Final rules on stock repurchase tax ease requirements, kill funding rule

The IRS and the Treasury introduced the updated regulations (TD 10037) on the stock repurchase excise tax on November 21, 2025. These regulations offer notable changes from previous stipulations, particularly the exclusion of certain repurchases in acquisitive reorganizations and specific M&A transactions. Furthermore, the revised regulations withdraw the “funding rule” and broaden exemptions for redemptions of certain preferred stock.

Numerous examples illuminating the application of the rules are included in the final regulations.

Enacted under the Inflation Reduction Act (IRA), IRC Section 4501 imposes an excise tax on a “covered corporation” to the extent its stock is repurchased by the covered corporation or its majority-owned or controlled subsidiary during the tax year. Generally speaking, a “covered corporation” is any publicly traded domestic corporation. A repurchase by the covered corporation includes a repurchase by its specified affiliate from a person who is not the covered corporation or its specified affiliate. Typically, a specified affiliate is a greater-than-50% subsidiary of the covered corporation that is treated either as a partnership or corporation.

IRC Section 4501 treats a domestic specified affiliate of the foreign parent corporation as a covered corporation in relation to certain purchases of the foreign parent corporation’s stock for publicly traded foreign corporations.

The proposed regulations (REG-115710-22) were released on April 9, 2024. These regulations largely adopted the interim guidance detailed in Notice 2023-2 (Tax Alert 2023-0054) with a few alterations. These regulations also introduced a new certification, which has the potential to confuse shareholders already receiving withholding tax certifications (Tax Alert 2024-0946). The final regulations (TD 10002) concerning the reporting and payment of the excise tax mostly adhered to the proposed regulations with minor modifications (Tax Alert 2024-1357).

The final regulations are applicable to stock repurchases and issuances during tax years ending after December 31, 2022. Special effective dates (repurchases and issuances after April 12, 2024) apply for specific rules not described in Notice 2023-2. A special transition effective date also applies under a de minimis rule for foreign partnerships. However, in general, taxpayers can apply all final rules to earlier periods, provided they apply those rules consistently.