U.S. Code of Federal Regulations
Regulations most recently checked for updates: Dec 15, 2025
§ 58.4501-0 - Table of contents.
This section lists the major captions that appear in §§ 58.4501-1 through 58.4501-7.
(a) Excise tax imposed.
(b) Definitions.
(1) Acquisitive reorganization.
(2) Applicable percentage.
(3) Cessation date.
(4) Clawback.
(5) Code.
(6) Controlled corporation.
(7) Covered corporation.
(8) Covered holder.
(9) Covered non-stock instrument.
(10) De minimis exception.
(11) Distributing corporation.
(12) E reorganization.
(13) Economically similar transaction.
(14) Employee.
(15) Employer-sponsored retirement plan.
(16) Established securities market.
(17) F reorganization.
(18) Forfeiture.
(19) Gross repurchase amount.
(20) Initiation date.
(21) IRS.
(22) Netting rule.
(23) Non-RIC '40 Act fund.
(24) Non-stock instrument.
(25) Recapitalizing corporation.
(26) REIT.
(27) Reorganization exception.
(28) Repurchase.
(29) RIC.
(30) SEC.
(31) Section 317(b) redemption.
(32) Specified affiliate.
(33) Split-off.
(34) Stock.
(35) Stock repurchase excise tax.
(36) Stock repurchase excise tax base.
(37) Stock repurchase excise tax regulations.
(38) Taxable year.
(39) Treasury stock.
(c) No application for any purposes of chapter 1 of the Code.
(d) Status as a domestic or foreign corporation.
(e) F reorganizations.
(a) Scope.
(b) Computation of excise tax liability.
(1) Imposition of tax.
(2) De minimis exception.
(c) Stock repurchase excise tax base.
(1) In general.
(2) Taxable year determination.
(3) Repurchases before January 1, 2023.
(d) Duration of covered corporation status.
(1) Initiation date.
(2) Cessation date.
(3) Inbound and outbound F reorganizations.
(e) Repurchase.
(1) Overview.
(2) Scope of repurchase.
(3) Certain section 317(b) redemptions that are not repurchases.
(4) Economically similar transactions.
(5) Transactions that are not repurchases.
(f) Specified affiliates.
(1) Acquisitions of stock of a covered corporation by a specified affiliate treated as a repurchase.
(2) Determination of specified affiliate status.
(g) Date of repurchase.
(1) General rule.
(2) Regular-way sale.
(h) Fair market value of repurchased stock.
(1) In general.
(2) Stock traded on an established securities market.
(3) Stock not traded on an established securities market.
(4) Market price of stock denominated in non-U.S. currency.
(a) Scope.
(b) Reduction of covered corporation's stock repurchase excise tax base.
(1) In general.
(2) Coordination of exceptions.
(c) Reorganization exception.
(d) Stock contributions to an employer-sponsored retirement plan.
(1) Reductions in computing covered corporation's stock repurchase excise tax base.
(2) Classes of stock contributed to an employer-sponsored retirement plan.
(3) Same class of stock repurchased and contributed.
(4) Different class of stock repurchased and contributed.
(5) Timing of contributions.
(6) Contributions before January 1, 2023.
(e) Repurchases or acquisitions by a dealer in securities in the ordinary course of business.
(1) In general.
(2) Applicability.
(f) Repurchases by a RIC or a REIT.
(g) Repurchase treated as a dividend.
(1) In general.
(2) Rebuttable presumption of no dividend equivalence.
(3) Sufficient evidence requirement.
(4) Documentation of sufficient evidence.
(h) Repurchases by a non-RIC '40 Act fund.
(a) Scope.
(b) Issuances and provisions of stock that are a reduction in computing the stock repurchase excise tax base.
(1) General rule.
(2) Stock issued or provided outside period of covered corporation status.
(3) Issuances or provisions before January 1, 2023.
(c) Stock issued or provided in connection with the performance of services.
(1) In general.
(2) Sale of shares to cover exercise price and withholding.
(d) Date of issuance.
(1) In general.
(2) Stock issued or provided in connection with the performance of services.
(e) Fair market value of issued or provided stock.
(1) In general.
(2) Stock traded on an established securities market.
(3) Stock not traded on an established securities market.
(4) Market price of stock denominated in non-U.S. currency.
(5) Stock issued or provided in connection with the performance of services.
(f) Issuances that are disregarded for purposes of applying the netting rule.
(1) Distributions by a covered corporation of its own stock.
(2) Issuances to a specified affiliate.
(3) Issuances in an E reorganization or an F reorganization.
(4) Deemed issuances under section 304(a)(1).
(5) Deemed issuance of a fractional share.
(6) Issuance by a covered corporation that is a dealer in securities.
(7) Issuance by the target corporation in a reverse triangular merger.
(8) Issuance as part of a section 1036(a) exchange.
(9) Issuance as part of a distribution under section 355.
(10) Stock contributions to an employer-sponsored retirement plan.
(11) Net exercises and share withholding.
(12) Settlement other than in stock.
(13) Instrument not in the legal form of stock.
(a) Scope.
(b) In general.
(1) Example 1: Redemption of preferred stock not subject to an exception.
(2) Example 2: Debt-for-debt exchange.
(3) Example 3: Valuation of repurchase.
(4) Example 4: Acquisition partially funded by the target corporation.
(5) Example 5: Pro rata stock split.
(6) Example 6: Acquisition of a target corporation in an acquisitive reorganization.
(7) Example 7: E reorganization.
(8) Example 8: E reorganization with non-qualifying property.
(9) Example 9: Cash paid in lieu of fractional shares.
(10) Example 10: F reorganization.
(11) Example 11: Section 355 split-off.
(12) Example 12: Section 355 split-off as part of a D reorganization.
(13) Example 13: Section 355 spin-off.
(14) Example 14: Section 355 spin-off as part of a D reorganization.
(15) Example 15: Repurchase pursuant to an accelerated share repurchase agreement.
(16) Example 16: Distribution in complete liquidation of a covered corporation.
(17) Example 17: Complete liquidation of a covered corporation to which sections 331 and 332(a) both apply.
(18) Example 18: Acquisition by disregarded entity.
(19) Example 19: Multiple repurchases and contributions of same class of stock.
(20) Example 20: Multiple repurchases and contributions of different classes of stock.
(21) Example 21: Treatment of contributions after the taxable year.
(22) Example 22: Becoming a covered corporation.
(23) Example 23: Actual pro rata redemption in partial liquidation.
(24) Example 24: Constructive redemption in partial liquidation.
(25) Example 25: Non-pro rata redemption in partial liquidation.
(26) Example 26: Physical settlement of call option contract.
(27) Example 27: Net cash settlement of call option contract.
(28) Example 28: Physical settlement of put option contract.
(29) Example 29: Net cash settlement of put option contract.
(30) Example 30: Indirect ownership.
(31) Example 31: Restricted stock provided to a service provider.
(32) Example 32: Restricted stock provided to a service provider with section 83(b) election.
(33) Example 33: Forfeiture of restricted stock provided to a service provider with section 83(b) election.
(34) Example 34: Vested stock provided to a service provider with share withholding.
(35) Example 35: Stock option net exercise.
(36) Example 36: Net share settlement not in connection with performance of services.
(37) Example 37: Broker-assisted net exercise.
(38) Example 38: Stock provided by a specified affiliate to an employee.
(39) Example 39: Stock provided by a specified affiliate to a non-employee.
(40) Example 40: Corporation treated as a domestic corporation under section 7874(b).
(a) In general.
(b) Exceptions.
(1) Applicability date for certain rules.
(2) Early application.
(c) Special rules for acquisitions or repurchases of stock of certain foreign corporations.
(a) Scope.
(b) Definitions.
(1) Application of definitions in § 58.4501-1(b).
(2) Section 4501(d) definitions.
(c) Computation of section 4501(d) excise tax liability for a section 4501(d) covered corporation.
(1) Imposition of tax.
(2) Section 4501(d) de minimis exception.
(3) Section 4501(d) excise tax base.
(4) Section 4501(d)(1) repurchases or section 4501(d)(2) repurchases before January 1, 2023.
(d) Section 4501(d)(2) coordination rules.
(1) Coordination rule for section 4501(d)(1) repurchases and section 4501(d)(2) repurchases.
(2) Coordination rule for multiple section 4501(d) covered corporations.
(e) Status as applicable foreign corporation or covered surrogate foreign corporation.
(1) Initiation date.
(2) Cessation date.
(3) Rules regarding F reorganizations.
(f) Status as an applicable specified affiliate or a specified affiliate of a covered surrogate foreign corporation.
(1) Timing of determination.
(2) Determination of indirect ownership.
(g) Foreign partnerships that are applicable specified affiliates.
(1) In general.
(2) Direct or indirect partner.
(3) Control of a foreign corporation.
(4) Indirect interests held through applicable foreign corporations.
(5) De minimis domestic entity (direct or indirect) partner.
(h) CSFC repurchase.
(1) Overview.
(2) Scope of CSFC repurchases.
(3) Certain section 317(b) redemptions that are not CSFC repurchases.
(4) Section 4501(d) economically similar transactions.
(5) Transactions that are not CSFC repurchases.
(i) [Reserved]
(j) Date of section 4501(d)(1) repurchase or section 4501(d)(2) repurchase.
(1) General rule.
(2) Regular-way sale.
(k) Fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation that is repurchased or acquired.
(1) In general.
(2) Stock traded on an established securities market.
(3) Stock not traded on an established securities market.
(4) Market price of stock denominated in non-U.S. currency.
(l) Section 4501(d) exceptions.
(1) In general.
(2) Section 4501(d) reorganization exception.
(3) Stock contributions to an employer-sponsored retirement plan.
(4) Repurchases or acquisitions by a dealer in securities in the ordinary course of business.
(5) Repurchases by a RIC or REIT.
(6) CSFC repurchase treated as a dividend.
(7) Repurchases by a non-RIC '40 Act fund.
(m) Application of section 4501(d) netting rule.
(1) In general.
(2) Stock issued or provided outside period of applicable foreign corporation or covered surrogate foreign corporation status.
(3) Issuances or provisions before January 1, 2023.
(4) Stock Issued or provided in connection with the performance of services.
(5) Date of issuance or provision for section 4501(d) netting rule.
(6) Fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation that is issued or provided to employees.
(7) Issuances that are disregarded for purposes of applying the section 4501(d) netting rule.
(n) Section 4501(d)(1) examples.
(1) Example 1: Section 4501(d) netting rule with respect to a single applicable specified affiliate.
(2) Example 2: Section 4501(d) netting rule with respect to multiple applicable specified affiliates.
(3) Example 3: Foreign partnership that is an applicable specified affiliate.
(4) Example 4: Foreign partnership that is not an applicable specified affiliate.
(5) Example 5: Foreign partnership that is directly owned by foreign corporations and is an applicable specified affiliate.
(o) Section 4501(d)(2) examples.
(1) Example 1: Section 4501(d) netting rule with respect to an expatriated entity.
(2) Example 2: Section 4501(d)(2) repurchase from the covered surrogate foreign corporation or another specified affiliate of the covered surrogate foreign corporation.
(3) Example 3: Liability with respect to multiple expatriated entities.
(p) Applicability dates.
(1) In general.
(2) Transition rule for foreign partnership de minimis rule.
(3) Early application.
§ 58.4501-1 - Excise tax on stock repurchases.
(a) Excise tax imposed. Section 4501(a) of the Code imposes a stock repurchase excise tax on each covered corporation equal to the applicable percentage of the fair market value of any stock of the corporation that is repurchased by the corporation during the taxable year. This section and § 58.4501-2 provide generally applicable definitions and operating rules regarding the application of the stock repurchase excise tax and the computation of the stock repurchase excise tax liability of a covered corporation. Section 58.4501-3 provides rules regarding the application of the exceptions in section 4501(e) (other than the de minimis exception described in section 4501(e)(3), which is addressed in § 58.4501-2(b)(2)) and related exceptions. Section 58.4501-4 provides rules regarding the application of section 4501(c)(3). Section 58.4501-5 provides examples that illustrate the application of section 4501 and the stock repurchase excise tax regulations. Section 58.4501-6 provides applicability dates for the stock repurchase excise tax regulations (other than § 58.4501-7). For special rules and examples regarding the application of section 4501(d) to acquisitions or repurchases of stock of certain foreign corporations, see § 58.4501-7.
(b) Definitions. The following definitions apply for purposes of this section and §§ 58.4501-2 through 58.4501-6, and, to the extent provided in § 58.4501-7(b), for purposes of § 58.4501-7:
(1) Acquisitive reorganization. The term acquisitive reorganization means a transaction that qualifies as a reorganization under—
(i) Section 368(a)(1)(A) of the Code, including by reason of section 368(a)(2)(D) or (a)(2)(E);
(ii) Section 368(a)(1)(C);
(iii) Section 368(a)(1)(D), if the reorganization satisfies the requirements of section 354(b)(1) of the Code; or
(iv) Section 368(a)(1)(G), if the reorganization satisfies the requirements of section 354(b)(1).
(2) Applicable percentage. The term applicable percentage means the percentage provided in section 4501(a).
(3) Cessation date. The term cessation date means the date on which all stock of a covered corporation ceases to be traded on an established securities market.
(4) Clawback. The term clawback means a surrender of stock pursuant to a contractual provision that requires an employee to return vested stock.
(5) Code. The term Code means the Internal Revenue Code.
(6) Controlled corporation. The term controlled corporation has the meaning given the term in section 355(a)(1)(A) of the Code.
(7) Covered corporation. The term covered corporation means any domestic corporation (including within the meaning of paragraph (d) of this section) the stock of which is traded on an established securities market.
(8) Covered holder. The term covered holder has the meaning given the term in § 58.4501-4(f)(13)(ii)(C).
(9) Covered non-stock instrument. The term covered non-stock instrument has the meaning given the term in § 58.4501-4(f)(13)(ii)(B).
(10) De minimis exception. The term de minimis exception has the meaning given the term in § 58.4501-2(b)(2)(i).
(11) Distributing corporation. The term distributing corporation has the meaning given the term in section 355(a)(1)(A).
(12) E reorganization. The term E reorganization means a transaction that qualifies as a reorganization under section 368(a)(1)(E).
(13) Economically similar transaction. The term economically similar transaction means a transaction described in § 58.4501-2(e)(4).
(14) Employee. The term employee means an employee as defined in section 3401(c) of the Code and § 31.3401(c)-1 of this chapter, or a former employee, of a covered corporation or a specified affiliate of the covered corporation (as appropriate).
(15) Employer-sponsored retirement plan—(i) In general. The term employer-sponsored retirement plan means a plan that includes a trust that is qualified under section 401(a) of the Code and maintained by a covered corporation or a specified affiliate of the covered corporation.
(ii) ESOPs included. For the purposes of these regulations, the term employer-sponsored retirement plan includes an employee stock ownership plan defined in section 4975(e)(7) of the Code (ESOP) that is maintained by a covered corporation or a specified affiliate of the covered corporation.
(16) Established securities market. The term established securities market has the meaning given the term in § 1.7704-1(b) of this chapter.
(17) F reorganization. The term F reorganization means a transaction that qualifies as a reorganization under section 368(a)(1)(F).
(18) Forfeiture. The term forfeiture means a surrender of stock to the issuing corporation for no consideration.
(19) Gross repurchase amount. The term gross repurchase amount has the meaning given the term in § 58.4501-2(c)(1)(i).
(20) Initiation date. The term initiation date means the date on which stock of a corporation begins to be traded on an established securities market.
(21) IRS. The term IRS means the Internal Revenue Service.
(22) Netting rule. The term netting rule has the meaning given the term in § 58.4501-4(a).
(23) Non-RIC '40 Act fund. The term non-RIC '40 Act fund has the meaning given the term in § 58.4501-3(h).
(24) Non-stock instrument. The term non-stock instrument has the meaning given the term in § 58.4501-4(f)(13)(ii)(A).
(25) Recapitalizing corporation. The term recapitalizing corporation means the corporation recapitalizing its stock in an E reorganization.
(26) REIT. The term REIT has the meaning given the term real estate investment trust in section 856(a) of the Code.
(27) Reorganization exception. The term reorganization exception means the exception provided in § 58.4501-3(c).
(28) Repurchase. The term repurchase has the meaning given the term in § 58.4501-2(e)(2).
(29) RIC. The term RIC has the meaning given the term regulated investment company in section 851 of the Code.
(30) SEC. The term SEC means the U.S. Securities and Exchange Commission.
(31) Section 317(b) redemption. The term section 317(b) redemption means a redemption within the meaning of section 317(b) of the Code with regard to the stock of a covered corporation.
(32) Specified affiliate. 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 interests of which is held, directly or indirectly, by the corporation.
(33) Split-off. The term split-off means a distribution qualifying under section 355 (or so much of section 356 of the Code as relates to section 355) by a distributing corporation pursuant to which the shareholders of the distributing corporation exchange stock of the distributing corporation for stock of the controlled corporation and, if applicable, other property (including securities of the controlled corporation) or money.
(34) Stock—(i) In general. Except as provided in paragraph (b)(34)(ii) or (iii) of this section, the term stock means any instrument issued by a corporation that is stock (including treasury 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.
(ii) Additional tier 1 capital. The term stock does not include preferred stock that—
(A) Qualifies as additional tier 1 capital (within the meaning of 12 CFR 3.20(c), 217.20(c), 217.608(a)(2), 324.20(c), or 628.20(c)); and
(B) Does not qualify as common equity tier 1 capital (within the meaning of 12 CFR 3.20(b), 217.20(b), 217.608(a)(3), 324.20(b), or 628.20(b)).
(iii) Section 1504(a)(4) stock. The term stock does not include preferred stock described in section 1504(a)(4) of the Code.
(35) Stock repurchase excise tax. The term stock repurchase excise tax means the excise tax imposed by section 4501(a) on each covered corporation equal to the applicable percentage of the fair market value of any stock of the corporation that is repurchased by the corporation during the taxable year.
(36) Stock repurchase excise tax base. The term stock repurchase excise tax base has the meaning given the term in § 58.4501-2(c)(1).
(37) Stock repurchase excise tax regulations. The term stock repurchase excise tax regulations means—
(i) Subparts A and B of this part; and
(ii) Section 1.1275-6(f)(12)(iii) of this chapter (providing that the integration of a qualifying debt instrument with a hedge pursuant to § 1.1275-6 of this chapter is not taken into account in determining whether and when stock is repurchased or issued).
(38) Taxable year. The term taxable year has the meaning given the term in section 7701(a)(23) of the Code.
(39) Treasury stock. The term treasury stock means treasury stock within the meaning of section 317(b).
(c) No application for any purposes of chapter 1 of the Code. The rules of this part have no application for purposes of chapter 1 of the Code.
(d) Status as a domestic or foreign corporation. If a corporation is, or is treated as, a domestic corporation for purposes of the Code or for purposes that include chapter 37 of the Code, then the corporation is a domestic corporation for purposes of the stock repurchase excise tax regulations. A corporation that is not a domestic corporation for purposes of the stock repurchase excise tax regulations is a foreign corporation for such purposes.
(e) F reorganizations. For purposes of the stock repurchase excise tax regulations, the transferor corporation and the resulting corporation (each as defined in § 1.368-2(m)(1) of this chapter) in an F reorganization are treated as the same corporation.
§ 58.4501-2 - General rules regarding excise tax on stock repurchases.
(a) Scope. This section provides general rules regarding the application of the stock repurchase excise tax and the computation of the stock repurchase excise tax liability of a covered corporation. Paragraphs (b) and (c) of this section provide rules for computing a covered corporation's stock repurchase excise tax liability. Paragraph (d) of this section provides rules for determining whether a corporation is a covered corporation. Paragraph (e) of this section provides rules for determining whether a transaction is a repurchase. Paragraph (f) of this section provides rules for acquisitions of stock of a covered corporation by a specified affiliate of the covered corporation. Paragraph (g) of this section provides rules for determining when stock is repurchased. Paragraph (h) of this section provides rules for determining the fair market value of repurchased stock.
(b) Computation of excise tax liability—(1) Imposition of tax. Except as provided in paragraph (b)(2) of this section (regarding the de minimis exception), the amount of stock repurchase excise tax imposed by section 4501(a) on a covered corporation for a taxable year equals the product obtained by multiplying—
(i) The applicable percentage; by
(ii) The stock repurchase excise tax base of the covered corporation for the taxable year determined in accordance with paragraph (c)(1) of this section.
(2) De minimis exception—(i) In general. 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 stock described in paragraphs (b)(2)(i)(A) and (B) of this section does not exceed $1,000,000 (de minimis exception):
(A) The stock of the covered corporation that is repurchased by the covered corporation (as determined under paragraph (e) of this section).
(B) The stock of the covered corporation that is acquired by a specified affiliate of the covered corporation (as determined under paragraph (f) of this section).
(ii) Determination. A determination of whether the de minimis exception applies with regard to a taxable year is made before applying—
(A) Any exception under § 58.4501-3; and
(B) Any adjustments pursuant to the netting rule under § 58.4501-4.
(c) Stock repurchase excise tax base—(1) In general. With regard to a covered corporation, the term stock repurchase excise tax base means the dollar amount (not less than zero) that is obtained by—
(i) Determining (in accordance with paragraphs (e) through (h) of this section) the aggregate fair market value of the stock of the covered corporation that is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation during the covered corporation's taxable year (gross repurchase amount);
(ii) Reducing the gross repurchase amount by the fair market value of the stock of the covered corporation repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation during the covered corporation's taxable year to the extent the repurchase or acquisition qualifies for an exception in accordance with § 58.4501-3; and then
(iii) Further reducing the gross repurchase amount by the aggregate fair market value of stock of the covered corporation issued by the covered corporation or provided by a specified affiliate of the covered corporation during the covered corporation's taxable year under the netting rule in accordance with § 58.4501-4.
(2) Taxable year determination—(i) In general. The determinations under paragraph (c)(1)(i) of this section are made separately for each covered corporation and for each taxable year of the covered corporation.
(ii) No carrybacks or carryforwards. Reductions under paragraphs (c)(1)(ii) and (iii) of this section in excess of the gross repurchase amount may not be carried forward or backward to preceding or succeeding taxable years of the covered corporation.
(3) Repurchases before January 1, 2023. Stock of a covered corporation repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation before January 1, 2023 (as determined under paragraphs (e) through (g) of this section) is neither—
(i) Included in the stock repurchase excise tax base of the covered corporation; nor
(ii) Taken into account in determining the applicability of the de minimis exception.
(d) Duration of covered corporation status—(1) Initiation date. A corporation becomes a covered corporation at the beginning of the corporation's initiation date (that is, the date on which stock of the corporation begins to be traded on an established securities market).
