Notice 2023-2 addresses the foregoing

issues but does not provide SPAC-specific rules. For example, if a de-SPAC transaction were to qualify as a reorganization under section 368(a), the no double benefit rule would disallow any netting rule offset for stock issued by the acquiring corporation. See section 3.08(4) (d) of Notice 2023-2. However, the Treasury Department and the IRS are of the view that the netting rule should not be expanded in the manner recommended by stakeholders. By its terms, the netting rule adjusts the amount of a covered corporation’s stock repurchases solely by the fair market value of covered corporation stock issued or provided during the taxable year.

Accordingly, the proposed regulations would not adopt these recommendations. See also parts XI.D (regarding a request for a one-year carryback and carryforward period for issuances of preferred stock) and XIV.F (discussion of a recommendation for a carryover approach in the context of acquisitive reorganizations and complete liquidations) of this Explanation of Provisions.

H. Treatment of disregarded entities

Section 301.7701-2(c)(2)(i) provides that, for Federal tax purposes, a business entity that has a single owner and that is not a corporation under §301.77012(b) is disregarded as an entity separate from its owner (disregarded entity). Section 301.7701-2(c)(2)(v) provides that §301.7701-2(c)(2)(i) does not apply for purposes of certain excise taxes set forth in §301.7701-2(c)(2)(v)(A). Section 4501 is not included among the excise taxes set forth in §301.7701-2(c)(2)(v)(A). Thus, the treatment of an entity as a disregarded entity under §301.7701-2(c)(2)(i) is respected for purposes of section 4501. See proposed §58.4501-5(b)(18).

I. Form 7208

In connection with the publication of Notice 2023-2, the IRS released a proposed draft of Form 7208, which it is intended that a covered corporation would use to calculate the amount of its stock repurchase excise tax. In connection with the publication of these proposed regulations, the IRS will release an updated draft Form 7208 along with draft instructions to the Form 7208.

XV. Applicability dates for proposed §§58.4501-1 through 58.4501-5

Proposed §58.4501-6(a) generally would provide that proposed §§58.4501-1 through 58.4501-5 apply to repurchases of stock of a covered corporation occurring after December 31, 2022, and during taxable years ending after December 31, 2022, and to issuances and provisions of stock of a covered corporation occurring during taxable years ending after December 31, 2022. See section 7805(b)(1) (C). However, certain rules in proposed

§§58.4501-1 through 58.4501-5 that were not described in Notice 2023-2 would apply to repurchases, issuances, or provisions of stock of a covered corporation occurring after April 12, 2024, and during taxable years ending after April 12, 2024. See proposed §58.4501-6(b)(1).

Except as described in the following paragraph, so long as a covered corporation consistently follows the provisions of proposed §§58.4501-1 through 58.4501-5, the covered corporation may rely on these proposed regulations with respect to (1) repurchases of stock of the covered corporation occurring after December 31, 2022, and on or before the date of publication of final regulations in the Federal Reg- ister, and (2) issuances and provisions of stock of the covered corporation occurring during taxable years ending after December 31, 2022, and on or before the date of publication of final regulations in the Fed- eral Register .

In addition, so long as a covered corporation consistently follows the provisions of Notice 2023-2 corresponding to the rules in proposed §§58.4501-1 through 58.4501-5, the covered corporation may choose to rely on Notice 2023-2 with respect to (1) repurchases of stock of a covered corporation occurring after December 31, 2022, and on or before April 12, 2024, and (2) issuances and provisions of stock of a covered corporation occurring during taxable years ending after December 31, 2022, and on or before April 12, 2024.

A covered corporation that relies on the provisions of Notice 2023-2 corresponding to the rules in proposed §§58.4501-1 through 58.4501-5 with respect to (1) repurchases occurring after December 31, 2022, and on or before April 12, 2024, and (2) issuances and provisions of stock of a covered corporation occurring during taxable years ending after December 31, 2022, and on or before April 12, 2024, may also choose to rely on the provisions of proposed §§58.4501-1 through 58.4501-5 with respect to (1) repurchases occurring after April 12, 2024, and on or before the date of publication of final regulations in the Federal Register, and (2) issuances and provisions of stock of a covered corporation occurring after April 12, 2024, and on or before the date of publication of final regulations in the Federal Register .

Bulletin No. 2024–20 1115 May 13, 2024

XVI. Section 4501(d)

A. In general

As noted in part I.D of the Background section of this preamble, section 4501(d) provides rules for the application of the stock repurchase excise tax to acquisitions of stock of applicable foreign corporations and repurchases and acquisitions of stock of covered surrogate foreign corporations (section 4501(d) excise tax). Section 4501(f) authorizes the Secretary to prescribe regulations and other guidance as are necessary or appropriate to carry out, and to prevent the avoidance of, the purposes of section 4501, including rules for the application of section 4501(d).

Proposed §58.4501-7 would provide rules specifically relating to the application of section 4501(d) (section 4501(d) proposed regulations). The section 4501(d) proposed regulations generally follow related rules in proposed §§58.4501-2 through 58.4501-4, with modifications as appropriate solely to reflect differences in the operation of section 4501(d). See part I.D of the Background section of this preamble. Among other differences, the section 4501(d) excise tax is imposed on an applicable specified affiliate treated as a covered corporation under section 4501(d) (1)(A) or an expatriated entity treated as a covered corporation under section 4501(d) (2)(A) (each, a section 4501(d) covered corporation). In addition, the netting rule applies only to stock issued or provided by the applicable specified affiliate or expatriated entity, as applicable, to its employees under section 4501(d)(1)(C) and (d) (2)(C), respectively.

