Executive Summary
On November 21, 2025, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued final regulations (the “Final Regulations”) under Section 4501, which imposes a 1% excise tax on certain repurchases by publicly-traded corporations of corporate stock (the “Excise Tax”).1 As compared with prior guidance issued by Treasury and the IRS, the Final Regulations narrow the scope of the Excise Tax in several significant ways. In particular, the Final Regulations exclude stock purchases that occur in connection with leveraged buyouts (“LBOs”)/“take-private” transactions and acquisitive reorganizations under Section 368. The Final Regulations also exclude repurchases of non-voting “plain vanilla” preferred stock within the meaning of Section 1504(a)(4) and provide transitional relief for certain types of redeemable preferred stock issued prior to the enactment of the Excise Tax. Given that the Final Regulations now exclude many transactions that were previously subject to the Excise Tax, some taxpayers may be entitled to a refund from the IRS.
General Background
The Inflation Reduction Act of 2022 introduced Section 4501, which imposes a 1% excise tax on stock repurchases made by U.S. and certain non-U.S. publicly-traded corporations (each a “Covered Corporation”) that occur after December 31, 2022.2 In general, Section 4501(c)(1) defines “repurchase” to mean a “redemption” within the meaning of Section 317 or an “economically similar transaction,” subject to certain statutory exceptions set forth under Section 4501(e). The statute also provides a “netting rule” (the “Netting Rule”) that allows a Covered Corporation to reduce the amount of redemptions subject to the 1% tax by the fair market value of stock issuances made within the same tax year.
Subsequent to the enactment of Section 4501, in late December 2022, Treasury and the IRS issued Notice 2023-2 (the “Notice”) providing initial guidance regarding the scope of the Excise Tax as applied to a wide range of common corporate transactions, including tax-free reorganizations under Section 368, spin-offs and split-offs under Section 355, LBOs, and certain liquidations, among other topics.3 Following the issuance of the Notice, in April 2024, Treasury and the IRS subsequently issued two Notices of Proposed Rulemaking (the “Proposed Regulations”) further expanding prior guidance.
The Final Regulations
On November 21, 2025, following extensive comments from practitioners, professional organizations and industry groups, Treasury and the IRS issued final regulations under Section 4501. The Final Regulations are generally much narrower in scope as compared with the Proposed Regulations, limiting the circumstances in which the Excise Tax applies. As described in more detail below, a variety of common M&A transactions and corporate restructurings are no longer subject to the Excise Tax, along with some types of capital markets offerings and a few other select transactions. The Final Regulations also eliminate the controversial “funding rule,” which would have applied to certain repurchases by non-U.S. corporations that were deemed funded by U.S. affiliates.
Transactions No Longer Subject to the Excise Tax
As previously noted, pursuant to the Notice and the Proposed Regulations, a wide variety of common M&A, corporate restructuring and capital markets transactions were initially deemed to be subject to the Excise Tax. However, the Final Regulations provide many significant exceptions to the Excise Tax as compared with prior guidance, and what follows is a summary of the now excluded transactions.
A. M&A Transactions / Restructurings
1. LBOs / “Take-Private” Transactions
The Final Regulations exclude taxable stock purchases that occur in connection with LBOs/“take-private” transactions and in which the target corporation ceases to be publicly traded (regardless of whether the consideration is treated as sourced from the target corporation).4
2. Corporate Liquidations to Which Both Sections 331 and 332 Apply
Under the Final Regulations, all corporate liquidations are now excluded from the Excise Tax (including liquidations that are both non-taxable under Section 332 as to a controlling parent corporation and, at the same time, taxable to one or more non-controlling minority shareholders under Section 331).5
3. Acquisitive Reorganizations Under Section 368
Pursuant to the Final Regulations, share exchanges that occur in connection with acquisitive reorganizations under Section 368 are not subject to the Excise Tax (including to the extent of any taxable cash or other non-stock consideration).6
4. Single-Entity Reorganizations Involving Only Qualifying Property
The Final Regulations exclude single-entity reorganizations/recapitalizations under Section 368(a)(1)(E) from the Excise Tax if participating shareholders receive only stock (“qualifying property”) and do not receive any cash or other non-stock consideration (“non-qualifying property” or “boot”).7
B. Capital Markets Transactions
1. Section 1504(a)(4) “Plain Vanilla” Preferred
Repurchases of “plain vanilla” preferred stock as defined in Section 1504(a)(4) are excluded from the Excise Tax.8 In general, stock qualifying under Section 1504(a)(4) is stock that (i) is not entitled to vote, (ii) is limited and preferred as to dividends and does not participate in corporate growth to any significant extent, (iii) has redemption and liquidation rights that do not exceed the issue price of such stock (except for a reasonable redemption or liquidation premium), and (iv) is not convertible to another class of stock.