(2) Cessation date. A corporation ceases to be a covered corporation at the end of the corporation's cessation date (that is, the date on which all stock of the corporation ceases to be traded on an established securities market).
(3) Inbound and outbound F reorganizations—(i) Inbound F reorganization. In the case of a foreign corporation that transfers its assets or that is treated as transferring its assets to a domestic corporation in an F reorganization (as described in § 1.367(b)-2(f) of this chapter), the corporation is not treated as a domestic corporation until the day after the reorganization.
(ii) Outbound F reorganization. In the case of a domestic corporation that transfers its assets or that is treated as transferring its assets to a foreign corporation in an F reorganization (as described in § 1.367(a)-1(e) of this chapter), the corporation is not treated as a foreign corporation until the day after the reorganization.
(e) Repurchase—(1) Overview. This paragraph (e) provides rules for determining whether a transaction is a repurchase. Paragraph (e)(2) of this section provides a general rule regarding the scope of the term repurchase for purposes of the stock repurchase excise tax. Paragraph (e)(3) of this section provides an exclusive list of transactions that are section 317(b) redemptions but are not repurchases. Paragraph (e)(4) of this section provides an exclusive list of transactions that are economically similar transactions. Paragraph (e)(5) of this section provides a non-exclusive list of transactions that are not repurchases.
(2) Scope of repurchase. A repurchase means solely—
(i) A section 317(b) redemption, except as provided in paragraph (e)(3) of this section; or
(ii) An economically similar transaction described in paragraph (e)(4) of this section.
(3) Certain section 317(b) redemptions that are not repurchases. This paragraph (e)(3) provides an exclusive list of section 317(b) redemptions that are not repurchases for purposes of the stock repurchase excise tax regulations.
(i) Section 304(a)(1) transactions—(A) Rule regarding deemed distributions. The deemed distribution by an acquiring corporation (within the meaning of section 304(a)(1) of the Code) that is a covered corporation in redemption of stock of the acquiring corporation (resulting from the application of section 304(a)(1) to an acquisition of stock by such acquiring corporation), regardless of whether section 302(a) or (d) of the Code applies to the acquiring corporation's deemed distribution in redemption of its stock.
(B) Rule regarding deemed issuances. For the rule addressing the treatment of any stock deemed to be issued by the acquiring corporation as a result of the application of section 304(a)(1), see § 58.4501-4(f)(4).
(ii) Leveraged buyouts and take-private transactions. A redemption by a covered corporation that occurs as part of a transaction in which the covered corporation ceases to be a covered corporation.
(iii) Stock issued prior to August 16, 2022. A redemption by a covered corporation of stock of the covered corporation issued prior to August 16, 2022, if, at the time such stock was issued and continuing until the time of the redemption, the stock was subject to—
(A) Mandatory redemption by the covered corporation; or
(B) A unilateral put option by the holder of such stock.
(iv) Payment by a covered corporation of cash in lieu of fractional shares. A payment by a covered corporation of cash in lieu of a fractional share of the covered corporation's stock, if—
(A) The payment is carried out as part of a transaction that qualifies as a reorganization under section 368(a) of the Code or a distribution to which section 355 of the Code applies, or pursuant to the settlement of an option or a similar financial instrument (for example, a convertible debt instrument or convertible preferred share);
(B) The cash received by the shareholder entitled to the fractional share is not separately bargained-for consideration (that is, the cash paid by the covered corporation in lieu of the fractional share represents a mere rounding off of the shares issued in the exchange or settlement);
(C) The payment is carried out solely for administrative convenience (and, therefore, solely for non-tax reasons); and
(D) The amount of cash paid to the shareholder in lieu of a fractional share does not exceed the fair market value of one full share of the class of stock of the covered corporation with respect to which the payment of cash in lieu of a fractional share is made.
(4) Economically similar transactions. This paragraph (e)(4) provides an exclusive list of transactions that are economically similar to section 317(b) redemptions solely for purposes of the stock repurchase excise tax (that is, economically similar transactions) and, therefore, are taken into account as repurchases for purposes of the stock repurchase excise tax regulations.
(i) E reorganizations—(A) In general. Except as provided in paragraph (e)(4)(i)(B) of this section, in the case of an E reorganization in which the recapitalizing corporation is a covered corporation, solely the recapitalizing corporation's acquisition of its stock pursuant to the plan of reorganization in exchange for property that is not permitted to be received by the recapitalizing corporation's shareholders under section 354 of the Code without the recognition of gain.
(B) Exception. Paragraph (e)(4)(i)(A) of this section does not apply to the extent that—
(1) The distribution of such property is treated as a distribution with respect to the recapitalizing corporation's stock under § 1.301-1(j) of this chapter; or
(2) The exchange is with respect to preferred stock with dividends in arrears that is treated under § 1.305-7(c)(2) or 1.368-2(e)(5) of this chapter as a deemed distribution to which sections 301 and 305(b)(4) of the Code apply.
(ii) Split-offs. In the case of a split-off by a distributing corporation that is a covered corporation, the acquisition by the distributing corporation of its stock in exchange for property.
(iii) Certain forfeitures and clawbacks of stock—(A) In general. In the case of a forfeiture or clawback of stock of a covered corporation pursuant to a legal or contractual obligation, the forfeiture to or clawback by the covered corporation or a specified affiliate of the covered corporation (as appropriate) on the date of forfeiture or clawback (as appropriate) if the stock was treated as issued or provided under § 58.4501-4(b) and the forfeiture or clawback of the stock (as appropriate) is described in paragraph (e)(4)(iii)(B), (C), or (D) of this section.
(B) Stock subject to post-closing price adjustments. The stock was issued pursuant to an acquisition of a target entity or its business, and the forfeiture of the stock was in accordance with the terms of the documents governing the transaction (for example, to compensate the acquiring corporation for breaches of representations or warranties made by the target entity, or because the business of the target entity did not achieve certain performance benchmarks agreed upon in the transaction documents).
(C) Stock for which a section 83(b) election was made. The stock was subject to a substantial risk of forfeiture within the meaning of section 83(a) of the Code on the date the stock was issued or provided, the service provider made a valid election under section 83(b) with regard to the stock, and the forfeiture resulted from the service provider failing to meet the vesting condition.
(D) Clawbacks. On the date the stock was issued or provided, the stock was subject to a clawback agreement, and a clawback of the stock resulted from the occurrence of an event specified in the clawback agreement.
(5) Transactions that are not repurchases. This paragraph (e)(5) provides a non-exclusive list of transactions each of which is not a repurchase for purposes of the stock repurchase excise tax regulations.
(i) Complete liquidations. A distribution by a covered corporation—
(A) In complete liquidation of the covered corporation to which section 331 or 332(a) (or both) applies;
(B) Pursuant to a resolution or plan of dissolution of the covered corporation that is reported on an original (but not a supplemented or an amended) IRS Form 966, Corporate Dissolution or Liquidation (or any successor form); or
(C) Pursuant to a deemed dissolution of the covered corporation (for instance, pursuant to a deemed liquidation under § 301.7701-3 of this chapter).
(ii) Distributions during taxable year of complete liquidation or dissolution. A distribution by a covered corporation during a taxable year of the covered corporation, if the covered corporation—
(A) Completely liquidates during the taxable year (that is, has a final distribution during the taxable year in a complete liquidation to which section 331 or 332(a) (or both) applies);
(B) Dissolves during the taxable year pursuant to a resolution or plan of dissolution as reported on an original (but not a supplemented or an amended) IRS Form 966, Corporate Dissolution or Liquidation (or any successor form); or
(C) Is deemed to dissolve during the taxable year (for instance, pursuant to a deemed liquidation under § 301.7701-3 of this chapter).
(iii) Divisive transactions under section 355 other than split-offs—(A) In general. Subject to paragraph (e)(5)(iii)(B) of this section, a distribution by a distributing corporation that is a covered corporation of stock of a controlled corporation qualifying under section 355 that is not a split-off.
(B) Exception regarding non-qualifying property in spin-offs. A distribution by a distributing corporation that is a covered corporation of other property or money in exchange for stock of the distributing corporation is a repurchase by the distributing corporation if it occurs in pursuance of a transaction qualifying under section 355 in which the distribution by the distributing corporation of stock of the controlled corporation is with respect to stock of the distributing corporation.
(iv) Non-redemptive distributions subject to section 301(c)(2) or (3). A distribution to which section 301 applies by a covered corporation to a distributee, if the distribution—
(A) Is subject to section 301(c)(2) or (3); and
(B) The distributee does not exchange stock of the covered corporation (and is not treated as exchanging stock of the covered corporation for Federal income tax purposes).
(v) Acquisitive reorganizations. In the case of an acquisitive reorganization in which the target corporation is a covered corporation, the acquisition by the target corporation of its stock pursuant to the plan of reorganization in exchange for property that is permitted to be received by the target corporation's shareholders under section 354 or 356 of the Code.
(vi) Net cash settlement of an option contract or other derivative financial instrument—(A) In general. Subject to paragraph (e)(5)(vi)(B) of this section, the net cash settlement of an option contract or other derivative financial instrument with respect to stock of a covered corporation.
(B) Exception regarding net cash settlement of an option contract or other derivative financial instrument treated as stock. The net cash settlement of an instrument in the legal form of an option contract or other derivative financial instrument that is treated as stock of a covered corporation for Federal tax purposes at the time of issuance is a repurchase.
(vii) Repurchases from a specified affiliate. The acquisition by a covered corporation of its stock from a specified affiliate of the covered corporation if the specified affiliate's acquisition of such stock of the covered corporation was treated as a repurchase under paragraph (f)(1) of this section.
(f) Specified affiliates—(1) Acquisitions of stock of a covered corporation by a specified affiliate treated as a repurchase. 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.
(2) Determination of specified affiliate status—(i) Timing of determination. A covered corporation must determine whether another corporation or partnership is a specified affiliate of the covered corporation at the time the stock of the covered corporation is acquired or provided by the other corporation or partnership for purposes of computing the stock repurchase excise tax with regard to the covered corporation.
(ii) Indirect ownership. For purposes of determining whether a corporation or a partnership is a specified affiliate of a covered corporation, the covered corporation is treated as indirectly owning stock in the corporation or holding capital or profits interests in the partnership in the percentage equal to the covered corporation's proportionate percentage of stock owned, or capital or profits interests held, through other entities.
(g) Date of repurchase—(1) General rule. In general, stock of a covered corporation is treated as repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation on the date on which ownership of the stock transfers to the covered corporation or specified affiliate (as appropriate) for Federal income tax purposes.
(2) Regular-way sale. A regular-way sale of stock of a covered corporation (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 period of time, as set by a regulator, after the trade date) is treated as a repurchase by the covered corporation or an acquisition by a specified affiliate of the covered corporation on the trade date.
(h) Fair market value of repurchased stock—(1) In general. The fair market value of stock of a covered corporation that is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation is the market price of the stock on the date the stock is repurchased or acquired (as determined under paragraph (g) of this section). That is, if the price at which the repurchased or acquired stock is purchased differs from the market price of the stock on the date the stock is repurchased or acquired, the fair market value of the stock is the market price on the date the stock is repurchased or acquired.
(2) Stock traded on an established securities market—(i) In general. If stock of a covered corporation that is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation is traded on an established securities market, the covered corporation must determine the market price of the repurchased or acquired stock by applying one of the methods provided in paragraph (h)(2)(ii) of this section. For purposes of this paragraph (h)(2), repurchased or acquired stock of a covered corporation is treated as traded on an established securities market if any stock of the same class and issue of stock is so traded, regardless of whether the shares repurchased or acquired are so traded.
(ii) Acceptable methods. The following are acceptable methods for determining the market price of repurchased or acquired stock of a covered corporation traded on an established securities market:
(A) The daily volume-weighted average price as determined on the date the stock is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation.
(B) The closing price on the date the stock is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation.
(C) The average of the high and low prices on the date the stock is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation.
(D) The trading price at the time the stock is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation.
(iii) Date of repurchase not a trading day. For purposes of each method provided in paragraph (h)(2)(ii) of this section, if the date the stock of a covered corporation is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation is not a trading day, the date on which the market price is determined is the immediately preceding trading day.
(iv) Consistency requirement—(A) Solely one method permitted for determining market price of repurchased or acquired stock. The market price of repurchased or acquired stock of a covered corporation that is traded on an established securities market must be determined by consistently applying one (but not more than one) of the methods provided in paragraph (h)(2)(ii) of this section to all stock of the covered corporation repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation throughout the covered corporation's taxable year.
(B) Application to netting rule. The method used by the covered corporation under paragraph (h)(2)(iv)(A) of this section must be consistently applied to determine the market price of all stock of the covered corporation issued or provided throughout the covered corporation's taxable year for purposes of the netting rule under § 58.4501-4 except with respect to the determination of the fair market value of stock of a covered corporation that the covered corporation issues, or that a specified affiliate of the covered corporation provides, in connection with the performance of services. See § 58.4501-4(e).
(v) Stock traded on multiple exchanges—(A) In general. A covered corporation the stock of which is traded on multiple established securities markets must determine the market price of the stock of the covered corporation by reference to trading on the established securities market in the country in which the covered corporation is organized, including a regional established securities market that trades in that country.
(B) Stock traded on multiple exchanges in country where covered corporation is organized. If a covered corporation's stock is traded on multiple established securities markets in the country in which the covered corporation is organized, the covered corporation must determine the market price of the stock by reference to trading on the established securities market in that country with the highest trading volume in that stock in the prior taxable year.
(C) Other cases in which stock is traded on multiple exchanges. If stock of a covered corporation is traded on multiple established securities markets and neither paragraph (h)(2)(v)(A) nor (B) of this section applies, the covered corporation must determine the market price of the stock in a manner that is reasonable and consistent under the facts and circumstances.
(3) Stock not traded on an established securities market—(i) General rule. If repurchased or acquired stock of a covered corporation is not traded on an established securities market, the market price of the stock is determined as of the date the stock is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation under the principles of § 1.409A-1(b)(5)(iv)(B)(1) of this chapter.
(ii) Consistency requirement—(A) Solely one method permitted for determining market price of repurchased or acquired stock. The valuation method for determining the market price of repurchased or acquired stock of a covered corporation that is not traded on an established securities market must be used for all repurchases of stock of the covered corporation or acquisitions by a specified affiliate of the covered corporation of the same class throughout the covered corporation's taxable year, unless the application of that method to a particular repurchase or acquisition would be unreasonable under the facts and circumstances as of the valuation date within the meaning of § 1.409A-1(b)(5)(iv)(B)(1) of this chapter.
(B) Application to netting rule. The method used by the covered corporation under paragraph (h)(3)(ii)(A) of this section must be consistently applied to determine the market price of all stock of the covered corporation of the same class issued throughout the covered corporation's taxable year for purposes of the netting rule under § 58.4501-4 except with respect to the determination of the market price of stock of the covered corporation that is issued or provided in connection with the performance of services or if the application of that method to a particular issuance in connection with the performance of services would be unreasonable under the facts and circumstances as of the valuation date.
(4) Market price of stock denominated in non-U.S. currency. The market price of any stock of a covered corporation that is denominated in a currency other than the U.S. dollar is converted into U.S. dollars at the spot rate (as defined in § 1.988-1(d)(1) of this chapter) on the date the stock is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation.
§ 58.4501-3 - Exceptions.
(a) Scope. This section provides rules regarding the application of each exception set forth in section 4501(e) of the Code, other than the de minimis exception described in section 4501(e)(3) and subject to § 58.4501-2(b)(2), to a repurchase of stock of a covered corporation by the covered corporation or an acquisition of stock of a covered corporation by a specified affiliate of the covered corporation (as appropriate). This section also provides rules regarding an additional exception to the stock repurchase excise tax applicable to non-RIC '40 Act funds. For rules regarding the application of these exceptions in the context of section 4501(d), see § 58.4501-7(l).
(b) Reduction of covered corporation's stock repurchase excise tax base—(1) In general. For purposes of determining a covered corporation's stock repurchase excise tax base under § 58.4501-2(c)(1), the covered corporation reduces its gross repurchase amount by an amount equal to the aggregate fair market value of its repurchased stock that qualifies for an exception described in paragraphs (c) through (h) of this section. See § 58.4501-2(c)(1)(ii).
(2) Coordination of exceptions. If a repurchase of stock qualifies for more than one exception described in paragraphs (c) through (h) of this section, the covered corporation may reduce its gross repurchase amount under solely a single exception, as determined by the covered corporation.
(c) Reorganization exception. A covered corporation reduces its gross repurchase amount under § 58.4501-2(c)(1)(ii) by an amount equal to the aggregate fair market value of its stock repurchased from a shareholder in a transaction described in § 58.4501-2(e)(4)(ii) to the extent that the repurchase is for property permitted by section 355 to be received without the recognition of gain or loss.
(d) Stock contributions to an employer-sponsored retirement plan—(1) Reductions in computing covered corporation's stock repurchase excise tax base—(i) General rule. A covered corporation reduces its gross repurchase amount under § 58.4501-2(c)(1)(ii) if the stock of the covered corporation that is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation, or an amount of stock equal to the fair market value of the stock repurchased or acquired, is contributed to an employer-sponsored retirement plan. The amount of the reduction under this paragraph (d)(1) is determined as provided in paragraph (d)(3) or (4) of this section.
(ii) Special rule for leveraged ESOPs. If a covered corporation or a specified affiliate of the covered corporation maintains an ESOP with an exempt loan (as described in section 4975(d)(3) of the Code), allocations of qualifying employer securities from the ESOP suspense account to ESOP participants' accounts that are attributable to employer contributions (and not to dividends) are treated as contributions of stock under this paragraph (d) as of the date stock attributable to repayment of the exempt loan is released from the suspense account and allocated to ESOP participants' accounts.
(2) Classes of stock contributed to an employer-sponsored retirement plan. This paragraph (d) applies to contributions of any class of covered corporation stock to an employer-sponsored retirement plan, regardless of the class of stock that was repurchased or acquired.
(3) Same class of stock repurchased and contributed. If stock of a covered corporation is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation, and stock of the covered corporation of the same class is contributed to an employer-sponsored retirement plan, the amount of the reduction under paragraph (d)(1) of this section is equal to the lesser of—
(i) The aggregate fair market value of the stock of the same class that was repurchased or acquired (as determined under § 58.4501-2(h)) during the covered corporation's taxable year; or
(ii) The amount obtained by—
(A) Determining the aggregate fair market value of all stock of that class repurchased or acquired (as determined under § 58.4501-2(h)) during the covered corporation's taxable year, reduced by the fair market value of shares of that class of stock that is a reduction to the stock repurchase excise tax base for the taxable year under an exception in this section other than the exception in this paragraph (d);
(B) Dividing the amount determined under paragraph (d)(3)(ii)(A) of this section by the number of shares of that class repurchased or acquired, reduced by the number of shares of that class of stock the fair market value of which is a reduction to the stock repurchase excise tax base for the taxable year under an exception in this section other than the exception in this paragraph (d); and
(C) Multiplying the amount determined under paragraph (d)(3)(ii)(B) of this section by the number of shares of that class contributed to an employer-sponsored retirement plan for the taxable year.
(4) Different class of stock repurchased and contributed. If stock of a covered corporation is repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation, and stock of the covered corporation of a different class is contributed to an employer-sponsored retirement plan, then the amount of the reduction under paragraph (d)(1) of this section is equal to the fair market value of the contributed stock at the time the stock is contributed to the employer-sponsored retirement plan.
(5) Timing of contributions—(i) In general. The reduction under paragraph (d)(1) of this section (that is, the reduction in computing the stock repurchase excise tax base), for a taxable year applies to contributions of covered corporation stock to an employer-sponsored retirement plan during the covered corporation's taxable year.
(ii) Treatment of contributions after close of taxable year. For purposes of paragraph (d)(5)(i) of this section, a covered corporation may treat stock contributions to an employer-sponsored retirement plan made after the close of the covered corporation's taxable year as having been contributed during that taxable year if the following two requirements are satisfied:
(A) The stock must be contributed to the employer-sponsored retirement plan by the filing deadline for the form on which the stock repurchase excise tax must be reported (applicable form) for that taxable year of the covered corporation.
(B) The stock must be treated by the employer-sponsored retirement plan in the same manner that the plan would treat a contribution received on the last day of that taxable year of the covered corporation.
(iii) No duplicate reductions. Stock contributions that are treated under paragraph (d)(5)(ii) of this section as having been contributed in the taxable year to which the applicable form applies may not be treated as having been contributed for any other taxable year for purposes of the stock repurchase excise tax.
(6) Contributions before January 1, 2023. A covered corporation with a taxable year that both begins before January 1, 2023, and ends after December 31, 2022, may include for that taxable year the fair market value of all contributions of its stock to an employer-sponsored retirement plan during the entirety of that taxable year for purposes of applying this paragraph (d).
(e) Repurchases or acquisitions by a dealer in securities in the ordinary course of business—(1) In general. Subject to paragraph (e)(2) of this section, a covered corporation reduces its gross repurchase amount under § 58.4501-2(c)(1)(ii) by an amount equal to the aggregate fair market value of its stock repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation (as appropriate) that is a dealer in securities (within the meaning of section 475(c)(1) of the Code) to the extent the stock is acquired in the ordinary course of the dealer's business of dealing in securities.
(2) Applicability. The reduction described in paragraph (e)(1) of this section applies solely to the extent that—
(i) The dealer accounts for the stock as securities held primarily for sale to customers in the dealer's ordinary course of business;
(ii) The dealer disposes of the stock within a period of time that is consistent with the holding of the stock for sale to customers in the dealer's ordinary course of business, taking into account the terms of the stock and the conditions and practices prevailing in the markets for similar stock during the period in which the stock is held; and
(iii) The dealer (if it is a covered corporation) does not sell or otherwise transfer the stock to a specified affiliate of the covered corporation, or the dealer (if it is a specified affiliate of the covered corporation) does not sell or otherwise transfer the stock to the covered corporation or to another specified affiliate of the covered corporation, in each case other than in a sale or transfer to a dealer that also satisfies the requirements of this paragraph (e)(2).
(f) Repurchases by a RIC or REIT. A covered corporation that is a RIC or a REIT reduces its gross repurchase amount under § 58.4501-2(c)(1)(ii) by an amount equal to the aggregate fair market value of any shares of its stock repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation.
(g) Repurchase treated as a dividend—(1) In general. A covered corporation reduces its gross repurchase amount under § 58.4501-2(c)(1)(ii) by an amount equal to the aggregate fair market value of the covered corporation's stock that the covered corporation repurchases (excluding stock treated as repurchased under § 58.4501-2(f)(1)) to the extent the repurchase is treated as a distribution of a dividend under section 301(c)(1) or 356(a)(2) of the Code.
