The Internal Revenue Service and the Treasury Department issued proposed rules Tuesday for the stock buyback tax for large corporations.

The two Notices of Proposed Rulemaking involve the stock buyback or “repurchase” excise tax that was included in the Inflation Reduction Act of 2022 in an effort to require large corporations to pay more taxes. 

“President Biden’s Inflation Reduction Act helps ensure that large corporations pay their fair share, just as American families do,” said Treasury Secretary Janet Yellen in a statement. “This proposed rule is a key part of the Biden administration’s efforts to improve tax fairness and reduce the deficit by closing loopholes and ensuring wealthy individuals, large corporations, and complex partnerships pay taxes owed.”

Andrew Harrer/Bloomberg

The proposed regulations aim to provide more clarity to taxpayers and tax professionals on how to correctly calculate and pay the new stock buyback excise tax on corporate stock buybacks, in accordance with the framework of  Notice 2023-2, which was posted in January 2023.

The stock buyback excise tax applies at a rate of one percent of the fair market value of any stock of a covered corporation that is repurchased by the corporation during its taxable year, minus the aggregate FMV of stock issued by the taxpayer during that year. The statute generally defines a “covered corporation” as a domestic corporation whose stock is publicly traded on an established securities market. An established securities market for this purpose includes U.S. national securities exchanges, certain foreign securities exchanges, regional or local exchanges, and certain interdealer quotation systems. “Repurchases” (or buybacks) include a corporation’s acquisition of any of its stock from a shareholder for property that qualifies as a redemption of the stock as defined in the tax code.

The Inflation Reduction Act also says a “repurchase” (buyback) includes any other transaction that the Treasury secretary determines in regulations or other guidance to be “economically similar” to a redemption of stock. They include buybacks of corporate stock that occur in connection with certain corporate mergers, separations and other M&A transactions.  A “repurchase” can also include acquisitions of the company’s stock by some specified affiliates.

The proposed regs also include a targeted anti-abuse rule aimed at foreign-parented multinational corporations to require them to pay a share of the stock buyback excise tax, without the routine intercompany funding transactions among corporate affiliates being inadvertently subject to the new rule.

The proposed regulations pertain to publicly traded domestic corporations that repurchase their stock or whose stock is acquired by certain affiliates. The regulations also would affect certain publicly traded foreign corporations that repurchase their stock or whose stock is acquired by certain affiliates.

The regulations would implement the statutory netting rule that reduces the aggregate fair market value of stock repurchased by a taxpayer during a taxable year by the aggregate fair market value of stock issued by the taxpayer during the taxable year. The regulations would implement the statutory “de minimis” exception which provides that a taxpayer is not subject to the stock repurchase excise tax with respect to a taxable year if the aggregate fair market value of the stock repurchased by the taxpayer during the tax year does not exceed $1,000,000.

The proposed regulations say the stock repurchase excise tax must be reported on the IRS Form 720, Quarterly Federal Excise Tax Return, with the Form 7208 attached. The Form 7208 would be used to compute the amount of stock repurchase excise tax owed. A draft version of the Form 7208 is currently available, and the final version will be released before the first due date on which the stock repurchase excise tax needs to be reported and paid.

As previewed last year in Announcement 2023-18, the proposed regulations say that, for taxpayers with a tax year ending after Dec. 31, 2022, but before publication of the final regs, any liability for the stock repurchase excise tax for the tax year will need to be reported on the Form 720 that’s due for the first full quarter after the date when the final regs are published, and the deadline for paying the tax will be the same as the filing deadline.

Written comments on the proposed regulations need to be submitted by the following dates: