h)(1).
    (iii) Analysis regarding impact of Target Merger on Target's 
stock repurchase excise tax base. Target's stock repurchase excise 
tax base for its 2024 taxable year initially is increased by $100x 
on account of the Target Merger. See Sec.  58.4501-2(c)(1)(i). Under 
the reorganization exception, the fair market value of the Target 
stock exchanged by the Target shareholders for Corporation X stock 
in the Target Merger (that is, $60x) is a reduction in Target's 
stock repurchase excise tax base. See Sec. Sec.  58.4501-2(c)(1)(ii) 
and 58.4501-3(c)(1) (regarding acquisitive reorganizations). 
However, the fair market value of the Target stock exchanged by the 
Target shareholders for $40x of cash in the Target Merger does not 
qualify for the reorganization exception. See Sec.  58.4501-3(c). 
Therefore, Target's stock repurchase excise tax base for its 2024 
taxable year is increased by $40x ($100x repurchase-$60x exception = 
$40x) as a result of the Target Merger.
    (iv) Analysis regarding impact of Target Merger on Corporation 
X's stock repurchase excise tax base. Corporation X's transfer of 
Corporation X stock to Target in the Target Merger is disregarded 
for purposes of the netting rule because Corporation X's issuance of 
that stock is part of a transaction to which the reorganization 
exception applies. See Sec.  58.4501-4(f)(3) (disregarding such 
types of issuances to ensure no double benefit). Specifically, 
Corporation X's transfer of Corporation X stock to Target is 
disregarded for purposes of the netting rule because the Corporation 
X stock constitutes property permitted to be received under section 
354 without the recognition of gain, the Corporation X stock is used 
by a covered corporation (that is, Target) to repurchase its stock 
in a transaction that is a repurchase under Sec.  58.4501-
2(e)(4)(i), and the repurchase by Target is not included in Target's 
stock repurchase excise tax base because it is a qualifying property 
repurchase. See id. Therefore, Corporation X does not take into 
account any of the $60x of its stock transferred to Target in the 
Target Merger in computing Corporation X's stock repurchase excise 
tax base for its 2024 taxable year under Sec.  58.4501-4(b)(1).
    (7) Example 7: Cash paid in lieu of fractional shares--(i) 
Facts. The facts are the same as in paragraph (b)(6)(i) of this 
section (Example 6). Additionally, the exchange ratio in the Target 
Merger is 1.25 shares of Corporation X stock for each share of 
Target stock. As part of the Target Merger, Shareholder A (who owns 
two shares of Target stock) receives two shares of Corporation X 
stock as well as cash in lieu of a 0.5 fractional share in 
Corporation X. The payment by Corporation X to Shareholder A of cash 
in lieu of a fractional share of Corporation X stock was not 
separately bargained-for consideration (that is, the cash paid by 
Corporation X in lieu of the fractional shares represented a mere

[[Page 26047]]

rounding off of the two Corporation X shares issued to Shareholder A 
in the exchange). In addition, the payment by Corporation X to 
Shareholder A of cash in lieu of a fractional share of Corporation X 
stock was carried out solely for administrative convenience (and 
therefore, solely for non-tax reasons) and was for an amount of cash 
that did not exceed the value of one full share of Corporation X 
stock.
    (ii) Analysis. The payment by Corporation X of cash to 
Shareholder A in lieu of a fractional share of Corporation X stock 
is treated for Federal income tax purposes as though the 0.5 
fractional share were distributed by Corporation X to Shareholder A 
as part of the Target Merger and then redeemed by Corporation X for 
cash. This deemed redemption is not a repurchase because the payment 
of cash in lieu of a fractional share satisfies the requirements of 
Sec.  58.4501-2(e)(3)(ii). In addition, Corporation X's deemed 
issuance of the fractional share to Shareholder A is disregarded for 
purposes of the netting rule. See Sec.  58.4501-4(f)(5).
    (8) Example 8: Two-step asset acquisition--(i) Facts. 
Corporation X acquires the assets of Target through the following 
transaction steps pursuant to an integrated plan to effect the 
acquisition. First, on September 30, 2024, Corporation X contributes 
$60x of Corporation X stock and $40x of cash to a newly formed 
subsidiary (Merger Sub). Second, on October 1, 2024, Merger Sub 
merges into Target in a statutory merger, with Target surviving 
(Subsidiary Merger). Third, on October 15, 2024, Target merges into 
Corporation X in a statutory merger (Upstream Merger). On the date 
of the Subsidiary Merger, the fair market value of Target's 
outstanding stock is $100x. In the Subsidiary Merger, $60x of Target 
stock is exchanged for Corporation X stock, and $40x of Target stock 
is exchanged for $40x of cash. For Federal income tax purposes, the 
Subsidiary Merger and the Upstream Merger are integrated into a 
single statutory merger of Target into Corporation X that qualifies 
as an A reorganization.
    (ii) Analysis. The analysis is the same as in paragraph (b)(6) 
of this section (Example 6).
    (9) Example 9: E reorganization--(i) Facts. On November 1, 2024, 
Corporation X issues new stock, with an aggregate fair market value 
of $100x (New Common Stock), to its shareholders in exchange for 
their outstanding stock in Corporation X (Old Common Stock). The 
exchange (Recapitalization) qualifies as an E reorganization. At the 
time of the Recapitalization, the fair market value of Corporation 
X's Old Common Stock is $100x.
    (ii) Analysis regarding repurchase treatment, timing, and 
amount. The exchange by the Corporation X shareholders of their Old 
Common Stock for New Common Stock in the Recapitalization pursuant 
to the plan of reorganization is a repurchase by Corporation X 
because that exchange is an economically similar transaction. See 
Sec.  58.4501-2(e)(2)(ii) and (e)(4)(ii). This repurchase occurs on 
November 1, 2024 (that is, the date on which the Target shareholders 
exchange their old Common Stock pursuant to the plan of 
reorganization). See Sec.  58.4501-2(g)(2). The amount of this 
repurchase by Corporation X is $100x, which equals the aggregate 
fair market value of the Old Common Stock on the date that stock is 
exchanged by the Corporation X shareholders pursuant to the plan of 
reorganization (that is, November 1, 2024). See Sec.  58.4501-
2(h)(1).
    (iii) Analysis regarding impact of repurchase of Old Common 
Stock on Corporation X's stock repurchase excise tax base. 
Corporation X's stock repurchase excise tax base for its 2024 
taxable year initially is increased by $100x on account of the 
Recapitalization. See Sec.  58.4501-2(c)(1)(i). Under the 
reorganization exception, the fair market value of the Old Common 
Stock exchanged by the Corporation X shareholders for New Common 
Stock in the Recapitalization (that is, $100x) is a qualifying 
property repurchase that reduces the amount of Corporation X's stock 
repurchase excise tax base. See Sec. Sec.  58.4501-2(c)(1)(ii) and 
Sec.  58.4501-3(c)(2). Consequently, because all the Old Common 
Stock was exchanged by the Corporation X shareholders for New Common 
Stock, the Recapitalization does not increase Corporation X's stock 
repurchase excise tax base for its 2024 taxable year ($100x 
repurchase-$100x exception = $0).
    (iv) Analysis regarding impact of issuance of New Common Stock 
on Corporation X's stock repurchase excise tax base. Corporation X's 
issuance of the New Common Stock is disregarded for purposes of the 
netting rule because Corporation X's issuance of that stock is part 
of a transaction to which the reorganization exception applies. See 
Sec.  58.4501-4(f)(3) (disregarding such types of issuances to 
ensure no double benefit). Specifically, Corporation X's issuance of 
its New Common Stock to Corporation X's shareholders is disregarded 
for purposes of the netting rule because the New Common Stock 
constitutes property permitted to be received under section 354 
without the recognition of gain, the New Common Stock is used by a 
covered corporation (that is, Corporation X) to repurchase its stock 
in a transaction that is a repurchase under Sec.  58.4501-
2(e)(4)(ii), and the repurchase by Corporation X is not included in 
Corporation X's stock repurchase excise tax base for its 2024 
taxable year because it is a qualifying property repurchase. See id. 
Therefore, Corporation X does not take into account any of the $100x 
of New Common Stock issued to its shareholders in computing its 
stock repurchase excise tax base for its 2024 taxable year under 
Sec.  58.4501-4(b)(1).
    (10) Example 10: F reorganization--(i) Facts. Corporation X is a 
State A corporation. In order to reorganize under the laws of State 
B, on November 15, 2024, Corporation X forms Corporation Y (a State 
B corporation) and merges into Corporation Y in a transaction 
(Corporation X Redomiciliation) that qualifies as an F 
reorganization. On the date of the Corporation X Redomiciliation, 
the fair market value of Corporation X's stock is $100x. Shareholder 
A owns $25x of Corporation X's outstanding stock. In the Corporation 
X Redomiciliation, Shareholder A transfers all its Corporation X 
stock to Corporation X in exchange for $25x of cash, which is 
treated for Federal income tax purposes as an unrelated, separate 
transaction from the Corporation X Redomiciliation to which section 
302(a) applies (Shareholder A Redemption). See Sec.  1.368-
2(m)(3)(iii) of this chapter. The remaining Corporation X 
shareholders exchange their Corporation X stock for Corporation Y 
stock as part of the Corporation X Redomiciliation.
    (ii) Analysis regarding repurchase treatment, timing, and 
amount. The exchange by Shareholder A of its Corporation X stock is 
a repurchase by Corporation X in the amount of $25x because it is a 
section 317(b) redemption. See Sec.  58.4501-2(e)(2)(i). In 
addition, the exchange by Corporation X's other shareholders of 
their Corporation X stock for Corporation Y stock is a repurchase by 
Corporation X in the amount of $75x because that exchange is an 
economically similar transaction. See Sec.  58.4501-2(e)(2)(ii) and 
(e)(4)(iii). These repurchases occur on November 15, 2024 (that is, 
the date on which the Corporation X shareholders transfer their 
Corporation X stock to Corporation X as part of the transaction). 
See Sec.  58.4501-2(g)(1) and (2). The total amount of these 
repurchases by Corporation X is $100x, which equals the sum of $25x 
(the fair market value of the Corporation X stock redeemed in the 
Shareholder A Redemption on the date of the redemption) and $75x 
(the aggregate fair market value of the Corporation X stock on the 
date that stock is exchanged by the remaining Corporation X 
shareholders as part of the Corporation X Redomiciliation (that is, 
November 15, 2024)). See Sec.  58.4501-2(h)(1).
    (iii) Analysis regarding impact of Shareholder A Redemption and 
Corporation X Redomiciliation on Corporation X's stock repurchase 
excise tax base. Corporation X's stock repurchase excise tax base 
for its 2024 taxable year initially is increased by $100x on account 
of the Shareholder A Redemption and the Corporation X 
Redomiciliation. See Sec.  58.4501-2(c)(1)(i). Under the 
reorganization exception, the fair market value of the Corporation X 
stock exchanged by the Corporation X shareholders for Corporation Y 
stock in the Corporation X Redomiciliation (that is, $75x) is a 
qualifying property repurchase that reduces the amount of 
Corporation X's stock repurchase excise tax base. See Sec. Sec.  
58.4501-2(c)(1)(ii) and 58.4501-3(c)(3). Accordingly, Corporation 
X's stock repurchase excise tax base for its 2024 taxable year is 
increased by $25x ($25x repurchase + ($75x repurchase-$75x 
exception) = $25x) because of the Corporation X Redomiciliation.
    (iv) Analysis regarding impact of Corporation X Redomiciliation 
on Corporation Y's stock repurchase excise tax base. Corporation Y's 
transfer of the $75x of its stock to Corporation X in the 
Corporation X Redomiciliation is disregarded for purposes of the 
netting rule because Corporation Y's issuance of that stock is part 
of a transaction to which the reorganization exception applies. See 
Sec.  58.4501-4(f)(3) (disregarding such types of issuances to 
ensure no double benefit). Specifically, Corporation Y's transfer of 
its stock to Corporation X is disregarded for purposes of the 
netting rule because the Corporation Y

[[Page 26048]]

stock constitutes property permitted to be received under section 
354 without the recognition of gain, the Corporation Y stock is used 
by a covered corporation (that is, Corporation X) to repurchase its 
stock in a transaction that is a repurchase under Sec.  58.4501-
2(e)(4)(iii), and the repurchase by Corporation X is not included in 
Corporation X's stock repurchase excise tax base for its 2024 
taxable year because it is a qualifying property repurchase. See id. 
Therefore, Corporation Y does not take into account any of the $75x 
of its stock transferred to Corporation X in computing Corporation 
Y's stock repurchase excise tax base for its 2024 taxable year under 
Sec.  58.4501-4(f)(2)(i).
    (11) Example 11: Section 355 split-off--(i) Facts. Corporation X 
owns all the stock of a pre-existing subsidiary (Controlled). On 
December 1, 2024, Corporation X distributes all the stock of 
Controlled and $20x of cash to certain of its shareholders 
(Participating Shareholders) in exchange for $100x of Corporation X 
stock in a split-off (Corporation X Split-Off). On the date of the 
Corporation X Split-Off, the Corporation X stock has a fair market 
value of $100x, and the Controlled stock has a fair market value of 
$80x.
    (ii) Analysis regarding repurchase treatment, timing, and 
amount. The exchange by the Participating Shareholders of their 
Corporation X stock for the $80x of Controlled stock and $20x of 
cash in the Corporation X Split-Off is a repurchase by Corporation X 
because the exchange is an economically similar transaction. See 
Sec.  58.4501-2(e)(2)(ii) and (e)(4)(iv). This repurchase occurs on 
December 1, 2024 (that is, the date on which the Participating 
Shareholders exchange their Corporation X stock as part of the 
Corporation X Split-Off). See Sec.  58.4501-2(g)(2). The amount of 
the repurchase by Corporation X is $100x, which equals the aggregate 
fair market value of the Corporation X stock on the date the stock 
is exchanged by the Participating Shareholders in the Corporation X 
Split-Off (that is, December 1, 2024). See Sec.  58.4501-2(h)(1).
    (iii) Analysis regarding impact of Corporation X Split-Off on 
Corporation X's stock repurchase excise tax base. Corporation X's 
stock repurchase excise tax base for its 2024 taxable year initially 
is increased by $100x on account of the Corporation X Split-Off. 
However, under the reorganization exception, the fair market value 
of the Corporation X stock exchanged by the Participating 
Shareholders for Controlled stock in the Corporation X Split-Off 
(that is, $80x) is a qualifying property repurchase that reduces the 
amount of Corporation X's stock repurchase excise tax base. See 
Sec. Sec.  58.4501-2(c)(1)(ii) and 58.4501-3(c)(4). The fair market 
value of the Corporation X stock exchanged by the Participating 
Shareholders for the $20x of cash in the Corporation X Split-Off 
does not qualify for the reorganization exception. See Sec.  
58.4501-3(c). Therefore, Corporation X's stock repurchase excise tax 
base for its 2024 taxable year is increased by $20x ($100x 
repurchase - $80x exception = $20x) as a result of the Corporation X 
Split-Off.
    (12) Example 12: Section 355 split-off as part of a D 
reorganization--(i) Facts. The facts are the same as in paragraph 
(b)(11)(i) of this section (Example 11), except that Controlled is a 
newly formed corporation, and the Corporation X Split-Off is carried 
out as part of a transaction qualifying as a D reorganization in 
which Corporation X transfers assets to Controlled.
    (ii) General analysis. Except as described in paragraph 
(b)(12)(iii) of this section, the analysis is the same as in 
paragraphs (b)(11)(ii) and (iii) of this section (Example 11).
    (iii) Analysis regarding Controlled's stock repurchase excise 
tax base. Controlled's transfer of $80x of its stock to Corporation 
X in the Corporation X Split-Off is disregarded for purposes of the 
netting rule because Controlled's issuance of that stock is part of 
a transaction to which the reorganization exception applies. See 
Sec.  58.4501-4(f)(3) (disregarding such types of issuances to 
ensure no double benefit). Specifically, Controlled's transfer of 
its stock to Corporation X is disregarded for purposes of the 
netting rule because the Controlled stock constitutes property 
permitted to be received under section 355 without the recognition 
of gain, the Controlled stock is used by a covered corporation (that 
is, Corporation X) to repurchase its stock in a transaction that is 
a repurchase under Sec.  58.4501-2(e)(4)(iv), and the repurchase by 
Corporation X is not included in Corporation X's stock repurchase 
excise tax base for its 2024 taxable year because it is a qualifying 
property repurchase. See id. Controlled's transfer of its stock to 
Corporation X also is disregarded for purposes of the netting rule 
because Controlled is not a covered corporation at the time of the 
transfer. See Sec.  58.4501-2(d)(1). Therefore, Controlled does not 
take into account any of the $80x of its stock transferred to 
Corporation X in computing Controlled's stock repurchase excise tax 
base for its 2024 taxable year under Sec.  58.4501-4(b)(1).
    (13) Example 13: Spin-off--(i) Facts. The facts are the same as 
in paragraph (b)(11)(i) of this section (Example 11), except that 
Corporation X distributes the Controlled stock and cash to its 
shareholders pro rata without the shareholders exchanging any 
Corporation X stock (Corporation X Spin-Off).
    (ii) Analysis. The Corporation X Spin-Off is not a repurchase by 
Corporation X. See Sec.  58.4501-2(e)(5)(iii).
    (14) Example 14: Section 355 spin-off as part of a D 
reorganization--(i) Facts. The facts are the same as in paragraph 
(b)(13)(i) of this section (Example 13), except that Controlled is a 
newly formed corporation, the Corporation X Spin-Off is carried out 
as part of a transaction qualifying as a D reorganization in which 
Corporation X transfers assets to Controlled, and Corporation X 
receives the $20x of cash from Controlled and distributes the cash 
to certain of Corporation X's shareholders in exchange for 
Corporation X stock.
    (ii) Analysis regarding Corporation X. The distribution by 
Corporation X of the $80x of stock of Controlled in the Corporation 
X Spin-Off is not a repurchase by Corporation X. See Sec.  58.4501-
2(e)(5)(iii)(A). The distribution by Corporation X of the $20x of 
cash in exchange for Corporation X stock is a repurchase. See Sec.  
58.4501-2(e)(5)(iii)(B).
    (iii) Analysis regarding Controlled's stock repurchase excise 
tax base. Controlled's transfer of the $80x of its stock to 
Corporation X is disregarded for purposes of the netting rule. See 
Sec.  58.4501-4(f)(9) (providing that any stock issued by a 
controlled corporation in a distribution qualifying under section 
355 (or so much of section 356 as relates to section 355) that is 
not a split-off is disregarded for purposes of the netting rule).
    (15) Example 15: Repurchase pursuant to an accelerated share 
repurchase agreement--(i) Facts. On October 10, 2022, Corporation X 
entered into an accelerated share repurchase (ASR) agreement with an 
investment bank (Bank). Under the terms of the ASR agreement, Bank 
agrees to deliver a number of shares of Corporation X stock to 
Corporation X during the term of the ASR, in an amount determined by 
reference to the price of Corporation X stock on specified days 
during the term of the ASR. Pursuant to the terms of the ASR 
agreement, Corporation X paid Bank a prepayment amount. Bank 
borrowed 80 shares of Corporation X stock from a party not related 
to Bank or Corporation X. Pursuant to the terms of the ASR 
agreement, Bank delivered 80 shares of Corporation X stock to 
Corporation X on October 12, 2022. On final settlement of the ASR, 
Bank may be required to deliver additional shares of Corporation X 
stock to Corporation X or Corporation X may be required to make a 
payment to Bank. The terms of the ASR agreement and the facts and 
circumstances cause ownership of the 80 shares to transfer from Bank 
to Corporation X for Federal income tax purposes at the time of 
delivery (that is, October 12, 2022). The agreement will settle in 
2023. On February 1, 2023, Bank delivers an additional 20 shares to 
Corporation X in final settlement of the ASR agreement. For Federal 
income tax purposes, ownership of those 20 shares is treated as 
transferring from Bank to Corporation X at the time of delivery 
(that is, February 1, 2023).
    (ii) Analysis. Corporation X is treated as repurchasing 80 
shares of Corporation X stock on October 12, 2022 (that is, the date 
on which ownership of the 80 shares delivered by Bank transferred 
from Bank to Corporation X for Federal income tax purposes). See 
Sec.  58.4501-2(g)(1). However, the repurchase by Corporation X of 
the 80 shares of Corporation X stock does not increase Corporation 
X's stock repurchase excise tax base for its 2023 taxable year 
because the repurchase occurred prior to January 1, 2023. See Sec.  
58.4501-2(c)(3); see also section 10201(d) of the IRA (providing 
that the stock repurchase excise tax applies to repurchases after 
December 31, 2022). The delivery by Bank to Corporation X of 20 
shares of Corporation X stock on February 1, 2023, constitutes a 
repurchase because, for Federal income tax purposes, the terms of 
the ASR agreement and the facts and circumstances cause ownership of 
those shares to transfer from Bank to Corporation X on that date. 
See Sec.  58.4501-2(g)(1). Therefore, the repurchase by Corporation 
X of those 20 shares of Corporation X stock