(2) Rebuttable presumption of no dividend equivalence—(i) Presumption. A repurchase to which section 302 or 356(a) of the Code applies is presumed to be subject to section 302(a) or 356(a)(1), respectively (and, therefore, is presumed ineligible for the exception in paragraph (g)(1) of this section).
(ii) Rebuttal of presumption. A covered corporation may rebut the presumption described in paragraph (g)(2)(i) of this section with regard to a specific shareholder solely by establishing with sufficient evidence that the covered corporation and the shareholder treat the repurchase as a dividend for Federal income tax purposes.
(3) Sufficient evidence requirement—(i) In general. To provide sufficient evidence under paragraph (g)(2)(ii) of this section to establish that the shareholder treats the repurchase as a dividend for Federal income tax purposes, the covered corporation must—
(A) Establish, based on information known to the covered corporation (for example, through legal documentation of share ownership, publicly available information, the pro rata nature of the repurchase, or the shareholder certification safe harbor described in paragraph (g)(3)(ii) of this section), that—
(1) The repurchase either constitutes a redemption that is treated as a distribution to which section 301 applies by reason of section 302(d) or has the effect of the distribution of a dividend under section 356(a)(2); and
(2) The covered corporation has no knowledge of facts that would indicate that the treatment described in paragraph (g)(3)(i)(A)(1) of this section is incorrect;
(B) Treat the repurchase consistent with the treatment described in paragraph (g)(3)(i)(A)(1) of this section, including by withholding the applicable amounts, if required; and
(C) Demonstrate sufficient earnings and profits to treat as a dividend either the redemption under section 302 or the receipt of money or other property under section 356.
(ii) Shareholder certification safe harbor—(A) In general. To provide sufficient evidence under paragraph (g)(3)(i)(A) of this section to establish that the shareholder treats the repurchase as a dividend for Federal income tax purposes, the covered corporation—
(1) May obtain certification from the shareholder, in accordance with paragraph (g)(3)(ii)(B) of this section, that the repurchase constitutes a redemption treated as a distribution to which section 301 applies by reason of section 302(d), or that the repurchase has the effect of the distribution of a dividend under section 356(a)(2); and
(2) Must have no knowledge of facts that would indicate that the shareholder certification is incorrect.
(B) Content of shareholder certification. The shareholder certification allowed under paragraph (g)(3)(ii)(A) of this section must include the following information:
(1) The name of the shareholder.
(2) The name of the covered corporation.
(3) The total number of shares of the covered corporation outstanding immediately before and immediately after the repurchase.
(4) A statement that the shareholder treated the repurchase as a dividend for Federal income tax purposes.
(5) The number of shares actually and constructively owned by the shareholder before and after the repurchase.
(6) The shareholder's percentage ownership before and after the repurchase.
(7) If the shareholder is not a United States person (within the meaning of section 7701(a)(30) of the Code) and the shares are held through a broker (within the meaning of section 6045(c) of the Code), a statement that a copy of the certification has been provided to the shareholder's broker.
(8) Any other information described in forms or instructions or in publications or guidance published in the Internal Revenue Bulletin (see §§ 601.601(d)(2) and 601.602 of this chapter).
(9) A penalties of perjury statement.
(10) The signature of the shareholder and date of signature.
(C) Agreement to shareholder certification. After receiving the shareholder certification provided under paragraph (g)(3)(ii)(A)(1) of this section, the covered corporation must include on the shareholder certification a statement signed by the covered corporation under penalties of perjury that the covered corporation—
(1) Agrees to treat the repurchase consistent with the shareholder certification provided under paragraph (g)(3)(ii)(A)(1) of this section; and
(2) Has no knowledge of facts that would indicate that the shareholder certification provided under paragraph (g)(3)(ii)(A)(1) of this section is incorrect.
(4) Documentation of sufficient evidence—(i) Retention and availability of evidence. A covered corporation must retain the evidence described in paragraph (g)(3) of this section and make that evidence available for inspection to the IRS if any of the evidence becomes material in the administration of any internal revenue law.
(ii) Retention of supporting records. The covered corporation must retain records of all information necessary to document and substantiate all content described in paragraph (g)(3) of this section.
(h) Repurchases by a non-RIC '40 Act fund. A covered corporation that is described in section 851(a)(1)(A) of the Code, but that has not elected to be a RIC under section 851(b) (non-RIC '40 Act fund), reduces its gross repurchase amount under § 58.4501-2(c)(1)(ii) by an amount equal to the aggregate fair market value of any shares of its stock repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation if—
(1) The non-RIC '40 Act fund is an open-end company as defined in section 5(a)(1) of the Investment Company Act of 1940 (15 U.S.C. 80a-5); or
(2) The non-RIC '40 Act fund is a closed-end company as defined in section 5(a)(2) of the Investment Company Act of 1940, and the repurchase occurs as part of a periodic repurchase offer made pursuant to SEC Rule 23c-3 (17 CFR 270.23c-3).
§ 58.4501-4 - Application of netting rule.
(a) Scope. This section provides rules regarding the application of section 4501(c)(3) of the Code. Paragraph (b) of this section provides general rules regarding the adjustment to a covered corporation's stock repurchase excise tax base with respect to stock that is issued by the covered corporation or provided by a specified affiliate of the covered corporation (netting rule). Paragraph (c) of this section provides special rules for stock issued or provided in connection with the performance of services. Paragraph (d) of this section provides rules for determining the date on which stock is issued or provided. Paragraph (e) of this section provides rules for determining the fair market value of stock that is issued or provided. Paragraph (f) of this section sets forth the only circumstances under which an issuance or provision of stock is disregarded for purposes of the netting rule. For rules regarding the application of the netting rule in the context of section 4501(d), see § 58.4501-7(m).
(b) Issuances and provisions of stock that are a reduction in computing the stock repurchase excise tax base—(1) General rule. The aggregate fair market value of stock of a covered corporation that is issued by the covered corporation or provided by a specified affiliate of the covered corporation during the covered corporation's taxable year is a reduction for purposes of computing the covered corporation's stock repurchase excise tax base for that taxable year in the following circumstances:
(i) The stock is issued by the covered corporation in connection with the performance of services for the covered corporation by an employee or other service provider of the covered corporation.
(ii) The stock is provided by a specified affiliate of the covered corporation in connection with the performance of services for the specified affiliate by an employee or other service provider of the specified affiliate.
(iii) The stock is issued by the covered corporation other than in connection with the performance of services.
(2) Stock issued or provided outside period of covered corporation status. Any stock of a covered corporation issued by the covered corporation or provided by a specified affiliate of the covered corporation before the initiation date or after the cessation date is not taken into account under paragraph (b)(1) of this section. See § 58.4501-2(d).
(3) Issuances or provisions before January 1, 2023. Except as provided in paragraph (b)(2) of this section, a covered corporation with a taxable year that both begins before January 1, 2023, and ends after December 31, 2022, may include the fair market value of all issuances or provisions of its stock during the entirety of that taxable year for purposes of applying paragraph (b)(1) of this section to that taxable year.
(c) Stock issued or provided in connection with the performance of services—(1) In general. For purposes of this section, stock of a covered corporation is issued or provided by the covered corporation or a specified affiliate of the covered corporation in connection with the performance of services only if the issuance or provision of stock is a transfer described in section 83 of the Code, including pursuant to the exercise of a nonqualified stock option described in § 1.83-7 of this chapter, pursuant to the exercise of a stock option described in section 421 of the Code, or pursuant to stock settlement of a restricted stock unit (RSU). A specified affiliate of the covered corporation is not a service provider for purposes of this section.
(2) Sale of shares to cover exercise price and withholding—(i) Payment or advance by third party equal to exercise price. If a third party pays the exercise price of an option to acquire stock of a covered corporation on behalf of a service provider or advances to a service provider an amount equal to the exercise price of a stock option that the service provider uses to exercise the option, then any stock transferred by the covered corporation or specified affiliate to the third party upon exercise of the option in connection with exercising the option (as well as any stock transferred by the covered corporation or specified affiliate to the service provider) is treated as issued or provided in connection with the performance of the services by the service provider.
(ii) Advance by third party equal to withholding obligation. If a third party advances an amount equal to the withholding obligation of a service provider, then any stock transferred by the covered corporation or specified affiliate to the third party in connection with this arrangement (as well as any stock transferred by the covered corporation or specified affiliate to the service provider) is treated as issued or provided in connection with the performance of services by the service provider.
(d) Date of issuance—(1) In general. Except as provided in paragraph (d)(2) of this section, stock of a covered corporation is treated as issued by the covered corporation or provided by a specified affiliate of the covered corporation on the date on which ownership of the stock transfers to the recipient for Federal income tax purposes.
(2) Stock issued or provided in connection with the performance of services—(i) In general. Stock of a covered corporation is issued by the covered corporation or provided by a specified affiliate of the covered corporation in connection with the performance of services as of the date the recipient of the stock is treated as the beneficial owner of the stock for Federal income tax purposes. In general, a recipient is treated as the beneficial owner of the stock when the stock is both transferred by the covered corporation (or a specified affiliate of the covered corporation) and substantially vested within the meaning of § 1.83-3(b) of this chapter. Thus, stock transferred pursuant to a vested stock award or an RSU is issued or provided when the covered corporation or a specified affiliate of the covered corporation initiates payment of the stock. Stock transferred that is not substantially vested within the meaning of § 1.83-3(b) of this chapter is not issued or provided until it vests, except as provided in paragraph (d)(2)(iii) of this section.
(ii) Stock options and stock appreciation rights. Stock of a covered corporation transferred by the covered corporation or a specified affiliate of the covered corporation pursuant to an option described in § 1.83-7 of this chapter or section 421 or a stock appreciation right is issued by the covered corporation or provided by the specified affiliate of the covered corporation (as applicable) as of the date the stock is transferred pursuant to the exercise of the option or stock appreciation right.
(iii) Stock on which a section 83(b) election is made. Stock of a covered corporation transferred by the covered corporation or a specified affiliate of the covered corporation when it is not substantially vested within the meaning of § 1.83-3(b) of this chapter, but as to which a valid election under section 83(b) is made, is treated as issued by the covered corporation or provided by the specified affiliate of the covered corporation (as applicable) as of the transfer date.
(e) Fair market value of issued or provided stock—(1) In general. Except as provided in paragraph (e)(5) of this section, the fair market value of stock of a covered corporation issued by the covered corporation or provided by a specified affiliate of the covered corporation is the market price of the stock on the date the stock is issued or provided.
(2) Stock traded on an established securities market—(i) In general. If stock of a covered corporation that is issued by the covered corporation is traded on an established securities market, the covered corporation must determine the market price of the stock by applying one of the methods provided in paragraph (e)(2)(ii) of this section.
(ii) Acceptable methods. The following are the acceptable methods for determining the market price of stock of a covered corporation traded on an established securities market:
(A) The daily volume-weighted average price as determined on the date the stock is issued by the covered corporation.
(B) The closing price on the trading day the stock is issued by the covered corporation, or the immediately preceding trading day.
(C) The average of the high and low prices on the date the stock is issued by the covered corporation.
(D) The trading price at the time the stock is issued by the covered corporation.
(iii) Date of issuance not a trading day. For purposes of each method provided in paragraph (e)(2)(ii) of this section, if the date the stock of a covered corporation is issued by the covered corporation is not a trading day, the date on which the market price is determined is the immediately preceding trading day.
(iv) Consistency requirement—(A) Solely one method permitted for determining market price of issued stock. The market price of stock of a covered corporation that is traded on an established securities market must be determined by consistently applying solely one of the methods provided in paragraph (e)(2)(ii) of this section to all stock of the covered corporation issued by the covered corporation throughout the covered corporation's taxable year.
(B) Application to repurchased stock. The method used by the covered corporation under paragraph (e)(2)(ii)(A) of this section must be consistently applied to determine the market price of all stock of the covered corporation repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation throughout the covered corporation's taxable year. See § 58.4501-2(h)(2)(iv).
(v) Stock traded on multiple exchanges. See § 58.4501-2(h)(2)(v) for rules regarding the valuation of stock of a covered corporation traded on multiple established securities markets.
(3) Stock not traded on an established securities market—(i) General rule. If stock of a covered corporation is not traded on an established securities market, the market price of the stock is determined as of the date the stock is issued by a covered corporation under the principles of § 1.409A-1(b)(5)(iv)(B)(1) of this chapter.
(ii) Consistency requirement. In determining the market price of stock of a covered corporation that is not traded on an established securities market, the same valuation method must be used for all issuances of stock of the covered corporation belonging to the same class throughout the covered corporation's taxable year, unless the application of that method to a particular issuance would be unreasonable under the facts and circumstances as of the valuation date. That same method also must be consistently applied to determine the market price of all stock of the covered corporation of the same class repurchased by the covered corporation or acquired by a specified affiliate of the covered corporation throughout the covered corporation's taxable year, unless the application of that method to a particular issuance would be unreasonable under the facts and circumstances as of the valuation date. See § 58.4501-2(h)(3)(ii).
(4) Market price of stock denominated in non-U.S. currency. The market price of any stock of a covered corporation that is denominated in a currency other than the U.S. dollar is converted into U.S. dollars at the spot rate (as defined in § 1.988-1(d)(1) of this chapter) on the date the stock is issued by the covered corporation or provided by a specified affiliate of the covered corporation (as applicable).
(5) Stock issued or provided in connection with the performance of services. The fair market value of stock of a covered corporation issued by the covered corporation or provided by a specified affiliate of the covered corporation (as applicable) in connection with the performance of services is the fair market value of the stock, as determined under section 83, as of the date the stock is issued by the covered corporation or provided by the specified affiliate of the covered corporation (as applicable). For purposes of this section, the fair market value of the stock is determined under the rules provided in section 83 regardless of whether an amount is includible in the service provider's income under section 83 or otherwise. For example, the fair market value of stock issued by a covered corporation pursuant to a stock option described in section 421 and stock issued by a covered corporation to a nonresident alien for services performed outside of the United States is determined using the rules provided in section 83.
(f) Issuances that are disregarded for purposes of applying the netting rule. This paragraph (f) lists the only circumstances in which an issuance of stock of a covered corporation is disregarded for purposes of the netting rule.
(1) Distributions by a covered corporation of its own stock. Stock of a covered corporation distributed by the covered corporation to its shareholders with respect to the covered corporation's stock is disregarded for purposes of the netting rule.
(2) Issuances to a specified affiliate—(i) In general. Subject to paragraphs (f)(2)(ii) through (iv) of this section, stock of a covered corporation is disregarded for purposes of the netting rule if that stock is issued by the covered corporation—
(A) To a specified affiliate of the covered corporation; or
(B) In connection with the performance of services by an employee of, or other service provider for, a specified affiliate of the covered corporation (but see paragraph (f)(2)(iv) of this section, allowing certain compensatory transfers of a specified affiliate to be regarded in accordance with paragraph (b)(1)(ii) of this section).
(ii) Subsequent transfer by specified affiliate. Stock of a covered corporation issued by the covered corporation to a specified affiliate of the covered corporation that is subsequently transferred by the specified affiliate to a person that is not a specified affiliate of the covered corporation is regarded for purposes of the netting rule, and is treated as issued by the covered corporation on the date of the subsequent transfer, only if—
(A) The subsequent transfer by the specified affiliate occurs within the same taxable year that the specified affiliate receives the stock from the covered corporation (applicable year);
(B) The covered corporation does not otherwise reduce its stock repurchase excise tax base for the applicable year with respect to the stock under this section; and
(C) The subsequent transfer by the specified affiliate is not in connection with the performance of services provided to the specified affiliate (but see paragraph (f)(2)(iv) of this section, allowing certain compensatory transfers of a specified affiliate to be regarded in accordance with paragraph (b)(1)(ii) of this section).
(iii) Specific identification of shares. For purposes of paragraph (f)(2)(ii)(A) of this section, unless specifically identified, the shares of stock of the covered corporation in a specific class of the covered corporation's stock treated as subsequently transferred by the specified affiliate are the earliest shares of that class issued by the covered corporation to the specified affiliate.
(iv) Subsequent transfers in connection with the performance of services for a specified affiliate. Stock issued by a covered corporation in connection with the performance of services for a specified affiliate is not treated as issued by the covered corporation. However, a transfer of stock of a covered corporation described in § 1.83-6(d) of this chapter (in addition to an actual provision of stock by a specified affiliate described in paragraph (b)(1)(ii) of this section) by a specified affiliate of the covered corporation to an employee or other service provider (that is not another specified affiliate of the covered corporation) of the specified affiliate is treated as a provision of stock described in paragraph (b)(1)(ii) of this section.
(3) Issuances in an E reorganization or an F reorganization. The following issuances are disregarded for purposes of the netting rule:
(i) Any stock issued by a recapitalizing corporation as part of a transaction qualifying as an E reorganization.
(ii) Any stock issued by a resulting corporation (as defined in § 1.368-2(m)(1) of this chapter) as part of a transaction qualifying as an F reorganization.
(4) Deemed issuances under section 304(a)(1). Any stock treated as issued by the acquiring corporation by reason of the application of section 304(a)(1) to a transaction (as more fully described in § 58.4501-2(e)(3)(i)) is disregarded for purposes of the netting rule.
(5) Deemed issuance of a fractional share. Any fractional share of a covered corporation's stock deemed to be issued for Federal income tax purposes (by virtue of a payment described in § 58.4501-2(e)(3)(iv)) is disregarded for purposes of the netting rule.
(6) Issuance by a covered corporation that is a dealer in securities. Any stock of a covered corporation that is a dealer in securities issued by such covered corporation is disregarded for purposes of the netting rule to the extent the stock is issued, or otherwise is used to satisfy obligations to customers arising, in the ordinary course of the covered corporation's business of dealing in securities.
(7) Issuance by the target corporation in a reverse triangular merger. Any target corporation stock that is issued by the target corporation to the merged corporation (within the meaning of section 368(a)(2)(E)) in exchange for consideration that includes the stock of the controlling corporation (within the meaning of section 368(a)(2)(E)) in a transaction qualifying as a reorganization under section 368(a)(1)(A) by reason of section 368(a)(2)(E) is disregarded for purposes of the netting rule.
(8) Issuance as part of a section 1036(a) exchange. Any stock of a covered corporation issued by the covered corporation in exchange for stock of the covered corporation in a transaction that qualifies under section 1036(a) of the Code is disregarded for purposes of the netting rule.
(9) Issuance as part of a distribution under section 355. Any stock issued by a controlled corporation in a distribution qualifying under section 355 (or so much of section 356 as relates to section 355) is disregarded for purposes of the netting rule.
(10) Stock contributions to an employer-sponsored retirement plan. Any stock of a covered corporation contributed to an employer-sponsored retirement plan, any stock of a covered corporation treated as contributed to an employer-sponsored retirement plan under § 58.4501-3(d)(1)(ii) and (d)(5)(ii), and any stock of a covered corporation sold to a leveraged or non-leveraged ESOP, is disregarded for purposes of the netting rule.
(11) Net exercises and share withholding. Stock of a covered corporation withheld by the covered corporation or a specified affiliate of the covered corporation to satisfy the exercise price of a stock option, or to pay any withholding obligation, is disregarded for purposes of the netting rule. For example, stock of a covered corporation withheld by a covered corporation or a specified affiliate of the covered corporation to pay the exercise price of a stock option, to satisfy an employer's income tax withholding obligation under section 3402 of the Code, to satisfy an employer's withholding obligation under section 3102 of the Code, or to satisfy an employer's withholding obligation for State, local, or foreign taxes, is disregarded for purposes of the netting rule.
(12) Settlement other than in stock. Settlement of an option contract with respect to stock of a covered corporation using any consideration other than stock of the covered corporation (including cash) is disregarded for purposes of the netting rule.
(13) Instrument not in the legal form of stock—(i) Issuance or provision of covered non-stock instrument generally disregarded. Except as provided in paragraph (f)(13)(iii) or (iv) of this section, the issuance by a covered corporation or provision by a specified affiliate of the covered corporation of a covered non-stock instrument (as defined in paragraph (f)(13)(ii)(B) of this section), including an issuance or provision before the initiation date or after the cessation date, is disregarded for purposes of the netting rule.
(ii) Definitions. The following definitions apply for purposes of this paragraph (f)(13).
(A) Non-stock instrument. A non-stock instrument is an instrument of a covered corporation that is not in the legal form of stock but that is treated as stock for Federal tax purposes. For the avoidance of doubt, in the case of a covered corporation that is an eligible entity within the meaning of § 301.7701-3(a) of this chapter, a non-stock instrument does not include an instrument that is in the legal form of a membership, partnership, or other ownership interest of the eligible entity.
(B) Covered non-stock instrument. A covered non-stock instrument is a non-stock instrument issued by a covered corporation or provided by a specified affiliate of the covered corporation to a covered holder.
(C) Covered holder. A covered holder is any person that owns (or under the attribution rules of section 318 of the Code is considered to own) at least 10 percent of the stock of the covered corporation, either by vote or value, but only if the covered corporation has knowledge of facts that would indicate such ownership, including through legal documentation of share ownership, publicly available information, or any other means—
(1) In the case of the covered corporation's issuance of a non-stock instrument, at the time of the issuance by the covered corporation; or
(2) In the case of a specified affiliate of the covered corporation's provision of a non-stock instrument, at the time of the provision by the specified affiliate.
(iii) Certain instruments treated as issued when repurchased or acquired—(A) In general. Subject to the identification requirement in paragraph (f)(13)(iii)(B) of this section, if a covered non-stock instrument is repurchased by a covered corporation or acquired by a specified affiliate of the covered corporation, the issuance or provision of the instrument is regarded for purposes of the netting rule at the time of such repurchase or acquisition based on the fair market value of the instrument when the instrument was issued or provided. Such fair market value is determined under paragraph (e) of this section. For purposes of the stock repurchase excise tax regulations, the delivery of stock pursuant to the terms of a covered non-stock instrument is treated as a repurchase of the covered non-stock instrument in exchange for an issuance or provision of the stock that is delivered.
(B) Identification of an instrument not in the legal form of stock. The issuance or provision of a covered non-stock instrument is regarded under paragraph (f)(13)(iii)(A) of this section only if the covered corporation identifies the repurchase or acquisition of the covered non-stock instrument as the repurchase or acquisition of a covered non-stock instrument on the return on which the stock repurchase excise tax must be reported for the covered corporation's taxable year in which the repurchase or acquisition occurs.
(iv) Issuances pursuant to a public offering. Paragraph (f)(13)(i) of this section does not apply to any issuance of a covered non-stock instrument the offer and sale of which was registered with the SEC.
(v) Coordination with specified affiliate rule. This paragraph (f)(13) does not apply to the extent that paragraph (f)(2) of this section applies.
§ 58.4501-5 - Examples.
(a) Scope. The examples in this section illustrate the application of section 4501 of the Code and the stock repurchase excise tax regulations other than the provisions of section 4501(d) and § 58.4501-7. See § 58.4501-7(n) and (o) for examples that illustrate the application of the rules in § 58.4501-7 related to section 4501(d).
(b) In general. For purposes of the examples in this section, unless otherwise stated: each of Corporation X and unrelated Target is a covered corporation that is a calendar-year taxpayer; the only outstanding stock of each of Corporation X and Target is a single class of common stock that is traded on an established securities market; any shareholder whose stock is redeemed in a section 317(b) redemption qualifies for sale or exchange treatment under section 302(a) of the Code; the de minimis exception does not apply; the covered corporation determines the fair market value of its stock repurchased or issued based on the trading price of the stock at the time it is repurchased or issued; the stock is not a non-stock instrument; and the facts set forth the only repurchases and issuances made during the taxable year.
(1) Example 1: Redemption of preferred stock not subject to an exception—(i) Facts. Corporation X has outstanding common stock that is traded on an established securities market. Corporation X also has outstanding mandatorily redeemable preferred stock issued on July 1, 2023, that is stock for Federal tax purposes but is not traded on an established securities market, is not additional tier 1 capital, and is not described in section 1504(a)(4) of the Code. On January 1, 2025, Corporation X redeems the preferred stock pursuant to its terms.
(ii) Analysis. The redemption by Corporation X of its mandatorily redeemable preferred stock is a repurchase because Corporation X redeems an instrument that is stock for purposes of the stock repurchase excise tax regulations (that is, preferred stock issued by Corporation X that is neither additional tier 1 capital nor described in section 1504(a)(4)), the redemption is a section 317(b) redemption, and the exception for mandatorily redeemable stock does not apply. See §§ 58.4501-1(b)(34) and 58.4501-2(e)(2)(i) and (e)(3)(iii).
(iii) Mandatorily redeemable preferred stock issued prior to August 16, 2022. The facts are the same as in paragraph (b)(1)(i) of this section (Example 1), except that Corporation X issues the mandatorily redeemable preferred stock on July 1, 2022. The redemption by Corporation X of such stock is not a repurchase. See § 58.4501-2(e)(3)(iii).
(2) Example 2: Debt-for-debt exchange—(i) Facts. Corporation X has outstanding securities with a principal amount of $100x. On January 1, 2024, Corporation X issues new securities with a principal amount of $100x to its security holders in exchange for the outstanding securities (debt-for-debt exchange). Neither the outstanding securities nor the new securities are treated as stock for Federal tax purposes.
(ii) Analysis. The debt-for-debt exchange is not subject to the stock repurchase excise tax because it is not a repurchase of stock. See §§ 58.4501-1(a) and (b)(34) and 58.4501-2(c)(1) and (e)(4)(i).
(3) Example 3: Valuation of repurchase—(i) Facts. On April 15, 2025, when the stock of Corporation X is trading at $0.70x per share, Corporation X purchases 50 shares of its stock for $35x from one of its shareholders on an established securities market. The shareholder is required to deliver the stock to Corporation X within the standard settlement cycle for the stock (a regular-way sale), which is one business day after execution of the sale (that is, the trade date of April 15, 2025). On April 17, 2025, the 50 shares are delivered to Corporation X.
(ii) Analysis. Corporation X's purchase of 50 shares of Corporation X stock is a repurchase, because the transaction is a section 317(b) redemption and no exception applies. See § 58.4501-2(e)(2)(i) and (e)(3). For purposes of computing Corporation X's stock repurchase excise tax base, the trade date of April 15, 2025, is the date of repurchase. See § 58.4501-2(g)(1) and (2). The fair market value of the 50 shares of stock repurchased on April 15, 2025, is the aggregate market price of those shares on the date of repurchase, or $35x ($0.70x per share × 50 shares = $35x). See § 58.4501-2(h)(1). Accordingly, the repurchase by Corporation X increases its stock repurchase excise tax base for the 2025 taxable year by $35x.
(iii) Application of netting rule. The facts are the same as in paragraph (b)(3)(i) of this section (Example 3), except that, on August 1, 2025, Corporation X issues 20 shares of its stock to an unrelated party, at which time ownership of the stock transfers to the unrelated party for Federal income tax purposes. On that date, the stock of Corporation X is trading at $0.50x per share. For purposes of computing Corporation X's stock repurchase excise tax base, Corporation X is treated as issuing the 20 shares of its stock on August 1, 2025 (that is, the date on which ownership of the stock transfers to the recipient for Federal income tax purposes). See § 58.4501-4(d)(1). The fair market value of that issued stock is its aggregate market price on the date of issuance by Corporation X, or $10x ($0.50x per share × 20 shares = $10x). See § 58.4501-4(e)(1). Accordingly, the net increase in Corporation X's stock repurchase excise tax base for its 2025 taxable year is $25x ($35x repurchase−$10x issuance = $25x). See § 58.4501-2(c)(1).
(4) Example 4: Acquisition partially funded by the target corporation—(i) Facts. On May 30, 2025, Corporation X acquires all of Target's outstanding stock (Target Stock Acquisition). To effectuate the Target Stock Acquisition, Corporation X causes the following transaction steps to occur. First, Corporation X contributes $40x to a newly formed corporation (Merger Sub). Second, Merger Sub merges into Target, with Target surviving the merger (Subsidiary Merger). At the time of the Subsidiary Merger, the stock of Target has an aggregate fair market value of $100x. In the Subsidiary Merger, Target's shareholders exchange all their Target stock for $100x of cash, of which $60x is funded by Target and $40x is funded by Corporation X. For Federal income tax purposes, the transitory existence of Merger Sub is disregarded, and Target is treated as if Target redeemed 60 percent of its outstanding stock for $60x as part of the Subsidiary Merger. (This treatment results from the fact that Target funded $60x of the consideration received by Target's shareholders in exchange for their Target stock.) All of Target's stock ceases to trade on an established securities market upon completion of the Target Stock Acquisition.
(ii) Analysis. Target ceases to be a covered corporation after the Target Stock Acquisition. See § 58.4501-1(b)(7). Target's redemption of 60 percent of its outstanding stock is a redemption within the meaning of section 317(b) with regard to the stock of a covered corporation. See § 58.4501-2(e)(2)(i). However, because Target's redemption occurs as part of a transaction in which Target ceases to be a covered corporation, it is not a repurchase. See § 58.4501-2(e)(3)(ii).
(5) Example 5: Pro rata stock split—(i) Facts. On October 1, 2025, Corporation X distributes three shares of Corporation X stock with respect to each existing share of its outstanding stock (Corporation X Stock Split).
(ii) Analysis. The stock distributed by Corporation X to its shareholders through the Corporation X Stock Split is disregarded for purposes of the netting rule because Corporation X distributed the stock to its shareholders with respect to its outstanding stock. See § 58.4501-4(f)(1). Accordingly, the Corporation X Stock Split is not taken into account in computing Corporation X's stock repurchase excise tax base for its 2025 taxable year. See § 58.4501-2(c)(1) (regarding the computation of the stock repurchase excise tax base).
(6) Example 6: Acquisition of a target corporation in an acquisitive reorganization—(i) Facts. On October 1, 2025, Target merges into Corporation X in a transaction that qualifies as a reorganization under section 368(a)(1)(A) of the Code (Target Merger). On the date of the Target Merger, the fair market value of Target's outstanding stock is $100x. In the Target Merger, Target's shareholders exchange their Target stock for Corporation X stock and cash.
(ii) Analysis. Target's acquisition of its stock from the Target shareholders in exchange for the consideration received in the Target Merger is not a repurchase by Target. See § 58.4501-2(e)(5)(v).
(7) Example 7: E reorganization—(i) Facts. On November 1, 2025, Corporation X issues shares of new stock, with a fair market value of $100x (New Common Stock), to its shareholders in exchange for their outstanding stock in Corporation X (Old Common Stock) pursuant to a plan of reorganization (Recapitalization). The Recapitalization qualifies as an E reorganization. At the time of the Recapitalization, the fair market value of Corporation X's Old Common Stock is $100x.
(ii) Analysis. The acquisition by Corporation X of its Old Common Stock solely in exchange for New Common Stock in the Recapitalization is not a repurchase. See § 58.4501-2(e)(4)(i). The issuance of the New Common Stock by Corporation X is disregarded for purposes of the netting rule. See § 58.4501-4(f)(3)(i).
(8) Example 8: E reorganization with non-qualifying property—(i) Facts. The facts are the same as in paragraph (b)(7)(i) of this section (Example 7), except that some shareholders receive solely shares of New Common Stock in exchange for their shares of Old Common Stock, and other shareholders receive both shares of New Common Stock and Corporation X securities in exchange for their shares of Old Common Stock. The aggregate fair market value of the New Common Stock is $80x, and the aggregate fair market value of the Corporation X securities is $20x. The distribution of the Corporation X securities is not treated as a distribution with respect to Corporation X's stock under § 1.301-1(j) of this chapter and is not treated as having the effect of a distribution of a dividend under section 356(a)(2) of the Code.
(ii) Analysis regarding repurchase treatment, timing, and amount. The acquisition by Corporation X of its Old Common Stock in exchange for New Common Stock in the Recapitalization is not a repurchase. See § 58.4501-2(e)(4)(i). The acquisition by Corporation X of its Old Common Stock for Corporation X securities is a repurchase by Corporation X because the securities would not be permitted to be received by Corporation X shareholders under section 354 of the Code without the recognition of gain. See id. The repurchase occurs on November 1, 2025 (that is, the date on which ownership of the Old Common Stock transfers to Corporation X for Federal income tax purposes). See § 58.4501-2(g)(1). The amount of the repurchase by Corporation X is $20x, which equals the fair market value of the Old Common Stock exchanged for Corporation X securities on the date of the repurchase. See § 58.4501-2(h)(1).
(iii) Analysis regarding impact of issuance of New Common Stock on Corporation X's stock repurchase excise tax base. Corporation X's issuance of the New Common Stock is disregarded for purposes of the netting rule. See § 58.4501-4(f)(3) (disregarding such types of issuances). Therefore, Corporation X does not take into account any of the New Common Stock issued to its shareholders in computing its stock repurchase excise tax base for its 2025 taxable year under § 58.4501-4(b)(1).
(9) Example 9: Cash paid in lieu of fractional shares—(i) Facts. The facts are the same as in paragraph (b)(7)(i) of this section (Example 7), except that, as part of the Recapitalization, Corporation X shareholders receive cash in lieu of fractional shares of New Common Stock. The payment by Corporation X of cash in lieu of fractional shares of New Common Stock was not separately bargained-for consideration (that is, the cash paid by Corporation X in lieu of the fractional shares represented a mere rounding off of the shares issued in the Recapitalization). In addition, the payment by Corporation X of cash in lieu of fractional shares of New Common Stock was carried out solely for administrative convenience (and, therefore, solely for non-tax reasons) and was for an amount of cash that did not exceed the value of one full share of New Common Stock.
(ii) Analysis. The payment by Corporation X of cash in lieu of fractional shares of New Common Stock is treated for Federal income tax purposes as though the fractional shares were distributed by Corporation X as part of the Recapitalization and then redeemed by Corporation X for cash. This deemed redemption is not a repurchase because the payment of cash in lieu of the fractional shares satisfies the requirements of § 58.4501-2(e)(3)(iv). In addition, Corporation X's deemed issuance of the fractional shares is disregarded for purposes of the netting rule. See § 58.4501-4(f)(5).
(10) Example 10: F reorganization—(i) Facts. Corporation X is a State A corporation. To reorganize under the laws of State B, on November 15, 2025, Corporation X forms New Corporation X (a State B corporation) and merges into New Corporation X in a transaction that qualifies as an F reorganization (Corporation X Redomiciliation). On the date of the Corporation X Redomiciliation, the fair market value of Corporation X's stock is $100x. Shareholder A owns $25x of Corporation X's outstanding stock. In the Corporation X Redomiciliation, Shareholder A transfers all its Corporation X stock in exchange for $25x of cash, which is treated for Federal income tax purposes as an unrelated, separate transaction from the Corporation X Redomiciliation to which section 302(a) applies (Shareholder A Redemption). See § 1.368-2(m)(3)(iii) of this chapter. The remaining Corporation X shareholders exchange their Corporation X stock for New Corporation X stock as part of the Corporation X Redomiciliation.
(ii) Analysis regarding repurchase treatment, timing, and amount. Corporation X and New Corporation X are treated as the same corporation for purposes of the stock repurchase excise tax regulations. See § 58.4501-1(e). The Shareholder A Redemption is a repurchase by Corporation X because it is a section 317(b) redemption. See § 58.4501-2(e)(2)(i). This repurchase occurs on November 15, 2025 (that is, the date on which Shareholder A's ownership of its Corporation X stock transfers to Corporation X as part of the transaction). See § 58.4501-2(g)(1). The acquisition by Corporation X of its Corporation X stock in exchange for New Corporation X stock pursuant to the plan of reorganization is not a repurchase because that exchange is not an economically similar transaction. See § 58.4501-2(e)(4). The total amount of the repurchase by Corporation X is $25x (the fair market value of the Corporation X stock redeemed in the Shareholder A Redemption on the date of the redemption). See § 58.4501-2(h)(1). New Corporation X's transfer of $75x of its stock to Corporation X in the Corporation X Redomiciliation is disregarded for purposes of the netting rule. See § 58.4501-4(f)(3) (disregarding such types of issuances). Therefore, New Corporation X's stock repurchase excise tax base for its 2025 taxable year is $25x ($25x gross repurchase amount unreduced by the $75x of New Corporation X stock issued in the Corporation X Redomiciliation).
(11) Example 11: Section 355 split-off—(i) Facts. Corporation X owns all the stock of a pre-existing subsidiary (Controlled). On December 1, 2025, Corporation X distributes all the stock of Controlled (with a fair market value of $80x) and $20x of cash to certain of Corporation X's shareholders (Participating Shareholders) in exchange for $100x of Corporation X stock in a split-off (Corporation X Split-Off).
(ii) Analysis regarding repurchase treatment, timing, and amount. The acquisition by Corporation X of its stock in exchange for Controlled stock is not a repurchase because the Controlled stock would be permitted to be received by the Participating Shareholders under section 355 without the recognition of gain. See § 58.4501-2(e)(4)(ii). The acquisition by Corporation X of its stock in exchange for Controlled stock and cash in the Corporation X Split-Off is a repurchase by Corporation X. See § 58.4501-2(e)(2)(ii) and (e)(4)(ii). This repurchase occurs on December 1, 2025 (that is, the date on which ownership of the Corporation X stock transfers to Corporation X for Federal income tax purposes). See § 58.4501-2(g)(1). The total amount of the repurchase by Corporation X is $100x, which equals the aggregate fair market value of the Corporation X stock on the date the stock is exchanged by the Participating Shareholders for Controlled stock and cash in the Corporation X Split-Off (that is, December 1, 2025). See § 58.4501-2(h)(1).
(iii) Analysis regarding impact of Corporation X Split-Off on Corporation X's stock repurchase excise tax base. Corporation X's gross repurchase amount for its 2025 taxable year is $100x on account of the Corporation X Split-Off. See § 58.4501-2(c)(1)(i). Under the reorganization exception, Corporation X may reduce its gross repurchase amount under § 58.4501-2(c)(1)(ii) by an amount equal to the aggregate fair market value of any Corporation X stock repurchased from a Participating Shareholder in the Corporation X Split-Off to the extent that the repurchase is for property permitted by section 355 to be received without the recognition of gain or loss. See § 58.4501-3(c). Accordingly, Corporation X's gross repurchase amount is reduced under § 58.4501-2(c)(1)(ii) by $80x as a result of the application of the reorganization exception. Consequently, Corporation X's stock repurchase excise base for its 2025 taxable year is $20x ($100x−$80x).
(12) Example 12: Section 355 split-off as part of a D reorganization—(i) Facts. The facts are the same as in paragraph (b)(11)(i) of this section (Example 11), except that Controlled is a newly formed corporation, and the Corporation X Split-Off is carried out as part of a transaction qualifying as a reorganization under section 368(a)(1)(D) in which Corporation X transfers assets to Controlled.
(ii) Analysis regarding Corporation X's stock repurchase excise tax base. The analysis regarding Corporation X's stock repurchase excise tax base is the same as in paragraphs (b)(11)(ii) and (iii) of this section (Example 11).
(iii) Analysis regarding Controlled's stock repurchase excise tax base. Controlled's transfer of $80x of its stock to Corporation X in the Corporation X Split-Off is disregarded for purposes of the netting rule. See § 58.4501-4(f)(9) (disregarding such types of issuances). Controlled's transfer of its stock to Corporation X also is disregarded for purposes of the netting rule because Controlled is not a covered corporation at the time of the transfer. See § 58.4501-2(d)(1). Therefore, Controlled does not take into account any of the $80x of its stock transferred to Corporation X in computing Controlled's stock repurchase excise tax base for its 2025 taxable year under § 58.4501-4(b)(1).
(13) Example 13: Section 355 spin-off—(i) Facts. The facts are the same as in paragraph (b)(11)(i) of this section (Example 11), except that Corporation X distributes the Controlled stock and cash to the Corporation X shareholders pro rata without the shareholders exchanging any Corporation X stock (Corporation X Spin-Off).
(ii) Analysis. The Corporation X Spin-Off is not a repurchase by Corporation X. See § 58.4501-2(e)(5)(iii).
(14) Example 14: Section 355 spin-off as part of a D reorganization—(i) Facts. The facts are the same as in paragraph (b)(13)(i) of this section (Example 13), except that Controlled is a newly formed corporation, the Corporation X Spin-Off is carried out as part of a transaction qualifying as a reorganization under section 368(a)(1)(D) in which Corporation X transfers assets to Controlled, and Corporation X receives the $20x of cash from Controlled and distributes the cash to certain of Corporation X's shareholders in exchange for Corporation X stock.
(ii) Analysis regarding Corporation X's stock repurchase excise tax base. The distribution by Corporation X of the $80x of stock of Controlled in the Corporation X Spin-Off is not a repurchase by Corporation X. See § 58.4501-2(e)(5)(iii)(A). The distribution by Corporation X of the $20x of cash in exchange for Corporation X stock is a repurchase. See § 58.4501-2(e)(5)(iii)(B).
(iii) Analysis regarding Controlled's stock repurchase excise tax base. The analysis regarding Controlled's stock repurchase excise tax base is the same as in paragraph (b)(12)(iii) of this section (Example 12).
(15) Example 15: Repurchase pursuant to an accelerated share repurchase agreement—(i) Facts. On October 10, 2022, Corporation X entered into an accelerated share repurchase (ASR) agreement with an investment bank (Bank). Under the terms of the ASR agreement, Bank agrees to deliver a number of shares of Corporation X stock to Corporation X during the term of the ASR, in an amount determined by reference to the price of Corporation X stock on specified days during the term of the ASR. Pursuant to the terms of the ASR agreement, Corporation X paid Bank a prepayment amount. Bank borrowed 80 shares of Corporation X stock from a party not related to Bank or Corporation X. Pursuant to the terms of the ASR agreement, Bank delivered 80 shares of Corporation X stock to Corporation X on October 12, 2022. On final settlement of the ASR, Bank may be required to deliver additional shares of Corporation X stock to Corporation X or Corporation X may be required to make a payment to Bank. The terms of the ASR agreement and the facts and circumstances cause ownership of the 80 shares to transfer from Bank to Corporation X for Federal income tax purposes at the time of delivery (that is, October 12, 2022). The agreement settled in 2023. On February 1, 2023, Bank delivers an additional 20 shares to Corporation X in final settlement of the ASR agreement. For Federal income tax purposes, ownership of those 20 shares is treated as transferring from Bank to Corporation X at the time of delivery (that is, February 1, 2023).
(ii) Analysis. Corporation X is treated as repurchasing 80 shares of Corporation X stock on October 12, 2022 (that is, the date on which ownership of the 80 shares delivered by Bank transferred from Bank to Corporation X for Federal income tax purposes). See § 58.4501-2(g)(1). However, the repurchase by Corporation X of the 80 shares of Corporation X stock does not increase Corporation X's stock repurchase excise tax base for its 2022 taxable year because the repurchase occurred prior to January 1, 2023. See § 58.4501-2(c)(3); see also section 10201(d) of the IRA (providing that the stock repurchase excise tax applies to repurchases after December 31, 2022). The delivery by Bank to Corporation X of 20 shares of Corporation X stock on February 1, 2023, constitutes a repurchase because, for Federal income tax purposes, the terms of the ASR agreement and the facts and circumstances cause ownership of those shares to transfer from Bank to Corporation X on that date. See § 58.4501-2(g)(1). Therefore, the repurchase by Corporation X of those 20 shares of Corporation X stock increases Corporation X's gross repurchase amount for its 2023 taxable year.
(16) Example 16: Distribution in complete liquidation of a covered corporation—(i) Facts. Corporation X adopts a plan of complete liquidation that becomes effective on March 1, 2025 (Corporation X Liquidation). Corporation X has 100 shares of stock outstanding. On April 1, 2025, all shareholders of Corporation X receive a liquidating distribution by Corporation X in full payment for their Corporation X stock. On the date on which Corporation X distributes all its corporate assets to its shareholders in complete liquidation (that is, April 1, 2025), Corporation X stock is trading at $1x per share. Each distribution in complete liquidation is subject to section 331 of the Code.
(ii) Analysis. A distribution in complete liquidation of a covered corporation (that is, Corporation X) to which section 331 applies is not a repurchase by the covered corporation. See § 58.4501-2(e)(5)(i). Therefore, none of the distributions by Corporation X in complete liquidation is a repurchase by Corporation X, and Corporation X's gross repurchase amount for its 2025 taxable year is not increased because of the Corporation X Liquidation.
(17) Example 17: Complete liquidation of a covered corporation to which sections 331 and 332(a) both apply—(i) Facts. The facts are the same as in paragraph (b)(16)(i) of this section (Example 16), except that one of Corporation X's shareholders (Corporation Z) is an 80-percent distributee (as defined in section 337(c) of the Code), and the liquidating distribution by Corporation X to Corporation Z as part of the Corporation X Liquidation qualifies as a complete liquidation under section 332(a).
(ii) Analysis. The analysis is the same as in paragraph (b)(16)(ii) of this section (Example 16).
(18) Example 18: Acquisition by disregarded entity—(i) Facts. Corporation X owns all the interests in LLC, a domestic limited liability company that is disregarded as an entity separate from its owner for Federal tax purposes (disregarded entity) under § 301.7701-3 of this chapter. On May 31, 2025, LLC purchases shares of Corporation X's stock for cash from an unrelated shareholder.
(ii) Analysis. Because LLC is a disregarded entity, the May 31, 2025, acquisition of Corporation X stock is treated as an acquisition by Corporation X. Accordingly, the acquisition is a section 317(b) redemption and therefore a repurchase. See § 58.4501-2(e)(2)(i). Section 301.7701-2(c)(2)(v) of this chapter (treating disregarded entities as corporations for purposes of certain excise taxes) does not apply to treat LLC as a corporation because neither chapter 37 of the Code nor section 4501 is described in § 301.7701-2(c)(2)(v)(A) of this chapter.
(19) Example 19: Multiple repurchases and contributions of same class of stock—(i) Facts. On January 15, 2025, Corporation X repurchases 100 shares of its Class A stock that have an aggregate fair market value of $1,000x ($10x per share). On September 16, 2025, Corporation X repurchases 50 shares of its Class A stock that have an aggregate fair market value of $200x ($4x per share). Corporation X contributes to its ESOP 75 shares of its Class A stock on March 15, 2025, and 75 shares of its Class A stock on October 15, 2025.
(ii) Analysis. Corporation X's gross repurchase amount for its 2025 taxable year is increased by $1,200x ($1,000x + $200x = $1,200x) as a result of the repurchases of its Class A stock. See § 58.4501-2(c)(1)(i). Under the exception for stock contributions to an employer-sponsored retirement plan, Corporation X's stock contributions reduce Corporation X's gross repurchase amount. See §§ 58.4501-2(c)(1)(ii) and 58.4501-3(d). The amount of the reduction is determined by dividing the aggregate fair market value of shares of Class A stock repurchased by the number of shares repurchased ($1,200x/150 shares = $8 per share) and multiplying the number of shares contributed by the average price of the repurchased shares (150 shares × $8 per share = $1,200x). See § 58.4501-3(d)(3)(i). Therefore, Corporation X's stock repurchase excise tax base for its 2025 taxable year is $0 ($1,200x repurchase−$1,200x exception = $0).
(20) Example 20: Multiple repurchases and contributions of different classes of stock—(i) Facts. The facts are the same as in paragraph (b)(19)(i) of this section (Example 19), except that Corporation X has Class B stock and contributes its Class B stock rather than its Class A stock to its ESOP. On October 15, 2025, Corporation X contributes to its ESOP 75 shares of its Class B stock that have an aggregate fair market value of $1,000x. On December 16, 2025, Corporation X contributes to its ESOP 25 shares of its Class B stock that have an aggregate fair market value of $500x.
(ii) Analysis. Corporation X reduces its gross repurchase amount by an amount equal to the sum of the fair market values of the different class of stock at the time the stock is contributed to the employer-sponsored retirement plan ($1,000x + $500x = $1,500x). However, the amount of the reduction may not exceed the aggregate fair market value of stock of a different class repurchased during the taxable year by Corporation X (that is, $1,200x). See § 58.4501-3(d)(4)(ii). Therefore, Corporation X's stock repurchase excise tax base for its 2025 taxable year is $0 ($1,200x repurchase−$1,200x exception = $0). The $300x excess of the contributions over the allowable reduction ($1,500x contributions−$1,200x allowable reduction) may not be carried forward or backward to preceding or succeeding taxable years of Corporation X. See § 58.4501-2(c)(2)(ii).
(21) Example 21: Treatment of contributions after the taxable year—(i) Facts. Corporation X repurchases 200 shares of its stock on December 31, 2025, for $200x ($1x per share). Corporation X has no other repurchases in 2025. On February 2, 2026, Corporation X contributes 200 shares of stock to its ESOP. Corporation X treats the contribution as if it had been received for the 2025 calendar year for plan allocation purposes. See § 58.4501-3(d)(5)(ii).
(ii) Analysis. Corporation X may use the contribution of the 200x shares of its stock on February 2, 2026, to reduce its $200x gross repurchase amount for 2025. See § 58.4501-3(d)(5)(ii).
(22) Example 22: Becoming a covered corporation—(i) Facts. As of January 1, 2025, all of Corporation X's stock is privately held (and, therefore, none of Corporation X's stock is traded on an established securities market). On February 15, 2025, Corporation X purchases 10 shares of its stock for $5x of cash ($.50x per share). On April 1, 2025, Corporation X issues 100 shares of its stock to the public (Public Shareholders), at which time Corporation X's stock begins trading on an established securities market. On November 15, 2025, when Corporation X stock is trading at $2x per share, Corporation X purchases 60 shares of its stock for $120x of cash.
(ii) Analysis regarding purchase on February 15, 2025. Corporation X becomes a covered corporation at the beginning of the day on April 1, 2025 (the initiation date). See § 58.4501-2(d)(1). Accordingly, Corporation X's purchase of 10 shares of its stock for $5x of cash on February 15, 2025, is not a repurchase. Thus, the purchase on February 15, 2025, is not included in Corporation X's gross repurchase amount for its 2025 taxable year.
(iii) Analysis regarding issuance on April 1, 2025. Corporation X is a covered corporation at the beginning of the day on April 1, 2025. See § 58.4501-2(d)(1). Accordingly, the Corporation X stock issued to the Public Shareholders on that date is stock of a covered corporation for purposes of the netting rule. See § 58.4501-4(b)(1). As a result, Corporation`s gross repurchase amount for its 2025 taxable year is reduced by $100x. See § 58.4501-2(c)(1)(iii).
(iv) Analysis regarding purchase on November 15, 2025. Corporation X is a covered corporation on November 15, 2025. Accordingly, Corporation X's purchase of 60 shares of its stock on that date is a repurchase because the transaction is a section 317(b) redemption (that is, a redemption within the meaning of section 317(b) with regard to the stock of a covered corporation). See §§ 58.4501-1(b)(31) and 58.4501-2(e)(2)(i). For purposes of computing Corporation X's gross repurchase amount, the fair market value of the 60 shares of stock repurchased on November 15, 2025, is the aggregate market price of those shares on that repurchase date, or $120x ($2x per share × 60 shares = $120x). See § 58.4501-2(g)(1). Accordingly, Corporation`s gross repurchase amount for its 2025 taxable year is increased by $120x. See § 58.4501-2(c)(1)(i).
(23) Example 23: Actual pro rata redemption in partial liquidation—(i) Facts. Corporation X is actively engaged in the conduct of Businesses A and B. Each business constitutes a qualified trade or business within the meaning of section 302(e)(3). On September 1, 2025, pursuant to a plan of partial liquidation adopted in the same taxable year, Corporation X sells Business B for $100x and distributes the proceeds to its shareholders pro rata in redemption of $100x of Corporation X stock. The transaction qualifies as a distribution in partial liquidation under section 302(b)(4) and (e).
(ii) Analysis. Corporation X's distribution in partial liquidation is a section 317(b) redemption. In addition, Corporation X's pro rata distribution in partial liquidation is not included in the exclusive list of transactions under § 58.4501-2(e)(3) that are a section 317(b) redemption but are not treated as a repurchase. Accordingly, the distribution in partial liquidation is a repurchase. See § 58.4501-2(e)(2)(i). Therefore, as a result of the distribution, Corporation X's gross repurchase amount for its 2025 taxable year is increased by $100x. See § 58.4501-2(c)(1)(i).
(24) Example 24: Constructive redemption in partial liquidation—(i) Facts. The facts are the same as in paragraph (b)(23)(i) of this section (Example 23), except that the shareholders of Corporation X surrender no stock in exchange for the proceeds from the sale of Business B. For Federal income tax purposes, a constructive redemption of stock is deemed to occur, and the transaction qualifies as a distribution in partial liquidation under section 302(b)(4) and (e).
(ii) Analysis. The analysis regarding Corporation X's gross repurchase amount is the same as in paragraph (b)(23)(ii) of this section (Example 23).
(25) Example 25: Non-pro rata redemption in partial liquidation—(i) Facts. The facts are the same as in paragraph (b)(23)(i) of this section (Example 23), except that Corporation X distributes the proceeds to Shareholder A in redemption of $100x of preferred Corporation X stock that is not described in § 58.4501-1(b)(34)(ii) or (iii).
(ii) Analysis. The analysis regarding Corporation X's gross repurchase amount is the same as in paragraph (b)(23)(ii) of this section (Example 23).
(26) Example 26: Physical settlement of call option contract—(i) Facts. On March 1, 2025, Corporation X issues an option that entitles the holder to buy 100 shares of Corporation X stock from Corporation X for $150x ($1.50x per share). On the date the option is issued, Corporation X stock is trading at $1x per share. On November 1, 2025, when Corporation X stock is trading at $2x per share, the holder pays $150x to Corporation X to exercise the option, and Corporation X issues 100 shares of Corporation X stock to the holder, at which time ownership of the shares transfers to the holder for Federal income tax purposes.
(ii) Analysis. For purposes of computing Corporation X's stock repurchase excise tax base, Corporation X is treated as issuing 100 shares of Corporation X stock on November 1, 2025. See § 58.4501-4(d)(1). The fair market value of that stock is its aggregate market price on the date of issuance by Corporation X, or $200x ($2x per share × 100 shares = $200x). See § 58.4501-4(e)(1). Accordingly, the issuance is a $200x reduction of $200x to Corporation X's gross repurchase amount in computing Corporation X's stock repurchase excise tax base for its 2025 taxable year. See § 58.4501-2(c)(1)(iii).
(27) Example 27: Net cash settlement of call option contract—(i) Facts. The facts are the same as in paragraph (b)(26)(i) of this section (Example 26), except that Corporation X net cash settles the option by paying the holder $50x.
(ii) Analysis. The net cash settlement is disregarded for purposes of the netting rule. See § 58.4501-4(f)(12) (disregarding the settlement of an option contract with respect to stock of a covered corporation using any consideration other than stock of the covered corporation). The net cash settlement also is not a repurchase. See § 58.4501-2(e)(5)(iv) (providing that net cash settlement of an option contract with respect to stock of a covered corporation generally is not a repurchase by the covered corporation).
(28) Example 28: Physical settlement of put option contract—(i) Facts. On April 1, 2025, Corporation X issues an option entitling the holder to sell 100 shares of Corporation X stock to Corporation X for $100x ($1x per share). On the date the option is issued, Corporation X stock is trading at $1.25x per share. On October 1, 2025, when Corporation X stock is trading at $0.75x per share, the holder exercises the option, and Corporation X purchases 100 shares of Corporation X stock for $100x, at which time ownership of the shares transfers to Corporation X.
(ii) Analysis. Corporation X's purchase on October 1, 2025, is a repurchase because it is a section 317(b) redemption that is not otherwise excluded. See § 58.4501-2(e)(2) and (3). For purposes of computing Corporation X's gross repurchase amount, the fair market value of the repurchased stock is its aggregate market price on the date on which ownership of the stock transfers to Corporation X for Federal income tax purposes (October 1, 2025), or $75x ($0.75x per share × 100 shares = $75x). See § 58.4501-2(g)(1) and (h)(1). Accordingly, the repurchase is an increase of $75x to Corporation X's gross repurchase amount for its 2025 taxable year. See § 58.4501-2(c)(1)(i).
(29) Example 29: Net cash settlement of put option contract—(i) Facts. The facts are the same as in paragraph (b)(28)(i) of this section (Example 28), except that Corporation X net cash settles the put option by paying the holder $25x.
(ii) Analysis. The net cash settlement is not a repurchase. See § 58.4501-2(e)(5)(vi) (providing that net cash settlement of an option contract with respect to stock of a covered corporation generally is not a repurchase by the covered corporation).
(30) Example 30: Indirect ownership—(i) Facts. Corporation X owns 60 percent of the only class of stock of Sub 1, a domestic corporation. Sub 1 owns 60 percent of the only class of stock of Sub 2, which also is a domestic corporation. On October 15, 2025, Sub 2 purchases stock of Corporation X with a market price of $100,000.
(ii) Analysis. Corporation X must determine at the time its stock is repurchased by Sub 2 (that is, on October 15, 2025) whether Sub 2 is a specified affiliate of Corporation X. See § 58.4501-2(f)(2)(i). Under § 58.4501-2(f)(2)(ii), Corporation X indirectly owns 36 percent (60% × 60% = 36%) of the stock of Sub 2. Sub 2 is not a specified affiliate of Corporation X, because Corporation X does not own, directly or indirectly, more than 50 percent of the stock of Sub 2. See § 58.4501-1(b)(32). Accordingly, Sub 2's purchase of Corporation X stock on October 15, 2025, is not a repurchase under § 58.4501-2(f)(1).
(31) Example 31: Restricted stock provided to a service provider—(i) Facts. Individual M provides services to Corporation X. In 2025, as compensation for Individual M's services, Corporation X transfers to Individual M 100 shares of Corporation X restricted stock with an aggregate fair market value of $500x ($5x per share). The shares vest in 2028. Individual M does not make an election under section 83(b) of the Code. In 2028, Corporation X withholds from Individual M's other wages amounts that are required to pay the income tax and employment tax withholding obligations arising from the stock transfer. The shares have a fair market value of $7x per share when they vest.
(ii) Analysis. Corporation X is treated as issuing 100 shares of stock to Individual M when they become substantially vested in 2028. See § 58.4501-4(d)(2)(i). The fair market value of the shares issued is $700x (100 shares × $7x per share = $700x). Accordingly, the issuance is a reduction of $700x in computing Corporation X's stock repurchase excise tax base for its 2028 taxable year.
(32) Example 32: Restricted stock provided to a service provider with section 83(b) election—(i) Facts. The facts are the same as in paragraph (b)(31)(i) of this section (Example 31), except that Individual M makes a valid election under section 83(b) to include the fair market value of the shares of restricted stock in gross income when the shares are transferred.
(ii) Analysis. Corporation X is treated as issuing 100 shares of stock to Individual M when the shares are transferred in 2025. See § 58.4501-4(d)(2)(iii). The fair market value of the shares issued is $500x (100 shares × $5x per share = $500x). Accordingly, the issuance is a reduction of $500x in computing Corporation X's stock repurchase excise tax base for its 2025 taxable year. Corporation X is not treated as issuing stock to Individual M when the shares vest in 2028.
(33) Example 33: Forfeiture of restricted stock provided to a service provider with section 83(b) election—(i) Facts. The facts are the same as in paragraph (b)(32)(i) of this section (Example 32), except that Individual M forfeits the 100 shares of restricted stock in 2027 because of a failure to meet the vesting conditions for the stock. At the time of the forfeiture, the fair market value of the 100 shares of stock is $600x (100 shares × $6x per share = $600x).
(ii) Analysis. The analysis regarding the timing and amount of Corporation X's issuance of stock is the same as in paragraph (b)(32)(ii) of this section (Example 32). See § 58.4501-4(d)(2)(iii). However, because Individual M made a valid election under section 83(b) with regard to the stock and the forfeiture resulted from Individual M failing to meet the vesting conditions for the stock, Individual M's forfeiture of the 100 shares of stock to Corporation X is a repurchase by Corporation X. See § 58.4501-2(e)(4)(iii). The stock is treated as repurchased in 2027. See § 58.4501-2(g)(1). The amount of the repurchase by Corporation X equals the fair market value of the stock (that is, $600x) on the date of the repurchase. See § 58.4501-2(h)(1).
(34) Example 34: Vested stock provided to a service provider with share withholding—(i) Facts. Individual N is an employee of Corporation X. In 2025, as compensation for Individual N's services, Corporation X grants Individual N 100 restricted stock units (RSUs). Pursuant to the RSUs, if Individual N remains employed by Corporation X through December 31, 2027, Corporation X will transfer 100 shares of Corporation X stock to Individual N in January 2028. Individual N remains employed by Corporation X through December 31, 2027. In January 2028, when the shares have a fair market value of $5x per share, Corporation X initiates the transfer of 60 shares of Corporation X stock to Individual N and withholds 40 shares to satisfy Corporation X's income tax and employment tax withholding obligations arising from Individual N vesting in the shares.
(ii) Analysis. Corporation X is treated as issuing 60 shares of stock to Individual N when the shares are transferred in 2028. See § 58.4501-4(d)(2)(i). The 40 shares of Corporation X stock withheld to satisfy Corporation X's withholding obligations are disregarded for purposes of the netting rule. See § 58.4501-4(f)(11)(i). The fair market value of the shares issued is $300x (60 shares × $5x per share = $300x). Accordingly, the issuance is a reduction of $300x in computing Corporation X's stock repurchase excise tax base for its 2028 taxable year.
(35) Example 35: Stock option net exercise—(i) Facts. Individual O is an employee of Corporation X. In 2025, in connection with the performance of services, Corporation X transfers to Individual O options to purchase 100 shares of Corporation X stock with an exercise price of $4x per share ($400x exercise price in total). The options are described in § 1.83-7 of this chapter and do not have a readily ascertainable fair market value. Individual O exercises the options to purchase 100 shares in 2026, when the fair market value is $5x per share. Corporation X withholds 80 shares to pay the $400x exercise price (80 shares × $5x per share = $400x).
(ii) Analysis. Corporation X is treated as issuing 20 shares of stock to Individual O when Individual O exercises the options in 2026. See § 58.4501-4(d)(2)(ii). The 80 shares of Corporation X stock withheld to pay the exercise price are disregarded for purposes of the netting rule. See § 58.4501-4(f)(11). The fair market value of the shares issued is $100x (20 shares × $5x per share = $100x). Accordingly, the issuance is a reduction of $100x in computing Corporation X's stock repurchase excise tax base for its 2026 taxable year.
(36) Example 36: Net share settlement not in connection with performance of services—(i) Facts. Corporation X issues a call option to Individual P that entitles Individual P to buy 100 shares of Corporation X stock for $100x ($1x per share) from Corporation X for a limited time. The terms of the option require or permit net share settlement. On the date the option is issued, Corporation X stock is trading at $1x per share. On the date the option is exercised, Corporation X stock is trading at $1.25x per share. To settle the option, Individual P makes no payment to Corporation X, and Corporation X issues 20 shares of Corporation X stock (worth $25x).
(ii) Analysis. Corporation X is treated as issuing 20 shares with a fair market value of $25x. See § 58.4501-4(f)(11).
(37) Example 37: Broker-assisted net exercise—(i) Facts. The facts are the same as in paragraph (b)(35)(i) of this section (Example 35), except that, instead of Corporation X withholding shares to pay the exercise price, a third-party broker pays an amount equal to the exercise price (that is, $400x) to Corporation X. Corporation X transfers 100 shares of Corporation X stock to the third-party broker, which deposits the 100 shares into Individual O's account. The third-party broker then immediately sells 80 shares to recover the $400x exercise price paid to Corporation X (80 shares × $5x per share = $400x).
(ii) Analysis. Corporation X is treated as issuing 100 shares of stock to Individual O when Individual O exercises the options in 2026. See § 58.4501-4(c)(2) and (d)(1)(i). The fair market value of the shares issued is $500x (100 shares × $5x per share = $500x). Accordingly, the issuance is a reduction of $500x in computing Corporation X's stock repurchase excise tax base for its 2026 taxable year.
(38) Example 38: Stock provided by a specified affiliate to an employee—(i) Facts. Individual Q is an employee of Corporation Y, which is a specified affiliate of Corporation X. In 2025, Corporation X transfers 100 shares of its stock to Individual Q, when the stock is valued at $9x per share, in connection with Individual Q's performance of services as an employee of Corporation Y.
(ii) Analysis. Under § 1.83-6(d) of this chapter, Corporation X is treated as contributing the stock to the capital of Corporation Y, which is treated as transferring the shares to Individual Q as compensation for services. Corporation Y is treated as providing 100 shares to Individual Q. See § 58.4501-4(b)(1)(ii) and (f)(2)(iv). The fair market value of the shares provided is $900x (100 shares × $9x per share = $900x). Accordingly, the provision is a reduction of $900x in computing Corporation X's stock repurchase excise tax base for its 2025 taxable year.
(39) Example 39: Stock provided by a specified affiliate to a non-employee—(i) Facts. The facts are the same as in paragraph (b)(38)(i) of this section (Example 38), except that Individual Q provides services as a non-employee service provider of Corporation Y.
(ii) Analysis. The analysis is the same as in paragraph (b)(38)(ii) of this section (Example 38).
(40) Example 40: Corporation treated as a domestic corporation under section 7874(b)—(i) Facts. Corporation FB is a corporation the stock of which is traded on an established securities market (within the meaning of section 7704(b)(1) of the Code) and that is created or organized in a foreign jurisdiction. Corporation FB is treated as a domestic corporation under section 7874(b) of the Code.
(ii) Analysis. Corporation FB is treated for purposes of this title as a domestic corporation under section 7874(b). Corporation FB is a covered corporation because it is treated for purposes of this title as a domestic corporation and its stock is traded on an established securities market. See § 58.4501-1(b)(7).
§ 58.4501-6 - Applicability dates.
(a) In general. Except as provided in paragraph (b) of this section, §§ 58.4501-1 through 58.4501-5 apply to—
(1) Repurchases of stock of a covered corporation occurring after December 31, 2022; and
(2) Issuances and provisions of stock of a covered corporation occurring during taxable years ending after December 31, 2022.
(b) Exceptions—(1) Applicability date for certain rules. Sections 58.4501-2(d), (e)(4)(iii), (f)(2), (h)(2)(v), and (h)(3)(ii), 58.4501-3(g)(3) through (5), 58.4501-4(e)(2)(v), (e)(3)(ii), (f)(2)(ii), (f)(8), (f)(9), and (f)(13) apply to—
(i) Repurchases of stock of a covered corporation occurring after April 12, 2024; and
(ii) Issuances and provisions of stock of a covered corporation occurring after April 12, 2024.
(2) Early application. Provided a covered corporation consistently applies all the rules set forth in paragraph (b)(1) of this section, the covered corporation may choose to apply all the rules set forth in paragraph (b)(1) of this section to—
(i) Repurchases of stock of the covered corporation occurring on or before April 12, 2024, and after December 31, 2022; and
(ii) Issuances and provisions of stock of the covered corporation occurring on or before April 12, 2024, and during taxable years ending after December 31, 2022.
(c) Special rules for acquisitions or repurchases of stock of certain foreign corporations. See § 58.4501-7(p) for applicability dates for the provisions of § 58.4501-7 and the provisions of § 58.4501-1 as applicable to transactions subject to § 58.4501-7.
§ 58.4501-7 - Special rules for acquisitions or repurchases of stock of certain foreign corporations.
