Bulletin No. 2024–20

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2024–20

May 13, 2024

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

EXCISE TAX

REG-115710-22, page 1070.

These proposed regulations provide guidance addressing

the application of the stock repurchase excise tax added to

section 4501 of the Internal Revenue Code by the enactment

of Public Law 117-169, 136 Stat. 1818 (August 16, 2022),

commonly referred to as the Inflation Reduction Act of 2022.

The proposed regulations in REG-115710-22 contain operative rules that provide taxpayers with guidance on how to

calculate the amount of stock repurchase excise tax owed.

Finding Lists begin on page ii.

REG-118499-23, page 1167.

These proposed regulations provide guidance addressing

the application of the stock repurchase excise tax added to

section 4501 of the Internal Revenue Code by the enactment

of Public Law 117-169, 136 Stat. 1818 (August 16, 2022),

commonly referred to as the Inflation Reduction Act of 2022.

The proposed regulations in REG-118499-23 provide procedural rules that prescribe the manner of reporting and paying

the stock repurchase excise tax.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and

enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

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internal practices and procedures that affect the rights and

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Revenue rulings represent the conclusions of the Service

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Rulings and procedures reported in the Bulletin do not have the

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may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

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procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

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To the extent practicable, pertinent cross references to these

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The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

May 13, 2024 

Bulletin No. 2024–20

Part IV

Excise Tax on Repurchase

of Corporate Stock

REG-115710-22

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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.

May 13, 2024

FOR FURTHER INFORMATION

CONTACT:

Concerning

proposed

§§58.4501-1 through 58.4501-6, Samuel

G. Trammell at (202) 317-6975; concerning proposed §58.4501-7, Brittany N.

Dobi at (202) 317-5469; concerning proposed §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 publichearings@irs.gov (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

1070

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 inter-

Bulletin No. 2024–20

ests 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 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).

Bulletin No. 2024–20

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:

1071

(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.

May 13, 2024

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

May 13, 2024

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

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 §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 §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 §58.4501-2

would provide general rules regarding

the application and computation of the

stock repurchase excise tax and proposed

§58.4501-7 would provide rules specifically relating to the application of section

4501(d). Except as provided in proposed

§58.4501-7, proposed §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

§58.4501-2(b)(2) applies), and proposed

1072

§58.4501-4 would provide rules regarding the application of section 4501(c)

(3). Proposed §58.4501-5 would provide

examples that illustrate the application of

section 4501, other than the provisions

of proposed §58.4501-7 (which are illustrated by examples in §58.4501-7(p) and

(q)), and proposed §58.4501-6 would provide applicability dates (other than for the

rules in §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 §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

Bulletin No. 2024–20

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 §58.45014(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

Bulletin No. 2024–20

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 §58.45013(d)(5).

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 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 §58.4501-2(g)(2). For rules

regarding the date of repurchase generally,

see part III.B.1 of this Explanation of Provisions.

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.

E. Transition relief for certain

transactions entered into prior to

enactment date

II. Application of the Stock Repurchase

Excise Tax to Various Types of Financial

Instruments

Several stakeholders requested transition relief (that is, an exemption from the

stock repurchase excise tax) for certain

repurchases that occur after the January

A. Definition of “stock”

D. Trade date or settlement date

1073

For purposes of Notice 2023-2, “stock”

would be defined as any instrument issued

May 13, 2024

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 §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 §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).

May 13, 2024

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 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 issu-

1074

ances 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 §§58.4501-1(b)(29),

58.4501-2(e)(2), and 58.4501-4(b)(1); see

also proposed §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

Bulletin No. 2024–20

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 §§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 addi-

Bulletin No. 2024–20

tional tier 1 preferred stock. See proposed

§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 §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 corpo-

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ration 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 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

May 13, 2024

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

§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 finan-

May 13, 2024

cial 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,

1076

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 §§58.4501-2(h)

(1) and 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

§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 §58.4501-4(e)(5) and

part XI.G.7 of this Explanation of Provisions.

Bulletin No. 2024–20

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

Bulletin No. 2024–20

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 §§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-themoney” 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

1077

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-themoney 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 §58.4501-2(e)

(5)(v). However, for a discussion of the

application of the netting rule to deep-inthe-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

§§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 §1.1275-6

A stakeholder requested clarification

on how section 4501 applies to a syn-

May 13, 2024

thetic debt instrument resulting from an

integrated transaction under §1.1275-6.