[[Page 26049]]

increases Corporation X's stock repurchase excise tax base for its 
2023 taxable year.
    (16) Example 16: Distribution in complete liquidation of a 
covered corporation--(i) Facts. Corporation X adopts a plan of 
complete liquidation that becomes effective on March 1, 2024 
(Corporation X Liquidation). Corporation X has 100 shares of stock 
outstanding. On April 1, 2024, all shareholders of Corporation X 
receive a liquidating distribution by Corporation X in full payment 
for their Corporation X stock. On the date on which Corporation X 
distributes all its corporate assets to its shareholders in complete 
liquidation (that is, April 1, 2024), Corporation X stock is trading 
at $1x per share. Each distribution in complete liquidation is 
subject to section 331.
    (ii) Analysis. A distribution in complete liquidation of a 
covered corporation (that is, Corporation X) to which section 331 
(but not section 332(a)) applies is not a repurchase by the covered 
corporation. See Sec.  58.4501-2(e)(5)(i). Therefore, none of the 
distributions by Corporation X in complete liquidation is a 
repurchase by Corporation X, and Corporation X's stock repurchase 
excise tax for its 2024 taxable year is not increased because of the 
Corporation X Liquidation.
    (17) Example 17: Complete liquidation of a covered corporation 
to which sections 331 and 332(a) both apply--(i) Facts. The facts 
are the same as in paragraph (b)(16)(i) of this section (Example 
16), except that one of Corporation X's shareholders (Corporation Z) 
is an 80-percent distributee (as defined in section 337(c) of the 
Code), and the liquidating distribution by Corporation X to 
Corporation Z as part of the Corporation X Liquidation qualifies as 
a complete liquidation under section 332(a).
    (ii) Analysis. In the case of a complete liquidation of a 
covered corporation, if sections 331 and 332(a), respectively, apply 
to component distributions of the complete liquidation, a 
distribution to which section 331 applies is a repurchase by the 
covered corporation, and the distribution to which section 332(a) 
applies is not a repurchase by the covered corporation. See Sec.  
58.4501-2(e)(4)(v). Therefore, as a result of the component 
liquidating distributions of the Corporation X Liquidation to which 
section 331 applies, Corporation X repurchased 20 shares of its 
stock on April 1, 2024. The Corporation X Liquidation results in a 
$20x increase in Corporation X's stock repurchase excise tax base 
for its 2024 taxable year because the fair market value of 
Corporation X's stock on the date of repurchase (that is, April 1, 
2024) was $1x per share (20 shares x $1x = $20x). See Sec.  58.4501-
2(h)(1).
    (18) Example 18: Acquisition by disregarded entity--(i) Facts. 
Corporation X owns all the interests in LLC, a domestic limited 
liability company that is disregarded as an entity separate from its 
owner for Federal tax purposes (disregarded entity) under Sec.  
301.7701-3 of this chapter. On May 31, 2024, LLC purchases shares of 
Corporation X's stock for cash from an unrelated shareholder.
    (ii) Analysis. Because LLC is a disregarded entity, the May 31, 
2024, acquisition of Corporation X stock is treated as an 
acquisition by Corporation X. Accordingly, the acquisition is a 
section 317(b) redemption and therefore a repurchase. See Sec.  
58.4501-2(e)(2)(i). Section 301.7701-2(c)(2)(v) of this chapter 
(treating disregarded entities as corporations for purposes of 
certain excise taxes) does not apply to treat LLC as a corporation 
because neither chapter 37 of the Code nor section 4501 is described 
in Sec.  301.7701-2(c)(2)(v)(A) of this chapter.
    (19) Example 19: Reverse triangular merger--(i) Facts. On 
October 1, 2024, Corporation X acquires all of Target's outstanding 
stock (Target Stock Acquisition) in a transaction that qualifies as 
a reverse triangular merger. To effectuate the Target Stock 
Acquisition, Corporation X causes the following steps to occur on 
the same day. First, Corporation X contributes $80x of Corporation X 
stock and $20x of cash (Merger Consideration) to a newly formed 
corporation (Merger Sub). Second, Merger Sub merges into Target in a 
statutory merger, with Target surviving (Reverse Triangular Merger). 
On the date of the Reverse Triangular Merger (that is, October 1, 
2024), the fair market value of Target's outstanding stock is $100x. 
In the Reverse Triangular Merger, $80x of Target stock is exchanged 
for Corporation X stock, and $20x of Target stock is exchanged for 
$20x of cash.
    (ii) Analysis regarding repurchase treatment, timing, and 
amount. The exchange by the Target shareholders of their Target 
stock for the Merger Consideration is a repurchase by Target because 
that exchange is an economically similar transaction. See Sec.  
58.4501-2(e)(2)(ii) and (e)(4)(i). The repurchase occurs on October 
1, 2024 (that is, the date on which the Target shareholders exchange 
their Target shares as part of the Reverse Triangular Merger). See 
Sec.  58.4501-2(g)(2). The amount of the repurchase is $100x, which 
equals the aggregate fair market value of the Target stock on the 
date the stock is exchanged by the Target shareholders as part of 
the Reverse Triangular Merger (that is, October 1, 2024). See Sec.  
58.4501-2(h)(1).
    (iii) Analysis regarding impact of Reverse Triangular Merger on 
Target's stock repurchase excise tax base. Target's stock repurchase 
excise tax base for its 2024 taxable year initially is increased by 
$100x on account of the Reverse Triangular Merger. See Sec.  
58.4501-2(c)(1)(i). Under the reorganization exception, the fair 
market value of the Target stock exchanged by the Target 
shareholders for Corporation X stock in the Reverse Triangular 
Merger (that is, $80x) is a qualifying property repurchase that 
reduces the amount of Target's stock repurchase excise tax base. See 
Sec. Sec.  58.4501-2(c)(1)(ii) and 58.4501-3(c)(1) (regarding 
acquisitive reorganizations). However, the fair market value of the 
Target stock exchanged by the Target shareholders for the $20x of 
cash in the Reverse Triangular Merger does not qualify for the 
reorganization exception. See Sec.  58.4501-3(c). In addition, any 
Target stock that is deemed to be issued by Target to Merger Sub in 
exchange for the Merger Consideration is disregarded for purposes of 
the netting rule. See Sec.  58.4501-4(f)(7). Therefore, Target's 
stock repurchase excise tax base for its 2024 taxable year is 
increased by $20x ($100x repurchase - $80x exception = $20x) as a 
result of the Reverse Triangular Merger.
    (iv) Analysis regarding impact of Reverse Triangular Merger on 
Corporation X's stock repurchase excise tax base. Corporation X's 
issuance of Corporation X stock in the Reverse Triangular Merger is 
disregarded for purposes of the netting rule because Corporation X's 
issuance of that stock is part of a transaction to which the 
reorganization exception applies. See Sec.  58.4501-4(f)(3) 
(disregarding such types of issuances to ensure no double benefit). 
Specifically, Corporation X's issuance of Corporation X stock is 
disregarded for purposes of the netting rule because the Corporation 
X stock constitutes property permitted to be received under section 
354 without the recognition of gain, the Corporation X stock is used 
by a covered corporation (that is, Target) to repurchase its stock 
in a transaction that is a repurchase under Sec.  58.4501-
2(e)(4)(i), and the repurchase by Target is not included in Target's 
stock repurchase excise tax base because it is a qualifying property 
repurchase. See id. Therefore, Corporation X does not take into 
account any of the $80x of its stock issued in the Reverse 
Triangular Merger in computing its stock repurchase excise tax base 
for its 2024 taxable year under Sec.  58.4501-4(b)(1).
    (20) Example 20: Multiple repurchases and contributions of same 
class of stock--(i) Facts. On January 15, 2024, Corporation X 
repurchases 100 shares of its Class A stock that have an aggregate 
fair market value of $1,000x ($10x per share). On September 16, 
2024, Corporation X repurchases 50 shares of its Class A stock that 
have an aggregate fair market value of $200x ($4x per share). 
Corporation X contributes to its ESOP 75 shares of its Class A stock 
on March 15, 2024, and 75 shares of its Class A stock on October 15, 
2024.
    (ii) Analysis. Corporation X's stock repurchase excise tax base 
for its 2024 taxable year initially is increased by $1,200x ($1,000x 
+ $200x = $1,200x) as a result of the repurchases of its Class A 
stock. See Sec.  58.4501-2(c)(1)(i). Under the exception for stock 
contributions to an employer-sponsored retirement plan, Corporation 
X's stock contributions reduce the amount of Corporation X's stock 
repurchase excise tax base. See Sec. Sec.  58.4501-2(c)(1)(ii) and 
58.4501-3(d). The amount of the reduction is determined by dividing 
the aggregate fair market value of shares of Class A stock 
repurchased by the number of shares repurchased ($1,200x/150 shares 
= $8 per share) and multiplying the number of shares contributed by 
the average price of the repurchased shares (150 shares x $8 per 
share = $1,200x). See Sec.  58.4501-3(d)(3)(i). Therefore, 
Corporation X's stock repurchase excise tax base for its 2024 
taxable year is $0 ($1,200x repurchase - $1,200x exception = $0).
    (21) Example 21: Multiple repurchases and contributions of 
different classes of stock--(i) Facts. The facts are the same as in 
paragraph (b)(20)(i) of this section (Example 20), except that 
Corporation X has Class B stock and contributes its Class B stock 
rather than its Class A stock to its ESOP. On October 15, 2024, 
Corporation X contributes to its ESOP

[[Page 26050]]

75 shares of its Class B stock that have an aggregate fair market 
value of $1,000x. On December 16, 2024, Corporation X contributes to 
its ESOP 25 shares of its Class B stock that have an aggregate fair 
market value of $500x.
    (ii) Analysis. Corporation X's reduction in computing its stock 
repurchase excise tax base is equal to the sum of the fair market 
values of the different class of stock at the time the stock is 
contributed to the employer-sponsored retirement plan ($1,000x + 
$500x = $1,500x). However, the amount of the reduction must not 
exceed the aggregate fair market value of stock of a different class 
repurchased during the taxable year by Corporation X (that is, 
$1,200x). See Sec.  58.4501-3(d)(4)(ii). Therefore, Corporation X's 
stock repurchase excise tax base for its 2024 taxable year is $0 
($1,200x repurchase - $1,200x exception = $0).
    (22) Example 22: Treatment of contributions after the taxable 
year--(i) Facts. Corporation X repurchases 200 shares of its stock 
on December 31, 2024, for $200x ($1x per share). Corporation X has 
no other repurchases in 2024. On February 2, 2026, Corporation X 
contributes 200 shares of stock to its ESOP. Corporation X treats 
the contribution as if it had been received for the 2024 calendar 
year for plan allocation purposes. See Sec.  58.4501-3(d)(5)(ii).
    (ii) Analysis. Corporation X may use the contribution of the 
200x shares of its stock on February 2, 2026, to reduce its $200x 
stock repurchase excise tax base for 2024. See Sec.  58.4501-
3(d)(5)(ii).
    (23) Example 23: Becoming a covered corporation--(i) Facts. As 
of January 1, 2024, all of Corporation X's stock is privately held 
(and, therefore, none of Corporation X's stock is traded on an 
established securities market). On February 15, 2024, Corporation X 
purchases 10 shares of its stock for $5x of cash ($.50x per share). 
On April 1, 2024, Corporation X issues 100 shares of its stock to 
the public (Public Shareholders), at which time Corporation X's 
stock begins trading on an established securities market. On 
November 15, 2024, when Corporation X stock is trading at $2x per 
share, Corporation X purchases 60 shares of its stock for $120x of 
cash.
    (ii) Analysis regarding purchase on February 15, 2024. 
Corporation X becomes a covered corporation at the beginning of the 
day on April 1, 2024 (the initiation date). See Sec.  58.4501-
2(d)(1). Accordingly, Corporation X's purchase of 10 shares of its 
stock for $5x of cash on February 15, 2024, is not a repurchase. See 
Sec.  58.4501-1(b)(24). Thus, the purchase on February 15, 2024, is 
not included in Corporation X's stock repurchase excise tax base for 
its 2024 taxable year.
    (iii) Analysis regarding issuance on April 1, 2024. Corporation 
X is a covered corporation on April 1, 2024. See Sec.  58.4501-
2(d)(1). Accordingly, the Corporation X stock issued to the Public 
Shareholders on that date is stock of a covered corporation for 
purposes of the netting rule. See Sec.  58.4501-4(b)(1). As a 
result, Corporation`s stock repurchase excise tax base for its 2024 
taxable year is reduced by $100x. See Sec.  58.4501-2(c)(1)(iii).
    (iv) Analysis regarding purchase on November 15, 2024. 
Corporation X is a covered corporation on November 15, 2024. 
Accordingly, Corporation X's purchase of 60x shares of its stock on 
that date is a repurchase because the transaction is a section 
317(b) redemption (that is, a redemption within the meaning of 
section 317(b) with regard to the stock of a covered corporation). 
See Sec. Sec.  58.4501-1(b)(24) and 58.4501-2(e)(2)(i). For purposes 
of computing Corporation X's stock repurchase excise tax base, the 
fair market value of the 60 shares of stock repurchased on November 
15, 2024, is the aggregate market price of those shares on that 
repurchase date, or $120x ($2x per share x 60 shares = $120x). See 
Sec.  58.4501-2(g)(1). Accordingly, Corporation`s stock repurchase 
excise tax base for its 2024 taxable year is increased by $120x. See 
Sec.  58.4501-2(c)(1)(i).
    (24) Example 24: Actual redemption in partial liquidation--(i) 
Facts. Corporation X is actively engaged in the conduct of 
Businesses A and B. Each business constitutes a qualified trade or 
business within the meaning of section 302(e)(3). On September 1, 
2024, pursuant to a plan of partial liquidation adopted in the same 
taxable year, Corporation X sells Business B for $100x and 
distributes the proceeds to its shareholders pro rata in redemption 
of $100x of Corporation X stock. The transaction qualifies as a 
distribution in partial liquidation under section 302(b)(4) and (e).
    (ii) Analysis. Corporation X's distribution in partial 
liquidation is a section 317(b) redemption. In addition, Corporation 
X's distribution in partial liquidation is not included in the 
exclusive list of transactions under Sec.  58.4501-2(e)(3) that are 
treated as a section 317(b) redemption but are not a repurchase. 
Accordingly, the distribution in partial liquidation is a 
repurchase. See Sec.  58.4501-2(e)(2)(i). Therefore, as a result of 
the distribution, Corporation X's stock repurchase excise tax base 
for its 2024 taxable year is increased by $100x. See Sec.  58.4501-
2(c)(1)(i).
    (25) Example 25: Constructive redemption in partial 
liquidation--(i) Facts. The facts are the same as in paragraph 
(b)(24)(i) of this section (Example 24), except that the 
shareholders of Corporation X surrender no stock in exchange for the 
proceeds from the sale of Business B. For Federal income tax 
purposes, a constructive redemption of stock is deemed to occur, and 
the transaction qualifies as a distribution in partial liquidation 
under section 302(b)(4) and (e).
    (ii) Analysis. The analysis is the same as in paragraph 
(b)(24)(ii) of this section (Example 24).
    (26) Example 26: Physical settlement of call option contract--
(i) Facts. On March 1, 2024, Corporation X issues an option that 
entitles the holder to buy 100 shares of Corporation X stock from 
Corporation X for $150x ($1.50x per share). On the date the option 
is issued, Corporation X stock is trading at $1x per share. On 
November 1, 2024, when Corporation X stock is trading at $2x per 
share, the holder pays Corporation X $150x to exercise the option, 
and Corporation X issues 100 shares of Corporation X stock to the 
holder, at which time ownership of the shares transfers to the 
holder for Federal income tax purposes.
    (ii) Analysis. For purposes of computing Corporation X's stock 
repurchase excise tax base, Corporation X is treated as issuing 100 
shares of Corporation X stock on November 1, 2024. See Sec.  
58.4501-4(d)(1). The fair market value of that stock is its 
aggregate market price on the date of issuance by Corporation X, or 
$200x ($2x per share x 100 shares = $200x). See Sec.  58.4501-
4(e)(1). Accordingly, the issuance is a reduction of $200x in 
computing Corporation X's stock repurchase excise tax base for its 
2024 taxable year. See Sec.  58.4501-2(c)(1)(iii).
    (27) Example 27: Net cash settlement of call option contract--
(i) Facts. The facts are the same as in paragraph (b)(26)(i) of this 
section (Example 26), except that Corporation X net cash settles the 
option by paying the holder $50x.
    (ii) Analysis. The net cash settlement is disregarded for 
purposes of the netting rule. See Sec.  58.4501-4(f)(12) 
(disregarding the settlement of an option contract with respect to 
stock of a covered corporation using any consideration other than 
stock of the covered corporation).
    (28) Example 28: Physical settlement of put option contract--(i) 
Facts. On April 1, 2024, Corporation X issues an option entitling 
the holder to sell 100 shares of Corporation X stock to Corporation 
X for $100x ($1x per share). On the date the option is issued, 
Corporation X stock is trading at $1.25x per share. On October 1, 
2024, when Corporation X stock is trading at $0.75x per share, the 
holder exercises the option, and Corporation X purchases 100 shares 
of Corporation X stock for $100x, at which time ownership of the 
shares transfers to Corporation X.
    (ii) Analysis. Corporation X's purchase on October 1, 2024, is a 
repurchase because it is a section 317(b) redemption. For purposes 
of computing Corporation X's stock repurchase excise tax base, the 
fair market value of the repurchased stock is its aggregate market 
price on the date on which ownership of the stock transfers to 
Corporation X for Federal income tax purposes (October 1, 2024), or 
$75x ($0.75x per share x 100 shares = $75x). See Sec.  58.4501-
2(g)(1) and (h)(1). Accordingly, the repurchase is an increase of 
$75x in computing Corporation X's stock repurchase excise tax base 
for its 2024 taxable year. See Sec.  58.4501-2(c)(1)(i).
    (29) Example 29: Net cash settlement of put option contract--(i) 
Facts. The facts are the same as in paragraph (b)(28)(i) of this 
section (Example 28), except that Corporation X net cash settles the 
put option by paying the holder $25x.
    (ii) Analysis. The net cash settlement is not a repurchase. See 
Sec.  58.4501-2(e)(5)(iv) (providing that net cash settlement of an 
option contract with respect to stock of a covered corporation is 
not a repurchase by the covered corporation).
    (30) Example 30: Indirect ownership--(i) Facts. Corporation X 
owns 60 percent of the only class of stock of Sub 1, a domestic 
corporation. Sub 1 owns 60 percent of the only class of stock of Sub 
2, which is also a domestic corporation. On October 15, 2024, Sub 2 
purchases stock of Corporation X with a market price of $100,000.
    (ii) Analysis. The determination of whether Sub 2 is a specified 
affiliate of Corporation X is relevant at the time Sub 2 purchases 
Corporation X stock on October 15, 2024, and