(a) Scope. This section provides rules regarding the application of section 4501(d) of the Code. Paragraph (b) of this section provides definitions applicable for purposes of this section. Paragraph (c) of this section provides rules for computing a section 4501(d) covered corporation's section 4501(d) excise tax liability. Paragraph (d) of this section provides certain coordination rules related to section 4501(d)(2). Paragraph (e) of this section provides certain rules for determining the status of a corporation as an applicable foreign corporation or a covered surrogate foreign corporation. Paragraph (f) of this section provides certain rules for determining the status of a corporation or partnership as an applicable specified affiliate of an applicable foreign corporation or a specified affiliate of a covered surrogate foreign corporation. Paragraph (g) of this section provides rules for determining whether a foreign partnership is an applicable specified affiliate. Paragraph (h) of this section defines the term CSFC repurchase. Paragraph (i) of this section is reserved. Paragraph (j) of this section provides rules for determining the date of a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase. Paragraph (k) of this section provides rules for determining the fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation that is repurchased or acquired. Paragraph (l) of this section provides rules regarding the application of certain section 4501(d) exceptions. Paragraph (m) of this section provides rules regarding the section 4501(d) netting rule. Paragraph (n) of this section illustrates the application of the rules of this section through examples involving section 4501(d)(1). Paragraph (o) of this section illustrates the application of the rules of this section through examples involving section 4501(d)(2). Paragraph (p) of this section provides applicability dates for the rules of this section.
(b) Definitions—(1) Application of definitions in § 58.4501-1(b). Any term used in this section but not defined in paragraph (b)(2) of this section has the meaning provided in § 58.4501-1(b), with the following modifications:
(i) For all definitions provided in § 58.4501-1(b) other than those described in paragraph (b)(1)(ii) of this section, any reference in those definitions to a covered corporation is treated as a reference to either a section 4501(d) covered corporation, an applicable foreign corporation, or a covered surrogate foreign corporation, as appropriate based on the context.
(ii) For the definitions of employee and employer-sponsored retirement plan provided in § 58.4501-1(b)(14) and (15), any reference to a covered corporation or its specified affiliates is treated solely as a reference to a section 4501(d) covered corporation.
(2) Section 4501(d) definitions. The definitions in this paragraph (b)(2) apply solely for purposes of this section.
(i) Applicable foreign corporation. The term applicable foreign corporation means any foreign corporation the stock of which is traded on an established securities market.
(ii) Applicable specified affiliate. The term applicable specified affiliate means a specified affiliate of an applicable foreign corporation, other than a foreign corporation or a foreign partnership (unless the partnership has a domestic entity as a direct or indirect partner, as determined under paragraph (g) of this section).
(iii) CSFC repurchase. The term CSFC repurchase has the meaning provided in paragraph (h) of this section.
(iv) Covered surrogate foreign corporation. 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, including any successor to the surrogate foreign corporation (as determined under § 1.7874-12(a)(10) of this chapter), but only with respect to taxable years that include any portion of the applicable period with respect to such corporation under section 7874(d)(1).
(v) Direct partner. The term direct partner has the meaning given the term in paragraph (g)(2)(i) of this section.
(vi) Domestic entity. The term domestic entity means a domestic corporation, a domestic partnership, or a trust within the meaning of section 7701(a)(30)(E) of the Code.
(vii) Expatriated entity. The term expatriated entity has the meaning given the term in section 7874(a)(2)(A) and § 1.7874-12(a)(8) of this chapter, including any successor (as determined under § 1.7874-12(a)(6) of this chapter).
(viii) Indirect partner. The term indirect partner has the meaning given the term in paragraph (g)(2)(ii) of this section.
(ix) Section 4501(d) covered corporation. The term section 4501(d) covered corporation means either—
(A) An applicable specified affiliate of an applicable foreign corporation that is treated as a covered corporation under section 4501(d)(1)(A) by reason of a section 4501(d)(1) repurchase; or
(B) Any expatriated entity with respect to a covered surrogate foreign corporation that is treated as a covered corporation under section 4501(d)(2)(A) by reason of a section 4501(d)(2) repurchase.
(x) Section 4501(d) covered holder. The term section 4501(d) covered holder has the meaning provided in paragraph (m)(7)(v)(B)(3) of this section.
(xi) Section 4501(d) covered non-stock instrument. The term section 4501(d) covered non-stock instrument has the meaning provided in paragraph (m)(7)(v)(B)(2) of this section.
(xii) Section 4501(d) de minimis exception. The term section 4501(d) de minimis exception has the meaning provided in paragraph (c)(2)(i) of this section.
(xiii) Section 4501(d) economically similar transaction. The term section 4501(d) economically similar transaction has the meaning provided in paragraph (h)(4) of this section.
(xiv) Section 4501(d) exception. The term section 4501(d) exception has the meaning provided in paragraph (l)(1) of this section.
(xv) Section 4501(d) excise tax. The term section 4501(d) excise tax has the meaning provided in paragraph (c)(1) of this section.
(xvi) Section 4501(d) excise tax base. The term section 4501(d) excise tax base has the meaning provided in paragraph (c)(3)(i) of this section.
(xvii) Section 4501(d) gross repurchase amount. The term section 4501(d) gross repurchase amount has the meaning provided in paragraph (c)(3)(i)(A) of this section.
(xviii) Section 4501(d) netting rule. The term section 4501(d) netting rule has the meaning provided in paragraph (m)(1) of this section.
(xix) Section 4501(d) non-stock instrument. The term section 4501(d) non-stock instrument has the meaning provided in paragraph (m)(7)(v)(B)(1) of this section.
(xx) Section 4501(d) reorganization exception. The term section 4501(d) reorganization exception has the meaning provided in paragraph (l)(2) of this section.
(xxi) Section 4501(d)(1) repurchase. The term section 4501(d)(1) repurchase means an acquisition of stock of an applicable foreign corporation by an applicable specified affiliate of the applicable foreign corporation from a person other than the applicable foreign corporation or a specified affiliate of the applicable foreign corporation. A section 4501(d)(1) repurchase includes a clawback or forfeiture of stock of an applicable foreign corporation pursuant to a legal or contractual obligation on the date of forfeiture or clawback (as appropriate), but only if the stock was treated in the current or a prior year as issued or provided by the section 4501(d) covered corporation to its employees in accordance with the section 4501(d) netting rule.
(xxii) Section 4501(d)(2) repurchase. The term section 4501(d)(2) repurchase means a CSFC repurchase or an acquisition of stock of a covered surrogate foreign corporation by a specified affiliate of the covered surrogate foreign corporation.
(c) Computation of section 4501(d) excise tax liability for a section 4501(d) covered corporation—(1) Imposition of tax. Except as provided in paragraph (c)(2) of this section (regarding the section 4501(d) de minimis exception), the amount of excise tax imposed pursuant to section 4501(a) on a section 4501(d) covered corporation (section 4501(d) excise tax) for a taxable year equals the product obtained by multiplying—
(i) The applicable percentage; by
(ii) The section 4501(d) excise tax base of the section 4501(d) covered corporation for the taxable year determined in accordance with paragraph (c)(3)(i) of this section.
(2) Section 4501(d) de minimis exception—(i) In general. A section 4501(d) covered corporation is not subject to the section 4501(d) excise tax with regard to a taxable year of the section 4501(d) covered corporation if, during that taxable year, the aggregate fair market value of all section 4501(d)(1) repurchases with respect to all applicable specified affiliates of the applicable foreign corporation or all section 4501(d)(2) repurchases by the covered surrogate foreign corporation and all specified affiliates of the covered surrogate foreign corporation, as applicable, does not exceed $1,000,000 (section 4501(d) de minimis exception).
(ii) Determination. A determination of whether the section 4501(d) de minimis exception applies with regard to a taxable year of a section 4501(d) covered corporation is made before applying—
(A) Any section 4501(d) exception under paragraph (l) of this section; and
(B) Any adjustments pursuant to the section 4501(d) netting rule under paragraph (m) of this section.
(3) Section 4501(d) excise tax base—(i) In general. With regard to a section 4501(d) covered corporation, the term section 4501(d) excise tax base means the dollar amount (not less than zero) that is obtained by—
(A) Determining the aggregate fair market value of, as applicable, all section 4501(d)(1) repurchases or section 4501(d)(2) repurchases during the section 4501(d) covered corporation's taxable year (section 4501(d) gross repurchase amount);
(B) Reducing the section 4501(d) gross repurchase amount by the fair market value of stock repurchased or acquired in all section 4501(d)(1) repurchases or section 4501(d)(2) repurchases, as applicable, during the section 4501(d) covered corporation's taxable year to the extent any section 4501(d) exceptions apply in accordance with paragraph (l) of this section; and then
(C) Further reducing the section 4501(d) gross repurchase amount by the aggregate fair market value of, as applicable, stock of the applicable foreign corporation or stock of the covered surrogate foreign corporation to the extent the section 4501(d) netting rule applies in accordance with paragraph (m) of this section.
(ii) Taxable year determination—(A) In general. The determinations under paragraph (c)(3)(i) of this section are made separately for each section 4501(d) covered corporation and for each taxable year of such section 4501(d) covered corporation.
(B) No carrybacks or carryforwards. Reductions under paragraphs (c)(3)(i)(B) and (C) of this section in excess of the section 4501(d) gross repurchase amount with regard to a section 4501(d) covered corporation may not be carried forward or backward to preceding or succeeding taxable years of the section 4501(d) covered corporation.
(4) Section 4501(d)(1) repurchases or section 4501(d)(2) repurchases before January 1, 2023. Section 4501(d)(1) repurchases and section 4501(d)(2) repurchases before January 1, 2023, are neither included in the section 4501(d) excise tax base of a section 4501(d) covered corporation nor taken into account in determining the applicability of the section 4501(d) de minimis exception.
(d) Section 4501(d)(2) coordination rules—(1) Coordination rule for section 4501(d)(1) repurchases and section 4501(d)(2) repurchases. To the extent any CSFC repurchase or acquisition of stock of a covered surrogate foreign corporation by a specified affiliate of the covered surrogate foreign corporation would be both a section 4501(d)(1) repurchase and a section 4501(d)(2) repurchase absent this paragraph (d)(1), the CSFC repurchase or acquisition will only be a section 4501(d)(2) repurchase.
(2) Coordination rule for multiple section 4501(d) covered corporations—(i) In general. Except as provided in paragraph (d)(2)(ii) of this section, each section 4501(d) covered corporation with respect to a covered surrogate foreign corporation is liable for any section 4501(d) excise tax with respect to section 4501(d)(2) repurchases that occur during a taxable year of the section 4501(d) covered corporation.
(ii) Full payment and reporting by a section 4501(d) covered corporation. If there are multiple section 4501(d) covered corporations with respect to a covered surrogate foreign corporation, then provided that one of those section 4501(d) covered corporations pays the amount of section 4501(d) excise tax determined under paragraph (c)(1) of this section with respect to all section 4501(d)(2) repurchases that occur during the paying section 4501(d) covered corporation's taxable year and fulfills the filing obligations for the taxable year with respect to such section 4501(d)(2) repurchases, no other section 4501(d) covered corporation with respect to the covered surrogate foreign corporation is liable for section 4501(d) excise tax related to such section 4501(d)(2) repurchases.
(e) Status as applicable foreign corporation or covered surrogate foreign corporation—(1) Initiation date. A corporation becomes an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, at the beginning of the corporation's initiation date (that is, the date on which stock of the corporation begins to be traded on an established securities market).
(2) Cessation date. A corporation ceases to be an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, at the end of the corporation's cessation date (that is, the date on which all stock of the corporation ceases to be traded on an established securities market).
(3) Rules regarding F reorganizations—(i) Inbound F reorganization. In the case of a foreign corporation that transfers its assets or that is treated as transferring its assets to a domestic corporation in an F reorganization (as described in § 1.367(b)-2(f) of this chapter), the corporation is not treated as a domestic corporation until the day after the reorganization.
(ii) Outbound F reorganization. In the case of a domestic corporation that transfers its assets or that is treated as transferring its assets to a foreign corporation in an F reorganization (as described in § 1.367(a)-1(e) of this chapter), the corporation is not treated as a foreign corporation until the day after the reorganization.
(iii) Treatment of F reorganizations. For purposes of the stock repurchase excise tax regulations, the transferor corporation and the resulting corporation (each as defined in § 1.368 2(m)(1) of this chapter) in an F reorganization are treated as the same corporation.
(f) Status as an applicable specified affiliate or a specified affiliate of a covered surrogate foreign corporation—(1) Timing of determination. The determination of whether a corporation or partnership is an applicable specified affiliate of an applicable foreign corporation, or a specified affiliate of a covered surrogate foreign corporation, as applicable, is made at the time the stock of the applicable foreign corporation or covered surrogate foreign corporation is acquired or provided by the applicable specified affiliate or a specified affiliate of a covered surrogate foreign corporation, respectively, whenever such determination is relevant for purposes of this section.
(2) Determination of indirect ownership. Except as provided in paragraph (g)(2)(ii)(B) of this section, a corporation or partnership is treated as indirectly owning stock in a corporation or holding capital or profits interests in a partnership equal to the corporation's or partnership's proportionate percentage of stock owned or capital or profits interests held through other entities.
(g) Foreign partnerships that are applicable specified affiliates—(1) In general. A foreign partnership is an applicable specified affiliate of an applicable foreign corporation, if—
(i) More than 50 percent of the capital interests or profits interests of the foreign partnership are held, directly or indirectly, by the applicable foreign corporation; and
(ii) Under the rules described in paragraphs (g)(2) through (5) of this section, at least one domestic entity is a direct or indirect partner with respect to the foreign partnership.
(2) Direct or indirect partner. Except as provided in paragraphs (g)(4) and (5) of this section—
(i) A domestic entity is a direct partner with respect to a foreign partnership if it directly owns an interest in the foreign partnership; and
(ii) A domestic entity is an indirect partner with respect to a foreign partnership if the domestic entity owns an interest in the foreign partnership indirectly through—
(A) One or more other foreign partnerships;
(B) One or more foreign corporations controlled by one or more domestic entities within the meaning of paragraph (g)(3) of this section; or
(C) An ownership chain with one or more entities described in paragraphs (g)(2)(ii)(A) and (B) of this section.
(3) Control of a foreign corporation. For purposes of paragraph (g)(2)(ii)(B) of this section, a foreign corporation is controlled by one or more domestic entities, if more than 50 percent of the total combined voting power of all classes of stock of such corporation entitled to vote or the total value of the stock of such corporation is owned, directly or indirectly, in aggregate, by one or more domestic entities.
(4) Indirect interests held through applicable foreign corporations. Solely for purposes of paragraph (g)(2)(ii) of this section, if an applicable foreign corporation owns, directly or indirectly, stock of a foreign corporation or an interest in a foreign partnership, a domestic entity is not treated as indirectly owning stock of the foreign corporation or an interest in the foreign partnership solely by reason of owning, directly or indirectly, stock of the applicable foreign corporation.
(5) De minimis domestic entity (direct or indirect) partner. A foreign partnership that has one or more domestic entities as direct or indirect partners is not considered an applicable specified affiliate if the domestic entities hold, directly or indirectly, in aggregate, less than 10 percent in each of the capital interests and profits interests in the foreign partnership.
(h) CSFC repurchase—(1) Overview. This paragraph (h) provides rules for determining whether a transaction is a CSFC repurchase for purposes of this section. Paragraph (h)(2) of this section provides a general rule regarding the scope of such term. Paragraph (h)(3) of this section provides an exclusive list of transactions that are section 317(b) redemptions but are not CSFC repurchases. Paragraph (h)(4) of this section provides an exclusive list of transactions that are section 4501(d) economically similar transactions. Paragraph (h)(5) of this section provides a non-exclusive list of transactions that are not CSFC repurchases.
(2) Scope of CSFC repurchases. For purposes of this section, a CSFC repurchase means solely—
(i) A section 317(b) redemption with respect to stock of a covered surrogate foreign corporation, except as provided in paragraph (h)(3) of this section; or
(ii) A section 4501(d) economically similar transaction described in paragraph (h)(4) of this section.
(3) Certain section 317(b) redemptions that are not CSFC repurchases. This paragraph (h)(3) provides an exclusive list of section 317(b) redemptions that are not CSFC repurchases for purposes of the section 4501(d) excise tax.
(i) Section 304(a)(1) transactions. The deemed distribution by an acquiring corporation (within the meaning of section 304(a)(1) of the Code) that is a covered surrogate foreign corporation in redemption of stock of the acquiring corporation (resulting from the application of section 304(a)(1) to an acquisition of stock by such acquiring corporation), regardless of whether section 302(a) or (d) of the Code applies to the acquiring corporation's deemed distribution in redemption of its stock.
(ii) Leveraged buyouts and take-private transactions. A redemption by a covered surrogate foreign corporation that occurs as part of a transaction in which the covered surrogate foreign corporation ceases to be a covered surrogate foreign corporation.
(iii) Stock issued prior to August 16, 2022. A redemption by a covered surrogate foreign corporation of stock of the covered corporation issued prior to August 16, 2022, if, at the time such stock was issued, the stock was subject to—
(A) Mandatory redemption by the covered surrogate foreign corporation; or
(B) A unilateral put option by the holder of such stock.
(iv) Payment by a covered surrogate foreign corporation of cash in lieu of fractional shares. A payment by a covered surrogate foreign corporation of cash in lieu of a fractional share of the stock of the covered surrogate foreign corporation, if—
(A) The payment is carried out as part of a transaction that qualifies as a reorganization under section 368(a) of the Code or a distribution to which section 355 of the Code applies, or pursuant to the settlement of an option or a similar financial instrument (for example, a convertible debt instrument or convertible preferred share);
(B) The cash received by the shareholder entitled to the fractional share is not separately bargained-for consideration (that is, the cash paid by the covered surrogate foreign corporation in lieu of the fractional share represents a mere rounding off of the shares issued in the exchange or settlement);
(C) The payment is carried out solely for administrative convenience (and, therefore, solely for non-tax reasons); and
(D) The amount of cash paid to the shareholder in lieu of a fractional share does not exceed the fair market value of one full share of the class of stock of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, with respect to which the payment of cash in lieu of a fractional share is made.
(4) Section 4501(d) economically similar transactions. This paragraph (h)(4) provides an exclusive list of transactions that are economically similar to section 317(b) redemptions solely for purposes of the section 4501(d) excise tax (each, a section 4501(d) economically similar transaction) and, therefore, are taken into account as CSFC repurchases for purposes of this section.
(i) E reorganizations—(A) In general. Except as provided in paragraph (h)(4)(i)(B) of this section, in the case of an E reorganization in which the recapitalizing corporation is a covered surrogate foreign corporation, solely the recapitalizing corporation's acquisition of its stock pursuant to the plan of reorganization in exchange for property that is not permitted to be received by the recapitalizing corporation's shareholders under section 354 of the Code without the recognition of gain.
(B) Exception. Paragraph (h)(4)(i)(A) of this section does not apply to the extent that—
(1) The distribution of such property is treated as a distribution with respect to the recapitalizing corporation's stock under § 1.301-1(j) of this chapter; or
(2) The exchange is with respect to preferred stock with dividends in arrears and is treated under § 1.305-7(c)(2) or 1.368-2(e)(5) of this chapter as a deemed distribution to which sections 301 and 305(b)(4) of the Code apply.
(ii) Split-offs. In the case of a split-off by a distributing corporation that is a covered surrogate foreign corporation, the acquisition by the distributing corporation of its stock in exchange for property.
(iii) Certain forfeitures and clawbacks of stock—(A) In general. In the case of a forfeiture or clawback of stock of a covered surrogate foreign corporation pursuant to a legal or contractual obligation, the forfeiture or clawback is a section 4501(d)(2) repurchase on the date of forfeiture or clawback (as appropriate) if the stock was treated as issued or provided under paragraph (m)(1) of this section and the forfeiture or clawback of the stock (as appropriate) is described in paragraph (h)(4)(iii)(B) or (C) of this section.
(B) Stock for which a section 83(b) election was made. The stock was subject to a substantial risk of forfeiture within the meaning of section 83(a) of the Code on the date the stock was issued or provided, the service provider made a valid election under section 83(b) with regard to the stock, and the forfeiture resulted from the service provider failing to meet the vesting condition.
(C) Clawbacks. On the date the stock was issued or provided, the stock was subject to a clawback agreement, and a clawback of the stock resulted from the occurrence of an event specified in the clawback agreement.
(5) Transactions that are not CSFC repurchases. This paragraph (h)(5) provides a non-exclusive list of transactions each of which is not a CSFC repurchase for purposes of this section.
(i) Complete liquidations. A distribution by a covered surrogate foreign corporation—
(A) In complete liquidation of the covered surrogate foreign corporation to which section 331 or 332(a) (or both) applies;
(B) Pursuant to a resolution or plan of dissolution of the covered surrogate foreign corporation that is reported on an original (but not a supplemented or an amended) IRS Form 966, Corporate Dissolution or Liquidation (or any successor form); or
(C) Pursuant to a deemed dissolution of the covered surrogate foreign corporation (for instance, pursuant to a deemed liquidation under § 301.7701-3 of this chapter).
(ii) Distributions during taxable year of complete liquidation or dissolution. A distribution by a covered surrogate foreign corporation during a taxable year of the covered surrogate foreign corporation, if the covered surrogate foreign corporation—
(A) Completely liquidates during the taxable year (that is, has a final distribution during the taxable year in a complete liquidation to which section 331 or 332(a) (or both) applies);
(B) Dissolves during the taxable year pursuant to a resolution or plan of dissolution as reported on an original (but not a supplemented or an amended) IRS Form 966, Corporate Dissolution or Liquidation (or any successor form); or
(C) Is deemed to dissolve during the taxable year (for instance, pursuant to a deemed liquidation under § 301.7701-3 of this chapter).
(iii) Divisive transactions under section 355 other than split-offs—(A) In general. Subject to paragraph (h)(5)(iii)(B) of this section, a distribution by a distributing corporation that is a covered surrogate foreign corporation of stock of a controlled corporation qualifying under section 355 that is not a split-off.
(B) Exception regarding non-qualifying property in spin-offs. A distribution by a distributing corporation that is a covered surrogate foreign corporation of other property or money in exchange for stock of the distributing corporation is a repurchase by the distributing corporation if it occurs in pursuance of a transaction qualifying under section 355 in which the distribution by the distributing corporation of stock of the controlled corporation is with respect to stock of the distributing corporation.
(iv) Non-redemptive distributions subject to section 301(c)(2) or (3). A distribution to which section 301 applies by a covered surrogate foreign corporation to a distributee, if the distribution—
(A) Is subject to section 301(c)(2) or (3); and
(B) The distributee does not exchange stock of the covered surrogate foreign corporation (and is not treated as exchanging stock of the covered surrogate foreign corporation for Federal income tax purposes).
(v) Acquisitive reorganizations. In the case of an acquisitive reorganization in which the target corporation is a covered surrogate foreign corporation, the acquisition by the target corporation of its stock pursuant to the plan of reorganization in exchange for property that is received by the target corporation's shareholders under section 354 or 356 of the Code.
(vi) Net cash settlement of an option contract—(A) In general. Subject to paragraph (h)(5)(vi)(B) of this section, the net cash settlement of an option contract or other derivative financial instrument with respect to stock of a covered surrogate foreign corporation.