Terms used in the section 4501(d) proposed regulations but not defined therein have the meaning provided in proposed §58.4501-1, except that: (i) references to a “covered corporation” are treated as references to a “section 4501(d) covered corporation,” an “applicable foreign corporation,” or a “covered surrogate foreign corporation,” as the context may require; and (ii) references to a “covered corporation” or “specified affiliate” in respect of the definitions of “employee” and “employer-sponsored retirement plan” are treated solely as references to a “section 4501(d) covered corporation.” See proposed §58.4501-7(b)(1).

Terms specifically defined in the section 4501(d) proposed regulations are solely applicable for purposes of those regulations. See proposed §58.4501-7(b)(2). In particular, the section 4501(d) proposed regulations would provide definitions relevant to the section 4501(d) excise tax computation, the funding rule of proposed §58.4501-7(e), and the application of the statutory exceptions in section 4501(e) to section 4501(d) covered corporations. See part XVI.D of this Explanation of Provisions (discussion of proposed funding rule).

B. Computation of section 4501(d) excise tax liability of a section 4501(d) covered corporation

1. Basic Computational Rules

The section 4501(d) excise tax liability of a section 4501(d) covered corporation would be computed under rules based on the computational rules for computing the stock repurchase excise tax liability of a covered corporation, as set forth in proposed §58.4501-2(c) (1), with certain modifications to reflect the differences relating to, among other items: (i) the application of the section 4501(d) excise tax at the level of the section 4501(d) covered corporation; (ii) the application of certain statutory exceptions in section 4501(e); and (iii) the application of the netting rule solely to stock of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, issued or provided by the section 4501(d) covered corporation to its employees.

The section 4501(d) proposed regulations would provide that the amount of section 4501(d) excise tax imposed on a section 4501(d) covered corporation equals the product obtained by multiplying the applicable percentage by the section 4501(d) excise tax base. See proposed §58.4501-7(c)(1). The “section 4501(d) excise tax base” would be equal to the aggregate fair market value of all section 4501(d)(1) repurchases (as defined in proposed §58.4501-7(b)(2) (xxii)) or section 4501(d)(2) repurchases (as defined in proposed §58.4501-7(b)(2) (xxiii)), as applicable, during the section 4501(d) covered corporation’s taxable

year, reduced by (i) the fair market value of stock repurchased or acquired during the taxable year to the extent any statutory exceptions in section 4501(e) apply, and (ii) the aggregate fair market value of stock of the applicable foreign corporation or stock of the covered surrogate foreign corporation, as applicable, to the extent the netting rule applies under section 4501(d)(1)(C) or (d)(2)(C), respectively. See proposed §58.4501-7(c)(3) (section 4501(d) excise tax base), (m) (section 4501(d) statutory exceptions), and (n) (section 4501(d) netting rule).

For purposes of the section 4501(d) excise tax base, the fair market value of a section 4501(d)(1) repurchase or section 4501(d)(2) repurchase, as applicable, during the section 4501(d) covered corporation’s taxable year generally would be determined in the same manner as in proposed §58.4501-2(h). However, the section 4501(d) covered corporation, rather than the covered corporation, would be required to determine the value of the stock of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, by applying one of the acceptable methods of valuation set forth in proposed §58.4501-7(l)(2)(ii), for stock traded on an established securities market, or under the principles of §1.409A-1(b)(5) (iv)(B)( 1 ), for stock not so traded.

In either case, the section 4501(d) covered corporation must be consistent in its application of the valuation methodology. For example, 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 acceptable methods 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, in the same taxable year of the applicable foreign corporation or covered surrogate foreign corporation, as applicable. See proposed §58.4501-7(l)(2) (iv). If an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, does not have a taxable year for Federal income tax purposes, the calendar year would be treated as the taxable year for this purpose.

May 13, 2024 1116 Bulletin No. 2024–20

2. Section 4501(d) De Minimis Exception

The section 4501(d) proposed regulations would provide that 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 or all section 4501(d)(2) repurchases with respect to an expatriated entity, as applicable, does not exceed $1,000,000 (section 4501(d) de minimis exception). See proposed §58.4501-7(c)(2)(i). The determination of whether the section 4501(d) de minimis exception applies is made before applying any section 4501(d) statutory exception or the section 4501(d) netting rule, which are discussed in parts XVI.I and J of this Explanation of Provisions, respectively.

In applying the section 4501(d) de minimis exception to applicable specified affiliates of an applicable foreign corporation in cases in which the applicable specified affiliates have different taxable years, each applicable specified affiliate (tested affiliate) would be required to aggregate section 4501(d)(1) repurchases that occur during its taxable year (tested taxable year), including section 4501(d) (1) repurchases by other applicable specified affiliates of the same applicable foreign corporation that occur during the tested affiliate’s taxable year, regardless of the taxable year ends of the other applicable specified affiliates. In other words, the section 4501(d) de minimis exception would be applied to the overlapping portion of the taxable years of all applicable specified affiliates of an applicable foreign corporation.

The Treasury Department and the IRS are of the view that applying the section 4501(d) de minimis exception to the overlapping portion of the taxable years of all applicable specified affiliates is consistent with the statute, which applies the de minimis exception to the total value of the stock repurchased during the taxable year without regard to the identity of the person effecting the repurchase, and also precludes the use or formation of multiple applicable specified affiliates for the purpose of improperly manipulating the application of the de minimis exception.