[[Page 26051]]

therefore must be made at that time. See Sec.  58.4501-2(f)(2)(i). 
Under Sec.  58.4501-2(f)(2)(ii), Corporation X indirectly owns 36 
percent (60% x 60% = 36%) of the stock of Sub 2. Sub 2 is not a 
specified affiliate of Corporation X, because Corporation X does not 
own, directly or indirectly, more than 50 percent of the stock of 
Sub 2. See Sec.  58.4501-1(b)(25). Accordingly, Sub 2's purchase of 
Corporation X stock on October 15, 2024, is not a repurchase under 
Sec.  58.4501-2(f)(1).
    (31) Example 31: Constructive specified affiliate acquisition--
(i) Facts. The facts are the same as in paragraph (b)(30)(i) of this 
section (Example 30), except that, on January 15, 2025, Sub 1 
acquires an additional 40 percent of the stock of Sub 2.
    (ii) Analysis. Because Sub 2 owns stock of Corporation X, the 
determination of whether Sub 2 is a specified affiliate of 
Corporation X is relevant at the time Sub 1 purchases acquires 
additional stock of Sub 2 on January 15, 2025. See Sec.  58.4501-
2(f)(2)(i). Under Sec.  58.4501-2(f)(2)(ii), Corporation X 
indirectly owns 60 percent (60% x 100% = 60%) of the stock of Sub 2. 
Accordingly, Sub 2 becomes a specified affiliate of Corporation X on 
January 15, 2025, because Corporation X owns, directly or 
indirectly, more than 50 percent of the stock of Sub 2. See Sec.  
58.4501-1(b)(25). Because Sub 2 owns stock of Corporation X that Sub 
2 acquired after December 31, 2022, and Sub 2 became a specified 
affiliate of Corporation X after Sub 2 acquired the stock of 
Corporation X, the stock of Corporation X owned by Sub 2 is treated 
as repurchased by Corporation X on January 15, 2025. See Sec.  
58.4501-2(f)(3)(i) and (g)(4).
    (32) Example 32: Restricted stock provided to a service 
provider--(i) Facts. Individual M provides services to Corporation 
X. In 2024, as compensation for Individual M's services, Corporation 
X transfers to individual M 100 shares of Corporation X restricted 
stock with an aggregate fair market value of $500x ($5x per share). 
The shares vest in 2028. Individual M does not make an election 
under section 83(b). In 2028, Corporation X withholds from 
Individual M's other wages amounts that are required to pay the 
income tax and employment tax withholding obligations arising from 
the stock transfer. The shares have a fair market value of $7x per 
share when they vest.
    (ii) Analysis. Corporation X is treated as issuing 100 shares of 
stock to Individual M when they become substantially vested in 2028. 
See Sec.  58.4501-4(d)(2)(i). The fair market value of the shares 
issued is $700x (100 shares x $7x per share = $700x). Accordingly, 
the issuance is a reduction of $700x in computing corporation X's 
stock repurchase excise tax base for its 2028 taxable year.
    (33) Example 33: Restricted stock provided to a service provider 
with section 83(b) election--(i) Facts. The facts are the same as in 
paragraph (b)(32)(i) of this section (Example 32), except that 
Individual M makes a valid election under section 83(b) to include 
the fair market value of the shares of restricted stock in gross 
income when the shares are transferred.
    (ii) Analysis. Corporation X is treated as issuing 100 shares of 
stock to Individual M when the shares are transferred in 2024. See 
Sec.  58.4501-4(d)(2)(iii). The fair market value of the shares 
issued is $500x (100 shares x $5x per share = $500x). Accordingly, 
the issuance is a reduction of $500x in computing Corporation X's 
stock repurchase excise tax base for its 2024 taxable year. 
Corporation X is not treated as issuing stock to Individual M when 
the shares vest in 2028.
    (34) Example 34: Vested stock provided to a service provider 
with share withholding--(i) Facts. Employee N is an employee of 
Corporation X. In 2024, as compensation for Employee N's services, 
Corporation X grants Employee N 100 restricted stock units (RSUs). 
Pursuant to the RSUs, if Employee N remains employed by Corporation 
X through December 31, 2027, Corporation X will transfer 100 shares 
of Corporation X stock to Employee N in January 2028. Employee N 
remains employed by Corporation X through December 31, 2027. In 
January 2028, when the shares have a fair market value of $5x per 
share, Corporation X initiates the transfer of 60 shares of 
Corporation X stock to Employee N and withholds 40 shares to satisfy 
its income tax and employment tax withholding obligations arising 
from Employee N vesting in the shares.
    (ii) Analysis. Corporation X is treated as issuing 60 shares of 
stock to Employee N when the shares are transferred in 2028. See 
Sec.  58.4501-4(d)(2)(i). The 40 shares of Corporation X stock 
withheld to satisfy Corporation X's withholding obligations are 
disregarded for purposes of the netting rule. See Sec.  58.4501-
4(f)(11)(i). The fair market value of the shares issued is $300x (60 
shares x $5x per share = $300x). Accordingly, the issuance is a 
reduction of $300x in computing Corporation X's stock repurchase 
excise tax base for its 2028 taxable year.
    (35) Example 35: Stock option net exercise--(i) Facts. Employee 
O is an employee of Corporation X. In 2024, in connection with the 
performance of services, Corporation X transfers to Employee O 
options to purchase 100 shares of Corporation X stock with an 
exercise price of $4x per share ($400x exercise price in total). The 
options are described in Sec.  1.83-7 of this chapter and do not 
have a readily ascertainable fair market value. Employee O exercises 
the option to purchase 100 shares in 2026, when the fair market 
value is $5x per share. Corporation X withholds 80 shares to pay the 
$400x exercise price (80 shares x $5x per share = $400x).
    (ii) Analysis. Corporation X is treated as issuing 20 shares of 
stock to Employee O when Employee O exercises the options in 2026. 
See Sec.  58.4501-4(d)(2)(ii). The 80 shares of Corporation X stock 
withheld to pay the exercise price are disregarded for purposes of 
the netting rule. See Sec.  58.4501-4(f)(11)(i). The fair market 
value of the shares issued is $100x (20 shares x $5x per share = 
$100x). Accordingly, the issuance is a reduction of $100x in 
computing Corporation X's stock repurchase excise tax base for its 
2026 taxable year.
    (36) Example 36: Net share settlement not in connection with 
performance of services--(i) Facts. Corporation X issues a call 
option to Individual A that entitles Individual A to buy 100 shares 
of Corporation X stock for $100x ($1x per share) from Corporation X 
for a limited time. The terms of the option require or permit net 
share settlement. On the date the option is issued, Corporation X 
stock is trading at $1x per share. On the date the option is 
exercised, Corporation X stock is trading at $1.25x per share. To 
settle the option, Individual A makes no payment to Corporation X, 
and Corporation X issues 20 shares of Corporation X stock (worth 
$25x).
    (ii) Analysis. Corporation X is treated as issuing 20 shares 
with a fair market value of $25x. See Sec.  58.4501-4(f)(11)(ii).
    (37) Example 37: Broker-assisted net exercise--(i) Facts. The 
facts are the same as in paragraph (b)(35)(i) of this section 
(Example 35), except that, instead of Corporation X withholding 
shares to pay the exercise price, a third-party broker pays an 
amount equal to the exercise price (that is, $400x) to Corporation 
X. Corporation X transfers 100 shares of Corporation X stock to the 
third-party broker, which deposits the 100 shares into Employee O's 
account. The third-party broker then immediately sells 80 shares to 
recover the $400x exercise price paid to Corporation X (80 shares x 
$5x per share = $400x).
    (ii) Analysis. Corporation X is treated as issuing 100 shares of 
stock to Employee O when Employee O exercises the options in 2026. 
See Sec.  58.4501-4(c)(2) and (d)(1)(i). The fair market value of 
the shares issued is $500x (100 shares x $5x per share = $500x). 
Accordingly, the issuance is a reduction of $500x in computing 
Corporation X's stock repurchase excise tax base for its 2026 
taxable year.
    (38) Example 38: Stock provided by a specified affiliate to an 
employee--(i) Facts. Individual P is an employee of Corporation Y, 
which is a specified affiliate of Corporation X. In 2024, 
Corporation X transfers 100 shares of its stock to Individual P, 
when the stock is valued at $9x per share, in connection with 
Individual P's performance of services as an employee of Corporation 
Y.
    (ii) Analysis. Under Sec.  1.83-6(d) of this chapter, 
Corporation X is treated as contributing the stock to the capital of 
Corporation Y, which is treated as transferring the shares to 
Individual P as compensation for services. Corporation Y is treated 
as providing 100 shares to individual P. See Sec.  58.4501-
4(b)(1)(ii) and (f)(2)(iv). The fair market value of the shares 
provided is $900x (100 shares x $9x per share = $900x). Accordingly, 
the provision is a reduction of $900x in computing Corporation X's 
stock repurchase excise tax base for its 2024 taxable year.
    (39) Example 39: Stock provided by a specified affiliate to a 
nonemployee--(i) Facts. The facts are the same as in paragraph 
(b)(38)(i) of this section (Example 38), except that Individual P 
provides services as a non-employee service provider of Corporation 
Y.
    (ii) Analysis. Corporation Y is not treated as providing shares 
for purposes of the netting rule because P is a non-employee service 
provider. See Sec.  58.4501-4(b)(1)(ii) and (f)(2)(iv). Accordingly, 
there is no reduction in Corporation X's stock repurchase excise tax 
base for its 2024 taxable year.

[[Page 26052]]

    (40) Example 40: Corporation treated as a domestic corporation 
under section 7874(b)--(i) Facts. Corporation FB is a corporation 
the stock of which is traded on an established securities market 
(within the meaning of section 7704(b)(1) of the Code) and that is 
created or organized in a foreign jurisdiction. Corporation FB is 
treated as a domestic corporation under section 7874(b).
    (ii) Analysis. Corporation FB is treated for purposes of this 
title as a domestic corporation under section 7874(b). Corporation 
FB is a covered corporation because it is treated for purposes of 
this title as a domestic corporation and its stock is traded on an 
established securities market. See Sec.  58.4501-1(b)(6).


Sec.  58.4501-6  Applicability dates.

    (a) In general. Except as provided in paragraph (b) of this 
section, Sec. Sec.  58.4501-1 through 58.4501-5 apply to--
    (1) Repurchases of stock of a covered corporation occurring after 
December 31, 2022, and during taxable years ending after December 31, 
2022; and
    (2) Issuances and provisions of stock of a covered corporation 
occurring during taxable years ending after December 31, 2022.
    (b) Exceptions--(1) Applicability date for certain rules. Sections 
58.4501-2(d), (e)(4)(vi), (f)(2) and (3), (g)(4), (h)(2)(v), and 
(h)(3)(ii), 58.4501-3(g)(3) and (4), 58.4501-4(e)(2)(v), (e)(3)(ii), 
(f)(2)(ii), and (f)(8), (9), and (13) apply to--
    (i) Repurchases of stock of a covered corporation occurring after 
April 12, 2024, and during taxable years ending after April 12, 2024; 
and
    (ii) Issuances and provisions of stock of a covered corporation 
occurring after April 12, 2024, and during taxable years ending after 
April 12, 2024.
    (2) Special rules for acquisitions or repurchases of stock of 
certain foreign corporations. See Sec.  58.4501-7(r) for applicability 
dates for the provisions of Sec.  58.4501-7 and the provisions of Sec.  
58.4501-1 as applicable to transactions subject to Sec.  58.4501-7.


Sec.  58.4501-7  Special rules for acquisitions or repurchases of stock 
of certain foreign corporations.

    (a) Scope. This section provides rules regarding the application of 
section 4501(d) of the Code. Paragraph (b) of this section provides 
definitions applicable for purposes of this section. Paragraph (c) of 
this section provides rules for computing a section 4501(d) covered 
corporation's section 4501(d) excise tax liability. Paragraph (d) of 
this section provides certain coordination rules related to section 
4501(d)(2). Paragraph (e) of this section provides rules that apply if 
an applicable specified affiliate funds certain acquisitions or 
repurchases of stock of an applicable foreign corporation. Paragraph 
(f) of this section provides certain rules for determining the status 
of a corporation as an applicable foreign corporation or a covered 
surrogate foreign corporation. Paragraph (g) of this section provides 
certain rules for determining the status of a corporation or 
partnership as an applicable specified affiliate, a relevant entity of 
an applicable foreign corporation, or a specified affiliate of a 
covered surrogate foreign corporation. Paragraph (h) of this section 
provides rules for determining whether a foreign partnership is an 
applicable specified affiliate. Paragraph (i) of this section is 
reserved. Paragraph (j) of this section defines the terms AFC 
repurchase and CSFC repurchase. Paragraph (k) of this section provides 
rules for determining the date of a section 4501(d)(1) repurchase or 
section 4501(d)(2) repurchase. Paragraph (l) of this section provides 
rules for determining the fair market value of stock of an applicable 
foreign corporation or a covered surrogate foreign corporation that is 
repurchased or acquired. Paragraph (m) of this section provides rules 
regarding the application of certain section 4501(d) statutory 
exceptions. Paragraph (n) of this section provides rules regarding the 
section 4501(d) netting rule. Paragraph (o) of this section provides 
rules applicable before April 15, 2024. Paragraph (p) of this section 
illustrates the application of the rules of this section through 
examples involving section 4501(d)(1). Paragraph (q) of this section 
illustrates the application of the rules of this section through 
examples involving section 4501(d)(2). Paragraph (r) of this section 
provides the applicability date of this section.
    (b) Definitions--(1) Application of definitions in Sec.  58.4501-
1(b). Any term used in this section (other than paragraph (o) of this 
section as provided in paragraph (o)(5) of this section) but not 
defined in paragraph (b)(2) of this section has the meaning provided in 
Sec.  58.4501-1(b), provided, however, that:
    (i) For all definitions provided in Sec.  58.4501-1(b) other than 
those described in paragraph (b)(1)(ii) of this section, any reference 
in those definitions to a covered corporation is treated as a reference 
to a section 4501(d) covered corporation or applicable foreign 
corporation or covered surrogate foreign corporation as appropriate 
based on the context.
    (ii) For the definitions of employee and employer-sponsored 
retirement plan provided in Sec.  58.4501-1(b)(10) and (11), any 
reference to a covered corporation or its specified affiliates is 
treated solely as a reference to a section 4501(d) covered corporation.
    (2) Section 4501(d) definitions. The definitions in this paragraph 
(b)(2) apply solely for purposes of this section (other than paragraph 
(o) of this section as provided in paragraph (o)(5) of this section).
    (i) AFC repurchase. The term AFC repurchase has the meaning 
provided in paragraph (j) of this section.
    (ii) Allocable amount of a covered purchase. The term allocable 
amount of a covered purchase has the meaning provided in paragraph 
(e)(5) of this section.
    (iii) Applicable foreign corporation. The term applicable foreign 
corporation means any foreign corporation the stock of which is traded 
on an established securities market.
    (iv) Applicable specified affiliate. The term applicable specified 
affiliate means a specified affiliate of an applicable foreign 
corporation, other than a foreign corporation or a foreign partnership 
(unless the partnership has a domestic entity as a direct or indirect 
partner, as determined under paragraph (h) of this section).
    (v) CSFC repurchase. The term CSFC repurchase has the meaning 
provided in paragraph (j) of this section.
    (vi) Covered funding. The term covered funding means a funding 
described in paragraph (e)(1) of this section.
    (vii) Covered purchase. The term covered purchase means an AFC 
repurchase or an acquisition of stock of an applicable foreign 
corporation by a relevant entity.
    (viii) Covered surrogate foreign corporation. The term covered 
surrogate foreign corporation means any surrogate foreign corporation 
(as determined under section 7874(a)(2)(B) of the Code by substituting 
September 20, 2021 for March 4, 2003 each place it appears) the stock 
of which is traded on an established securities market, including any 
successor to the surrogate foreign corporation (as determined under 
Sec.  1.7874-12(a)(10) of this chapter), but only with respect to 
taxable years that include any portion of the applicable period with 
respect to such corporation under section 7874(d)(1).
    (ix) Direct partner. The term direct partner has the meaning given 
the term in paragraph (h)(2)(i) of this section.
    (x) Domestic entity. The term domestic entity means a domestic 
corporation, a domestic partnership, or a trust within the meaning of 
section 7701(a)(30)(E) of the Code.
    (xi) Downstream relevant entity. The term downstream relevant 
entity means a relevant entity--

[[Page 26053]]

    (A) 25 percent or more of the stock of which is owned (by vote or 
by value), directly or indirectly, by, individually or in aggregate, 
one or more applicable specified affiliates of an applicable foreign 
corporation; or
    (B) 25 percent or more of the capital interests or profits 
interests of which is held, directly or indirectly, by, individually or 
in aggregate, one or more applicable specified affiliates of an 
applicable foreign corporation.
    (xii) Expatriated entity. The term expatriated entity has the 
meaning given the term in section 7874(a)(2)(A) and Sec.  1.7874-
12(a)(8) of this chapter, including any successor (as determined under 
Sec.  1.7874-12(a)(6) of this chapter).
    (xiii) Indirect partner. The term indirect partner has the meaning 
given the term in paragraph (h)(2)(ii) of this section.
    (xiv) Relevant entity. The term relevant entity means a specified 
affiliate of an applicable foreign corporation that is not an 
applicable specified affiliate of the applicable foreign corporation.
    (xv) Section 4501(d) covered corporation. The term section 4501(d) 
covered corporation means either--
    (A) An applicable specified affiliate of an applicable foreign 
corporation that is treated as a covered corporation under section 
4501(d)(1)(A) by reason of a section 4501(d)(1) repurchase; or
    (B) Any expatriated entity with respect to a covered surrogate 
foreign corporation that is treated as a covered corporation under 
section 4501(d)(2)(A) by reason of a section 4501(d)(2) repurchase.
    (xvi) Section 4501(d) de minimis exception. The term section 
4501(d) de minimis exception has the meaning provided in paragraph 
(c)(2)(i) of this section.
    (xvii) Section 4501(d) economically similar transaction. The term 
section 4501(d) economically similar transaction has the meaning 
provided in paragraph (j)(4) of this section.
    (xviii) Section 4501(d) excise tax. The term section 4501(d) excise 
tax has the meaning provided in paragraph (c)(1) of this section.
    (xix) Section 4501(d) excise tax base. The term section 4501(d) 
excise tax base has the meaning provided in paragraph (c)(3)(i) of this 
section.
    (xx) Section 4501(d) netting rule. The term section 4501(d) netting 
rule has the meaning provided in paragraph (n)(1) of this section.
    (xxi) Section 4501(d) reorganization exception. The term section 
4501(d) reorganization exception has the meaning provided in paragraph 
(m)(2) of this section.
    (xxii) Section 4501(d)(1) repurchase. The term section 4501(d)(1) 
repurchase means--
    (A) An acquisition of stock of an applicable foreign corporation by 
an applicable specified affiliate of the applicable foreign corporation 
from a person other than the applicable foreign corporation or a 
specified affiliate of the applicable foreign corporation; and
    (B) A covered purchase to the extent an applicable specified 
affiliate is treated under paragraph (e) of this section as acquiring 
stock of the applicable foreign corporation that is repurchased or 
acquired, as applicable, in the covered purchase.
    (xxiii) Section 4501(d)(2) repurchase. The term section 4501(d)(2) 
repurchase means a CSFC repurchase or an acquisition of stock of a 
covered surrogate foreign corporation by a specified affiliate of the 
covered surrogate foreign corporation.
    (xxiv) Section 4501(d) statutory exception. The term section 
4501(d) statutory exception has the meaning provided in paragraph 
(m)(1) of this section.
    (c) Computation of section 4501(d) excise tax liability for a 
section 4501(d) covered corporation--(1) Imposition of tax. Except as 
provided in paragraph (c)(2) of this section (regarding the section 
4501(d) de minimis exception), the amount of excise tax imposed 
pursuant to section 4501(d) on a section 4501(d) covered corporation 
(section 4501(d) excise tax) for a taxable year equals the product 
obtained by multiplying--
    (i) The applicable percentage; by
    (ii) The section 4501(d) excise tax base of the section 4501(d) 
covered corporation for the taxable year determined in accordance with 
paragraph (c)(3)(i) of this section.
    (2) Section 4501(d) de minimis exception--(i) In general. A section 
4501(d) covered corporation is not subject to the section 4501(d) 
excise tax with regard to a taxable year of the section 4501(d) covered 
corporation if, during that taxable year, the aggregate fair market 
value of all section 4501(d)(1) repurchases with respect to all 
applicable specified affiliates or all section 4501(d)(2) repurchases 
with respect to an expatriated entity, as applicable, does not exceed 
$1,000,000 (section 4501(d) de minimis exception).
    (ii) Determination. A determination of whether the section 4501(d) 
de minimis exception applies with regard to a taxable year of a section 
4501(d) covered corporation is made before applying--
    (A) Any section 4501(d) statutory exception under paragraph (m) of 
this section; and
    (B) Any adjustments pursuant to the section 4501(d) netting rule 
under paragraph (n) of this section.
    (3) Section 4501(d) excise tax base--(i) In general. With regard to 
a section 4501(d) covered corporation, the term section 4501(d) excise 
tax base means the dollar amount (not less than zero) that is obtained 
by--
    (A) Determining the aggregate fair market value of, as applicable, 
all section 4501(d)(1) repurchases or section 4501(d)(2) repurchases 
during the section 4501(d) covered corporation's taxable year;
    (B) Reducing the amount determined under paragraph (c)(3)(i)(A) of 
this section by the fair market value of stock repurchased or acquired 
in all section 4501(d)(1) repurchases or section 4501(d)(2) 
repurchases, as applicable, during the section 4501(d) covered 
corporation's taxable year to the extent any section 4501(d) statutory 
exceptions apply in accordance with paragraph (m) of this section; and 
then
    (C) Reducing the amount determined under paragraphs (c)(3)(i)(A) 
and (B) of this section by the aggregate fair market value of, as 
applicable, stock of the applicable foreign corporation or stock of the 
covered surrogate foreign corporation to the extent the section 4501(d) 
netting rule applies in accordance with paragraph (n) of this section.
    (ii) Taxable year determination--(A) In general. The determinations 
under paragraph (c)(3)(i) of this section are made separately for each 
section 4501(d) covered corporation and for each taxable year of such 
section 4501(d) covered corporation.
    (B) No carrybacks or carryforwards. Reductions under paragraphs 
(c)(3)(i)(B) and (C) of this section in excess of the amount determined 
under paragraph (c)(3)(i)(A) of this section with regard to a section 
4501(d) covered corporation are not carried forward or backward to 
preceding or succeeding taxable years of the section 4501(d) covered 
corporation.
    (4) Section 4501(d)(1) repurchases or section 4501(d)(2) 
repurchases before January 1, 2023. Section 4501(d)(1) repurchases and 
section 4501(d)(2) repurchases before January 1, 2023, are neither 
included in the section 4501(d) excise tax base of a section 4501(d) 
covered corporation nor taken into account in determining the 
applicability of the section 4501(d) de minimis exception.
    (d) Section 4501(d)(2) coordination rules--(1) Coordination rule 
for section 4501(d)(1) repurchases and section 4501(d)(2) repurchases. 
To the extent any CSFC repurchase or acquisition of stock of a covered 
surrogate foreign

[[Page 26054]]

corporation would be both a section 4501(d)(1) repurchase and a section 
4501(d)(2) repurchase absent this paragraph (d)(1), the CSFC repurchase 
or acquisition will only be a section 4501(d)(2) repurchase.
    (2) Coordination rule for multiple section 4501(d) covered 
corporations--(i) In general. Except as provided in paragraph 
(d)(2)(ii) of this section, each section 4501(d) covered corporation 
with respect to a covered surrogate foreign corporation is liable for 
any section 4501(d) excise tax with respect to section 4501(d)(2) 
repurchases that occur during a taxable year of the section 4501(d) 
covered corporation.
    (ii) Full payment and reporting by a section 4501(d) covered 
corporation. If there are multiple section 4501(d) covered corporations 
with respect to a covered surrogate foreign corporation, then provided 
that one of those section 4501(d) covered corporations pays the amount 
of section 4501(d) excise tax determined under paragraph (c)(1) of this 
section with respect to all section 4501(d)(2) repurchases relating to 
the covered surrogate foreign corporation and its specified affiliates 
that occur during the paying section 4501(d) covered corporation's 
taxable year and fulfills the filing obligations for the taxable year 
with respect to such section 4501(d)(2) repurchases, no other section 
4501(d) covered corporation with respect to the covered surrogate 
foreign corporation is liable for section 4501(d) excise tax related to 
such section 4501(d)(2) repurchases.
    (e) Acquisitions and AFC repurchases of stock funded by applicable 
specified affiliates--(1) Principal purpose rule. An applicable 
specified affiliate of an applicable foreign corporation is treated as 
acquiring stock of the applicable foreign corporation to the extent the 
applicable specified affiliate funds by any means (including through 
distributions, debt, or capital contributions), directly or indirectly, 
a covered purchase with a principal purpose of avoiding the section 
4501(d) excise tax (a covered funding). If a principal purpose of the 
covered funding is to fund, directly or indirectly, a covered purchase, 
then there is a principal purpose of avoiding the section 4501(d) 
excise tax. Whether a covered funding is described in this paragraph 
(e)(1) is determined based on all the facts and circumstances. A 
covered funding may be described in this paragraph (e)(1) regardless of 
whether the funding occurs before or after a covered purchase. This 
paragraph (e)(1) applies to fundings that occur on or after December 
27, 2022, in taxable years ending after December 27, 2022.
    (2) Rebuttable presumption. A principal purpose described in 
paragraph (e)(1) of this section is presumed to exist if the applicable 
specified affiliate funds by any means, directly or indirectly, a 
downstream relevant entity, and the funding occurs within two years of 
a covered purchase by or on behalf of the downstream relevant entity. 
The presumption described in this paragraph (e)(2) may be rebutted only 
if facts and circumstances clearly establish that there was not a 
principal purpose described in paragraph (e)(1) of this section. An 
applicable specified affiliate that takes the position that the 
presumption is rebutted must, for the taxable year that includes the 
date on which the applicable specified affiliate would, absent the 
rebuttal, be treated as acquiring stock of the applicable foreign 
corporation: (i) attach a statement to its stock repurchase excise tax 
return disclosing the relevant fundings and covered purchases and the 
facts that rebut the presumption, and (ii) provide any additional 
information that the stock repurchase excise tax return or the 
accompanying instructions require. See paragraph (e)(3) of this section 
for the date on which the applicable specified affiliate would, absent 
the rebuttal, be treated as acquiring stock of the applicable foreign 
corporation.
    (3) Date stock of applicable foreign corporation is treated as 
acquired. To the extent an applicable specified affiliate is treated, 
by reason of a covered funding, as acquiring stock of an applicable 
foreign corporation that is acquired by a relevant entity or applicable 
foreign corporation in a covered purchase, such stock is treated as 
acquired by the applicable specified affiliate on the later of the date 
of the covered funding or the covered purchase.
    (4) Amount of stock of applicable foreign corporation treated as 
acquired. The amount of stock of an applicable foreign corporation 
acquired in a covered purchase that is treated as acquired by an 
applicable specified affiliate is equal to the amount of the applicable 
specified affiliate's covered fundings that are allocated to the 
covered purchase under paragraph (e)(7) of this section.
    (5) Rules for determining the allocable amount of a covered 
purchase. The allocable amount of a covered purchase is equal to the 
aggregate fair market value of the shares repurchased or acquired in 
the covered purchase (as determined in accordance with paragraph (l) of 
this section), reduced by the amount described in paragraph (m)(2), 
(4), or (6) of this section, as applicable.
    (6) Priority rule for covered fundings. The allocable amount of a 
covered purchase is treated as made first from covered fundings.
    (7) Rules for allocating covered fundings to allocable amounts of 
covered purchases--(i) In general. The rules of this paragraph (e)(7) 
apply for purposes of determining the extent to which a covered 
purchase is treated as funded by covered fundings. For purposes of 
applying this paragraph (e)(7), a reference to covered fundings means 
all covered fundings by all applicable specified affiliates with 
respect to an applicable foreign corporation, and a covered funding 
denominated in a currency other than the U.S. dollar is converted into 
U.S. dollars at the spot rate (as defined in Sec.  1.988-1(d)(1) of 
this chapter) on the date of the funding. To the extent covered 
fundings are allocated to an allocable amount of a covered purchase 
under this paragraph (e)(7), those fundings are not allocated to any 
other allocable amounts of covered purchases.
    (ii) Multiple covered purchases. If there are multiple covered 
purchases by one or more relevant entities or an applicable foreign 
corporation, then covered fundings are allocated to the allocable 
amounts of covered purchases in the order in which the covered 
purchases occur. If multiple covered purchases occur simultaneously, 
covered fundings are allocated to the allocable amounts of those 
simultaneous covered purchases on a pro rata basis, based on the 
relative allocable amounts of those covered purchases.
    (iii) Single covered funding. If there is a single covered funding, 
the covered funding is allocated to a covered purchase to the extent of 
the lesser of the amount of the covered funding or the allocable amount 
of the covered purchase.
    (iv) Multiple covered fundings. If there are multiple covered 
fundings and the aggregate amount of those fundings exceeds the 
allocable amount of the covered purchase, then covered fundings are 
allocated to the allocable amount of the covered purchase in the order 
in which the covered fundings occur. If multiple covered fundings occur 
simultaneously, those covered fundings are allocated to the allocable 
amount of the covered purchase on a pro rata basis, based on the 
relative amounts of those covered fundings. To the extent the aggregate 
amount of covered fundings exceeds the allocable amount of the covered 
purchase, those excess covered fundings are allocated to

[[Page 26055]]

the allocable amounts of other covered purchases, if any.
    (f) Status as applicable foreign corporation or covered surrogate 
foreign corporation--(1) Initiation date. A corporation becomes an 
applicable foreign corporation or a covered surrogate foreign 
corporation, as applicable, at the beginning of the corporation's 
initiation date.
    (2) Cessation date--(i) In general. Except as provided in paragraph 
(f)(2)(ii) of this section, a corporation ceases to be an applicable 
foreign corporation or a covered surrogate foreign corporation, as 
applicable, at the end of the corporation's cessation date.
    (ii) Repurchases after cessation date. If an applicable foreign 
corporation or a covered surrogate foreign corporation, as applicable, 
ceases to be an applicable foreign corporation or a covered surrogate 
foreign corporation, as applicable, pursuant to a plan that includes a 
repurchase, and if the cessation date precedes the date on which any 
section 4501(d)(1) repurchase or section 4501(d)(2) repurchase, as 
applicable, undertaken pursuant to the plan occurs (for example, if 
stock of an applicable foreign corporation ceases trading prior to 
completion of an acquisitive reorganization), then the corporation will 
continue to be an applicable foreign corporation or a covered surrogate 
foreign corporation, as applicable, with regard to each repurchase 
pursuant to the plan until the end of the date on which the last 
section 4501(d)(1) repurchase or section 4501(d)(2) repurchase, as 
applicable, pursuant to the plan occurs.
    (3) Inbound and outbound F reorganizations--(i) Inbound F 
reorganization. In the case of a foreign corporation that transfers its 
assets or that is treated as transferring its assets to a domestic 
corporation in an F reorganization (as described in Sec.  1.367(b)-2(f) 
of this chapter), the corporation is not treated as a domestic 
corporation until the day after the reorganization.
    (ii) Outbound F reorganization. In the case of a domestic 
corporation that transfers its assets or that is treated as 
transferring its assets to a foreign corporation in an F reorganization 
(as described in Sec.  1.367(a)-1(e) of this chapter), the corporation 
is not treated as a foreign corporation until the day after the 
reorganization.
    (g) Status as applicable specified affiliate, a relevant entity of 
an applicable foreign corporation, or a specified affiliate of a 
covered surrogate foreign corporation--(1) Timing of determination. The 
determination of whether a corporation or partnership is an applicable 
specified affiliate or a relevant entity of an applicable foreign 
corporation or a specified affiliate of a covered surrogate foreign 
corporation, as applicable, is made whenever such determination is 
relevant for purposes of this section.
    (2) Determination of indirect ownership. Except as provided in 
paragraph (h)(2)(ii)(B) of this section, a corporation or partnership 
is treated as indirectly owning stock in a corporation or holding 
capital or profits interests in a partnership equal to the 
corporation's or partnership's proportionate percentage of stock owned 
or capital or profits interests held through other entities.
    (3) Consequences of becoming a specified affiliate--(i) General 
rule. Except as provided in paragraph (g)(3)(ii) of this section, if a 
corporation or partnership becomes a specified affiliate of an 
applicable foreign corporation or a covered surrogate foreign 
corporation, as applicable, and, at the time the corporation or 
partnership becomes a specified affiliate, the corporation or 
partnership owns stock of the applicable foreign corporation or covered 
surrogate foreign corporation that the corporation or partnership 
acquired after December 31, 2022, and such stock represents more than 
one percent of the fair market value of the assets of the corporation 
or partnership as determined at the time that the corporation or 
partnership becomes a specified affiliate, then for purposes of this 
section, such stock is treated as acquired by the corporation or 
partnership immediately after the corporation or partnership becomes a 
specified affiliate.
    (ii) Stock previously treated as acquired not subject to deemed 
acquisition more than once. Paragraph (g)(3)(i) of this section does 
not apply with regard to any shares of stock of the applicable foreign 
corporation or covered surrogate foreign corporation, as applicable--
    (A) Held by the corporation or partnership described in paragraph 
(g)(3)(i) of this section at the time that it becomes a specified 
affiliate; and
    (B) That the section 4501(d) covered corporation identifies as 
previously having been subject to paragraph (g)(3)(i) of this section 
when held by the corporation or partnership.
    (iii) Specific identification. For purposes of paragraphs (g)(3)(i) 
and (g)(3)(ii)(B) of this section, if the section 4501(d) covered 
corporation is unable to specifically identify which shares of stock of 
the applicable foreign corporation or covered surrogate foreign 
corporation, as applicable, the corporation or partnership described in 
paragraph (g)(3)(i) is treated as holding at the time it becomes a 
specified affiliate, the section 4501(d) covered corporation must treat 
the corporation or partnership described in paragraph (g)(3)(i) of this 
section as holding the most recently acquired shares of the stock of 
the applicable foreign corporation or covered surrogate foreign 
corporation, as applicable.
    (h) Foreign partnerships that are applicable specified affiliates--
(1) In general. A foreign partnership is an applicable specified 
affiliate of an applicable foreign corporation, if--
    (i) More than 50 percent of the capital interests or profits 
interests of the foreign partnership are held, directly or indirectly, 
by the applicable foreign corporation; and
    (ii) Under the rules described in paragraphs (h)(2) through (5) of 
this section, at least one domestic entity is a direct or indirect 
partner with respect to the foreign partnership.
    (2) Direct or indirect partner. Except as provided in paragraphs 
(h)(4) and (5) of this section--
    (i) A domestic entity is a direct partner with respect to a foreign 
partnership if it directly owns an interest in the foreign partnership; 
and
    (ii) A domestic entity is an indirect partner with respect to a 
foreign partnership if the domestic entity owns an interest in the 
foreign partnership indirectly through--
    (A) One or more other foreign partnerships;
    (B) One or more foreign corporations controlled by one or more 
domestic entities within the meaning of paragraph (h)(3) of this 
section; or
    (C) An ownership chain with one or more entities described in 
paragraphs (h)(2)(ii)(A) and (B) of this section.
    (3) Control of a foreign corporation. For purposes of paragraph 
(h)(2)(ii)(B) of this section, a foreign corporation is controlled by 
one or more domestic entities, if more than 50 percent of the total 
combined voting power of all classes of stock of such corporation 
entitled to vote or the total value of the stock of such corporation is 
owned, directly or indirectly, in aggregate, by one or more domestic 
entities.
    (4) Indirect interests held through applicable foreign 
corporations. Solely for purposes of paragraph (h)(2)(ii) of this 
section, if an applicable foreign corporation owns, directly or 
indirectly, stock of a foreign corporation or an interest in a foreign 
partnership, a domestic entity is not treated as indirectly owning 
stock of the foreign corporation or an interest in the foreign

[[Page 26056]]