2. Mandatorily Redeemable or Puttable Preferred Stock
Preferred stock that was issued prior to August 16, 2022 (the date on which the Excise Tax was first enacted) is not subject to the Excise Tax if such stock is either (i) mandatorily redeemable by the issuer or (ii) subject to a unilateral holder put—in each case—from the time of original issuance until the time of redemption.9
3. Stock Repurchases by Certain Non-RIC Funds
The Final Regulations include an exception for certain repurchases by a fund that is a “regulated investment company” (“RIC”) as described in Section 851(a)(1)(A) (i.e., a corporation registered under the Investment Company Act as a management company or unit investment trust) but that has not elected to be a RIC under Section 851(b). To qualify for this exception, the non-RIC fund must be either an “open-end company” or a “closed-end company” (each as defined in Section 5(a) of the Investment Company Act), and in the case of a closed-end company, the repurchase must occur as part of a periodic repurchase offer made pursuant to Securities and Exchange Commission (“SEC”) Rule 23c-3.10
Other Key Features of the Final Regulations
A. Acquisition of Stock of Certain Foreign Corporations / the “Funding Rule”
The Final Regulations do not adopt a controversial funding rule that was contained in the Proposed Regulations with respect to repurchases of stock of certain foreign corporations. Under Section 4501(d), the Excise Tax applies if a specified affiliate of a publicly-traded foreign corporation repurchases stock of that foreign corporation. Under the proposed funding rule, a specified affiliate of a foreign corporation was treated as repurchasing stock of that foreign corporation if it funded by any means, directly or indirectly, a repurchase or acquisition of stock of the foreign corporation by such foreign corporation or another specified affiliate with a principal purpose of avoiding the Excise Tax (a “Covered Purchase”). The Proposed Regulations contained a rebuttable presumption that a principal purpose exists if the specified affiliate funded, directly or indirectly, a downstream relevant entity and the funding occurred within two years of a Covered Purchase by or on behalf of the downstream relevant entity. The Final Regulations eliminate this proposed funding rule in response to criticism from commenters on the Proposed Regulations.12
B. Single-Entity Reorganizations / Receipt of Non-Qualifying Property
Although the Final Regulations categorically exempt acquisitive reorganizations from triggering liability under the Excise Tax, single-entity “Type E” and “Type F” reorganizations may still potentially implicate Section 4501 to the extent boot is present. Generally speaking, Type E and F reorganizations are exempt when shares are acquired with qualifying property.13 However, to the extent that a Covered Corporation receives shares in exchange for boot in a Type E reorganization, the exchange is a repurchase in an amount equal to the fair market value of the boot if it isn’t otherwise treated as a distribution under Section 301.14 To the extent shareholders receive boot in a Type F reorganization, the portion of shares acquired with boot is deemed to be a separate transaction that constitutes a redemption under Section 317(b).15 The Final Regulations also clarify that, in Type E reorganizations, debt-for-debt exchanges are not subject to Section 4501.16 Additionally, the fair market value of shares exchanged that correspond to accrued but unpaid dividends is not subject to Section 4501.17
C. Spin-Offs and Split-Offs / Receipt of Non-Qualifying Property
Consistent with the Proposed Regulations, under the Final Regulations non-taxable “spin-offs” and “split-offs” under Section 355 are generally subject to the Excise Tax only to the extent that any taxable non-qualifying property is received by the distributing corporation’s shareholders.18
D. Dividend Exception / Substantiation Requirements
In general, a Covered Corporation will not be subject to the Excise Tax if a buyback is treated as a dividend for U.S. federal income tax purposes,19 and the Final Regulations make this exception easier to substantiate as compared with the Proposed Regulations. Unlike the Proposed Regulations—which required actual shareholder certifications and other documentary proof of shareholder dividend treatment20—the Final Regulations generally contain a less stringent set of evidentiary requirements in order to demonstrate that the Covered Corporation and shareholder will treat the repurchase as a dividend.21 However, although the Final Regulations are generally more lenient, a Covered Corporation must still be in possession of sufficient evidence in order to establish dividend treatment (for example, through legal documentation of share ownership, publicly available information, the pro rata nature of the repurchase or the shareholder certification safe harbor) and also maintain evidence that its earnings and profits are sufficient to support dividend treatment.22