For example, assume that an applicable foreign corporation, FX, has a taxable year end of June 30 and owns the stock of two domestic corporations, US1 and US2, that are applicable specified affiliates. US1 has a taxable year end of June 30, and US2 has a taxable year end of December 31. In applying the section 4501(d) de minimis exception to US1 in its taxable year ending June 30, 2026, the aggregate fair market value of all section 4501(d) (1) repurchases with respect to all applicable specified affiliates during its taxable year ending June 30, 2026, is taken into account. Consequently, any acquisition of stock of FX that occurs from July 1, 2025, through June 30, 2026, whether by US1 or US2, would be included in applying the section 4501(d) de minimis exception to US1’s taxable year ending June 30, 2026.

C. Certain rules for section 4501(d)(2) repurchases

1. Coordination Rules for Section 4501(d)(2) Repurchases

The section 4501(d) proposed regulations would provide certain coordination rules relating to section 4501(d)(2) repurchases. In particular, the section 4501(d) proposed regulations would provide a priority rule for a transaction that is otherwise both a section 4501(d)(1) repurchase and a section 4501(d)(2) repurchase, and a coordination rule for multiple expatriated entities with respect to a covered surrogate foreign corporation.

With respect to the priority rule, one stakeholder recommended that, if both section 4501(d)(1) and (2) could apply to a transaction, only section 4501(d)(1) should be applied. The Treasury Department and the IRS recognize that, in certain limited situations, acquisitions of stock of a covered surrogate foreign corporation could be subject to the section 4501(d) excise tax under both section 4501(d)(1) and (2). The Treasury Department and the IRS agree that a coordination rule is appropriate but are of the view that section 4501(d)(2) should take priority over section 4501(d)(1). Section 4501(d)(2) is specifically targeted to the repurchase of stock of a covered surrogate foreign corporation by the covered surrogate foreign corporation or the acquisition of the stock

of a covered surrogate foreign corporation by a specified affiliate of such corporation. Accordingly, it is appropriate to give primacy to section 4501(d)(2) in that context.

Further, the proposed approach accords with the statutory regime that bifurcates between the operation of section 4501(d) (1) and (2) because this approach would apply section 4501(d)(2) consistently to such repurchases or acquisitions instead of applying a mix of section 4501(d)(1) or (d)(2) depending on the circumstances of a particular acquisition. This mixed application of section 4501(d)(1) and (d)(2) could also present difficulties from a computational perspective. Accordingly, to the extent any repurchase or acquisition of stock of a covered surrogate foreign corporation would be both a section 4501(d) (1) repurchase and a section 4501(d)(2) repurchase, the repurchase or acquisition would be only a section 4501(d)(2) repurchase. See proposed §58.4501-7(d)(1).

With respect to the coordination rule, section 6.02(5) of Notice 2023-2 requested comments on how the section 4501(d) excise tax liability should be allocated in circumstances in which there are multiple expatriated entities, each of which is treated as a covered corporation with respect to a covered surrogate foreign corporation. A stakeholder recommended that the parties be permitted to contractually allocate liability for the section 4501(d) excise tax in this circumstance. The stakeholder stated that permitting the parties to determine their own allocation of section 4501(d) excise tax liability, rather than mandating an allocation scheme, would allow taxpayers to consider a number of ancillary factors relevant to the allocation, such as the cash flow needs of particular entities. The stakeholder suggested that the government’s interest in the payment and collection of the section 4501(d) excise tax could be protected through imposing joint and several liability for the tax liability with respect to each relevant expatriated entity, notwithstanding the privately contracted liability allocation, and through coordination of the reporting of the stock repurchase excise tax on Form 720. The Treasury Department and the IRS are of the view that, under the plain language of section 4501(d)(2), if there are multiple expatriated entities with respect

Bulletin No. 2024–20 1117 May 13, 2024

to a covered surrogate foreign corporation, each expatriated entity is separately liable for the section 4501(d) excise tax with respect to all section 4501(d)(2) repurchases with respect to the covered surrogate foreign corporation’s stock. In particular, under the language of the statute, each expatriated entity is liable for the section 4501(d) excise tax on the full amount of stock repurchases by a covered surrogate foreign corporation and its specified affiliates, and the statute does not provide any method of allocation among multiple expatriated entities. For example, if there are two expatriated entities with respect to the same covered surrogate foreign corporation, and the covered surrogate foreign corporation repurchases $100x of stock during the year, then under the statute’s plain language, both expatriated entities would be liable for any section 4501(d) excise tax with respect to the $100x repurchase.

Accordingly, the section 4501(d) proposed regulations would follow the statute by providing the default rule that multiple expatriated entities are each liable for the full amount of section 4501(d) excise tax with respect to the covered surrogate foreign corporation. However, the section 4501(d) proposed regulations would provide procedures to allow one of those multiple expatriated entities to report and pay its full excise tax obligation and thereby relieve the remaining expatriated entities of their obligations to report and pay the same amount of section 4501(d) excise tax with respect to the section 4501(d) (2) repurchases during the paying expatriated entity’s taxable year. See proposed §58.4501-7(d)(2)(ii); see also proposed §58.4501-7(q)(3) ( Example 3 ) for an illustration of this rule.