partnership solely by reason of owning, directly or indirectly, stock 
of the applicable foreign corporation.
    (5) De minimis domestic entity (direct or indirect) partner. A 
foreign partnership that has one or more domestic entities as direct or 
indirect partners is not considered an applicable specified affiliate 
if the domestic entities hold, directly or indirectly, in aggregate, 
less than five percent of the capital interests and profits interests 
in the foreign partnership.
    (i) [Reserved]
    (j) AFC repurchase or CSFC repurchase--(1) Overview. This paragraph 
(j) provides rules for determining whether a transaction is an AFC 
repurchase or CSFC repurchase for purposes of this section. Paragraph 
(j)(2) of this section provides a general rule regarding the scope of 
such terms. Paragraph (j)(3) of this section provides an exclusive list 
of transactions that are treated as a section 317(b) redemption but are 
not AFC repurchases or CSFC repurchases. Paragraph (j)(4) of this 
section provides an exclusive list of transactions that are section 
4501(d) economically similar transactions. Paragraph (j)(5) of this 
section provides a non-exclusive list of transactions that are not AFC 
repurchases or CSFC repurchases.
    (2) Scope of AFC repurchases and CSFC repurchases. For purposes of 
this section, an AFC repurchase or CSFC repurchase means solely--
    (i) A section 317(b) redemption with respect to stock of an 
applicable foreign corporation or a covered surrogate foreign 
corporation, as applicable, except as provided in paragraph (j)(3) of 
this section; or
    (ii) A section 4501(d) economically similar transaction described 
in paragraph (j)(4) of this section.
    (3) Certain section 317(b) redemptions not AFC repurchases or CSFC 
repurchases. This paragraph (j)(3) provides an exclusive list of 
transactions that are section 317(b) redemptions but are not AFC 
repurchases or CSFC repurchases.
    (i) Section 304(a)(1) transactions--(A) Rule regarding deemed 
distributions. If section 304(a)(1) applies to an acquisition of stock 
by an acquiring corporation (within the meaning of section 304(a)(1)), 
the acquiring corporation's deemed distribution in redemption of the 
acquiring corporation's stock (resulting from the application of 
section 304(a)(1)) is not an AFC repurchase or CSFC repurchase, as 
applicable.
    (B) Scope of rule. The rule described in paragraph (j)(3)(i)(A) of 
this section applies to a transaction described in paragraph 
(j)(3)(i)(A) of this section regardless of whether section 302(a) or 
(d) of the Code applies to the acquiring corporation's deemed 
distribution in redemption of its stock.
    (ii) Payment by an applicable foreign corporation or a covered 
surrogate foreign corporation of cash in lieu of fractional shares. A 
payment by an applicable foreign corporation or a covered surrogate 
foreign corporation, as applicable, of cash in lieu of a fractional 
share of the applicable foreign corporation or covered surrogate 
foreign corporation is not an AFC repurchase or CSFC repurchase, as 
applicable, if--
    (A) The payment is carried out as part of a transaction that 
qualifies as a reorganization under section 368(a) or a distribution to 
which section 355 of the Code applies, or pursuant to the settlement of 
an option or similar financial instrument (for example, a convertible 
debt instrument or convertible preferred share);
    (B) The cash received by the shareholder entitled to the fractional 
share is not separately bargained-for consideration (that is, the cash 
paid by the applicable foreign corporation or covered surrogate foreign 
corporation in lieu of the fractional share represents a mere rounding 
off of the shares issued in the exchange or settlement);
    (C) The payment is carried out solely for administrative 
convenience (and, therefore, solely for non-tax reasons); and
    (D) The amount of cash paid to the shareholder in lieu of a 
fractional share does not exceed the fair market value of one full 
share of the class of stock of the applicable foreign corporation or 
covered surrogate foreign corporation, as applicable, with respect to 
which the payment of cash in lieu of a fractional share is made.
    (4) Section 4501(d) economically similar transactions. This 
paragraph (j)(4) provides an exclusive list of transactions that are 
economically similar transactions for section 4501(d) purposes (each a 
section 4501(d) economically similar transaction).
    (i) Acquisitive reorganizations. In the case of an acquisitive 
reorganization in which the target corporation is an applicable foreign 
corporation or a covered surrogate foreign corporation, as applicable, 
the exchange by the target corporation shareholders of their target 
corporation stock pursuant to the plan of reorganization is an AFC 
repurchase or a CSFC repurchase, as applicable, by the target 
corporation.
    (ii) E Reorganizations. In the case of an E reorganization in which 
the recapitalizing corporation is an applicable foreign corporation or 
a covered surrogate foreign corporation, as applicable, the exchange by 
the recapitalizing corporation shareholders of their recapitalizing 
corporation stock pursuant to the plan of reorganization is an AFC 
repurchase or a CSFC repurchase, as applicable, by the recapitalizing 
corporation.
    (iii) F Reorganizations. In the case of an F reorganization in 
which the transferor corporation (as defined in Sec.  1.368-2(m)(1) of 
this chapter) is an applicable foreign corporation or a covered 
surrogate foreign corporation, as applicable, the exchange by the 
transferor corporation shareholders of their transferor corporation 
stock pursuant to the plan of reorganization is an AFC repurchase or a 
CSFC repurchase, as applicable, by the transferor corporation.
    (iv) Split-offs. In the case of a split-off by a distributing 
corporation that is an applicable foreign corporation or a covered 
surrogate foreign corporation, as applicable, the exchange by the 
distributing corporation shareholders of their distributing corporation 
stock is an AFC repurchase or a CSFC repurchase, as applicable, by the 
distributing corporation.
    (v) Complete liquidations to which both sections 331 and 332 apply. 
In the case of a complete liquidation of an applicable foreign 
corporation or a covered surrogate foreign corporation, as applicable, 
to which sections 331 and 332(a) of the Code respectively apply to 
component distributions of the complete liquidation--
    (A) Each distribution to which section 331 applies is an AFC 
repurchase or a CSFC repurchase, as applicable; and
    (B) The distribution to which section 332(a) applies is not an AFC 
repurchase or a CSFC repurchase, as applicable. See paragraph 
(j)(5)(i)(A) of this section.
    (vi) Certain forfeitures and clawbacks of stock--(A) In general. In 
the case of a forfeiture or clawback of stock of an applicable foreign 
corporation or a covered surrogate foreign corporation, as applicable, 
pursuant to a legal or contractual obligation, the forfeiture or 
clawback is an AFC repurchase or a CSFC repurchase, as applicable, on 
the date of forfeiture or clawback (as appropriate) if the stock was 
treated as issued or provided under paragraph (n)(1) of this section 
and the forfeiture or clawback of the stock (as appropriate) is 
described in paragraph (j)(4)(vi)(B), (C), or (D) of this section.
    (B) Stock subject to post-closing price adjustments. The stock was 
issued pursuant to an acquisition of a target entity or its business, 
and the forfeiture of the stock was in accordance with the terms of the 
documents governing the

[[Page 26057]]

transaction (for example, to compensate the acquiring corporation for 
breaches of representations or warranties made by the target entity, or 
because the business of the target entity did not achieve certain 
performance benchmarks agreed upon in the transaction documents).
    (C) Stock for which a section 83(b) election was made. The stock 
was subject to a substantial risk of forfeiture within the meaning of 
section 83(a) of the Code on the date the stock was issued or provided, 
the service provider made a valid election under section 83(b) with 
regard to the stock, and the forfeiture resulted from the service 
provider failing to meet the vesting condition.
    (D) Clawbacks. On the date the stock was issued or provided, the 
stock was subject to a clawback agreement, and a clawback of the stock 
resulted from the occurrence of an event specified in the clawback 
agreement.
    (5) Transactions that are not AFC repurchases or CSFC repurchases. 
This paragraph (j)(5) provides a non-exclusive list of transactions 
that are not AFC repurchases or CSFC repurchases.
    (i) Complete liquidations generally. Except as provided in 
paragraph (j)(4)(v)(A) of this section, the following is not an AFC 
repurchase or CSFC repurchase, as applicable:
    (A) A distribution in complete liquidation of an applicable foreign 
corporation or a covered surrogate foreign corporation, as applicable, 
to which section 331 or 332(a) applies.
    (B) A distribution pursuant to a plan of dissolution of such 
corporation that is reported on the original (but not a supplemented or 
an amended) IRS Form 966, Corporate Dissolution or Liquidation (or any 
successor form).
    (C) A distribution pursuant to a deemed dissolution of such 
corporation (for instance, a deemed liquidation under Sec.  301.7701-3 
of this chapter).
    (ii) Distributions during taxable year of complete liquidation or 
dissolution. Unless paragraph (j)(4)(v) of this section applies, no 
distribution by an applicable foreign corporation or a covered 
surrogate foreign corporation, as applicable, during such corporation's 
taxable year is an AFC repurchase or CSFC repurchase, as applicable, if 
the applicable foreign corporation or covered surrogate foreign 
corporation--
    (A) Completely liquidates during such corporation's taxable year 
(that is, has a final distribution during the taxable year in a 
complete liquidation to which section 331 applies);
    (B) Dissolves during the taxable year pursuant to a plan of 
dissolution as reported on the original (but not a supplemented or an 
amended) IRS Form 966, Corporate Dissolution or Liquidation (or any 
successor form); or
    (C) Is deemed to dissolve during the taxable year (for instance, 
pursuant to a deemed liquidation under Sec.  301.7701-3 of this 
chapter).
    (iii) Divisive transactions under section 355 other than split-
offs--(A) In general. Subject to paragraph (j)(5)(iii)(B) of this 
section, a distribution by a distributing corporation that is an 
applicable foreign corporation or a covered surrogate foreign 
corporation, as applicable, of stock of a controlled corporation 
qualifying under section 355 that is not a split-off is not an AFC 
repurchase or CSFC repurchase, as applicable.
    (B) Exception regarding non-qualifying property in spin-offs. A 
distribution by a distributing corporation that is an applicable 
foreign corporation or a covered surrogate foreign corporation, as 
applicable, of other property or money in exchange for stock of the 
distributing corporation is a repurchase by the distributing 
corporation if it occurs in pursuance of a transaction qualifying under 
section 355 in which the distribution by the distributing corporation 
of stock of the controlled corporation is with respect to stock of the 
distributing corporation.
    (iv) Non-redemptive distributions subject to section 301(c)(2) or 
(3). A distribution to which section 301 of the Code applies by an 
applicable foreign corporation or a covered surrogate foreign 
corporation to a distributee is not an AFC repurchase or CSFC 
repurchase if the distribution--
    (A) Is subject to section 301(c)(2) or (3); and
    (B) The distributee does not exchange stock of the applicable 
foreign corporation or covered surrogate foreign corporation, as 
applicable (and is not treated as exchanging stock of the applicable 
foreign corporation or covered surrogate foreign corporation, as 
applicable, for Federal income tax purposes).
    (v) Net cash settlement of an option contract. The net cash 
settlement of an option contract with respect to stock of an applicable 
foreign corporation or a covered surrogate foreign corporation is not 
an AFC repurchase or CSFC repurchase, as applicable. The net cash 
settlement of an instrument in the legal form of an option contract or 
other derivative financial instrument that is treated as stock for 
Federal tax purposes at the time of issuance is treated as a repurchase 
of that instrument, and therefore an AFC repurchase or CSFC repurchase, 
as applicable.
    (k) Date of section 4501(d)(1) repurchase or section 4501(d)(2) 
repurchase--(1) General rule. In general, stock of an applicable 
foreign corporation or a covered surrogate foreign corporation is 
treated as subject to a section 4501(d)(1) repurchase or section 
4501(d)(2) repurchase, as applicable, on the date on which ownership of 
the stock transfers to the specified affiliate of the applicable 
foreign corporation, the applicable foreign corporation, the specified 
affiliate of the covered surrogate foreign corporation, or the covered 
surrogate foreign corporation, as applicable, for Federal income tax 
purposes. To determine the date of repurchase in particular situations, 
see paragraphs (k)(2), (3), and (4) of this section.
    (2) Regular-way sale. A regular-way sale of stock of an applicable 
foreign corporation or a covered surrogate foreign corporation (that 
is, a transaction in which a trade order is placed on the trade date, 
and settlement of the transaction, including payment and delivery of 
the stock, occurs a standardized number of days after the trade date 
that is set by a regulator) is treated as subject to a section 
4501(d)(1) repurchase or section 4501(d)(2) repurchase, as applicable, 
on the trade date.
    (3) AFC repurchase or CSFC repurchase pursuant to certain section 
4501(d) economically similar transactions. Stock of an applicable 
foreign corporation or a covered surrogate foreign corporation 
repurchased in an AFC repurchase or a CSFC repurchase that is a section 
4501(d) economically similar transaction described in paragraph (j)(4) 
of this section is treated as repurchased on the date the shareholders 
of the applicable foreign corporation or covered surrogate foreign 
corporation exchange their stock in such corporation.
    (4) Section 4501(d)(1) repurchase pursuant to a covered funding. To 
the extent an applicable specified affiliate of an applicable foreign 
corporation is treated under paragraph (e) of this section as acquiring 
stock of the applicable foreign corporation that is repurchased or 
acquired in a covered purchase, such stock is treated as acquired by 
the applicable specified affiliate on the date of the covered purchase. 
However, if the date of the covered funding occurs after the date of 
the covered purchase, then such stock is treated as acquired by the 
applicable specified affiliate on the date of the covered funding.
    (l) Fair market value of stock of an applicable foreign corporation 
or a covered surrogate foreign corporation that is repurchased or 
acquired--(1) In

[[Page 26058]]

general. The fair market value of stock of an applicable foreign 
corporation or a covered surrogate foreign corporation, as applicable, 
that is subject to a section 4501(d)(1) repurchase or section 
4501(d)(2) repurchase is the market price of the stock on the date of 
the section 4501(d)(1) repurchase or section 4501(d)(2) repurchase (as 
determined under paragraph (k) of this section without regard to the 
last sentence of paragraph (k)(4) of this section). That is, if the 
price at which the repurchased or acquired stock is purchased differs 
from the market price of the stock on the date the stock is repurchased 
or acquired, the fair market value of the stock is the market price on 
the date the stock is repurchased or acquired.
    (2) Stock traded on an established securities market--(i) In 
general. If stock of an applicable foreign corporation or a covered 
surrogate foreign corporation, as applicable, that is subject to a 
section 4501(d)(1) repurchase or section 4501(d)(2) repurchase with 
respect to a section 4501(d) covered corporation is traded on an 
established securities market, the section 4501(d) covered corporation 
must determine the market price of the stock by applying one of the 
methods provided in paragraph (l)(2)(ii) of this section. For purposes 
of this paragraph (l)(2), stock of an applicable foreign corporation or 
a covered surrogate foreign corporation, as applicable, is treated as 
traded on an established securities market if any stock of the same 
class and issue of stock is so traded, regardless of whether the shares 
repurchased or acquired are so traded.
    (ii) Acceptable methods. The following are acceptable methods for 
determining the market price of stock of an applicable foreign 
corporation or a covered surrogate foreign corporation, as applicable, 
traded on an established securities market:
    (A) The daily volume-weighted average price as determined on the 
date the stock is subject to a section 4501(d)(1) repurchase or section 
4501(d)(2) repurchase.
    (B) The closing price on the date the stock is subject to a section 
4501(d)(1) repurchase or section 4501(d)(2) repurchase.
    (C) The average of the high and low prices on the date the stock is 
subject to a section 4501(d)(1) repurchase or section 4501(d)(2) 
repurchase.
    (D) The trading price at the time the stock is subject to a section 
4501(d)(1) repurchase or section 4501(d)(2) repurchase.
    (iii) Date of section 4501(d)(1) repurchase or section 4501(d)(2) 
repurchase not a trading day. For purposes of each method provided in 
paragraph (l)(2)(ii) of this section, if the date stock is subject to a 
section 4501(d)(1) repurchase or section 4501(d)(2) repurchase is not a 
trading day, the date on which the market price is determined is the 
immediately preceding trading day.
    (iv) Consistency requirement. The market price of stock of an 
applicable foreign corporation or a covered surrogate foreign 
corporation, as applicable, that is traded on an established securities 
market must be determined by consistently applying one (but not more 
than one) of the methods provided in paragraph (l)(2)(ii) of this 
section to all section 4501(d)(1) repurchases with respect to an 
applicable foreign corporation or all section 4501(d)(2) repurchases 
with respect to a covered surrogate foreign corporation, as applicable, 
in the same taxable year of the applicable foreign corporation or 
covered surrogate foreign corporation, as applicable (which, if the 
applicable foreign corporation or covered surrogate foreign 
corporation, as applicable, does not have a taxable year for Federal 
income tax purposes, is the calendar year).
    (v) Stock traded on multiple exchanges--(A) In general. A section 
4501(d) covered corporation must determine the fair market value of the 
stock of the applicable foreign corporation or covered surrogate 
foreign corporation, as applicable, by reference to trading on the 
established securities market in the country in which the applicable 
foreign corporation or covered surrogate foreign corporation, as 
applicable, is organized, including a regional established securities 
market that trades in that country.
    (B) Stock traded on multiple exchanges in country where corporation 
is organized. If the stock of an applicable foreign corporation or a 
covered surrogate foreign corporation, as applicable, is traded on 
multiple established securities markets in the country in which the 
applicable foreign corporation or covered surrogate foreign 
corporation, as applicable, is organized, a section 4501(d) covered 
corporation must treat the established securities market with the 
highest trading volume in the stock of the applicable foreign 
corporation or covered surrogate foreign corporation, as applicable, in 
the section 4501(d) covered corporation's prior taxable year as the 
established securities market that the section 4501(d) covered 
corporation must reference to determine the fair market value of the 
stock of the applicable foreign corporation or covered surrogate 
foreign corporation, as applicable.
    (C) Other cases in which stock is traded on multiple exchanges. If 
stock of an applicable foreign corporation or a covered surrogate 
foreign corporation, as applicable is traded on multiple established 
securities markets and paragraphs (l)(2)(v)(A) and (B) of this section 
do not apply, a section 4501(d) covered corporation must determine the 
fair market value of the stock of the applicable foreign corporation or 
covered surrogate foreign corporation, as applicable, in a manner that 
is reasonable under the facts and circumstances.
    (3) Stock not traded on an established securities market--(i) 
General rule. If stock of an applicable foreign corporation or a 
covered surrogate foreign corporation, as applicable, is not traded on 
an established securities market, the market price of the stock is 
determined as of the date of the section 4501(d)(1) repurchase or 
section 4501(d)(2) repurchase under the principles of Sec.  1.409A-
1(b)(5)(iv)(B)(1) of this chapter.
    (ii) Consistency requirement. The valuation method for determining 
the market price of stock of an applicable foreign corporation or a 
covered surrogate foreign corporation, as applicable, that is not 
traded on an established securities market must be used for all section 
4501(d)(1) repurchases with respect to the same class of stock of an 
applicable foreign corporation or all section 4501(d)(2) repurchases 
with respect to the same class of stock of a covered surrogate foreign 
corporation, as applicable, in the same taxable year of the applicable 
foreign corporation or covered surrogate foreign corporation, as 
applicable (which, if the applicable foreign corporation or covered 
surrogate foreign corporation, as applicable, does not have a taxable 
year for Federal income tax purposes, is the calendar year), unless the 
application of that method to a particular section 4501(d)(1) 
repurchase or section 4501(d)(2) repurchase would be unreasonable under 
the facts and circumstances as of the valuation date within the meaning 
of Sec.  1.409A-1(b)(5)(iv)(B)(1) of this chapter.
    (4) Market price of stock denominated in non-U.S. currency. The 
market price of any stock of an applicable foreign corporation or a 
covered surrogate foreign corporation that is denominated in a currency 
other than the U.S. dollar is converted into U.S. dollars at the spot 
rate (as defined in Sec.  1.988-1(d)(1) of this chapter) on the date 
the stock is subject to a section 4501(d)(1) repurchase or section 
4501(d)(2) repurchase.

[[Page 26059]]

