Final Treasury Regulations Significantly Limit Application of 1% Corporate Stock Buyback Tax Rules

On November 24, 2025, the U.S. Department of Treasury ("Treasury") and Internal Revenue Service ("IRS") issued final regulations (the "final regulations", which can be found here) that address the calculation of the nondeductible 1% excise tax on certain stock repurchases under Section 4501 of the Internal Revenue Code (the "Stock Buyback Tax"). The Stock Buyback Tax generally applies to stock repurchases, occurring after December 31, 2022, by U.S. corporations and certain non-U.S. corporations whose stock is traded on an established securities market (including any national, regional, local, or foreign stock exchange, as well as any interdealer quotation system) ("traded corporations").

On April 12, 2024, Treasury and the IRS issued proposed regulations relating to the calculation of the Stock Buyback Tax (the "proposed regulations") (our prior coverage of the proposed regulations can be found here). The final regulations finalize the proposed regulations and follow them in many respects, but also contain a number of significant limitations, generally in favor of taxpayers. The changes in the final regulations are many, but certain key differences between the proposed and final versions of the regulations are listed here:

• Removal of "Funding Rule." The proposed regulations generally imposed Stock Buyback Tax on any "funding" (broadly defined, including intercompany distributions, contributions, and lending) of a non-U.S. traded corporation by certain affiliates with ties to the United States, if the funding had a principal purpose of avoiding the Stock Buyback Tax by facilitating covered repurchases by the non-U.S. traded corporation. Moreover, many fundings within two years before or after certain covered repurchases were treated "per se" as having such a principal purpose, and therefore subject to the Stock Buyback Tax. Noting the many criticisms received, the final regulations reverse course and wholly eliminate this funding rule—transactions funding non-U.S. traded corporations are generally no longer taken into account under the Stock Buyback Tax (though direct acquisitions of stock of non-U.S. traded corporations by applicable specified affiliates are still subject to tax).
• Boot in Reorganizations. The proposed regulations treated non-stock consideration ("boot") paid to shareholders in acquisitive reorganizations as "economically similar" to buybacks of the target company stock and thus subjected those boot payments to the Stock Buyback Tax. By contrast, the final regulations exclude such boot payments from redemption treatment for purposes of the Stock Buyback Tax. Thus, when an acquiring corporation merges with a "target" that is a traded corporation in an acquisitive asset reorganization, and the target corporation shareholders receive boot and acquiror stock in the merger, the boot payments are not subject to the Stock Buyback Tax. In addition, the final regulations generally clarify that recapitalizations and redomestications are subject to the Stock Buyback Tax only to the extent an exchange of equity for nonqualifying property (e.g., cash) occurs; debt-for-debt recapitalizations are not covered.
• Plain Vanilla Preferred Stock. Under the proposed regulations, redemptions of preferred stock were included in the calculation of the Stock Buyback Tax, even redemptions of "plain vanilla" preferred stock that primarily resembled debt (generally, stock that is nonvoting, nonconvertible, limited and preferred as to dividends, and does not significantly participate in corporate growth). Under the final regulations, while not all preferred stock is excluded from the Stock Buyback Tax calculation, redemptions of primarily debt-like preferred stock is so excluded. A similar exclusion also applies to mandatorily redeemable stock (not necessarily preferred stock), but only if issued prior to August 16, 2022, and at all times subject to such a redemption requirement.
• "Take Private" Transactions. The proposed regulations and earlier guidance had identified taxable "take private" transactions of traded corporations, including applicable leveraged buyouts, as subject to the Stock Buyback Tax to the extent any portion of the consideration paid to shareholders of a target traded corporation in such a transaction was sourced from the target itself. The final regulations eliminate this result and generally exempt redemptions by a traded corporation that engages in such redemptions in connection with ceasing to be a traded corporation, including in typical "take private" transactions.
• Evidence Required for Redemption Payments Treated as a Dividend. Under the proposed regulations, redemptions that resulted in dividend treatment (generally, redemptions that did not reduce a shareholder's proportionate interest in the company) were not subject to the Stock Buyback Tax, but only if the redeeming company satisfied a "sufficient evidence" standard, which in turn required obtaining certification from the shareholder itself confirming dividend treatment. Under the final regulations, such shareholder certification is no longer required, though "sufficient evidence" of dividend treatment is still necessary, which a company can establish and document by, among other steps, treating a redemption as dividend equivalent in its books, records, and IRS reporting, and demonstrating sufficient earnings and profits.

The issuance of the final regulations will likely eliminate a significant amount of Stock Buyback Tax for traded corporations. The final regulations generally apply to stock repurchases occurring after, and stock issuances and provisions occurring in taxable years ending after, December 31, 2022 (the effective date of the Stock Buyback Tax), with certain exceptions. Filing and payment of the Stock Buyback Tax, which was originally delayed by prior IRS announcements, started in October 2024. As a result of filing and calculating payment of the excise tax under the broader proposed regulations, certain traded corporations may have overpaid their Stock Buyback Tax for transactions entered into during 2023, 2024, and 2025. Subject to certain specific rules and requirements, refunds of previously paid excise taxes can generally be obtained through filing an amended excise tax return (on an "Amended" IRS Form 7208 attached to a Form 720-X for each tax period in which a refund is being claimed) by the later of three years after the filing of the original return or two years after the time the tax was paid.