IRS answers key questions on stock buyback tax

The IRS released two sets of proposed regulations on April 9, 2024, that provide important details on the operating rules as well as reporting and payment requirements for the new excise tax on repurchases of corporate stock under Section 4501 (the stock repurchase excise tax). The proposed regulations were highly anticipated because the tax applies to repurchases on or after Jan. 1, 2023.

One set of the proposed regulations (Reg-118499-23) provides important details about the record-keeping requirements, reporting and payment of the stock repurchase excise tax, while the other (REG-116710-22) provides key definitions and operating rules related to the stock repurchase excise tax.

The guidance generally postpones the requirement to report and pay tax until after the final regulations are published. This article describes the payment and reporting requirement in more detail, while the operational rules will be covered in a subsequent story.

The proposed regulations related to the record-keeping requirements, reporting and payment of the stock repurchase excise tax are proposed to be applicable for tax returns required to be filed after the date of publication of final regulations in the Federal Register.

Background

Section 4501 imposes an excise tax on each covered corporation equal to 1% of the fair market value (FMV) of the corporation’s stock repurchased by that corporation during a taxable year. The stock repurchase excise tax is effective for repurchases after Dec. 31, 2022.

A “covered corporation” is any domestic corporation the stock of which is traded on an established securities market within the meaning of Section 7704(b)(1). The definition of covered corporation includes a domestic corporation that has stock traded on a national securities exchange (e.g., NYSE and NASDAQ).

The tax may also apply to an acquisition of stock of a covered corporation by certain related parties and to acquisitions of stock of a foreign corporation under certain circumstances.

The IRS released initial guidance related to the stock repurchase excise tax in December 2023 (Notice 2023-2).

The Notice provided that forthcoming rules would provide the following: 

• The stock repurchase excise tax would be reported on IRS Form 720, Quarterly Federal Excise Tax Return
• Taxpayers would need to attach an additional form to the Form 720 reflecting the computation of the stock repurchase excise tax
• The stock repurchase excise tax would be reported once per taxable year
• The deadline for payment of the stock repurchase excise tax would be the same as the filing deadline
• No extensions would be permitted for reporting or paying the stock repurchase excise tax owed

In July 2023, the IRS also announced (Announcement 2023-18) that no taxpayer would be required to report or pay the stock repurchase excise tax prior to the time specified in forthcoming regulations. Specifically, Announcement 2023-18 stated that, prior to the publication of the forthcoming regulations, taxpayers would not be required to file the Form 720 reporting the tax and would not be required to pay excise tax liability until the Form 720 that is due for the first full quarter after the date of the publication of the forthcoming regulations.

The proposed regulations are consistent with the above guidance and provide additional details on the due dates.

Reporting, payment and record-keeping requirements

The proposed regulations confirm that the term “stock repurchase excise tax return” will be the Form 720. The tax will be calculated on a Form 7208, Excise Tax on Repurchase of Corporate Stock, which will be attached to the Form 720, where the stock repurchase excise tax liability will be reported.  

The proposed regulations stipulate that any covered corporation (or person treated as a covered corporation) must keep complete and detailed records that are sufficient to establish accurately the amount of repurchases, adjustments or exceptions required to be shown in any stock repurchase excise tax return.

The proposed regulations specify that a stock repurchase excise tax return will be required to be filed by any covered corporation that makes a repurchase after Dec. 31, 2022. Furthermore, the IRS may require any covered corporation (or person treated as a covered corporation) to make such returns, render such statements, or keep such specific records by notice served, to enable the IRS to determine whether such corporation or person is liable for the tax.

Under the proposed regulations, the full payment of the stock repurchase excise tax liability is required with a stock repurchase excise tax return when it is filed.

Due dates

The proposed regulations would generally require the stock repurchase excise tax return to be filed by the due date for the Form 720 related to the first full calendar quarter after the end of the taxable year of the covered corporation. However, there are transition rules for taxable years that end before the publication of the final regulations.  

Under the general rules, a calendar-year corporation would be required to file the stock repurchase excise tax return for its 2024 taxable year ending Dec. 31, 2024, by April 30, 2025 (assuming the final regulations are published before Dec. 31, 2024), which is the due date of the Form 720 for the calendar quarter ending March 31, 2025.

The transition rules provide that for taxable years ending after Dec. 31, 2022, and before the date of publication of final regulations in the Federal Register, the form is due by the due date of the Form 720 for the first full calendar quarter after the date of publication of final regulations in the Federal Register. For example, if the date of publication of the final regulations in the Federal Register is Sept. 16, 2024, a calendar-year covered corporation would be required to file the stock repurchase excise tax return for its 2023 taxable year ending Dec. 31, 2023, by Jan. 31, 2025 (i.e., the due date of the Form 720 for the calendar quarter ending Dec. 31, 2024).

If a covered corporation has more than one taxable year ending after Dec. 31, 2022, but before the final regulations are issued, the covered corporation should file a single Form 720 with two separate Forms 7208.

A covered corporation (or a person treated as a covered corporation) that is required to file a stock repurchase excise tax return, or pay the stock repurchase excise tax, but does not timely file such return or pay such tax, may be subject to additions to tax under Section 6651 and Treas. Reg. Sec. 301.6651-1. Any person signing a stock repurchase excise tax return is required to include a written declaration that the return is made under penalties of perjury when required by the return or the forms or their corresponding instructions.

Next steps

While the proposed regulations provide welcome news that Form 720 and the payment of any tax is not due until after the publication of final regulations, taxpayers can consider assessing potential tax liability under the proposed regulations. Comments on the proposed regulations are due on or before May 13, 2024.