The Treasury Department and the IRS are of the view that allowing multiple expatriated entities to pay different portions of the section 4501(d) excise tax liability would be too complex and that the most straightforward and administrable approach would be to require one expatriated entity to pay its full section 4501(d) excise tax liability for the taxable year and thereby relieve each other expatriated entity’s liability for the section 4501(d) excise tax. Further, as relevant to the stakeholders’ recommendations, multiple expatriated entities still could choose

the expatriated entity that fully reports and pays its section 4501(d) excise tax liability, and they could provide for payments or reimbursements among themselves by private contract.

2. Example for Entity Subject to Section 7874(b)

One stakeholder requested that the proposed regulations clarify that an entity described in section 7874(b) is treated as a domestic corporation for purposes of applying section 4501, and so is subject to section 4501(a) as a covered corporation (and is not a covered surrogate foreign corporation under section 4501(d) (2)). The Treasury Department and the IRS agree with this request because this result follows from the plain language of sections 4501(d) and 7874. See proposed §58.4501-5(b)(40) ( Example 40 ) for an illustration of this result.

3. Transfers Among the Covered Surrogate Foreign Corporation and its Specified Affiliates

One stakeholder requested clarification of whether section 4501(d)(2) applies to transfers of stock of a covered surrogate foreign corporation among related entities (in particular, among a covered surrogate foreign corporation and its specified affiliates). Those transactions are section 4501(d)(2) repurchases because, unlike section 4501(d)(1), section 4501(d)(2) is not limited to repurchases or acquisitions of stock from persons who are not the covered surrogate foreign corporation or a specified affiliate of the covered surrogate foreign corporation. See proposed §58.4501-7(q)(2) ( Example 2 ) for an illustration of this result.

D. The proposed funding rule

1. The Notice Funding Rule

Section 3.05(2)(a)(ii) of Notice 2023-2 provides that an applicable specified affiliate is treated as acquiring stock of an applicable foreign corporation if (i) the applicable specified affiliate funds by any means (including through distributions, debt, or capital contributions) the repurchase or acquisition of stock of

the applicable foreign corporation by the applicable foreign corporation or a specified affiliate that is not also an applicable specified affiliate, and (ii) such funding is undertaken with a principal purpose of avoiding the stock repurchase excise tax (Notice funding rule). The Notice funding rule also provides that such a principal purpose is deemed to exist if the funding (other than through distributions) occurs within two years of the funded entity’s repurchase or acquisition of stock of the applicable foreign corporation (per se rule).

Numerous stakeholders provided feedback on the Notice funding rule. Stakeholders generally asserted that the Notice funding rule and, in particular, the per se rule were overbroad for various reasons. This feedback was considered in drafting and revising the version of the funding rule in the section 4501(d) proposed regulations (proposed funding rule) and is discussed in part XVI.D.2 of this Explanation of Provisions.

2. The Proposed Funding Rule

a. General structure and the rebuttable presumption

The proposed funding rule would retain the general structure of the Notice funding rule, but with substantial modifications that include replacing the per se rule with a rebuttable presumption that applies in limited circumstances. Under the proposed funding rule, an applicable specified affiliate of an applicable foreign corporation would be treated as acquiring stock of the applicable foreign corporation to the extent the applicable specified affiliate (i) funds by any means (including through distributions, debt, or capital contributions), directly or indirectly, an AFC repurchase or an acquisition of stock of an applicable foreign corporation by a specified affiliate of an applicable foreign corporation that is not an applicable specified affiliate of the applicable foreign corporation (such entity, a relevant entity, and such repurchase or acquisition, a covered purchase) (ii) with a principal purpose of avoiding the section 4501(d) excise tax (a funding with such a principal purpose, a covered funding). If a principal purpose of a funding is to fund, directly or indirectly, a covered purchase,

May 13, 2024 1118 Bulletin No. 2024–20

then with respect to that funding, there is a principal purpose of avoiding the section 4501(d) excise tax. See proposed §58.45017(e)(1); see also proposed §58.4501-7(j) (definition of “AFC repurchase”). Proposed §58.4501-7(p)(3) ( Example 3 ), (p) (4) ( Example 4 ), and (p)(7) ( Example 7 ) would illustrate the application of the proposed funding rule.

The section 4501(d) proposed regulations would not include the per se rule. Instead, a principal purpose described in proposed §58.4501-7(e)(1) would be presumed to exist if the applicable specified affiliate funds by any means, directly or indirectly, a downstream relevant entity, and the funding occurs within two years of a covered purchase by or on behalf of the downstream relevant entity (rebuttable presumption). A covered purchase “on behalf of” a downstream relevant entity would include an acquisition by an agent or nominee of the downstream relevant entity for the downstream relevant entity’s account. The term “downstream relevant entity” would be defined as a relevant entity (i) 25 percent or more of the stock of which is owned (by vote or by value), directly or indirectly, by, individually or in aggregate, one or more applicable specified affiliates of an applicable foreign corporation, or (ii) 25 percent or more of the capital or profits interests in which are held, directly or indirectly, by, individually or in aggregate, one or more applicable specified affiliates of an applicable foreign corporation. The rebuttable presumption may be rebutted only if facts and circumstances clearly establish that there was not a principal purpose described in proposed §58.4501-7(e)(1).