In general, §1.1275-6 provides for the

integration of a qualifying debt instrument (as defined in §1.1275-6(b)(1))

with a §1.1275-6 hedge or combination

of §1.1275-6 hedges in certain circumstances. The circumstances in which

§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 §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 §1.1275-6 hedge or combination

of §1.1275-6 hedges under §1.1275-6. See

proposed §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

May 13, 2024

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 §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 §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 §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

1078

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 §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

§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

Bulletin No. 2024–20

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) 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 20232, 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

Bulletin No. 2024–20

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 §§58.4501-2(h)(1) and 58.45014(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

1079

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.

May 13, 2024

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 20232, 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 §§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

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 §§58.4501-2(h)(2)(iv) and

58.4501-4(e)(2)(iv). For special rules for

valuing stock issued or provided to an

May 13, 2024

employee or other service provider in connection with the performance of services,

see proposed §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 §§58.4501-2(h)(2)(v) and 58.45014(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

1080

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 §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 §§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 §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

Bulletin No. 2024–20

method to a particular repurchase or issuance would be unreasonable under the

facts and circumstances as of the valuation

date. See proposed §§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 §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

Bulletin No. 2024–20

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 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 §§58.4501‑2(g)

(1) and 58.4501-4(d)(1). For specific

timing rules applicable in particular situations, see proposed §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 §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 §58.4501‑2(e)

1081

(4) is treated as repurchased on the date

the shareholders of the covered corporation exchange their stock in such corporation. See proposed §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

May 13, 2024

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

May 13, 2024

the proposed regulations would retain the

approach described in Notice 2023-2. See

proposed §§58.4501-2(h)(1), 58.45014(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 §§58.4501-2(h)(1) and 58.45014(e)(1). For a discussion of the application

of the netting rule to forward contracts or

other instruments not in the legal form 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

1082

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 20232, 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 immedi-

Bulletin No. 2024–20

ately 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 §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,

Bulletin No. 2024–20

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

§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 §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.

1083

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 §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

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

§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 §1.367(a)-1(e)) is not

treated as a foreign corporation until the

day after the reorganization. See proposed

§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

May 13, 2024

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 §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 §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 oth-

May 13, 2024

erwise” (interdealer system). See §1.77041(b)(5). However, §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

§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 §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 affil-

1084

iate” 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 §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 20232, 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 requirements analogous

to those under the Securities Exchange

Act of 1934. See §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.

Bulletin No. 2024–20

F. Depository receipts

In section 6.02(10) of Notice 20232, 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 §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

Bulletin No. 2024–20

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

1085

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 §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

May 13, 2024

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

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

§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

May 13, 2024

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)

1086

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 §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

§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)

Bulletin No. 2024–20

[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 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 §301.7701-3),

is not a repurchase and, therefore, is not

subject to the stock repurchase excise tax.

See proposed §58.4501-2(e)(5)(i). For the

treatment of liquidations to which both

sections 331 and 332 apply, see proposed

§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

Bulletin No. 2024–20

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 §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 §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 §58.45012(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

1087

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 §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 liq-

May 13, 2024

uidation 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. The

stakeholders further contended that such

May 13, 2024

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 lookthrough 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 tar-

1088

get 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.

Bulletin No. 2024–20

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 pri-

Bulletin No. 2024–20

vate” 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 proposed regulations. See

proposed §§58.4501-2(d)(1) and 58.45014(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 20232, 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

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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.

May 13, 2024

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 §§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 stake-

May 13, 2024

holder. 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, 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

1090

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

Bulletin No. 2024–20

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

Bulletin No. 2024–20

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

1091

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 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 §58.4501‑2(e)(4)(i); see also

proposed §58.4501-3(c) (reorganization

exception); part X.A of this Explanation

May 13, 2024

of Provisions (discussion of reorganization exception). However, the proposed

regulations would not subject B reorganizations to the stock repurchase excise

tax. See proposed §§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

May 13, 2024

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 §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.

1092

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.

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.

Bulletin No. 2024–20

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 20232. 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

Bulletin No. 2024–20

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

§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 §§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.

1093

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 20232. 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 §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 pur-

May 13, 2024

poses of the stock repurchase excise tax.

See parts 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 §§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-qual

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