The Treasury Department and the IRS have finalized regulations (TD 10037) providing definitive guidance on the application of the stock repurchase excise tax, enacted under section 10201 of the Inflation Reduction Act of 2022 (IRA). These final regulations, which amend 26 CFR parts 1 and 58, are effective on November 24, 2025. They affect domestic publicly traded corporations and their specified affiliates for repurchases made after December 31, 2022. This technical guidance is issued pursuant to the express delegations of authority found in sections 1275(d), 4501(f), and 7805(a) of the Code.

Scope of Taxable Repurchases and Covered Corporations

The excise tax is imposed at the applicable percentage (one percent) on the fair market value of stock repurchased by a covered corporation during its taxable year. A covered corporation is defined as any domestic corporation whose stock is traded on an established securities market (within the meaning of section 7704(b)(1) of the Code). A corporation becomes a covered corporation at the beginning of its initiation date.

A repurchase means solely a section 317(b) redemption (with certain exclusions) or any transaction determined by the Secretary to be economically similar. An acquisition of covered corporation stock by a specified affiliate from a non-affiliate is treated as a repurchase by the covered corporation. A specified affiliate is generally any corporation or partnership where the covered corporation owns, directly or indirectly, more than 50 percent of the stock (vote or value) or capital/profits interests, respectively.

The tax is calculated on the stock repurchase excise tax base, which is determined by:

Determining the gross repurchase amount (aggregate fair market value (FMV) of all repurchased/acquired stock).
Reducing the gross repurchase amount by the FMV of stock qualifying for a statutory exception (section 4501(e)).
Further reducing the gross repurchase amount by the value of stock issued under the netting rule (section 4501(c)(3)).

The fair market value of repurchased stock is the market price on the date of repurchase, generally the date ownership transfers for Federal income tax purposes. For a regular-way sale, the date of repurchase is the trade date.

Interpretation of Stock and Exclusion of Certain Instruments

The term stock generally includes instruments treated as stock for Federal tax purposes. However, the final regulations exclude:

Section 1504(a)(4) Preferred Stock: Stock described in section 1504(a)(4) of the Code is excluded because it is viewed as "more akin to debt" and does not implicate the policy concerns underlying the excise tax.
Additional Tier 1 Preferred Stock: Preferred stock that qualifies as additional tier 1 capital (within the meaning of 12 CFR Sections 3.20(c), 217.20(c), 217.608(a)(2), 324.20(c), or 628.20(c)) and does not qualify as common equity tier 1 capital. This exclusion was expanded to include similar stock issued by Farm Credit System entities and certain savings and loan holding companies.

Transition Relief: Repurchases of stock issued prior to August 16, 2022 (the IRA enactment date), are not treated as a repurchase if, at the time of issuance and continuously thereafter, the stock was subject to mandatory redemption by the covered corporation or a unilateral put option by the holder.

Corporate Restructurings and Economically Similar Transactions

The final regulations preclude the excise tax from applying to transactions that fundamentally restructure corporate ownership.

Transactions that are not Repurchases (Section 58.4501-2(e)(5)):

Redemptions by a covered corporation that occur as part of a transaction in which the covered corporation ceases to be a covered corporation (e.g., leveraged buyouts/take-private transactions).
A distribution in complete liquidation to which section 331, section 332(a), or both apply.
The acquisition by the target corporation of its stock in an acquisitive reorganization.

Economically Similar Transactions (Exclusive List):

E Reorganizations (Recapitalizations): Treated as a repurchase only to the extent the acquisition of stock is in exchange for property not permitted to be received without gain recognition under section 354.
Split-offs: The acquisition of distributing corporation stock in exchange for property.
Certain Forfeitures and Clawbacks: Forfeitures or clawbacks of stock for which a valid section 83(b) election was made (and vesting failed), or stock subject to a clawback agreement.

Statutory Exceptions (Section 4501(e))

Repurchased stock qualifying for one of the statutory exceptions reduces the gross repurchase amount.