Thus, the rebuttable presumption would apply only to “downstream” fundings (that is, fundings of, and covered purchases by or on behalf of, relevant entities in which one or more applicable specified affiliates have a material direct or indirect ownership interest). The rebuttable presumption would not otherwise apply. Proposed §58.4501-7(p)(5) ( Example 5 ) and (p)(6) ( Example 6 ) would illustrate the application of the rebuttable presumption.

b. Timing and allocation rules

The proposed funding rule would provide rules for determining the date that an

applicable specified affiliate is treated, by reason of a covered funding, as acquiring stock of an applicable foreign corporation. More specifically, the proposed funding rule would provide that stock of an applicable foreign corporation that is treated as acquired by an applicable specified affiliate by reason of a covered funding is treated as acquired on the later of the date of the covered funding or the covered purchase to which the covered funding is allocated.

The proposed funding rule also would provide specific rules allocating covered fundings to covered purchases to determine the amount of a deemed acquisition pursuant to the proposed funding rule. The proposed funding rule would provide that the amount of stock of an applicable foreign corporation acquired in a covered purchase that is treated as acquired by an applicable specified affiliate is equal to the amount of the applicable specified affiliate’s covered fundings that are allocated to a covered purchase. To the extent covered fundings are allocated to a covered purchase, those fundings would not be allocated to any other covered purchases.

The proposed funding rule would provide that a covered purchase is treated as made first from covered fundings such that, to the extent there is both a covered funding and a covered purchase subject to the proposed funding rule, such covered purchase is treated as funded by the covered funding before fundings received from other sources.

The proposed funding rule would further provide that, if there is a single covered funding, the covered funding is allocated to a covered purchase to the extent of the lesser of the amount of the covered funding or the amount of the covered purchase. If there are multiple covered fundings, and if the aggregate amount of those fundings exceeds the amount of the covered purchase, then covered fundings would be allocated to the covered purchase in the order in which the covered fundings occur (a “first in, first out” approach). If multiple covered fundings occur simultaneously, those covered fundings would be allocated to the covered purchase on a pro rata basis.

If there are multiple covered purchases, then covered fundings would be allocated to the covered purchases in the order in

which the covered purchases occur. If multiple covered purchases occur simultaneously, then covered fundings would be allocated to those simultaneous covered purchases on a pro rata basis.

3. Response to Feedback on the Notice Funding Rule

a. Authority for the Notice funding rule

Stakeholders requested that the Notice funding rule be withdrawn for various reasons, including that, in the stakeholders’ view, the Notice funding rule is not supported by the statutory language and is contrary to congressional intent.

Stakeholders asserted that the Notice funding rule is contrary to the statutory language in section 4501(d)(1) because that language requires the applicable specified affiliate to acquire the stock of the applicable foreign corporation, as opposed to merely funding a separate entity’s acquisition of such stock. Several stakeholders also alleged that section 4501(f) does not provide sufficient authority for the Notice funding rule because the Notice funding rule does not appropriately target the avoidance of section 4501(d)(1) and does not carry out, or prevent the avoidance of, the purposes of section 4501.

Stakeholders also asserted that the Notice funding rule and the per se rule are otherwise overbroad, particularly given that section 4501(d)(1) only applies to a set of transactions—certain acquisitions by applicable specified affiliates of stock of an applicable foreign corporation—that stakeholders alleged occur rarely, if ever (for example, because foreign law prohibits a subsidiary from owning stock of its ultimate parent entity).

As a threshold matter, the Treasury Department and the IRS continue to be of the view that, for several reasons, a version of the funding rule is necessary to carry out the purposes of, and to prevent avoidance of, the section 4501(d) excise tax. As acknowledged by stakeholders, an applicable specified affiliate potentially could avoid the section 4501(d) excise tax with relative ease absent a funding rule. Accordingly, the Treasury Department and the IRS are of the view that a version of the funding rule is necessary to prevent such avoidance of the section 4501(d) excise tax.

Bulletin No. 2024–20 1119 May 13, 2024

The Treasury Department and the IRS are also of the view that the proposed funding rule is an appropriate and permissible exercise of the broad grant of authority in section 4501(f) to prescribe regulations and other guidance as necessary or appropriate to carry out, and to prevent the avoidance of, the purposes of the stock repurchase excise tax, including guidance for the application of the rules of section 4501(d). As one stakeholder noted, statutory grants of regulatory authority like section 4501(f) generally are understood to be broad. For example, see H.R. Rep. No. 100-795, at 54 (1988) (stating that the Treasury Department has, under section 382(m) of the Code, “broad regulatory authority to prescribe any regulations necessary or appropriate to carry out the purposes of the loss limitation provisions”). Further, longstanding rules in other Treasury regulations provide that, if a taxpayer funds an acquisition of property by a relevant related party rather than acquiring the property itself, the taxpayer can be treated in appropriate circumstances as acquiring the property for certain Federal income tax purposes if the funding satisfies a principal purpose requirement. See §§1.3044(b)(1); 1.956-1(b)(1)(iii). The Treasury Department and the IRS therefore are of the view that the statutory language of section 4501, including section 4501(f), authorizes the proposed funding rule.

The Treasury Department and the IRS also are of the view that the alleged rarity of relevant acquisitions by applicable specified affiliates does not address the concern that an applicable specified affiliate potentially could, with relative ease, fund another entity’s repurchase or acquisition of the stock of an applicable foreign corporation. One stakeholder noted survey results indicating that some respondents do have acquisitions of parent stock by subsidiaries in their multinational groups. The enactment of section 4501(d)(1) indicates congressional intent to address acquisitions of stock of an applicable foreign corporation by applicable specified affiliates. In addition, other provisions in the Code and Treasury regulations recognize and address the Federal income tax consequences of a subsidiary’s acquisition of a parent entity’s stock. For example, Treasury regulations specifically address certain transactions undertaken by taxpay

ers involving a subsidiary’s acquisition of parent stock. See §1.367(b)-10 (providing treatment of certain transactions in which a foreign subsidiary acquires stock of a parent corporation).