E. Netting Rule
1. “No Double Benefit Rule”
The Netting Rule generally states that a Covered Corporation may reduce the gross value of redemptions subject to the Excise Tax by the fair market value of stock it issues within the same tax year. Under the Proposed Regulations, the “no double benefit rule” prohibited a Covered Corporation from crediting qualifying stock issued as part of a Section 368 reorganization or a Section 355 distribution against its Excise Tax base. The Final Regulations effectively remove the “double benefit” limitation as applied to acquisitive reorganizations by exempting acquisitive reorganizations from the purview of Section 4501, even where there is non-qualifying boot.23 Consequently, a Covered Corporation may now reduce its Excise Tax base by the fair market value of its stock issued in an acquisitive reorganization. However, stock issued in a Type E or Type F reorganization does not count for Netting Rule purposes and thus cannot offset potential Excise Tax implications arising from those transactions.24 The same is true for stock issued in spin-offs and split-offs.25
2. Non-stock Instruments / Pre-Funded Warrants
The Netting Rule in the Proposed Regulations contained special rules for instruments that are not in the legal form of stock but are treated as stock for federal income tax purposes (“Non-stock Instruments”).26 The Final Regulations instead treat Non-stock Instruments the same as stock for purposes of the Netting Rule, except where the Non-stock Instrument is issued to a person that owns at least 10% of the stock of the Covered Corporation (by vote or value) in an offer and sale that was not registered with the SEC (which Treasury and the IRS consider to be a potentially abusive transaction).27
3. Compensatory Transactions
Under the Netting Rule in the Proposed Regulations, the Excise Tax base was reduced by the fair market value of stock issued by the Covered Corporation in connection with the performance of services for the Covered Corporation by an employee or other service provider and by the fair market value of stock provided by a specified affiliate of the Covered Corporation in connection with the performance of services by an employee of the specified affiliate (but not by a non-employee service provider of the specified affiliate).28 The Final Regulations expand the Netting Rule to apply to all stock provided by a specified affiliate in connection with the performance of services (whether by an employee or a non-employee service provider).29
F. List of Economically Similar Transactions / Anti-Abuse Rule
Section 4501 defines “repurchase” to include certain “economically similar transactions.” Notably, the Final Regulations reserve the right for Treasury and the IRS to potentially issue future guidance that may retroactively designate one or more additional transactions as economically similar.31
Applicability Dates / Effect on Prior Returns / Taxpayer Refunds
The Final Regulations generally apply to repurchases of stock of a Covered Corporation occurring after December 31, 2022 (the original effective date of Section 4501) and issuances of stock occurring during taxable years ending after December 31, 2022.
As discussed above, the Final Regulations add several significant exceptions to the Excise Tax as compared with the Notice and the Proposed Regulations, resulting in a number of M&A, corporate restructuring and capital markets transactions no longer being subject to the Excise Tax. If a Covered Corporation completed a transaction that is no longer subject to the Excise Tax under the Final Regulations and previously filed a Form 7208 (Excise Tax on Repurchase of Corporate Stock) applying the prior rules, that Covered Corporation may be able to claim a refund. A claim for a refund generally should be made by filing an amended return on Form 720-X (Amended Quarterly Federal Excise Tax Return) for the quarter in which the Covered Corporation previously filed the original Form 720 (Quarterly Federal Excise Tax Return) and attaching a corrected Form 7208.
Contact
If you have questions about the Final Regulations or the application of the Excise Tax, please contact David Strong, Meghan Walsh, or another member of the WilmerHale Tax Group.