    (m) Section 4501(d) statutory exceptions--(1) In general--(i) 
Overview. This paragraph (m) provides rules regarding the application 
of the exceptions in section 4501(e) (each, a section 4501(d) statutory 
exception), other than the section 4501(d) de minimis exception, to a 
section 4501(d)(1) repurchase or section 4501(d)(2) repurchase.
    (ii) Reduction of section 4501(d) excise tax base. The fair market 
value of stock of an applicable foreign corporation or a covered 
surrogate foreign corporation, as applicable, repurchased or acquired 
in a section 4501(d)(1) repurchase or section 4501(d)(2) repurchase 
described in this paragraph (m) is a reduction for purposes of 
computing the section 4501(d) covered corporation's section 4501(d) 
excise tax base. See paragraph (c)(3)(i)(B) of this section.
    (2) Section 4501(d) reorganization exception. The fair market value 
of stock repurchased in an AFC repurchase that is a section 4501(d)(1) 
repurchase or a CSFC repurchase that is a section 4501(d)(2) repurchase 
described in any of paragraphs (m)(2)(i) through (iv) of this section 
is a reduction for purposes of computing the section 4501(d) covered 
corporation's section 4501(d) excise tax base (section 4501(d) 
reorganization exception) to the extent that such AFC repurchase or 
CSFC repurchase is for property permitted by section 354 or 355 of the 
Code to be received without the recognition of gain or loss:
    (i) A repurchase by a target corporation in an acquisitive 
reorganization pursuant to the plan of reorganization.
    (ii) A repurchase by a recapitalizing corporation in an E 
reorganization pursuant to the plan of reorganization.
    (iii) A repurchase by a transferor corporation in an F 
reorganization pursuant to the plan of reorganization.
    (iv) A repurchase by a distributing corporation in a split-off 
(whether or not part of a D reorganization).
    (3) Stock contributions to an employer-sponsored retirement plan--
(i) Reductions to section 4501(d) excise tax base--(A) General rule. 
The fair market value of stock of an applicable foreign corporation or 
a covered surrogate foreign corporation, as applicable, that is 
repurchased or acquired in a section 4501(d)(1) repurchase or section 
4501(d)(2) repurchase, as applicable, with respect to a section 4501(d) 
covered corporation, is a reduction for purposes of computing the 
section 4501(d) covered corporation's section 4501(d) excise tax base 
if the stock that is repurchased or acquired, or an amount of stock 
equal to the fair market value of the stock repurchased or acquired, is 
contributed to an employer-sponsored retirement plan.
    (B) Special rule for leveraged ESOPs. If a section 4501(d) covered 
corporation maintains an ESOP with an exempt loan (as defined in 
section 4975(d)(3) of the Code), allocations of qualifying employer 
securities that are stock of the applicable foreign corporation or 
covered surrogate foreign corporation from the ESOP suspense account to 
ESOP participants' accounts that are attributable to employer 
contributions (and not to dividends) are treated as contributions of 
stock under this paragraph (m)(3), as of the date stock attributable to 
repayment of the exempt loan is released from the suspense account and 
allocated to ESOP participants' accounts.
    (ii) Classes of stock contributed to an employer-sponsored 
retirement plan. This paragraph (m)(3) applies to contributions of any 
class of stock of an applicable foreign corporation or a covered 
surrogate foreign corporation, as applicable, to an employer-sponsored 
retirement plan regardless of the class of stock that was repurchased 
or acquired in a section 4501(d)(1) repurchase or section 4501(d)(2) 
repurchase by the section 4501(d) covered corporation.
    (iii) Determining amount of reduction to section 4501(d) excise tax 
base. The amount of the reduction under paragraph (m)(3)(i) of this 
section for a section 4501(d) covered corporation is determined as 
provided in paragraph (m)(3)(iii)(A) or (B) of this section.
    (A) Same class of stock repurchased and contributed. If stock of an 
applicable foreign corporation or a covered surrogate foreign 
corporation, as applicable, is repurchased or acquired in a section 
4501(d)(1) repurchase or section 4501(d)(2) repurchase, as applicable, 
with respect to a section 4501(d) covered corporation, and stock of the 
applicable foreign corporation or covered surrogate foreign 
corporation, as applicable, that is of the same class is contributed to 
an employer-sponsored retirement plan of the section 4501(d) covered 
corporation, the amount of the reduction under paragraph (m)(3)(i) of 
this section is equal to the lesser of--
    (1) The aggregate fair market value of the stock of the same class 
that was repurchased or acquired (as determined under paragraph (l) of 
this section) during the taxable year; or
    (2) The amount obtained by--
    (i) Determining the aggregate fair market value of all stock of 
that class repurchased or acquired in all section 4501(d)(1) 
repurchases or section 4501(d)(2) repurchases, as applicable, with 
respect to the section 4501(d) covered corporation (as determined under 
paragraph (l) of this section) during its taxable year, reduced by the 
fair market value of shares of that class of stock that is a reduction 
to the section 4501(d) excise tax base for the taxable year under a 
section 4501(d) statutory exception other than this paragraph (m)(3);
    (ii) Dividing the amount determined under paragraph 
(m)(3)(iii)(A)(2)(i) of this section by the number of shares of that 
class repurchased or acquired in all section 4501(d)(1) repurchases or 
section 4501(d)(2) repurchases, as applicable, with respect to the 
section 4501(d) covered corporation during the taxable year, reduced by 
the number of shares of that class of stock the fair market value of 
which is a reduction to the section 4501(d) excise tax base for the 
taxable year under a section 4501(d) statutory exception other than 
this paragraph (m)(3); and
    (iii) Multiplying the amount determined under paragraph 
(m)(3)(iii)(A)(2)(ii) of this section by the number of shares of that 
class contributed to an employer-sponsored retirement plan for the 
taxable year.
    (B) Different class of stock repurchased and contributed--(1) In 
general. If stock of an applicable foreign corporation or a covered 
surrogate foreign corporation, as applicable, of a different class of 
stock than is repurchased or acquired in a section 4501(d)(1) 
repurchase or section 4501(d)(2) repurchase, as applicable, with 
respect to a section 4501(d) covered corporation is contributed to an 
employer-sponsored retirement plan of the section 4501(d) covered 
corporation, then the amount of the reduction under paragraph (m)(3)(i) 
of this section is equal to the fair market value of the contributed 
stock at the time the stock is contributed to the employer-sponsored 
retirement plan.
    (2) Maximum reduction permitted. The amount of the reduction under 
paragraph (m)(3)(i) of this section must not exceed the section 4501(d) 
excise tax base for the taxable year (determined without regard to any 
reduction under paragraph (m)(3)(i) of this section), reduced by the 
fair market value of any stock that is a reduction to the section 
4501(d) excise tax base for the taxable year under a section 4501(d) 
statutory exception other than this paragraph (m)(3).
    (iv) Timing of contributions--(A) In general. The reduction in the 
section 4501(d) excise tax base, in accordance with paragraph (m)(3)(i) 
of this section

[[Page 26060]]

(that is, the reduction in the section 4501(d) excise tax base), for a 
taxable year applies to contributions of stock of an applicable foreign 
corporation or a covered surrogate foreign corporation, as applicable, 
to an employer-sponsored retirement plan during the section 4501(d) 
covered corporation's taxable year.
    (B) Treatment of contributions after close of taxable year. For 
purposes of paragraph (m)(3)(i) of this section, a section 4501(d) 
covered corporation may treat stock contributions to an employer-
sponsored retirement plan made after the close of the section 4501(d) 
covered corporation's taxable year as having been contributed during 
that taxable year if the following two requirements are satisfied:
    (1) The stock must be contributed to the employer-sponsored 
retirement plan by the filing deadline for the form on which the 
section 4501(d) excise tax must be reported (applicable form) that is 
due for the first full quarter after the close of the section 4501(d) 
covered corporation's taxable year.
    (2) The stock must be treated by the employer-sponsored retirement 
plan in the same manner that the plan would treat a contribution 
received on the last day of that taxable year.
    (C) No duplicate reductions. Stock contributions that are treated 
under paragraph (m)(3)(iv)(B) of this section as having been 
contributed in the taxable year to which the applicable form applies 
may not be treated as having been contributed for any other taxable 
year for purposes of the section 4501(d) excise tax.
    (v) Contributions before January 1, 2023. A section 4501(d) covered 
corporation with a taxable year that both begins before January 1, 
2023, and ends after December 31, 2022, may include the fair market 
value of all contributions of its stock to an employer-sponsored 
retirement plan during the entirety of that taxable year for purposes 
of applying this paragraph (m)(3).
    (4) Repurchases or acquisitions by a dealer in securities in the 
ordinary course of business--(i) In general. Subject to paragraph 
(m)(4)(ii) of this section, the fair market value of stock repurchased 
or acquired in a section 4501(d)(1) repurchase (for this purpose, 
determined without regard to paragraph (b)(2)(xxii)(B) of this section) 
or a covered purchase that is treated as a section 4501(d)(1) 
repurchase by a specified affiliate of an applicable foreign 
corporation or an applicable foreign corporation, or in a section 
4501(d)(2) repurchase by a specified affiliate of a covered surrogate 
foreign corporation or a covered surrogate foreign corporation, is a 
reduction for purposes of computing the section 4501(d) covered 
corporation's section 4501(d) excise tax base if the repurchasing or 
acquiring entity is a dealer in securities (within the meaning of 
section 475(c)(1) of the Code) to the extent the stock is repurchased 
or acquired in the ordinary course of the dealer's business of dealing 
in securities.
    (ii) Applicability. The reduction described in paragraph (m)(4)(i) 
of this section applies solely to the extent that--
    (A) The dealer accounts for the stock as securities held primarily 
for sale to customers in the dealer's ordinary course of business;
    (B) The dealer disposes of the stock within a period of time that 
is consistent with the holding of the stock for sale to customers in 
the dealer's ordinary course of business, taking into account the terms 
of the stock and the conditions and practices prevailing in the markets 
for similar stock during the period in which the stock is held; and
    (C) The dealer (if it is an applicable foreign corporation or a 
covered surrogate foreign corporation) does not sell or otherwise 
transfer the stock to a specified affiliate of the applicable foreign 
corporation or covered surrogate foreign corporation, as applicable, or 
the dealer (if it is a specified affiliate of an applicable foreign 
corporation or of a covered surrogate foreign corporation, as 
applicable) does not sell or otherwise transfer the stock to the 
applicable foreign corporation, covered surrogate foreign corporation, 
or to another specified affiliate of the applicable foreign corporation 
or covered surrogate foreign corporation, as applicable, in each case 
other than in a sale or transfer to a dealer that also satisfies the 
requirements of this paragraph (m)(4)(ii).
    (5) Repurchases by a RIC or REIT. Section 4501(e)(5) does not apply 
for purposes of section 4501(d).
    (6) AFC repurchase or CSFC repurchase treated as a dividend--(i) In 
general. In accordance with paragraph (m)(6)(ii) of this section, the 
fair market value of stock repurchased by an applicable foreign 
corporation or a covered surrogate foreign corporation in an AFC 
repurchase or a CSFC repurchase, as applicable, is a reduction for 
purposes of computing the section 4501(d) covered corporation's section 
4501(d) excise tax base to the extent the AFC repurchase or CSFC 
repurchase, as applicable, is treated as a distribution of a dividend 
under section 301(c)(1) or 356(a)(2).
    (ii) Rebuttable presumption of no dividend equivalence. An AFC 
repurchase or CSFC repurchase to which section 302 or 356(a) applies is 
presumed to be subject to section 302(a) or 356(a)(1), respectively 
(and, therefore, is presumed ineligible for the exception in paragraph 
(m)(6)(i) of this section). A section 4501(d) covered corporation may 
rebut this presumption with regard to a specific shareholder of an 
applicable foreign corporation or a covered surrogate foreign 
corporation, as applicable, solely by establishing with sufficient 
evidence that the shareholder treats the AFC repurchase or CSFC 
repurchase as a dividend on the shareholder's Federal income tax return 
or, for a shareholder who does not have a Federal income tax filing 
obligation with respect to the AFC repurchase or CSFC repurchase, would 
properly treat the AFC repurchase or CSFC repurchase as a dividend if 
the shareholder filed a Federal income tax return.
    (n) Application of section 4501(d) netting rule--(1) In general. 
This paragraph (n) provides the section 4501(d) netting rule, under 
which the section 4501(d) excise tax base with respect to a section 
4501(d) covered corporation for a taxable year is reduced only by stock 
of the applicable foreign corporation or covered surrogate foreign 
corporation, as applicable, issued or provided by the section 4501(d) 
covered corporation to its employees during its taxable year. Any 
reference in this paragraph (n) to issuing or providing stock to an 
employee refers solely to stock of the applicable foreign corporation 
or covered surrogate foreign corporation, as applicable, that is issued 
or provided by a section 4501(d) covered corporation to an employee in 
connection with the employee's performance of services in the 
employee's capacity as an employee of the section 4501(d) covered 
corporation. The fair market value of stock of an applicable foreign 
corporation or a covered surrogate foreign corporation, as applicable, 
that is described in this paragraph (n) is a reduction for purposes of 
computing the section 4501(d) covered corporation's section 4501(d) 
excise tax base. See paragraph (c)(3)(i)(C) of this section.
    (2) Stock issued or provided outside period of applicable foreign 
corporation or covered surrogate foreign corporation status. Any stock 
issued or provided prior to the initiation date or after the cessation 
date of the applicable foreign corporation or covered surrogate foreign 
corporation, as applicable, is not taken into account under paragraph 
(n)(1) of

[[Page 26061]]

this section. See paragraph (f)(1) of this section.
    (3) Issuances or provisions before January 1, 2023. Except as 
provided in paragraph (n)(2) of this section, a section 4501(d) covered 
corporation with a taxable year that begins before January 1, 2023, and 
ends after December 31, 2022, must include the fair market value of 
issuances or provisions of stock that occur before January 1, 2023, in 
such taxable year for purposes of paragraph (n)(1) of this section for 
that taxable year.
    (4) F reorganizations. For purposes of this paragraph (n), the 
transferor corporation and the resulting corporation (as defined in 
Sec.  1.368-2(m)(1) of this chapter) in an F reorganization are treated 
as the same corporation.
    (5) Stock issued or provided in connection with the performance of 
services--(i) In general. For purposes of this paragraph (n), stock of 
an applicable foreign corporation or a covered surrogate foreign 
corporation, as applicable, is transferred by the section 4501(d) 
covered corporation in connection with the performance of services only 
if the transfer is described in section 83, including pursuant to a 
nonqualified stock option described in Sec.  1.83-7 of this chapter, or 
is pursuant to a stock option described in section 421 of the Code.
    (ii) Sale of shares to cover exercise price or withholding--(A) 
Payment or advance by third party equal to exercise price. If a third 
party pays the exercise price of a stock option on behalf of an 
employee or advances to an employee an amount equal to the exercise 
price of a stock option that the employee uses to exercise the option, 
then any stock transferred by the section 4501(d) covered corporation 
to the employee or to the third party in connection with exercising the 
option is treated as issued or provided in connection with the 
performance of the services.
    (B) Advance by third party equal to withholding obligation. If a 
third party advances an amount equal to the withholding obligation of 
an employee, then any stock transferred by the section 4501(d) covered 
corporation to the employee or to the third party in connection with 
this arrangement is treated as issued or provided in connection with 
the performance of services.
    (6) Date of issuance or provision for section 4501(d) netting 
rule--(i) In general. Stock of an applicable foreign corporation or a 
covered surrogate foreign corporation, as applicable, is issued or 
provided to an employee of a section 4501(d) covered corporation as of 
the date the employee is treated as the beneficial owner of the stock 
for Federal income tax purposes. In general, an employee is treated as 
the beneficial owner of the stock when the stock is both transferred by 
the section 4501(d) covered corporation and substantially vested within 
the meaning of Sec.  1.83-3(b) of this chapter. Thus, stock transferred 
pursuant to a vested stock award or restricted stock unit is issued or 
provided when the section 4501(d) covered corporation initiates payment 
of the stock. Stock transferred that is not substantially vested within 
the meaning of Sec.  1.83-3(b) of this chapter is not issued or 
provided until it vests, except as provided in paragraph (n)(6)(iii) of 
this section.
    (ii) Stock options and stock appreciation rights. Stock of an 
applicable foreign corporation or a covered surrogate foreign 
corporation, as applicable, transferred by a section 4501(d) covered 
corporation pursuant to an option described in Sec.  1.83-7 of this 
chapter or section 421 or a stock appreciation right is issued or 
provided by the section 4501(d) covered corporation as of the date the 
option or stock appreciation right is exercised.
    (iii) Stock on which a section 83(b) election is made. Stock of an 
applicable foreign corporation or a covered surrogate foreign 
corporation, as applicable, transferred by the section 4501(d) covered 
corporation when it is not substantially vested within the meaning of 
Sec.  1.83-3(b) of this chapter, but as to which a valid election under 
section 83(b) is made, is treated as issued or provided by the section 
4501(d) covered corporation as of the transfer date.
    (7) Fair market value of stock of an applicable foreign corporation 
or a covered surrogate foreign corporation that is issued or provided 
to employees--(i) In general. For purposes of paragraph (n)(1) of this 
section, the fair market value of stock of an applicable foreign 
corporation or a covered surrogate foreign corporation that is issued 
or provided is determined under section 83 as of the date the stock is 
issued or provided to an employee by the section 4501(d) covered 
corporation. The fair market value of the stock is determined under the 
rules provided in section 83 regardless of whether an amount is 
includible in the employee's income under section 83 or otherwise. For 
example, the fair market value of stock issued or provided by a section 
4501(d) covered corporation to its employee pursuant to a stock option 
described in section 421 and stock issued or provided by a section 
4501(d) covered corporation to an employee who is a nonresident alien 
for services performed outside of the United States is determined using 
the rules provided in section 83.
    (ii) Market price of stock denominated in non-U.S. currency. The 
market price of any stock of an applicable foreign corporation or a 
covered surrogate foreign corporation that is denominated in a currency 
other than the U.S. dollar is converted into U.S. dollars at the spot 
rate (as defined in Sec.  1.988-1(d)(1) of this chapter) on the date 
the stock is issued or provided by the section 4501(d) covered 
corporation to its employee.
    (8) Issuances that are disregarded for purposes of applying the 
section 4501(d) netting rule--(i) In general. This paragraph (n)(8) 
lists the sole circumstances in which an issuance or provision of stock 
by the section 4501(d) covered corporation to its employee is 
disregarded for purposes of paragraph (n) of this section. The 
transfers of stock described in Sec.  58.4501-4(f)(1) through (9) are 
not issuances or provisions of stock by a section 4501(d) covered 
corporation to its employees and therefore are not relevant to the 
section 4501(d) netting rule.
    (ii) Stock contributions to an employer-sponsored retirement plan. 
Any stock of an applicable foreign corporation or a covered surrogate 
foreign corporation, as applicable, contributed to an employer-
sponsored retirement plan, any stock of an applicable foreign 
corporation or a covered surrogate foreign corporation, as applicable, 
treated as contributed to an employer-sponsored retirement plan under 
paragraph (m)(3) of this section, and any stock of an applicable 
foreign corporation or a covered surrogate foreign corporation, as 
applicable, sold to a leveraged or non-leveraged ESOP, is disregarded 
for purposes of this paragraph (n).
    (iii) Net exercises and share withholding. Stock of an applicable 
foreign corporation or a covered surrogate foreign corporation, as 
applicable, withheld by a section 4501(d) covered corporation to 
satisfy the exercise price of a stock option issued to an employee, or 
to pay any withholding obligation, is disregarded for purposes of 
paragraph (n) of this section. For example, stock of an applicable 
foreign corporation or a covered surrogate foreign corporation, as 
applicable, withheld by a section 4501(d) covered corporation to pay 
the exercise price of a stock option, to satisfy an employer's income 
tax withholding obligation under section 3402 of the Code, to satisfy 
an employer's withholding obligation under section 3102 of the Code, or 
to

[[Page 26062]]