In addition, as discussed in part XVI.D.2.a of this Explanation of Provisions, the proposed funding rule would not include the per se rule. Instead, the proposed funding rule would provide a more targeted rebuttable presumption that applies only with respect to downstream relevant entities. The rebuttable presumption would apply over the same timeframe as the per se rule; however, unlike the per se rule, the rebuttable presumption would apply only to a limited category of fundings and could be rebutted. This replacement of the per se rule with the rebuttable presumption would materially narrow the scope of the proposed funding rule relative to the Notice funding rule. The Treasury Department and the IRS are of the view that this narrower scope of the proposed funding rule further addresses concerns raised by stakeholders related to the Notice funding rule and the per se rule.

b. Principal purpose standard

Certain stakeholders questioned how to determine whether a taxpayer has a principal purpose of avoiding the stock repurchase excise tax under the Notice funding rule. The proposed funding rule would clarify that, if a principal purpose of the covered funding is to fund, directly or indirectly, a covered purchase, then there is a principal purpose of avoiding the section 4501(d) excise tax.

In addition, one stakeholder recommended that the Notice funding rule provide specific factors to be considered in determining whether a taxpayer has a principal purpose of avoiding the stock repurchase excise tax. The proposed funding rule would not add such specific factors because the relevant factors may vary depending on the particular facts and circumstances in each case. The Treasury Department and the IRS are of the view that this approach is in accordance with other statutory and regulatory rules involving or requiring a principal purpose, as those rules typically do not provide specific factors for determining whether a principal purpose is present. However, the

proposed funding rule would clarify that whether a covered funding is described in proposed §58.4501-7(e)(1) is determined based on all the facts and circumstances.

Further, another stakeholder recommended that the principal purpose standard be changed from requiring “a” principal purpose of avoidance to requiring “the” principal purpose of avoidance (akin to the standard in section 269 of the Code). The proposed funding rule would not change its principal purpose standard in this manner. The Treasury Department and the IRS are of the view that requiring “a” principal purpose is common in existing rules analogous to the proposed funding rule. The Treasury Department and the IRS are of the view that, if the other requirements to apply the proposed funding rule are met, then it would be appropriate for the proposed funding rule to apply if “a” principal purpose of the funding is described in proposed §58.4501-7(e)(1).

c. Limitation to certain relevant entities

Several stakeholders recommended that the per se rule be limited to acquisitions by certain persons other than the applicable foreign corporation, such as subsidiaries of an applicable specified affiliate. Another stakeholder similarly recommended limiting the application of the Notice funding rule to subsidiaries of the applicable specified affiliate by interpreting the term “acquisition” to include indirect acquisitions by applicable specified affiliates through domestic subsidiaries, domestic and foreign partnerships, and controlled foreign corporations (CFCs) owned (within the meaning of section 958(a) of the Code) by applicable specified affiliates. (Note that such intermediate domestic entities also would be applicable specified affiliates, so their acquisitions would separately be subject to section 4501(d)(1)).

The Treasury Department and the IRS are of the view that the application of the proposed funding rule should not be limited in this manner. This type of limitation on the scope of the funding rule potentially would allow the rule to be avoided with relative ease through funding to whichever related entities are excluded from the scope of the proposed funding rule. Accordingly, the proposed funding

May 13, 2024 1120 Bulletin No. 2024–20

rule could apply regardless of whether the funded entity is an applicable foreign corporation, brother-sister entity, or subsidiary of the applicable specified affiliate.

However, the Treasury Department and the IRS are of the view that applying the rebuttable presumption solely to fundings of downstream relevant entities is appropriate. In line with observations from certain stakeholders, these “downstream” fundings—in which one or more applicable specified affiliates have a material ownership stake in the relevant entity that receives a funding and by or on behalf of whom the covered purchase is made— strongly implicate the anti-avoidance concerns that motivate the proposed funding rule. Accordingly, the Treasury Department and the IRS are of the view that the rebuttable presumption would appropriately be applied in that context.

d. Recommended exclusions from the Notice funding rule

Stakeholders suggested that, if the Notice funding rule is retained, then certain ordinary-course fundings should be excluded from the meaning of a “funding,” such as arm’s-length payments (including payments for inventory, services, or treasury functions) or payments of royalties or interest. In addition, one stakeholder requested that a “funding” should not include payments made pursuant to a so-called “recharge agreement” in which an applicable specified affiliate reimburses the applicable foreign corporation for providing stock to the applicable specified affiliate’s employees.

Several stakeholders also requested that certain types of taxpayers, such as foreign banks or financial institutions, should be exempt from the Notice funding rule because they frequently engage in intercompany financing transactions as part of their ordinary course of business (and such intercompany activity should not be viewed as abusive or as avoidance of the section 4501(d) excise tax).