De Minimis Exception (Section 4501(e)(3)): The tax is exempt if the total FMV of stock repurchased/acquired does not exceed $1,000,000. This is determined before applying any other exceptions or the netting rule.
Reorganization Exception (Section 4501(e)(1)): Applies to a split-off (Section 58.4501-2(e)(4)(ii)) to the extent the repurchase is for property permitted by section 355 to be received without the recognition of gain or loss.
Stock Contribution (Section 4501(e)(2)): The reduction applies if the repurchased stock, or stock of equal value, is contributed to an employer-sponsored retirement plan (a plan qualified under section 401(a), including ESOPs).
Dealer in Securities (Section 4501(e)(4)): Applies to acquisitions by a dealer in securities (section 475(c)(1)) in the ordinary course of business, provided the stock is held for sale and disposed of consistently.
RIC/REIT (Section 4501(e)(5)): Repurchases by a Regulated Investment Company (RIC) or a Real Estate Investment Trust (REIT) qualify for a full reduction.
Non-RIC '40 Act Fund: Under the authority of Section 4501(f), this regulatory exception is provided for certain funds described in section 851(a)(1)(A) that operate as open-end companies or closed-end interval funds making periodic repurchase offers under SEC Rule 23c-3.
Dividend Exception (section 4501(e)(6)): The reduction applies to redemptions treated as a dividend under section 301(c)(1) or 356(a)(2). A repurchase subject to section 302 or 356(a) carries a rebuttable presumption of non-dividend equivalence. Rebuttal requires the covered corporation to establish with sufficient evidence that the corporation and the shareholder treat the repurchase as a dividend and demonstrate sufficient E&P.

The Netting Rule (Section 4501(c)(3))

The netting rule reduces the gross repurchase amount by the aggregate FMV of stock issued or provided during the taxable year. This includes stock issued by the covered corporation in connection with services to employees or other service providers, or provided by a specified affiliate in connection with services to its employees or other service providers. Stock issued in connection with services is governed by the principles of section 83 of the Code.

Disregarded Issuances: Stock issuances that are disregarded for netting purposes include: distributions of stock to shareholders; stock issued in an E reorganization or F reorganization; stock issued by a controlled corporation in a distribution under section 355; stock contributions to an employer-sponsored retirement plan; and stock withheld by the corporation or affiliate to satisfy an exercise price or withholding obligation (net exercises and share withholding).

Instrument Not in Legal Form of Stock (Anti-Avoidance): The issuance of a covered non-stock instrument (an instrument treated as stock for Federal tax purposes but not in legal form, issued to a "covered holder"—a person owning at least 10 percent of the stock—and not registered with the SEC) is generally disregarded for netting purposes. This issuance is only regarded at the time the instrument is repurchased, based on its FMV when originally issued or provided.

Special Rules for Foreign Corporations (Section 4501(d))

Section 4501(d) contains special rules for acquisitions of stock of Applicable Foreign Corporations (AFCs) and Covered Surrogate Foreign Corporations (CSFCs).

The party liable for the tax (Section 4501(d) covered corporation) is either:

For AFCs: An applicable specified affiliate (ASA) that acquires the AFC’s stock. An ASA excludes a foreign corporation or foreign partnership, unless the foreign partnership has a domestic entity as a direct or indirect partner.
For CSFCs: The expatriated entity with respect to the CSFC.

Foreign Partnership De Minimis: A foreign partnership is not considered an ASA if domestic entities hold, in aggregate, less than 10 percent in both the capital and profits interests.

Foreign Netting Rule Limitation (Section 4501(d) netting rule): This rule is narrowly defined by statute. The section 4501(d) excise tax base is reduced only by stock issued or provided by the section 4501(d) covered corporation to its own employees in connection with the performance of services. It does not apply to non-employee service providers. The proposed anti-abuse funding rule was not adopted.

Applicability Dates

The final regulations are effective on November 24, 2025.

General Rule: Sections 58.4501-1 through 58.4501-5 generally apply to repurchases occurring after December 31, 2022, and issuances/provisions during taxable years ending after December 31, 2022.
Exceptions to the General Rule: Certain specific rules, including those related to anti-avoidance measures and section 4501(d), apply to transactions occurring after April 12, 2024.
Early Application: Taxpayers may choose to apply all rules consistently to transactions occurring after December 31, 2022, provided all relevant parties (for section 4501(d) purposes) also apply them consistently.

Prepared with assistance from NotebookLM.