satisfy an employer's withholding obligation for State, local, or 
foreign taxes, is disregarded for purposes of this paragraph (n) to an 
employee.
    (iv) Settlement other than in stock. Settlement of an option 
contract with respect to an applicable foreign corporation or a covered 
surrogate foreign corporation, as applicable, using any consideration 
other than stock of the applicable foreign corporation or covered 
surrogate foreign corporation, as applicable, (including cash) is 
disregarded for purposes of this paragraph (n).
    (v) Instrument not in the legal form of stock--(A) Generally 
disregarded. Except as provided in paragraph (n)(8)(v)(B) of this 
section, the issuance or provision by a section 4501(d) covered 
corporation of an instrument that is not in the legal form of stock but 
is treated as stock for Federal income tax purposes (non-stock 
instrument) is disregarded for purposes of the section 4501(d) netting 
rule.
    (B) Certain instruments treated as issued--(1) In general. Subject 
to paragraphs (n)(8)(v)(B)(2), (3), and (4) of this section, if there 
is a section 4501(d)(1) repurchase or section 4501(d)(2) repurchase of 
a non-stock instrument, the issuance or provision of the instrument is 
regarded for purposes of the section 4501(d) netting rule at the time 
of such section 4501(d)(1) repurchase or section 4501(d)(2) repurchase, 
provided that the issuance or provision was by the section 4501(d) 
covered corporation to its employees. For purposes of the stock 
repurchase excise tax regulations, the delivery of stock pursuant to 
the terms of a non-stock instrument is treated as a section 4501(d)(1) 
repurchase or a section 4501(d)(2) repurchase, as applicable, of the 
non-stock instrument in exchange for an issuance or provision of the 
stock that is delivered.
    (2) Issuances or provisions before the initiation date or after the 
cessation date. Any non-stock instrument issued or provided by the 
section 4501(d) covered corporation before the initiation date or after 
the cessation date is not regarded for purposes of the section 4501(d) 
netting rule.
    (3) Identification of an instrument not in the legal form of stock. 
The section 4501(d) covered corporation must identify the section 
4501(d)(1) repurchase or section 4501(d)(2) repurchase, as applicable, 
of a non-stock instrument on the return on which the stock repurchase 
excise tax must be reported for the section 4501(d) covered 
corporation's taxable year in which the section 4501(d)(1) repurchase 
or section 4501(d)(2) repurchase, as applicable, occurs (repurchase 
year) in order for the issuance or provision to be regarded under 
paragraph (n)(8)(v)(B)(1) of this section.
    (4) Consistency requirement. In the repurchase year of a non-stock 
instrument (tested non-stock instrument), the issuance or provision of 
the non-stock instrument is not regarded under paragraph 
(n)(8)(v)(B)(1) of this section unless the section 4501(d) covered 
corporation reports or has reported the section 4501(d)(1) repurchase 
or section 4501(d)(2) repurchase of all other comparable non-stock 
instruments repurchased or acquired within the five taxable years 
ending on the last day of the repurchase year in a consistent manner. A 
comparable non-stock instrument is a non-stock instrument that has 
substantially similar economic terms as the tested non-stock 
instrument, regardless of whether the comparable non-stock instrument 
and the tested non-stock instrument have the same legal form. A 
comparable non-stock instrument is reported in a consistent manner if 
it is or was timely reported on the return on which the stock 
repurchase excise tax must be reported that is or was due for the first 
full quarter after the close of the repurchase year for such comparable 
non-stock instrument. Notwithstanding the first sentence of this 
paragraph (n)(8)(v)(B)(4), the issuance or provision of the tested non-
stock instrument will be regarded if the section 4501(d) covered 
corporation demonstrates to the satisfaction of the IRS that the 
section 4501(d) covered corporation's failure to timely report the 
repurchase or acquisition of the comparable non-stock instruments was 
due to reasonable cause (within the meaning Sec.  1.6664-4 of this 
chapter) and not willful neglect. In determining whether this failure 
to report was due to reasonable cause and not willful neglect, the IRS 
will consider all the facts and circumstances, including the steps the 
section 4501(d) covered corporation took to comply with its Federal tax 
reporting and payment obligations.
    (5) Fair market value of the instrument. The amount of the 
reduction for purposes of computing the section 4501(d) covered 
corporation's section 4501(d) excise tax base for a taxable year under 
this section for the issuance or provision of a non-stock instrument is 
equal to the lesser of the fair market value of the instrument when the 
instrument was issued or provided within the meaning of paragraph 
(n)(7) of this section or the fair market value of the instrument at 
the time of the section 4501(d)(1) repurchase or section 4501(d)(2) 
repurchase, as applicable.
    (o) Rules applicable before April 13, 2024--(1) Acquisitions of 
applicable foreign corporation stock. If an applicable specified 
affiliate of an applicable foreign corporation acquires stock of the 
applicable foreign corporation from a person that is not the applicable 
foreign corporation or another specified affiliate of such applicable 
foreign corporation--
    (i) The applicable specified affiliate is treated as a covered 
corporation with regard to the acquisition; and
    (ii) The acquisition is treated as a repurchase of stock of a 
covered corporation by a covered corporation.
    (2) Funding rule. For purposes of applying section 4501(d)(1), an 
applicable specified affiliate is treated as acquiring stock of an 
applicable foreign corporation if the applicable specified affiliate 
funds by any means (including through distributions, debt, or capital 
contributions) the acquisition or repurchase of stock of the applicable 
foreign corporation by the applicable foreign corporation or a 
specified affiliate that is not also an applicable specified affiliate, 
and such funding is undertaken for a principal purpose of avoiding the 
stock repurchase excise tax. For purposes of the preceding sentence, 
the fair market value of stock treated as acquired by the applicable 
specified affiliate is limited to the amount funded by the applicable 
specified affiliate. This paragraph (o)(2) applies with respect to a 
funding that occurs on or after December 27, 2022, provided that the 
covered purchase occurs after December 31, 2022, and on or before April 
12, 2024. See paragraph (r)(2) of this section.
    (3) Per se rule. A principal purpose described in paragraph (o)(2) 
of this section is deemed to exist if the applicable specified 
affiliate funds by any means, other than through distributions, the 
applicable foreign corporation or a specified affiliate that is not 
also an applicable specified affiliate, and such funded entity acquires 
or repurchases stock of the applicable foreign corporation within two 
years of the funding.
    (4) Repurchases or acquisitions of covered surrogate foreign 
corporation stock. If a covered surrogate foreign corporation 
repurchases its stock, or if a specified affiliate of the covered 
surrogate foreign corporation acquires stock of the covered surrogate 
foreign corporation--
    (i) The expatriated entity with respect to the covered surrogate 
foreign corporation is treated as a covered

[[Page 26063]]

corporation with respect to the repurchase or acquisition; and
    (ii) The repurchase or acquisition is treated as a repurchase of 
stock of a covered corporation by the covered corporation.
    (5) Definitions solely for purposes of paragraph (o)--(i) 
Application of definitions in Sec. Sec.  58.4501-1(b) and 58.4501-
7(b)(2). Solely for purposes of this paragraph (o), any term used but 
not defined in this paragraph (o) has the meaning provided in Sec.  
58.4501-1(b) or paragraph (b)(2) of this section (other than paragraph 
(b)(2)(xiii) of this section), as applicable.
    (ii) Definition of applicable specified affiliate. Solely for 
purposes of this paragraph (o), the term applicable specified affiliate 
means a specified affiliate of an applicable foreign corporation, other 
than a foreign corporation or a foreign partnership (unless the 
partnership has a domestic entity as a direct or indirect partner).
    (6) Early application of rules of this section other than paragraph 
(o). See paragraph (r)(3) of this section regarding a section 4501(d) 
covered corporation's ability to choose to apply all the rules of this 
section (other than paragraphs (o) and (r)(1) and (2) of this section) 
to transactions occurring after December 31, 2022.
    (p) Section 4501(d)(1) examples. The following examples illustrate 
the application of the rules in this section relating to section 
4501(d)(1). For purposes of the following examples, unless otherwise 
stated: Corporation FZ is an applicable foreign corporation; each 
entity has a calendar taxable year, has no direct or indirect owner 
that is a domestic entity, and is not related to any other entity; each 
corporation's only outstanding stock is a single class of common stock; 
the functional currency (within the meaning of section 985 of the Code) 
of any entity is the U.S. dollar; any repurchase or acquisition of the 
stock of an applicable foreign corporation is from a person who is not 
the applicable foreign corporation or a specified affiliate of the 
applicable foreign corporation; no stock is transferred to any 
employee; for examples that expressly provide that stock is transferred 
to any employee, such transfer is made in connection with the 
employee's performance of services in its capacity as an employee of 
the transferor, and the employee is treated as the beneficial owner of 
the stock for Federal income tax purposes on the date of the transfer; 
there are no covered fundings or covered purchases; and the section 
4501(d) statutory exceptions are inapplicable.

    (1) Example 1: The section 4501(d) netting rule with respect to 
a single applicable specified affiliate--(i) Facts. Corporation FZ 
owns all the outstanding stock of Corporation US1, a domestic 
corporation. Each of Employee M and Employee P is an employee of 
Corporation US1. On February 1, 2025, Corporation US1 purchases 100 
shares of stock of Corporation FZ when the fair market value of each 
share is $8x. On May 15, 2025, Corporation US1 transfers to Employee 
M 50 shares of stock of Corporation FZ when the fair market value of 
each share is $5x. On November 1, 2025, Corporation US1 transfers to 
Employee P 30 shares of stock of Corporation US1 when the fair 
market value of each share is $9x.
    (ii) Analysis. Corporation US1's purchase of 100 shares of stock 
of Corporation FZ on February 1, 2025, is a section 4501(d)(1) 
repurchase. See paragraph (b)(2)(xxii)(A) of this section. 
Corporation US1 is a section 4501(d) covered corporation with 
respect to the section 4501(d)(1) repurchase. See paragraph 
(b)(2)(xv)(A) of this section. For purposes of computing Corporation 
US1's section 4501(d) excise tax base for its 2025 taxable year, the 
fair market value of the 100 shares of stock of Corporation FZ 
subject to the section 4501(d)(1) repurchase is $800x. See paragraph 
(l) of this section. Accordingly, the section 4501(d)(1) repurchase 
increases Corporation US1's section 4501(d) excise tax base for the 
2025 taxable year by $800x. 50 shares of Corporation FZ stock are 
treated as issued or provided to Employee M on May 15, 2025. See 
paragraph (n) of this section. Therefore, Corporation US1's section 
4501(d) excise tax base for its 2025 taxable year is reduced by 
$250x (50 shares x $5x per share = $250x). See paragraph 
(c)(3)(i)(C) of this section. Corporation US1's section 4501(d) 
excise tax base for its 2025 taxable year is not reduced by the 
transfer of stock of Corporation US1 to Employee P because the 
section 4501(d) excise tax base with respect to Corporation US1 can 
only be reduced by the fair market value of stock of Corporation FZ 
issued or provided by Corporation US1 to employees of Corporation 
US1. See paragraph (n) of this section. Accordingly, Corporation 
US1's section 4501(d) excise tax base with respect to these 
transactions for its 2025 taxable year is $550x ($800x repurchase-
$250x issuance = $550x).
    (2) Example 2: The section 4501(d) netting rule with respect to 
multiple applicable specified affiliates--(i) Facts. Corporation FZ 
owns all the outstanding stock of both Corporation US1, a domestic 
corporation, and Corporation US2, a domestic corporation. Employee T 
is an employee of Corporation US2. On February 1, 2025, Corporation 
US1 purchases 100 shares of stock of Corporation FZ when the fair 
market value of each share is $8x. On May 15, 2025, Corporation US2 
transfers to Employee T 50 shares of stock of Corporation FZ when 
the fair market value of each share is $5x.
    (ii) Analysis. Corporation US1's purchase of 100 shares of stock 
of Corporation FZ on February 1, 2025, is a section 4501(d)(1) 
repurchase. See paragraph (b)(2)(xxii)(A) of this section. 
Corporation US1 is a section 4501(d) covered corporation with 
respect to the section 4501(d)(1) repurchase. See paragraph 
(b)(2)(xv)(A) of this section. For purposes of computing Corporation 
US1's section 4501(d) excise tax base for its 2025 taxable year, the 
fair market value of the 100 shares of stock of Corporation FZ 
subject to the section 4501(d)(1) repurchase is $800x. See paragraph 
(l) of this section. Accordingly, the section 4501(d)(1) repurchase 
increases Corporation US1's section 4501(d) excise tax base for the 
2025 taxable year by $800x. Corporation US1's section 4501(d) excise 
tax base for its 2025 taxable year is not reduced by the transfer of 
stock of Corporation FZ to Employee T, an employee of Corporation 
US2, because the section 4501(d) excise tax base with respect to 
Corporation US1 can only be reduced by the fair market value of 
stock of Corporation FZ issued or provided by Corporation US1 to 
employees of Corporation US1. See paragraph (n) of this section.
    (3) Example 3: A single covered funding and covered purchase--
(i) Facts. Corporation FZ owns all the outstanding stock of 
Corporation US1, a domestic corporation. On March 1, 2024, 
Corporation US1 makes a distribution with respect to its stock of 
$600x to Corporation FZ. A principal purpose of the distribution is 
to fund a covered purchase. On May 15, 2026, Corporation FZ 
repurchases 100 shares of its stock when the fair market value of 
each share is $8x.
    (ii) Analysis. Because a principal purpose of the distribution 
by Corporation US1 to Corporation FZ is to fund a covered purchase, 
the distribution of $600x is a covered funding. See paragraph (e)(1) 
of this section. The repurchase by Corporation FZ of its stock is an 
AFC repurchase and therefore a covered purchase. See paragraph 
(b)(2)(vii) of this section. The entire amount of the covered 
purchase, or $800x, is the allocable amount of the covered purchase. 
See paragraph (e)(5) of this section. The entire amount of the 
covered funding, or $600x, is allocated to the allocable amount of 
the covered purchase because the amount of the covered funding is 
less than the amount of the covered purchase. See paragraph 
(e)(7)(iii) of this section. The amount of stock of Corporation FZ 
acquired in the covered purchase that is treated as acquired by 
Corporation US1 is equal to the amount of covered fundings allocated 
to the allocable amount of the covered purchase, or $600x (which 
represents 75 of the 100 shares of stock repurchased). See paragraph 
(e)(4) of this section. Corporation US1 is treated as acquiring 
stock of Corporation FZ in a section 4501(d)(1) repurchase on May 
15, 2026. See paragraphs (b)(2)(xxii)(B) and (k)(4) of this section. 
Corporation US1 is a section 4501(d) covered corporation with 
respect to the section 4501(d)(1) repurchase. See paragraph 
(b)(2)(xv)(A) of this section. For purposes of computing Corporation 
US1's section 4501(d) excise tax base, the fair market value of the 
75 shares of stock of Corporation FZ subject to the section 
4501(d)(1) repurchase is $600x. See paragraph (l) of this section. 
Accordingly, the section 4501(d)(1) repurchase by Corporation US1 
increases its section 4501(d) excise tax base for the 2026 taxable 
year by $600x.
    (4) Example 4: Multiple covered fundings and a single covered 
purchase--(i) Facts. The

[[Page 26064]]

facts are the same as in paragraph (p)(3)(i) of this section 
(Example 3), except that Corporation FZ also owns all the stock of 
Corporation FB, a foreign corporation. In addition, on April 15, 
2024, Corporation FB makes a distribution with respect to its stock 
of $1,000x to Corporation FZ. Further, on October 15, 2024, 
Corporation US1 makes another distribution with respect to its stock 
of $400x to Corporation FZ. A principal purpose of the October 15, 
2024, distribution is also to fund a covered purchase.
    (ii) Analysis. Because a principal purpose of the distributions 
by Corporation US1 to Corporation FZ is to fund a covered purchase, 
each of the March 1, 2024, distribution of $600x and the October 15, 
2024, distribution of $400x is a covered funding. See paragraph 
(e)(1) of this section. The repurchase by Corporation FZ of its 
stock is an AFC repurchase and therefore a covered purchase. See 
paragraph (b)(2)(vii) of this section. The entire amount of the 
covered purchase, or $800x, is the allocable amount of the covered 
purchase. See paragraph (e)(5) of this section. Further, the 
allocable amount of the covered purchase is treated as made first 
from the covered fundings. With respect to the covered fundings, the 
March 1, 2024, distribution by Corporation US1 is treated as funding 
the allocable amount of the covered purchase before the October 15, 
2024, distribution by Corporation US1. See paragraphs (e)(6) and 
(e)(7)(iv) of this section. Accordingly, the entire amount of the 
March 1, 2024, distribution, or $600x, and $200x of the October 15, 
2024, distribution is allocated to the allocable amount of the 
covered purchase. The amount of stock of Corporation FZ acquired in 
the covered purchase that is treated as acquired by Corporation US1 
is equal to the amount of covered fundings allocated to the 
allocable amount of the covered purchase, or $800x (which represents 
the 100 shares of stock repurchased). See paragraph (e)(4) of this 
section. Corporation US1 is treated as acquiring stock of 
Corporation FZ in a section 4501(d)(1) repurchase on May 15, 2026. 
See paragraphs (b)(2)(xxii)(B) and (k)(4) of this section. 
Corporation US1 is a section 4501(d) covered corporation with 
respect to the section 4501(d)(1) repurchase. See paragraph 
(b)(2)(xv)(A) of this section. For purposes of computing Corporation 
US1's section 4501(d) excise tax base, the fair market value of the 
100 shares of stock of Corporation FZ subject to the section 
4501(d)(1) repurchase is $800x. See paragraph (l) of this section. 
Accordingly, the section 4501(d)(1) repurchase by Corporation US1 
increases its section 4501(d) excise tax base for the 2026 taxable 
year by $800x.
    (5) Example 5: The rebuttable presumption--(i) Facts. 
Corporation FZ owns all the outstanding stock of Corporation US1, a 
domestic corporation. Corporation US1 owns all the outstanding stock 
of Corporation FD, a foreign corporation. On March 1, 2024, 
Corporation US1 makes a capital contribution of $600x to Corporation 
FD. On May 15, 2024, Corporation FD acquires 100 shares of the stock 
of Corporation FZ when the fair market value of each share is $8x. 
The facts and circumstances do not clearly establish that there was 
not a principal purpose of avoiding the section 4501(d) excise tax 
as described in paragraph (e)(1) of this section.
    (ii) Analysis. A principal purpose described in paragraph (e)(1) 
of this section is presumed to exist because Corporation FD is a 
downstream relevant entity and the capital contribution by 
Corporation US1 to Corporation FD occurs within two years of a 
covered purchase by Corporation FD. See paragraph (e)(2) of this 
section. Because the facts and circumstances do not clearly 
establish that there was not a principal purpose with respect to the 
March 1, 2024, capital contribution of avoiding the section 4501(d) 
excise tax as described in paragraph (e)(1) of this section, the 
presumption is not rebutted. See paragraph (e)(2) of this section. 
Accordingly, the capital contribution of $600x is a covered funding. 
See paragraph (e)(1) of this section. The acquisition by Corporation 
FD of the stock of Corporation FZ is an acquisition of stock of an 
applicable foreign corporation by a relevant entity and therefore a 
covered purchase. See paragraph (b)(2)(vii) of this section. The 
entire amount of the covered purchase, or $800x, is the allocable 
amount of the covered purchase. See paragraph (e)(5) of this 
section. The entire amount of the covered funding, or $600x, is 
allocated to the allocable amount of the covered purchase because 
the amount of the covered funding is less than the amount of the 
covered purchase. See paragraph (e)(7)(iii) of this section. The 
amount of stock of Corporation FZ acquired in the covered purchase 
that is treated as acquired by Corporation US1 is equal to the 
amount of covered fundings allocated to the allocable amount of the 
covered purchase, or $600x (which represents 75 of the 100 shares of 
stock repurchased). See paragraph (e)(4) of this section. 
Corporation US1 is treated as acquiring stock of Corporation FZ in a 
section 4501(d)(1) repurchase on May 15, 2024. See paragraphs 
(b)(2)(xxii)(B) and (k)(4) of this section. Corporation US1 is a 
section 4501(d) covered corporation with respect to the section 
4501(d)(1) repurchase. See paragraph (b)(2)(xv)(A) of this section. 
For purposes of computing Corporation US1's section 4501(d) excise 
tax base, the fair market value of the 75 shares of stock of 
Corporation FZ subject to the section 4501(d)(1) repurchase is 
$600x. See paragraph (l) of this section. Accordingly, the section 
4501(d)(1) repurchase by Corporation US1 increases its section 
4501(d) excise tax base for the 2024 taxable year by $600x. Other 
covered fundings, if any, could be allocated to the remaining $200x 
of stock of Corporation FZ that Corporation FD acquired.
    (6) Example 6: Indirect funding subject to rebuttable 
presumption--(i) Facts. Corporation FZ owns all the outstanding 
stock of each of Corporation US1, a domestic corporation and 
Corporation FB, a foreign corporation. Corporation US1 owns all the 
outstanding stock of Corporation FY, a foreign corporation. 
Corporation FY owns all the outstanding stock of Corporation FD, a 
foreign corporation. On March 1, 2024, Corporation US1 makes a loan 
of $1,000x to Corporation FB. On March 15, 2024, Corporation FB 
makes a loan of $900x to Corporation FD. The facts and circumstances 
do not clearly establish that there was not a principal purpose of 
avoiding the section 4501(d) excise tax as described in paragraph 
(e)(1) of this section. On May 15, 2024, Corporation FD acquires 100 
shares of the stock of Corporation FZ when the fair market value of 
each share is $8x.
    (ii) Analysis. A principal purpose described in paragraph (e)(1) 
of this section is presumed to exist because Corporation FD is a 
downstream relevant entity and the March 1, 2024, loan by 
Corporation US1 to Corporation FB occurs within two years of a 
covered purchase by Corporation FD. See paragraph (e)(2) of this 
section. Because the facts and circumstances do not clearly 
establish that there was not a principal purpose of avoiding the 
section 4501(d) excise tax as described in paragraph (e)(1) of this 
section, the presumption is not rebutted. See paragraph (e)(2) of 
this section. Accordingly, the March 1, 2024, loan is a covered 
funding. See paragraph (e)(1) of this section. The acquisition by 
Corporation FD of the stock of Corporation FZ is an acquisition of 
stock of an applicable foreign corporation by a relevant entity and 
therefore a covered purchase. See paragraph (b)(2)(vii) of this 
section. The entire amount of the covered purchase, or $800x, is the 
allocable amount of the covered purchase. See paragraph (e)(5) of 
this section. $800x of the covered funding is allocated to the 
allocable amount of covered purchase because the allocable amount of 
the covered purchase is less than the amount of the covered funding. 
See paragraph (e)(7)(iii) of this section. The amount of stock of 
Corporation FZ acquired in the covered purchase that is treated as 
acquired by Corporation US1 is equal to the amount of covered 
fundings allocated to the allocable amount of the covered purchase, 
or $800x (which represents the 100 shares of stock repurchased). See 
paragraph (e)(4) of this section. Corporation US1 is treated as 
acquiring stock of Corporation FZ in a section 4501(d)(1) repurchase 
on May 15, 2024. See paragraphs (b)(2)(xxii)(B) and (k)(4) of this 
section. Corporation US1 is a section 4501(d) covered corporation 
with respect to the section 4501(d)(1) repurchase. See paragraph 
(b)(2)(xv)(A) of this section. For purposes of computing Corporation 
US1's section 4501(d) excise tax base, the fair market value of the 
100 shares of stock of Corporation FZ subject to the section 
4501(d)(1) repurchase is $800x. See paragraph (l) of this section. 
Accordingly, the section 4501(d)(1) repurchase by Corporation US1 
increases its section 4501(d) excise tax base for the 2024 taxable 
year by $800x.
    (7) Example 7: Indirect funding--(i) Facts. Corporation FZ owns 
all the outstanding stock of two foreign corporations, Corporation 
FB and Corporation FE, and all the outstanding stock of two domestic 
corporations, Corporation US1 and Corporation US2. On March 1, 2024, 
Corporation US1 makes a loan of $700x to Corporation FZ. On April 1, 
2024, Corporation FZ makes a loan to Corporation FB of $1,100x. On 
May 15, 2024, Corporation FE makes a loan of $900x to Corporation 
FB. On June 1, 2024, Corporation US2 makes a