The section 4501(d) proposed regulations would not adopt exclusions from the rebuttable presumption or the proposed funding rule for specific types of fundings or for taxpayers in specific industries. The targeted scope of the rebuttable presumption means that only a limited category of

fundings would be subject to the rebuttable presumption. The Treasury Department and the IRS are of the view that the elimination of the per se rule and the targeted nature of the rebuttable presumption appropriately address the concerns reflected in the feedback requesting these exclusions. Further, the Treasury Department and the IRS are of the view that exclusions for taxpayers in specific industries are not appropriate in this context as a general matter. The Treasury Department and the IRS also are of the view that the manner in which the exception for repurchases or acquisitions by a dealer in securities would apply with respect to covered purchases further addresses these concerns. See proposed §58.4501-7(m) (4).

e. Treaty and extraterritoriality concerns

Stakeholders also asserted that the Notice funding rule, including the per se rule, overrides arm’s-length transfer pricing principles, is contrary to bilateral income tax treaties and Organisation for Economic Co-operation and Development (OECD) efforts involving extraterritorial taxation, and creates the risk of other countries imposing an analogous rule with respect to fundings provided to a U.S. corporation to repurchase its own stock.

The Treasury Department and the IRS are of the view that the Notice funding rule generally does not implicate these concerns. The section 4501(d) excise tax is imposed on an applicable specified affiliate or expatriated entity, and not the applicable foreign corporation or covered surrogate foreign corporation, as applicable. The section 4501(d) excise tax is also an excise tax and not an income tax. In any event, the Treasury Department and the IRS also are of the view that the tailoring of the proposed funding rule—including the elimination of the per se rule and the other limits described previously—would appropriately address the concerns motivating this feedback.

f. Funding from multiple sources

Stakeholders also requested guidance on how to apply the funding rule if a funded entity receives funding from multiple sources. In those cases, different

ordering rules or conventions could result in differences in the potential section 4501(d) excise tax liability after application of the funding rule.

The Treasury Department and the IRS agree that guidance on ordering rules or conventions would be helpful in applying the proposed funding rule. Accordingly, the proposed fund rule would include the allocation and timing rules previously described in part XVI.D.2.b of this Explanation of Provisions.

The Treasury Department and the IRS considered other timing and allocation rules in developing the proposed funding rule, such as allocation rules that allocate a specific funding amount to a covered purchase if the particular funds or assets can be “traced” to a covered purchase, or allocation rules that base the allocation on a proration of fundings received from all sources. The Treasury Department and the IRS are of the view that proposed ordering rules should: (i) recognize the typically fungible nature of liquid assets; (ii) take into account that transactions subject to the proposed funding rule have a principal purpose of funding a stock repurchase or acquisition; and (iii) be administrable.

The Treasury Department and the IRS are of the view that the allocation method in the proposed funding rule is both reasonable and administrable. As previously described, the proposed funding rule would provide that a covered purchase is treated as made first from covered fundings such that, to the extent there is both a covered funding and a covered purchase subject to the proposed funding rule, such covered purchase is treated as funded by the covered funding before fundings received from other sources. The Treasury Department and the IRS are of the view that treating a funding made with a relevant principal purpose as actually being used for that purpose is appropriate.

Further, the proposed allocation rules would be more administrable than other allocation rules (such as a pure “tracing” approach, or a proration of fundings from all sources) because the proposed rules would not require taxpayers to track or order fundings other than covered fundings. Additionally, a pure “tracing” rule potentially would permit avoidance of the funding rule with relative ease given the fungible nature of liquid assets that often

Bulletin No. 2024–20 1121 May 13, 2024

may be most relevant to the proposed funding rule.

E. Status as an applicable foreign corporation, covered surrogate foreign corporation, applicable specified affiliate, relevant entity, specified affiliate

1. Status as an Applicable Foreign Corporation or a Covered Surrogate Foreign Corporation

The rules for determining when a corporation becomes or ceases to be an applicable foreign corporation or a covered surrogate foreign corporation are provided in proposed §58.4501-7(f). These rules are based on the rules in proposed §58.45012(d) (duration of covered corporation status) for determining when a corporation becomes or ceases to be a covered corporation. Under proposed §58.4501-7(f)(2), in general, a corporation becomes an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, at the beginning of the initiation date (as defined in proposed §58.4501-1(b)(15)), and a corporation ceases to be an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, at the end of the cessation date (as defined in proposed §58.4501-1(b)(2)). Proposed §58.4501-7(f)(2) and (3), respectively, would provide additional rules for when (i) a corporation transfers its assets in an inbound or outbound F reorganization, or (ii) a foreign corporation ceases to be an applicable foreign corporation or a covered surrogate foreign corporation as part of a transaction that includes a section 4501(d)(1) repurchase or section 4501(d) (2) repurchase, as applicable.

2. Status as an Applicable Specified Affiliate, Relevant Entity, or Specified Affiliate

The rules for determining whether a corporation or a partnership is an applicable specified affiliate or a relevant entity of an applicable foreign corporation or a specified affiliate of a covered surrogate foreign corporation, as applicable, are provided in proposed §58.4501-7(g). These rules are based on the rules in proposed §58.4501-2(f)(2) (determination of specified affiliate status). Under proposed

§58.4501-7(g)(1), the determination of whether a corporation or partnership is an applicable specified affiliate or a relevant entity of an applicable foreign corporation or a specified affiliate of a covered surrogate foreign corporation, as applicable, is made whenever such determination is relevant. In the case of tiered ownership structures, the rules for determining indirect ownership are consistent with the rules provided in §58.4501-2(f)(2)(ii), except for a special rule (described in part XVI.F of this Explanation of Provisions) that applies for purposes of determining whether a domestic entity is a direct or indirect partner in a partnership. See proposed §58.4501-7(g)(2).