(B) Exception regarding net cash settlement of an option contract or other derivative financial instrument treated as stock. The net cash settlement of an instrument in the legal form of an option contract or other derivative financial instrument that is treated as stock of a covered surrogate foreign corporation for Federal tax purposes at the time of issuance is a repurchase.
(i) [Reserved]
(j) Date of section 4501(d)(1) repurchase or section 4501(d)(2) repurchase—(1) General rule. In general, stock of an applicable foreign corporation or a covered surrogate foreign corporation is treated as acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase, as applicable, on the date on which ownership of the stock transfers to the specified affiliate of the applicable foreign corporation, the specified affiliate of the covered surrogate foreign corporation, or the covered surrogate foreign corporation, as applicable, for Federal income tax purposes.
(2) Regular-way sale. A regular-way sale of stock of an applicable foreign corporation or a covered surrogate foreign corporation (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 period of time, as set by a regulator, after the trade date) is treated as acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase, as applicable, on the trade date.
(k) Fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation that is repurchased or acquired—(1) In general. The fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase is the market price of the stock on the date of the section 4501(d)(1) repurchase or the section 4501(d)(2) repurchase (as determined under paragraph (j) of this section). That is, if the price at which the repurchased or acquired stock is purchased differs from the market price of the stock on the date the stock is repurchased or acquired, the fair market value of the stock is the market price on the date the stock is repurchased or acquired.
(2) Stock traded on an established securities market—(i) In general. If stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is acquired in a section 4501(d)(1) repurchase a or section 4501(d)(2) repurchase with respect to a section 4501(d) covered corporation is traded on an established securities market, the section 4501(d) covered corporation must determine the market price of the stock by applying one of the methods provided in paragraph (k)(2)(ii) of this section. For purposes of this paragraph (k)(2), stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is treated as traded on an established securities market if any stock of the same class and issue of stock is so traded, regardless of whether the shares repurchased or acquired are so traded.
(ii) Acceptable methods. The following are acceptable methods for determining the market price of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, traded on an established securities market:
(A) The daily volume-weighted average price as determined on the date the stock is acquired in a section 4501(d)(1) repurchase or section 4501(d)(2) repurchase.
(B) The closing price on the date the stock is acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase.
(C) The average of the high and low prices on the date the stock is acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase.
(D) The trading price at the time the stock is acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase.
(iii) Date of section 4501(d)(1) repurchase or section 4501(d)(2) repurchase not a trading day. For purposes of each method provided in paragraph (k)(2)(ii) of this section, if the date stock is acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase is not a trading day, the date on which the market price is determined is the immediately preceding trading day.
(iv) Consistency requirement. The market price of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is traded on an established securities market must be determined by consistently applying one (but not more than one) of the methods provided in paragraph (k)(2)(ii) of this section to all section 4501(d)(1) repurchases with respect to an applicable foreign corporation or all section 4501(d)(2) repurchases with respect to a covered surrogate foreign corporation, as applicable, in the same taxable year of the applicable foreign corporation or covered surrogate foreign corporation, as applicable (which, if the applicable foreign corporation or covered surrogate foreign corporation, as applicable, does not have a taxable year for Federal tax purposes, is the calendar year).
(v) Stock traded on multiple exchanges—(A) In general. A section 4501(d) covered corporation must determine the market price of the stock of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, by reference to trading on the established securities market in the country in which the applicable foreign corporation or covered surrogate foreign corporation, as applicable, is organized, including a regional established securities market that trades in that country.
(B) Stock traded on multiple exchanges in country where corporation is organized. If the stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is traded on multiple established securities markets in the country in which the applicable foreign corporation or covered surrogate foreign corporation, as applicable, is organized, a section 4501(d) covered corporation must determine the market price of the stock by reference to trading on the established securities market in that country with the highest trading volume in the stock of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, in the section 4501(d) covered corporation's prior taxable year.
(C) Other cases in which stock is traded on multiple exchanges. If stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is traded on multiple established securities markets and neither paragraph (k)(2)(v)(A) nor (B) of this section applies, a section 4501(d) covered corporation must determine the market price of the stock of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, in a manner that is reasonable and consistent under the facts and circumstances.
(3) Stock not traded on an established securities market—(i) General rule. If stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is not traded on an established securities market, the market price of the stock is determined as of the date the stock is acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase under the principles of § 1.409A-1(b)(5)(iv)(B)(1) of this chapter.
(ii) Consistency requirement. The valuation method for determining the market price of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is not traded on an established securities market must be used for all section 4501(d)(1) repurchases with respect to the same class of stock of an applicable foreign corporation or all section 4501(d)(2) repurchases with respect to the same class of stock of a covered surrogate foreign corporation, as applicable, in the same taxable year of the applicable foreign corporation or covered surrogate foreign corporation, as applicable (which, if the applicable foreign corporation or covered surrogate foreign corporation, as applicable, does not have a taxable year for Federal tax purposes, is the calendar year), unless the application of that method to a particular section 4501(d)(1) repurchase or a particular section 4501(d)(2) repurchase would be unreasonable under the facts and circumstances as of the valuation date within the meaning of § 1.409A-1(b)(5)(iv)(B)(1) of this chapter.
(4) Market price of stock denominated in non-U.S. currency. The market price of any stock of an applicable foreign corporation or a covered surrogate foreign corporation that is denominated in a currency other than the U.S. dollar is converted into U.S. dollars at the spot rate (as defined in § 1.988-1(d)(1) of this chapter) on the date the stock is acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase.
(l) Section 4501(d) exceptions—(1) In general—(i) Overview. This paragraph (l) provides rules regarding the application of each exception set forth in section 4501(e) (other than the section 4501(d) de minimis exception) and an additional exception applicable to certain investment companies (each, a section 4501(d) exception) to a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase.
(ii) Reduction of section 4501(d) excise tax base. For purposes of determining a section 4501(d) covered corporation's section 4501(d) stock repurchase excise tax base under paragraph (c)(3) of this section, the section 4501(d) covered corporation reduces its section 4501(d) gross repurchase amount by an amount equal to the aggregate fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that qualifies for an exception described in this paragraph (l). See paragraph (c)(3)(i)(B) of this section.
(iii) Coordination of exceptions. If a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase qualifies for more than one exception described in paragraphs (l)(2) through (7) of this section, the section 4501(d) covered corporation may reduce its gross repurchase amount under solely a single exception, as determined by the section 4501(d) covered corporation.
(2) Section 4501(d) reorganization exception. A section 4501(d) covered corporation reduces its section 4501(d) gross repurchase amount under paragraph (c)(3)(i)(B) of this section by an amount equal to the aggregate fair market value of a covered surrogate foreign corporation's stock repurchased from a shareholder in a CSFC repurchase described in paragraph (h)(4)(i) or (ii) of this section to the extent that the repurchase is for property permitted by section 355 to be received without the recognition of gain or loss on that CSFC repurchase (section 4501(d) reorganization exception).
(3) Stock contributions to an employer-sponsored retirement plan—(i) Reductions to section 4501(d) excise tax base—(A) General rule. A section 4501(d) covered corporation reduces its section 4501(d) gross repurchase amount under paragraph (c)(3)(i)(B) of this section if the stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, that is repurchased or acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase, as applicable, or an amount of stock equal to the fair market value of the stock repurchased or acquired, is contributed to an employer-sponsored retirement plan of the section 4501(d) covered corporation.
(B) Special rule for leveraged ESOPs. If a section 4501(d) covered corporation maintains an ESOP with an exempt loan (as described in section 4975(d)(3) of the Code), allocations of qualifying employer securities that are stock of the applicable foreign corporation or covered surrogate foreign corporation from the ESOP suspense account to ESOP participants' accounts that are attributable to employer contributions (and not to dividends) are treated as contributions of stock under this paragraph (l)(3) as of the date stock attributable to repayment of the exempt loan is released from the suspense account and allocated to ESOP participants' accounts.
(ii) Classes of stock contributed to an employer-sponsored retirement plan. This paragraph (l)(3) applies to contributions of any class of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, to an employer-sponsored retirement plan of the section 4501(d) covered corporation, regardless of the class of stock that was repurchased or acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase by the section 4501(d) covered corporation.
(iii) Determining amount of reduction to section 4501(d) excise tax base. The amount of the reduction under paragraph (l)(3)(i) of this section for a section 4501(d) covered corporation is determined as provided in paragraph (l)(3)(iii)(A) or (B) of this section.
(A) Same class of stock repurchased and contributed. If stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is repurchased or acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase, as applicable, and stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, that is of the same class is contributed to an employer-sponsored retirement plan of the section 4501(d) covered corporation, the amount of the reduction under paragraph (l)(3)(i) of this section is equal to the lesser of—
(1) The aggregate fair market value of the stock of the same class that was repurchased or acquired (as determined under paragraph (k) of this section) during the section 4501(d) covered corporation's taxable year; or
(2) The amount obtained by—
(i) Determining the aggregate fair market value of all stock of that class repurchased or acquired (as determined under paragraph (k) of this section) in all section 4501(d)(1) repurchases or section 4501(d)(2) repurchases, as applicable, during the section 4501(d) covered corporation's taxable year, reduced by the fair market value of shares of that class of stock that is a reduction to the section 4501(d) excise tax base for the taxable year under a section 4501(d) exception other than this paragraph (l)(3);
(ii) Dividing the amount determined under paragraph (l)(3)(iii)(A)(2)(i) of this section by the number of shares of that class repurchased or acquired in all section 4501(d)(1) repurchases or section 4501(d)(2) repurchases, as applicable, during the section 4501(d) covered corporation's taxable year, reduced by the number of shares of that class of stock the fair market value of which is a reduction to the section 4501(d) excise tax base for the taxable year under a section 4501(d) exception other than this paragraph (l)(3); and
(iii) Multiplying the amount determined under paragraph (l)(3)(iii)(A)(2)(ii) of this section by the number of shares of that class contributed to an employer-sponsored retirement plan of the section 4501(d) covered corporation for the taxable year.
(B) Different class of stock repurchased and contributed—(1) In general. Subject to paragraph (l)(3)(iii)(B)(2) of this section, if stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, of a different class of stock than is repurchased or acquired in a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase, as applicable, with respect to a section 4501(d) covered corporation is contributed to an employer-sponsored retirement plan of the section 4501(d) covered corporation, then the amount of the reduction under paragraph (l)(3)(i) of this section is equal to the fair market value of the contributed stock at the time the stock is contributed to the employer-sponsored retirement plan.
(2) Maximum reduction permitted. The amount of the reduction under paragraph (l)(3)(iii)(B)(1) of this section may not exceed the section 4501(d) excise tax base for the taxable year (determined without regard to any reduction under paragraph (l)(3)(i) of this section).
(iv) Timing of contributions—(A) In general. The reduction under paragraph (l)(3)(i) of this section (that is, the reduction in the section 4501(d) excise tax base), for a taxable year applies to contributions of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, to an employer-sponsored retirement plan during the section 4501(d) covered corporation's taxable year.
(B) Treatment of contributions after close of taxable year. For purposes of paragraph (l)(3)(iv)(A) of this section, a section 4501(d) covered corporation may treat stock contributions to an employer-sponsored retirement plan made after the close of the section 4501(d) covered corporation's taxable year as having been contributed during that taxable year if the following two requirements are satisfied:
(1) The stock must be contributed to the employer-sponsored retirement plan by the filing deadline for the form on which the section 4501(d) excise tax must be reported (applicable form) for that taxable year of the section 4501(d) covered corporation.
(2) The stock must be treated by the employer-sponsored retirement plan in the same manner that the plan would treat a contribution received on the last day of that taxable year of the section 4501(d) covered corporation.
(C) No duplicate reductions. Stock contributions that are treated under paragraph (l)(3)(iv)(B) of this section as having been contributed in the taxable year to which the applicable form applies may not be treated as having been contributed for any other taxable year for purposes of the section 4501(d) excise tax.
(v) Contributions before January 1, 2023. A section 4501(d) covered corporation with a taxable year that both begins before January 1, 2023, and ends after December 31, 2022, may include for that taxable year the fair market value of all contributions of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, to an employer-sponsored retirement plan during the entirety of that taxable year for purposes of applying this paragraph (l)(3).
(4) Repurchases or acquisitions by a dealer in securities in the ordinary course of business—(i) In general. Subject to paragraph (l)(4)(ii) of this section, a section 4501(d) covered corporation reduces its section 4501(d) gross repurchase amount under paragraph (c)(3)(i)(B) of this section by an amount equal to the aggregate fair market value of stock acquired in a section 4501(d)(1) repurchase or in a section 4501(d)(2) repurchase if the repurchasing or acquiring entity is a dealer in securities (within the meaning of section 475(c)(1) of the Code) to the extent the stock is repurchased or acquired in the ordinary course of the dealer's business of dealing in securities.
(ii) Applicability. The reduction described in paragraph (l)(4)(i) of this section applies solely to the extent that—
(A) The dealer accounts for the stock as securities held primarily for sale to customers in the dealer's ordinary course of business;
(B) The dealer disposes of the stock within a period of time that is consistent with the holding of the stock for sale to customers in the dealer's ordinary course of business, taking into account the terms of the stock and the conditions and practices prevailing in the markets for similar stock during the period in which the stock is held; and
(C) The dealer (if it is a covered surrogate foreign corporation) does not sell or otherwise transfer the stock to a specified affiliate of the covered surrogate foreign corporation or the dealer (if it is a specified affiliate of an applicable foreign corporation or of a covered surrogate foreign corporation, as applicable) does not sell or otherwise transfer the stock to the applicable foreign corporation, covered surrogate foreign corporation, or to another specified affiliate of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, in each case other than in a sale or transfer to a dealer that also satisfies the requirements of this paragraph (l)(4)(ii).
(5) Repurchases by a RIC or REIT. Section 4501(e)(5) does not apply for purposes of section 4501(d).
(6) CSFC repurchase treated as a dividend—(i) In general. A section 4501(d) covered corporation reduces its section 4501(d) gross repurchase amount under paragraph (c)(3)(i)(B) of this section by an amount equal to the aggregate fair market value of stock of a covered surrogate foreign corporation repurchased by the covered surrogate foreign corporation in a CSFC repurchase to the extent the CSFC repurchase is treated as a distribution of a dividend under section 301(c)(1) or 356(a)(2).
(ii) Rebuttable presumption of no dividend equivalence—(A) Presumption. A CSFC repurchase to which section 302 or 356(a) applies is presumed to be subject to section 302(a) or 356(a)(1), respectively (and, therefore, is presumed ineligible for the exception in paragraph (l)(6)(i) of this section).
(B) Rebuttal of presumption. A section 4501(d) covered corporation may rebut the presumption described in paragraph (l)(6)(ii)(A) of this section with regard to a specific shareholder of the covered surrogate foreign corporation solely by establishing with sufficient evidence that the covered surrogate foreign corporation and the shareholder treat the CSFC repurchase as a dividend for Federal income tax purposes.
(iii) Sufficient evidence requirement—(A) In general. To provide sufficient evidence under paragraph (l)(6)(ii)(B) of this section to establish that the covered surrogate foreign corporation and the shareholder treat the CSFC repurchase as a dividend for Federal income tax purposes, the section 4501(d) covered corporation must—
(1) Establish, based on information known to the section 4501(d) covered corporation (for example, through legal documentation of share ownership, publicly available information, the pro rata nature of the repurchase, or the shareholder certification safe harbor described in paragraph (l)(6)(iii)(B) of this section), that—
(i) The CSFC repurchase either constitutes a redemption that is treated as a distribution to which section 301 applies by reason of section 302(d) or has the effect of the distribution of a dividend under section 356(a)(2); and
(ii) The section 4501(d) covered corporation has no knowledge of facts that would indicate that the treatment described in paragraph (l)(6)(iii)(A)(1)(i) of this section is incorrect;
(2) Treat the CSFC repurchase consistent with the treatment described in paragraph (l)(6)(iii)(A)(1)(i) of this section, including by withholding the applicable amounts, if required; and
(3) Demonstrate sufficient earnings and profits to treat as a dividend either the redemption under section 302 or the receipt of money or other property under section 356.
(B) Shareholder certification safe harbor. To provide sufficient evidence under paragraph (l)(6)(iii)(A) of this section to establish that the shareholder treats the repurchase as a dividend for Federal income tax purposes, the section 4501(d) covered corporation—
(1) May obtain certification from the shareholder, in accordance with § 58.4501-3(g)(3)(ii), that the repurchase constitutes a redemption treated as a distribution to which section 301 applies by reason of section 302(d), or that the repurchase has the effect of the distribution of a dividend under section 356(a)(2), including evidence that applicable withholding occurred if required; and
(2) Must have no knowledge of facts that would indicate that the shareholder certification is incorrect.
(iv) Documentation of sufficient evidence—(A) Retention and availability of evidence. A section 4501(d) covered corporation must retain the evidence described in paragraph (l)(6)(iii) of this section and make that evidence available for inspection to the IRS if any of the evidence becomes material in the administration of any internal revenue law.
(B) Retention of supporting records. The section 4501(d) covered corporation must retain records of all information necessary to document and substantiate all content described in paragraph (l)(6)(iii) of this section.
(7) Repurchases by a non-RIC '40 Act fund. The exception for repurchases by a non-RIC '40 Act fund under § 58.4501-3(h) does not apply for purposes of section 4501(d).
(m) Application of section 4501(d) netting rule—(1) In general. This paragraph (m) provides the section 4501(d) netting rule, under which the section 4501(d) excise tax base with respect to a section 4501(d) covered corporation for a taxable year is reduced only by stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, issued or provided by the section 4501(d) covered corporation to its employees during its taxable year. Any reference in this paragraph (m) to issuing or providing stock to an employee refers solely to stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, that is issued or provided by a section 4501(d) covered corporation to an employee in connection with the employee's performance of services in the employee's capacity as an employee of the section 4501(d) covered corporation. The fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is described in this paragraph (m) is a reduction for purposes of computing the section 4501(d) covered corporation's section 4501(d) excise tax base. See paragraph (c)(3)(i)(C) of this section.
(2) Stock issued or provided outside period of applicable foreign corporation or covered surrogate foreign corporation status. Any stock issued or provided prior to the initiation date or after the cessation date of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, is not taken into account under paragraph (m)(1) of this section. See paragraph (e)(1) of this section (determination of initiation date and cessation date).
(3) Issuances or provisions before January 1, 2023. Except as provided in paragraph (m)(2) of this section, a section 4501(d) covered corporation with a taxable year that both begins before January 1, 2023, and ends after December 31, 2022, must include the fair market value of all issuances or provisions of stock during the entirety of that taxable year for purposes of applying paragraph (m)(1) of this section for that taxable year.
(4) Stock issued or provided in connection with the performance of services—(i) In general. For purposes of this paragraph (m), stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is transferred by the section 4501(d) covered corporation in connection with the performance of services only if the transfer is described in section 83, including pursuant to the exercise of a nonqualified stock option described in § 1.83-7 of this chapter, or is pursuant to the exercise of a stock option described in section 421 of the Code.
(ii) Sale of shares to cover exercise price or withholding—(A) Payment or advance by third party equal to exercise price. If a third party pays the exercise price of an option to acquire stock of a covered corporation on behalf of an employee or advances to an employee an amount equal to the exercise price of a stock option that the employee uses to exercise the option, then any stock transferred by the section 4501(d) covered corporation to the third party in connection with exercising the option (as well as any stock transferred by the covered corporation or specified affiliate to the employee) is treated as issued or provided in connection with the performance of the services by the employee.
(B) Advance by third party equal to withholding obligation. If a third party advances an amount equal to the withholding obligation of an employee, then any stock transferred by the section 4501(d) covered corporation to the third party (as well as any stock transferred by the covered corporation or specified affiliate to the employee) in connection with this arrangement is treated as issued or provided in connection with the performance of services by the employee.
(5) Date of issuance or provision for section 4501(d) netting rule—(i) In general. Stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is issued or provided to an employee of a section 4501(d) covered corporation as of the date the employee is treated as the beneficial owner of the stock for Federal income tax purposes. In general, an employee is treated as the beneficial owner of the stock when the stock is both transferred by the section 4501(d) covered corporation and substantially vested within the meaning of § 1.83-3(b) of this chapter. Thus, stock transferred pursuant to a vested stock award or a restricted stock unit is issued or provided when the section 4501(d) covered corporation initiates payment of the stock. Stock transferred that is not substantially vested within the meaning of § 1.83-3(b) of this chapter is not issued or provided until it vests, except as provided in paragraph (m)(5)(iii) of this section.
(ii) Stock options and stock appreciation rights. Stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, transferred by a section 4501(d) covered corporation pursuant to an option described in § 1.83-7 of this chapter or section 421 or a stock appreciation right is issued or provided by the section 4501(d) covered corporation as of the date the option or stock appreciation right is exercised.
(iii) Stock on which a section 83(b) election is made. Stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, transferred by the section 4501(d) covered corporation when it is not substantially vested within the meaning of § 1.83-3(b) of this chapter, but as to which a valid election under section 83(b) is made, is treated as issued or provided by the section 4501(d) covered corporation as of the transfer date.
(6) Fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation that is issued or provided to employees—(i) In general. For purposes of paragraph (m)(1) of this section, the fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is issued or provided is determined under section 83 as of the date the stock is issued or provided to an employee by the section 4501(d) covered corporation. The fair market value of the stock is determined under the rules provided in section 83 regardless of whether an amount is includible in the employee's income under section 83 or otherwise. For example, the fair market value of stock issued or provided by a section 4501(d) covered corporation to its employee pursuant to a stock option described in section 421 and stock issued or provided by a section 4501(d) covered corporation to an employee who is a nonresident alien for services performed outside of the United States is determined using the rules provided in section 83.
(ii) Market price of stock denominated in non-U.S. currency. The market price of any stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is denominated in a currency other than the U.S. dollar is converted into U.S. dollars at the spot rate (as defined in § 1.988-1(d)(1) of this chapter) on the date the stock is issued or provided by the section 4501(d) covered corporation to its employee.
(7) Issuances that are disregarded for purposes of applying the section 4501(d) netting rule—(i) In general. This paragraph (m)(7) lists the sole circumstances in which an issuance or provision of stock by the section 4501(d) covered corporation to its employee is disregarded for purposes of this paragraph (m). The transfers of stock described in § 58.4501-4(f)(1) through (9) are not issuances or provisions of stock by a section 4501(d) covered corporation to its employees and therefore are not relevant to the section 4501(d) netting rule.
(ii) Stock contributions to an employer-sponsored retirement plan. Any stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, contributed to an employer-sponsored retirement plan of the section 4501(d) covered corporation, any stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, treated as contributed to an employer-sponsored retirement plan of the section 4501(d) covered corporation under paragraph (l)(3) of this section, and any stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, sold to a leveraged or non-leveraged ESOP, is disregarded for purposes of this paragraph (m).