[[Page 26065]]

loan of $800x to Corporation FZ. A principal purpose of each of the 
March 1, 2024, loan by Corporation US1 and the June 1, 2024, loan by 
Corporation US2 is to fund a covered purchase. On December 1, 2024, 
Corporation FB acquires 100 shares of stock of Corporation FZ when 
the fair market value of each share is $8x.
    (ii) Analysis. Because a principal purpose of each of the March 
1, 2024, loan by Corporation US1 and the June 1, 2024, loan by 
Corporation US2 is to fund a covered purchase, each of those loans 
is a covered funding. See paragraph (e)(1) of this section. The 
acquisition by Corporation FB of stock of Corporation FZ is an 
acquisition of stock of an applicable foreign corporation by a 
relevant entity and therefore a covered purchase. See paragraph 
(b)(2)(vii) of this section. The entire amount of the covered 
purchase, or $800x, is the allocable amount of the covered purchase. 
See paragraph (e)(5) of this section. The March 1, 2024, loan by 
Corporation US1 and the June 1, 2024, loan by Corporation US2 are 
treated as funding the allocable amount of the covered purchase 
before the May 15, 2024, loan by Corporation FE. See paragraph 
(e)(5) of this section. Further, the March 1, 2024, loan by 
Corporation US1 is treated as funding the allocable amount of the 
covered purchase before the June 1, 2024, loan by Corporation US2. 
See paragraph (e)(7)(iv) of this section. Accordingly, the entire 
amount of the March 1, 2024, loan, or $700x, and $100x of the June 
1, 2024, loan is allocated to the allocable amount of the covered 
purchase. The amount of stock of Corporation FZ acquired in the 
covered purchase that is treated as acquired by Corporation US1 is 
the amount of covered fundings by Corporation US1 allocated to the 
allocable amount of the covered purchase, or $700x (which represents 
the 87.5 shares of stock repurchased). The amount of stock of 
Corporation FZ acquired in the covered purchase that is treated as 
acquired by Corporation US2 is equal to the amount of covered 
fundings by Corporation US2 allocated to the allocable amount of the 
covered purchase, or $100x (which represents the 12.5 shares of 
stock repurchased). See paragraph (e)(4) of this section. 
Corporation US1 and Corporation US2 are each treated as acquiring 
stock of Corporation FZ in a section 4501(d)(1) repurchase on 
December 1, 2024. See paragraphs (b)(2)(xxii)(B) and (k)(4) of this 
section. Each of Corporation US1 and Corporation US2 is a section 
4501(d) covered corporation with respect to its portion of the 
section 4501(d)(1) repurchase. See paragraph (b)(2)(xv)(A) of this 
section. For purposes of computing Corporation US1's section 4501(d) 
excise tax base, the fair market value of the 87.5 shares of stock 
of Corporation FZ subject to the section 4501(d)(1) repurchase is 
$700x. For purposes of computing Corporation US2's section 4501(d) 
excise tax base, the fair market value of the 12.5 shares of stock 
of Corporation FZ subject to the section 4501(d)(1) repurchase is 
$100x. See paragraph (l) of this section. Accordingly, the section 
4501(d)(1) repurchase by Corporation US1 increases its section 
4501(d) excise tax base for the 2024 taxable year by $700x, and the 
section 4501(d)(1) repurchase by Corporation US2 increases its 
section 4501(d) excise tax base for the 2024 taxable year by $100x.
    (8) Example 8: A foreign partnership that is an applicable 
specified affiliate--(i) Facts. Partnership FP is a foreign 
partnership in which Corporation FZ, Corporation FB, a foreign 
corporation, and Corporation US1, a domestic corporation, are 
partners. Corporation FZ owns 70 percent of the capital interests 
and profits interests of Partnership FP; Corporation FB owns 20 
percent of the capital interests and profits interests of 
Partnership FP; and Corporation US1 owns 10 percent of the capital 
interests and profits interests of Partnership FP. On March 1, 2024, 
Partnership FP purchases 100 shares of stock of Corporation FZ when 
the fair market value of each share is $8x.
    (ii) Analysis. Corporation US1 is a domestic entity. See 
paragraph (b)(2)(x) of this section. Corporation US1 is a direct 
partner with respect to Partnership FP for purposes of section 
4501(d)(1) because Corporation US1 directly owns an interest in 
Partnership FP and is not a de minimis domestic entity partner with 
respect to Partnership FP. See paragraphs (h)(2)(i) and (h)(5) of 
this section. Accordingly, Partnership FP is an applicable specified 
affiliate of Corporation FZ because Corporation FZ owns more than 50 
percent of the capital interests or profits interests of Partnership 
FP, and Corporation US1, a domestic entity, is a direct partner of 
Partnership FP. Partnership FP's purchase of 100 shares of stock of 
Corporation FZ is a section 4501(d)(1) repurchase. See paragraph 
(b)(2)(xxii)(A) of this section. Partnership FP is a section 4501(d) 
covered corporation with respect to the section 4501(d)(1) 
repurchase. See paragraph (b)(2)(xv)(A) of this section. For 
purposes of computing Partnership FP's section 4501(d) excise tax 
base, the fair market value of the 100 shares of stock of 
Corporation FZ subject to the section 4501(d)(1) repurchase is 
$800x. See paragraph (l) of this section. Accordingly, the section 
4501(d)(1) repurchase increases Partnership FP's section 4501(d) 
excise tax base for the 2024 taxable year by $800x.
    (9) Example 9: A foreign partnership that is not an applicable 
specified affiliate--(i) Facts. The facts are the same as in 
paragraph (p)(8)(i) of this section (Example 8), except that 
Corporation FZ owns 76 percent of the capital interests and profits 
interests of Partnership FP; Corporation FB owns 20 percent of the 
capital interests and profits interests of Partnership FP; and 
Corporation US1 owns 4 percent of the capital interests and profits 
interests of Partnership FP.
    (ii) Analysis. Corporation US1 is not a direct or indirect 
partner with respect to Partnership FP for purposes of section 
4501(d)(1) because Corporation US1 qualifies as a de minimis 
domestic entity partner. See paragraph (h)(5) of this section. 
Partnership FP is not an applicable specified affiliate of 
Corporation FZ because Partnership FP has no direct or indirect 
domestic entity partner. Accordingly, Partnership FP's purchase of 
100 shares of stock of Corporation FZ is not treated as a section 
4501(d)(1) repurchase.
    (10) Example 10: A foreign partnership that is directly owned by 
foreign corporations and is an applicable specified affiliate--(i) 
Facts. Corporation FZ owns all the outstanding stock of Corporation 
US1, a domestic corporation. Corporation US1 owns all the 
outstanding stock of Corporation FB, a foreign corporation. 
Partnership FP is a foreign partnership in which Corporation FB and 
Corporation FE, a foreign corporation, are partners. Corporation FB 
owns 80 percent of the capital interests and profits interests of 
Partnership FP, and Corporation FE owns 20 percent of the capital 
interests and profits interests of Partnership FP.
    (ii) Analysis. Corporation US1 is a domestic entity. See 
paragraph (b)(2)(x) of this section. Corporation US1 owns an 
interest in Partnership FP indirectly through Corporation FB, a 
foreign corporation that Corporation US1 controls within the meaning 
of paragraph (h)(3) of this section. Corporation US1 does not 
qualify as a de minimis domestic entity partner with respect to 
Partnership FP. See paragraph (h)(5) of this section. Corporation 
US1 is thus an indirect partner with respect to Partnership FP for 
purposes of section 4501(d)(1). See paragraph (h)(2)(ii)(B) of this 
section. Accordingly, Partnership FP is an applicable specified 
affiliate of Corporation FZ because Corporation FZ indirectly owns 
more than 50 percent of the capital interests or profits interests 
of Partnership FP and Corporation US1, a domestic entity, is an 
indirect partner of Partnership FP.

    (q) Section 4501(d)(2) examples. The following examples illustrate 
the application of the rules in this section relating to section 
4501(d)(2). For purposes of the following examples, unless otherwise 
stated: Corporation FZ is a covered surrogate foreign corporation; each 
domestic entity is an expatriated entity within the meaning of section 
7874(a)(2)(A) with respect to Corporation FZ and is not a member of a 
U.S. consolidated group; there are not any expatriated entities with 
respect to Corporation FZ other than as described in the facts; a 
reference to ownership refers to direct ownership; any repurchase or 
acquisition of stock is during a taxable year that includes at least a 
portion of the applicable period with respect to Corporation FZ under 
section 7874(d)(1); each entity has a calendar taxable year; each 
corporation's only outstanding stock is a single class of common stock; 
the functional currency (within the meaning of section 985) of any 
entity is the U.S. dollar; no stock is transferred to any employee; for 
examples that expressly provide that stock is transferred to any 
employee, such transfer is made in connection with the employee's 
performance of services in its capacity as an employee of the 
transferor, and the employee is treated as the beneficial owner of the 
stock for Federal income tax purposes on the date of the transfer; and 
the section 4501(d) statutory exceptions are inapplicable.

[[Page 26066]]

    (1) Example 1: The section 4501(d) netting rule with respect to an 
expatriated entity--(i) Facts. Corporation FZ owns all the outstanding 
stock of Corporation US1, a domestic corporation. Employee M is an 
employee of Corporation FZ, and Employee P is an employee of 
Corporation US1. On February 1, 2024, Corporation US1 purchases 100 
shares of stock of Corporation FZ when the fair market value of each 
share is $8x. On May 15, 2024, Corporation FZ transfers to Employee M 
50 shares of stock of Corporation FZ when the fair market value of each 
share is $5x. On November 1, 2024, Corporation US1 transfers to 
Employee P 30 shares of stock of Corporation US1 when the fair market 
value of each share is $9x. On December 15, 2024, Corporation FZ 
purchases 90 shares of its stock when the fair market value of each 
share is $12x.
    (ii) Analysis. Each of Corporation US1's purchase of 100 shares of 
stock of Corporation FZ and Corporation FZ's purchase of 90 shares of 
its stock is a section 4501(d)(2) repurchase. See paragraph 
(b)(2)(xxiii) of this section. Corporation US1 is a section 4501(d) 
covered corporation with respect to the section 4501(d)(2) repurchases. 
See paragraph (b)(2)(xv)(B) of this section. For purposes of computing 
Corporation US1's section 4501(d) excise tax base, the fair market 
value of the 100 shares of stock of Corporation FZ subject to the 
section 4501(d)(2) repurchase on February 1, 2024, is $800x, and the 
fair market value of the 90 shares of stock of Corporation FZ subject 
to the section 4501(d)(2) repurchase on December 15, 2024, is $1,080x. 
See paragraph (l) of this section. The section 4501(d)(2) repurchases 
thus increase Corporation US1's section 4501(d) excise tax base for the 
2024 taxable year by $1,880x ($800x + $1,080x). Corporation US1's 
section 4501(d) excise tax base for its 2024 taxable year is not 
reduced by the fair market value of the stock of Corporation FZ 
transferred to Employee M or the fair market value of the stock of 
Corporation US1 transferred to Employee P because the section 4501(d) 
excise tax base with respect to Corporation US1 can only be reduced by 
the fair market value of stock of Corporation FZ issued or provided by 
Corporation US1 to employees of Corporation US1. See paragraph (n) of 
this section. Accordingly, Corporation US1's section 4501(d) excise tax 
base with respect to these transactions for its 2024 taxable year is 
$1,880x.
    (2) Example 2: Section 4501(d)(2) repurchase from the covered 
surrogate foreign corporation or another specified affiliate of the 
covered surrogate foreign corporation--(i) Facts. Corporation FZ owns 
all the outstanding stock of each of Corporation US1, a domestic 
corporation, Corporation FB, a foreign corporation, and Corporation FE, 
a foreign corporation. On February 1, 2024, Corporation US1 purchases 
100 shares of stock of Corporation FZ from Corporation FB when the fair 
market value of each share is $8x. On December 15, 2024, Corporation FZ 
contributes 90 shares of its stock to Corporation FE when the fair 
market value of each share is $12x.
    (ii) Analysis. Each of Corporation US1's purchase of 100 shares of 
stock of Corporation FZ and Corporation FZ's transfer of 90 shares of 
its stock is a section 4501(d)(2) repurchase. See paragraph 
(b)(2)(xxiii) of this section. Corporation US1 is a section 4501(d) 
covered corporation with respect to the section 4501(d)(2) repurchases. 
See paragraph (b)(2)(xv)(B) of this section. For purposes of computing 
Corporation US1's section 4501(d) excise tax base, the fair market 
value of the 100 shares of stock of Corporation FZ subject to the 
section 4501(d)(2) repurchase on February 1, 2024, is $800x, and the 
fair market value of the 90 shares of stock of Corporation FZ subject 
to the section 4501(d)(2) repurchase on December 15, 2024, is $1,080x. 
See paragraph (l) of this section. Accordingly, Corporation US1's 
section 4501(d) excise tax base with respect to these transactions for 
its 2024 taxable year is $1,880x.
    (3) Example 3: Liability with respect to multiple expatriated 
entities--(i) Facts. Corporation FZ owns all the outstanding stock of 
each of Corporation US1, a domestic corporation, and Corporation US2, a 
domestic corporation. Employee M is an employee of Corporation US1, and 
Employee P is an employee of Corporation US2. On February 1, 2024, 
Corporation US1 purchases 100 shares of stock of Corporation FZ when 
the fair market value of each share is $8x. On May 15, 2024, 
Corporation US2 purchases 40 shares of stock of Corporation FZ when the 
fair market value of each share is $9x. On October 15, 2024, 
Corporation FZ repurchases 50 shares of its stock when the fair market 
value of each share is $7x. On November 1, 2024, Corporation US1 
transfers to Employee M 30 shares of stock of Corporation FZ when the 
fair market value of each share is $9x. On November 20, 2024, 
Corporation US2 transfers to Employee P 30 shares of stock of 
Corporation FZ when the fair market value of each share is $8x. 
Corporation US1 pays the entire amount of section 4501(d) excise tax 
that it owes with respect to all section 4501(d)(2) repurchases 
relating to Corporation FZ and its specified affiliates that occur 
during Corporation US1's 2024 taxable year and fulfills its filing 
obligations for its 2024 taxable year with respect to such section 
4501(d)(2) repurchases.
    (ii) Analysis. Each of Corporation US1's purchase of 100 shares of 
stock of Corporation FZ, Corporation US2's purchase of 40 shares of 
stock of Corporation FZ, and Corporation FZ's repurchase of 50 shares 
of its stock is a section 4501(d)(2) repurchase. See paragraphs 
(b)(2)(xxiii) and (d)(2)(i) of this section. Each of Corporation US1 
and Corporation US2 is a section 4501(d) covered corporation with 
respect to the section 4501(d)(2) repurchases. See paragraph 
(b)(2)(xv)(B) of this section. For purposes of computing the section 
4501(d) excise tax base for each of Corporation US1 and Corporation 
US2, the fair market value of the 100 shares subject to the section 
4501(d)(2) repurchase on February 1, 2024, is $800x; the fair market 
value of the 40 shares of stock of Corporation FZ subject to the 
section 4501(d)(2) repurchase on May 15, 2024, is $360x; and the fair 
market value of the 50 shares of stock of Corporation FZ subject to the 
section 4501(d)(2) repurchase on October 15, 2024, is $350x. See 
paragraph (l) of this section. The section 4501(d)(2) repurchases thus 
increase each of Corporation US1's and Corporation US2's section 
4501(d) excise tax base for the 2024 taxable year by $1,510x ($800x + 
$360x + $350x). 30 shares of Corporation FZ stock are treated as issued 
or provided to Employee M on November 1, 2024. See paragraph (n) of 
this section. Therefore, Corporation US1's section 4501(d) excise tax 
base is reduced for its 2024 taxable year by the fair market value of 
the 30 shares of stock of Corporation FZ transferred on November 1, 
2024, or $270x ($9x per share x 30 shares = $270x). See paragraph 
(c)(3)(i)(C) of this section. Corporation US1's section 4501(d) excise 
tax base for its 2024 taxable year is not reduced by the fair market 
value of the stock of Corporation FZ that Corporation US2 transferred 
to Employee P because the section 4501(d) excise tax base with respect 
to Corporation US1 can only be reduced by the fair market value of 
stock of Corporation FZ issued or provided by Corporation US1 to 
employees of Corporation US1. See paragraph (n) of this section. 
Accordingly, Corporation US1's section 4501(d) excise tax base with 
respect to these transactions for its 2024 taxable year is $1,240x 
($1,510x-$270x). Because Corporation

[[Page 26067]]

US1 pays the entire amount of section 4501(d) excise tax that it owes 
with respect to all section 4501(d)(2) repurchases that occur during 
Corporation US1's 2024 taxable year relating to Corporation FZ and its 
specified affiliates and fulfills its filing obligations for its 2024 
taxable year with respect to such section 4501(d)(2) repurchases, 
Corporation US2 is not liable for section 4501(d) excise tax with 
respect to such section 4501(d)(2) repurchases. See paragraph 
(d)(2)(ii) of this section.
    (r) Applicability dates--(1) In general. Except as provided in 
paragraphs (e)(1) and (r)(3) of this section, the provisions of this 
section (other than paragraph (o) of this section) apply to 
transactions that occur after April 12, 2024.
    (2) Rules applicable before April 13, 2024. Except as provided in 
paragraphs (o)(2) and (r)(3) of this section, the rules in paragraph 
(o) of this section apply to transactions that occur after December 31, 
2022, and on or before April 12, 2024.
    (3) Early application. A section 4501(d) covered corporation may 
choose to apply all the rules of this section (other than paragraphs 
(o), (r)(1), and (r)(2) of this section) to transactions occurring 
after December 31, 2022, subject to paragraph (e)(1) of this section. A 
section 4501(d) covered corporation may choose to apply the rules of 
this section (other than paragraphs (o) and (r)(1) and (2) of this 
section) pursuant to the immediately preceding sentence only if the 
section 4501(d) covered corporation and all other section 4501(d) 
covered corporations with respect to the same applicable foreign 
corporation or covered surrogate foreign corporation, as applicable, 
consistently apply all the rules of this section (other than paragraphs 
(o) and (r)(1) and (2) of this section) as described in the immediately 
preceding sentence.

Subpart B [Reserved]

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2024-07117 Filed 4-9-24; 4:15 pm]
BILLING CODE 4830-01-P