(iii) Net exercises and share withholding. Stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, withheld by a section 4501(d) covered corporation to satisfy the exercise price of a stock option issued to an employee, or to pay any withholding obligation, is disregarded for purposes of this paragraph (m). For example, stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, withheld by a section 4501(d) covered corporation to pay the exercise price of a stock option, to satisfy an employer's income tax withholding obligation under section 3402 of the Code, to satisfy an employer's withholding obligation under section 3102 of the Code, or to satisfy an employer's withholding obligation for State, local, or foreign taxes, is disregarded for purposes of this paragraph (m).
(iv) Settlement other than in stock. Settlement of an option contract with respect to stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, using any consideration other than stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, (including cash) is disregarded for purposes of this paragraph (m).
(v) Instrument not in the legal form of stock—(A) Issuance or provision of section 4501(d) covered non-stock instrument generally disregarded. Except as provided in paragraph (m)(7)(v)(C) or (D) of this section, the issuance or provision by a section 4501(d) covered corporation of a section 4501(d) covered non-stock instrument (as defined in paragraph (m)(7)(v)(B)(2) of this section, including an issuance or provision before the initiation date or after the cessation date, is disregarded for purposes of the section 4501(d) netting rule.
(B) Definitions. The following definitions apply for purposes of this paragraph (m)(7)(v).
(1) Section 4501(d) non-stock instrument. A section 4501(d) non-stock instrument is an instrument of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is not in the legal form of stock but that is treated as stock for Federal tax purposes. For the avoidance of doubt, in the case of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is an eligible entity with the meaning of § 301.7701-3(a) of this chapter, a section 4501(d) non-stock instrument does not include an instrument that is in the legal form of membership, partnership, or other ownership interests of the eligible entity.
(2) Section 4501(d) covered non-stock instrument. A section 4501(d) covered non-stock instrument is a section 4501(d) non-stock instrument issued or provided by a section 4501(d) covered corporation to a section 4501(d) covered holder.
(3) Section 4501(d) covered holder. A section 4501(d) covered holder is any person that owns (or under the attribution rules of section 318 of the Code is considered to own) at least 10 percent of the stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, either by vote or value, but only if the section 4501(d) covered corporation has knowledge of facts that would indicate such ownership, including through legal documentation of share ownership, publicly available information, or any other means at the time of the issuance or provision of the section 4501(d) non-stock instrument by the section 4501(d) covered corporation.
(C) Certain instruments treated as issued when repurchased—(1) In general. Subject to the identification requirement in paragraph (m)(7)(v)(C)(2) of this section, if a section 4501(d) covered non-stock instrument is repurchased by a section 4501(d) covered corporation, the issuance or provision of the instrument is regarded for purposes of the section 4501(d) netting rule at the time of such repurchase based on the fair market value of the instrument when the instrument was issued or provided. Such fair market value is determined under paragraph (m)(6) of this section. For purposes of the section 4501(d) excise tax, the delivery of stock pursuant to the terms of a section 4501(d) covered non-stock instrument is treated as a repurchase of the section 4501(d) covered non-stock instrument in exchange for an issuance or provision of the stock that is delivered.
(2) Identification of an instrument not in the legal form of stock. The issuance or provision of a section 4501(d) covered non-stock instrument is regarded under paragraph (m)(7)(v)(C)(1) of this section only if the section 4501(d) covered corporation identifies the section 4501(d)(1) repurchase or the section 4501(d)(2) repurchase, as applicable, of the section 4501(d) covered non-stock instrument on the return on which the section 4501(d) excise tax must be reported for the section 4501(d) covered corporation's taxable year in which the section 4501(d)(1) repurchase or the section 4501(d)(2) repurchase, as applicable, occurs.
(D) Issuances pursuant to a public offering. Paragraph (m)(7)(v)(A) of this section does not apply to any issuance or provision of a section 4501(d) covered non-stock instrument the offer and sale of which was registered with the SEC.
(n) Section 4501(d)(1) examples. The following examples illustrate the application of the rules in this section relating to section 4501(d)(1). For purposes of the following examples, unless otherwise stated: Corporation FZ is an applicable foreign corporation; each entity has a calendar taxable year, has no direct or indirect owner that is a domestic entity, and is not related to any other entity; each corporation's only outstanding stock for Federal tax purposes is a single class of common stock; the functional currency (within the meaning of section 985 of the Code) of any entity is the U.S. dollar; any acquisition of the stock of an applicable foreign corporation is from a person who is not the applicable foreign corporation or a specified affiliate of the applicable foreign corporation; no stock is transferred to any employee; for examples that expressly provide that stock is transferred to any employee, such transfer is made in connection with the employee's performance of services in its capacity as an employee of the transferor, and the employee is treated as the beneficial owner of the stock for Federal income tax purposes on the date of the transfer; and the section 4501(d) exceptions are inapplicable.
(1) Example 1: Section 4501(d) netting rule with respect to a single applicable specified affiliate—(i) Facts. Corporation FZ owns all the outstanding stock of Corporation US1, a domestic corporation. Each of Employee M and Employee P is an employee of Corporation US1. On February 1, 2025, Corporation US1 purchases 100 shares of stock of Corporation FZ when the market price of each share is $8x. On May 15, 2025, Corporation US1 transfers to Employee M 50 shares of stock of Corporation FZ when the fair market value of each share is $5x. On November 1, 2025, Corporation US1 transfers to Employee P 30 shares of stock of Corporation US1 when the fair market value of each share is $9x.
(ii) Analysis. Corporation US1 is an applicable specified affiliate. See paragraph (b)(2)(ii) of this section. Corporation US1's purchase of 100 shares of stock of Corporation FZ on February 1, 2025, is a section 4501(d)(1) repurchase. See paragraph (b)(2)(xxi) of this section. Corporation US1 is a section 4501(d) covered corporation with respect to the section 4501(d)(1) repurchase. See paragraph (b)(2)(ix)(A) of this section. For purposes of computing Corporation US1's section 4501(d) excise tax base for its 2025 taxable year, the fair market value of the 100 shares of stock of Corporation FZ subject to the section 4501(d)(1) repurchase is $800x. See paragraph (k)(1) of this section. Accordingly, the section 4501(d)(1) repurchase increases Corporation US1's section 4501(d) excise tax base for the 2025 taxable year by $800x. 50 shares of Corporation FZ stock are treated as issued or provided to Employee M on May 15, 2025. See paragraph (m)(5) of this section. Therefore, Corporation US1's section 4501(d) excise tax base for its 2025 taxable year is reduced by $250x (50 shares × $5x per share = $250x). See paragraph (c)(3)(i)(C) of this section. Corporation US1's section 4501(d) excise tax base for its 2025 taxable year is not reduced by the transfer of stock of Corporation US1 to Employee P because the section 4501(d) excise tax base with respect to Corporation US1 can only be reduced by the fair market value of stock of Corporation FZ issued or provided by Corporation US1 to employees of Corporation US1. See paragraph (m) of this section. Accordingly, Corporation US1's section 4501(d) excise tax base with respect to these transactions for its 2025 taxable year is $550x ($800x repurchase − $250x issuance = $550x).
(2) Example 2: Section 4501(d) netting rule with respect to multiple applicable specified affiliates—(i) Facts. Corporation FZ owns all the outstanding stock of both Corporation US1, a domestic corporation, and Corporation US2, a domestic corporation. Employee T is an employee of Corporation US2. On February 1, 2025, Corporation US1 purchases 100 shares of stock of Corporation FZ when the market price of each share is $8x. On May 15, 2025, Corporation US2 transfers to Employee T 50 shares of stock of Corporation FZ when the fair market value of each share is $5x.
(ii) Analysis. Corporation US1 is an applicable specified affiliate. See paragraph (b)(2)(ii) of this section. Corporation US1's purchase of 100 shares of stock of Corporation FZ on February 1, 2025, is a section 4501(d)(1) repurchase. See paragraph (b)(2)(xxi) of this section. Corporation US1 is a section 4501(d) covered corporation with respect to the section 4501(d)(1) repurchase. See paragraph (b)(2)(ix)(A) of this section. For purposes of computing Corporation US1's section 4501(d) excise tax base for its 2025 taxable year, the fair market value of the 100 shares of stock of Corporation FZ subject to the section 4501(d)(1) repurchase is $800x. See paragraph (k)(1) of this section. Accordingly, the section 4501(d)(1) repurchase increases Corporation US1's section 4501(d) excise tax base for the 2025 taxable year by $800x. Corporation US1's section 4501(d) excise tax base for its 2025 taxable year is not reduced by the transfer of stock of Corporation FZ to Employee T, an employee of Corporation US2, because the section 4501(d) excise tax base with respect to Corporation US1 can only be reduced by the fair market value of stock of Corporation FZ issued or provided by Corporation US1 to employees of Corporation US1. See paragraph (m) of this section. Because there is no section 4501(d) repurchase by Corporation US2, the section 4501(d) netting rule does not apply to Corporation US2's transfer of 50 shares of stock of Corporation FZ to Employee T.
(3) Example 3: Foreign partnership that is an applicable specified affiliate—(i) Facts. Partnership FP is a foreign partnership in which Corporation FZ, Corporation FB, a foreign corporation, and Corporation US1, a domestic corporation, are partners. Corporation FZ owns 70 percent of the capital interests and profits interests of Partnership FP; Corporation FB owns 20 percent of the capital interests and profits interests of Partnership FP; and Corporation US1 owns 10 percent of the capital interests and profits interests of Partnership FP. On March 1, 2024, Partnership FP purchases 100 shares of stock of Corporation FZ when the market price of each share is $8x.
(ii) Analysis. Corporation US1 is a domestic entity. See paragraph (b)(2)(vi) of this section. Corporation US1 is a direct partner with respect to Partnership FP for purposes of section 4501(d)(1) because Corporation US1 directly owns an interest in Partnership FP and is not a de minimis domestic entity partner with respect to Partnership FP. See paragraphs (g)(2)(i) and (g)(5) of this section. Accordingly, Partnership FP is an applicable specified affiliate of Corporation FZ because Corporation FZ owns more than 50 percent of the capital interests or profits interests of Partnership FP, and Corporation US1, a domestic entity, is a direct partner of Partnership FP. See paragraph (g)(1) of this section. Consequently, Partnership FP's purchase of 100 shares of stock of Corporation FZ is a section 4501(d)(1) repurchase. See paragraph (b)(2)(xxi) of this section. Partnership FP is a section 4501(d) covered corporation with respect to the section 4501(d)(1) repurchase. See paragraph (b)(2)(ix)(A) of this section. For purposes of computing Partnership FP's section 4501(d) excise tax base, the fair market value of the 100 shares of stock of Corporation FZ subject to the section 4501(d)(1) repurchase is $800x. See paragraph (k)(1) of this section. Accordingly, the section 4501(d)(1) repurchase increases Partnership FP's section 4501(d) excise tax base for the 2024 taxable year by $800x. See paragraph (c)(3)(i) of this section.
(4) Example 4: Foreign partnership that is not an applicable specified affiliate—(i) Facts. The facts are the same as in paragraph (n)(3)(i) of this section (Example 3), except that Corporation FZ owns 76 percent of the capital interests and profits interests of Partnership FP; Corporation FB owns 20 percent of the capital interests and profits interests of Partnership FP; and Corporation US1 owns 4 percent of the capital interests and profits interests of Partnership FP.
(ii) Analysis. Corporation US1 is not a direct or indirect partner with respect to Partnership FP for purposes of section 4501(d)(1) because Corporation US1 qualifies as a de minimis domestic entity partner. See paragraph (g)(5) of this section. Consequently, Partnership FP is not an applicable specified affiliate of Corporation FZ because Partnership FP has no direct or indirect domestic entity partner. See paragraph (g)(1) of this section. Accordingly, Partnership FP's purchase of 100 shares of stock of Corporation FZ is not a section 4501(d)(1) repurchase. See paragraph (b)(2)(xxi) of this section.
(5) Example 5: Foreign partnership that is directly owned by foreign corporations and is an applicable specified affiliate—(i) Facts. Corporation FZ owns all the outstanding stock of Corporation US1, a domestic corporation. Corporation US1 owns all the outstanding stock of Corporation FB, a foreign corporation. Partnership FP is a foreign partnership in which Corporation FB and Corporation FE, a foreign corporation, are partners. Corporation FB owns 80 percent of the capital interests and profits interests of Partnership FP, and Corporation FE owns 20 percent of the capital interests and profits interests of Partnership FP.
(ii) Analysis. Corporation US1 is a domestic entity. See paragraph (b)(2)(vi) of this section. Corporation US1 owns an interest in Partnership FP indirectly through Corporation FB, a foreign corporation that Corporation US1 controls within the meaning of paragraph (g)(3) of this section. Corporation US1 does not qualify as a de minimis domestic entity partner with respect to Partnership FP. See paragraph (g)(5) of this section. Thus, Corporation US1 is an indirect partner with respect to Partnership FP for purposes of section 4501(d)(1). See paragraph (g)(2)(ii)(B) of this section. Accordingly, Partnership FP is an applicable specified affiliate of Corporation FZ because Corporation FZ indirectly owns more than 50 percent of the capital interests or profits interests of Partnership FP and Corporation US1, a domestic entity, is an indirect partner of Partnership FP. See paragraph (g)(1) of this section.
(o) Section 4501(d)(2) examples. The following examples illustrate the application of the rules in this section relating to section 4501(d)(2). For purposes of the following examples, unless otherwise stated: Corporation FZ is a covered surrogate foreign corporation; each domestic entity is an expatriated entity within the meaning of section 7874(a)(2)(A) with respect to Corporation FZ and is not a member of a consolidated group; there are no expatriated entities with respect to Corporation FZ other than as described in the facts; a reference to ownership refers to direct ownership; any repurchase or acquisition of stock is during a taxable year that includes at least a portion of the applicable period with respect to Corporation FZ under section 7874(d)(1); each entity has a calendar taxable year; each corporation's only outstanding stock is a single class of common stock; the functional currency (within the meaning of section 985) of any entity is the U.S. dollar; no stock is transferred to any employee; for examples that expressly provide that stock is transferred to any employee, such transfer is made in connection with the employee's performance of services in its capacity as an employee of the transferor, and the employee is treated as the beneficial owner of the stock for Federal income tax purposes on the date of the transfer; and the section 4501(d) exceptions are inapplicable.
(1) Example 1: Section 4501(d) netting rule with respect to an expatriated entity—(i) Facts. Corporation FZ owns all the outstanding stock of Corporation US1, a domestic corporation. Employee M is an employee of Corporation FZ, and Employee P is an employee of Corporation US1. On February 1, 2024, Corporation US1 purchases 100 shares of stock of Corporation FZ when the market price of each share is $8x. On May 15, 2024, Corporation FZ transfers to Employee M 50 shares of stock of Corporation FZ when the fair market value of each share is $5x. On November 1, 2024, Corporation US1 transfers to Employee P 30 shares of stock of Corporation US1 when the fair market value of each share is $9x. On December 15, 2024, Corporation FZ purchases 90 shares of its stock when the market price of each share is $12x.
(ii) Analysis. Each of Corporation US1's purchase of 100 shares of stock of Corporation FZ and Corporation FZ's purchase of 90 shares of its stock is a section 4501(d)(2) repurchase. See paragraph (b)(2)(xxii) of this section. Corporation US1 is a section 4501(d) covered corporation with respect to the section 4501(d)(2) repurchases. See paragraph (b)(2)(ix)(B) of this section. For purposes of computing Corporation US1's section 4501(d) excise tax base, the fair market value of the 100 shares of stock of Corporation FZ subject to the section 4501(d)(2) repurchase on February 1, 2024, is $800x, and the fair market value of the 90 shares of stock of Corporation FZ subject to the section 4501(d)(2) repurchase on December 15, 2024, is $1,080x. See paragraph (k)(1) of this section. Thus, the section 4501(d)(2) repurchases increase Corporation US1's section 4501(d) excise tax base for the 2024 taxable year by $1,880x ($800x + $1,080x). See paragraph (c)(3)(i)(A) of this section. Corporation US1's section 4501(d) excise tax base for its 2024 taxable year is not reduced by the fair market value of the stock of Corporation FZ transferred to Employee M or the fair market value of the stock of Corporation US1 transferred to Employee P because the section 4501(d) excise tax base with respect to Corporation US1 can only be reduced by the fair market value of stock of Corporation FZ issued or provided by Corporation US1 to employees of Corporation US1. See paragraph (m)(1) of this section. Accordingly, Corporation US1's section 4501(d) excise tax base with respect to these transactions for its 2024 taxable year is $1,880x.
(2) Example 2: Section 4501(d)(2) repurchase from the covered surrogate foreign corporation or another specified affiliate of the covered surrogate foreign corporation—(i) Facts. Corporation FZ owns all the outstanding stock of each of Corporation US1, a domestic corporation, Corporation FB, a foreign corporation, and Corporation FE, a foreign corporation. On February 1, 2024, Corporation US1 purchases 100 shares of stock of Corporation FZ from Corporation FB when the market price of each share is $8x. On December 15, 2024, Corporation FZ contributes 90 shares of its stock to Corporation FE when the fair market value of each share is $12x.
(ii) Analysis. Each of Corporation US1's purchase of 100 shares of stock of Corporation FZ and Corporation FZ's transfer of 90 shares of its stock is a section 4501(d)(2) repurchase. See paragraph (b)(2)(xxii) of this section. Corporation US1 is a section 4501(d) covered corporation with respect to the section 4501(d)(2) repurchases. See paragraph (b)(2)(ix)(B) of this section. For purposes of computing Corporation US1's section 4501(d) excise tax base, the fair market value of the 100 shares of stock of Corporation FZ subject to the section 4501(d)(2) repurchase on February 1, 2024, is $800x, and the fair market value of the 90 shares of stock of Corporation FZ subject to the section 4501(d)(2) repurchase on December 15, 2024, is $1,080x. See paragraph (k)(1) of this section. Accordingly, Corporation US1's section 4501(d) excise tax base with respect to these transactions for its 2024 taxable year is $1,880x. See paragraph (c)(3)(i) of this section.
(3) Example 3: Liability with respect to multiple expatriated entities—(i) Facts. Corporation FZ owns all the outstanding stock of each of Corporation US1, a domestic corporation, and Corporation US2, a domestic corporation. Employee M is an employee of Corporation US1, and Employee P is an employee of Corporation US2. On February 1, 2024, Corporation US1 purchases 100 shares of stock of Corporation FZ when the market price of each share is $8x. On May 15, 2024, Corporation US2 purchases 40 shares of stock of Corporation FZ when the market price of each share is $9x. On October 15, 2024, Corporation FZ repurchases 50 shares of its stock when the market price of each share is $7x. On November 1, 2024, Corporation US1 transfers to Employee M 30 shares of stock of Corporation FZ when the fair market value of each share is $9x. On November 20, 2024, Corporation US2 transfers to Employee P 30 shares of stock of Corporation FZ when the fair market value of each share is $8x. Corporation US1 pays the entire amount of section 4501(d) excise tax that it owes with respect to all section 4501(d)(2) repurchases relating to Corporation FZ and its specified affiliates that occur during Corporation US1's 2024 taxable year and fulfills its filing obligations for its 2024 taxable year with respect to such section 4501(d)(2) repurchases.
(ii) Analysis. Each of Corporation US1's purchase of 100 shares of stock of Corporation FZ, Corporation US2's purchase of 40 shares of stock of Corporation FZ, and Corporation FZ's repurchase of 50 shares of its stock is a section 4501(d)(2) repurchase. See paragraphs (b)(2)(xxii) and (d)(2)(i) of this section. Each of Corporation US1 and Corporation US2 is a section 4501(d) covered corporation with respect to the section 4501(d)(2) repurchases. See paragraph (b)(2)(ix)(B) of this section. For purposes of computing the section 4501(d) excise tax base for each of Corporation US1 and Corporation US2, the fair market value of the 100 shares subject to the section 4501(d)(2) repurchase on February 1, 2024, is $800x; the fair market value of the 40 shares of stock of Corporation FZ subject to the section 4501(d)(2) repurchase on May 15, 2024, is $360x; and the fair market value of the 50 shares of stock of Corporation FZ subject to the section 4501(d)(2) repurchase on October 15, 2024, is $350x. See paragraph (k)(1) of this section. Thus, the section 4501(d)(2) repurchases increase each of Corporation US1's and Corporation US2's section 4501(d) excise tax base for the 2024 taxable year by $1,510x ($800x + $360x + $350x). See paragraph (c)(3)(i)(A) of this section. 30 shares of Corporation FZ stock are treated as issued or provided to Employee M on November 1, 2024. See paragraph (m)(5) of this section. Therefore, Corporation US1's section 4501(d) excise tax base is reduced for its 2024 taxable year by the fair market value of the 30 shares of stock of Corporation FZ transferred on November 1, 2024, or $270x ($9x per share × 30 shares = $270x). See paragraph (m)(7) of this section. Corporation US1's section 4501(d) excise tax base for its 2024 taxable year is not reduced by the fair market value of the stock of Corporation FZ that Corporation US2 transferred to Employee P because the section 4501(d) excise tax base with respect to Corporation US1 can only be reduced by the fair market value of stock of Corporation FZ issued or provided by Corporation US1 to employees of Corporation US1. See paragraph (m)(1) of this section. Accordingly, Corporation US1's section 4501(d) excise tax base with respect to these transactions for its 2024 taxable year is $1,240x ($1,510x−$270x). See paragraph (c)(3)(i) of this section. Because Corporation US1 pays the entire amount of section 4501(d) excise tax that it owes with respect to all section 4501(d)(2) repurchases that occur during Corporation US1's 2024 taxable year relating to Corporation FZ and its specified affiliates and fulfills its filing obligations for its 2024 taxable year with respect to such section 4501(d)(2) repurchases, Corporation US2 is not liable for section 4501(d) excise tax with respect to such section 4501(d)(2) repurchases. See paragraph (d)(2)(ii) of this section.
(p) Applicability dates—(1) In general. Except as provided in paragraphs (p)(2) and (3) of this section, the provisions of this section apply to transactions that occur after April 12, 2024.
(2) Transition rule for foreign partnership de minimis rule. A section 4501(d) covered corporation may choose to apply paragraph (g)(5) of this section by replacing the phrase “10 percent” with “five percent” for transactions that occur after April 12, 2024, but before November 24, 2025.
(3) Early application. A section 4501(d) covered corporation may choose to apply all the rules of this section to transactions occurring after December 31, 2022, provided that the section 4501(d) covered corporation and all other section 4501(d) covered corporations with respect to the same applicable foreign corporation or covered surrogate foreign corporation, as applicable, consistently apply all the rules of this section with respect to such transactions.