Finally, similar to proposed §58.45012(f)(3), proposed §58.4501-7(g)(3) describes the tax consequences if a corporation or partnership becomes a specified affiliate and owns stock of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, that was acquired after December 31, 2022. In this case, for purposes of applying the section 4501(d) proposed regulations, the corporation or partnership is generally treated as acquiring such stock immediately after the corporation or partnership becomes a specified affiliate.

F. Foreign partnerships that are applicable specified affiliates

1. In General

Section 4501(d)(1) provides that, if a foreign partnership that is a specified affiliate of an applicable foreign corporation has a direct or indirect partner that is a domestic entity, then the foreign partnership is an applicable specified affiliate of the application foreign corporation. The rules for determining if a foreign partnership is an applicable specified affiliate are in proposed §58.4501-7(h).

2. Direct and Indirect Partners

In section 6 of Notice 2023-2, the Treasury Department and the IRS requested comments regarding the factors that should be considered in determining whether a domestic entity is an indirect partner of a foreign partnership for purposes of section 4501(d)(1).

One stakeholder recommended that indirect domestic partners not be taken into account if they hold their interests in the foreign partnership through an intermediate foreign corporation or an intermediate domestic corporation or partnership. (In the latter case, the intermediate domestic corporation or partnership itself already would be a direct or indirect domestic partner.) The stakeholder argued that this recommendation is consistent with general Federal income tax principles and would simplify the determination of whether a domestic entity is an indirect partner of a foreign partnership. Another stakeholder recommended that the stock repurchase excise tax apply to acquisitions by a foreign partnership in which a domestic entity owns (within the meaning of section 958(a)) its interest directly or indirectly through a CFC.

The Treasury Department and the IRS do not agree with the first recommendation because the statute does not limit indirect ownership to indirect ownership solely through a foreign partnership. Moreover, limiting the scope of indirect ownership in this manner for purposes of determining whether a foreign partnership is an applicable specified affiliate could facilitate avoidance of the statute. For instance, a domestic entity could form a wholly owned foreign corporation to hold the domestic entity’s interest in a foreign partnership in which the domestic entity otherwise would be a domestic entity partner for purposes of section 4501(d) (1). The Treasury Department and the IRS are of the view that this type of transaction should not alter whether a foreign partnership is an applicable specified affiliate for purposes of section 4501(d)(1). Accordingly, section 4501(d) proposed regulations would not follow this approach.

With respect to the second recommendation, although the stakeholder made this suggestion in the context of interpreting the term “acquisition,” the Treasury Department and the IRS agree that a domestic entity that owns its interest in a foreign partnership through a CFC generally should be an indirect partner for purposes of determining whether a foreign partnership is an applicable specified affiliate.

The section 4501(d) proposed regulations would, in part, follow a similar approach. Specifically, the section 4501(d) proposed regulations would pro

May 13, 2024 1122 Bulletin No. 2024–20

vide that a domestic entity is an indirect partner with respect to a foreign partnership if the domestic entity owns an interest in the foreign partnership through: (i) one or more foreign partnerships; (ii) one or more foreign corporations controlled by one or more domestic entities (domestic control requirement), or (iii) an ownership chain with one or more entities described in the preceding clauses (i) and (ii). See proposed §58.4501-7(h)(2)(ii).

For this purpose, 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. See proposed §58.4501-7(h)(3). These domestic entities do not need to be related to each other.

However, the section 4501(d) proposed regulations would provide that a domestic entity is not treated as indirectly owning stock in a foreign corporation or an interest in a foreign partnership solely by reason of owning, directly or indirectly, stock of the applicable foreign corporation. See proposed §58.4501-7(h)(4). For example, assume that a U.S. corporation (USX) directly owns stock of an applicable foreign corporation (FP), which directly owns 100 percent of the stock of two foreign corporations, FS1 and FS2. FS1 and FS2, in aggregate, own all the interests in a foreign partnership (FPS). Under these facts, USX would not be treated as indirectly owning stock of FS1 or FS2 or an interest in FPS.

The Treasury Department and the IRS are of the view that, absent the domestic control requirement, look-through for indirect ownership for this purpose under the statute would require full, proportionate look-through of all foreign corporations. See part XVI.E.2 of this Explanation of Provisions. The Treasury Department and the IRS are of the view that it is appropriate to narrow the application of this statutory rule in this context to address compliance and administrability concerns.

3. The Proposed De Minimis Rule for Domestic Entity Ownership

Several stakeholders recommended that the Treasury Department and the

IRS: (i) adopt a de minimis threshold for direct or indirect domestic ownership of a foreign partnership before the foreign partnership is treated as an applicable specified affiliate; and (ii) limit the applicability of section 4501(d)(1) to foreign partnerships to situations in which the domestic entity partner is related to the relevant applicable foreign corporation. Although the plain language of the statute does not provide for either of these limitations, the stakeholders contended that a de minimis exception or a relatedness requirement (or both) are appropriate in light of the statute’s focus on entities with a meaningful U.S. connection and the potential diligence issues with determining indirect domestic ownership for foreign partnerships potentially subject to the section 4501(d) excise tax.

One stakeholder recommended a de minimis threshold of one or two percent, analogizing to de minimis exceptions under other Code provisions ( see §§1.351-1(c)(7), Example 1 (treating a less-than-one percent interest as de minimis for purposes of section 351(e)), and 1.1202-2(a)(2) (applying a two percent de minimis threshold for purposes of section 1202 of the Code)). Another stakeholder recommended a 10 percent de minimis threshold, analogizing to §1.59A-7(d)(2) (exception for base erosion tax benefits for certain small partners). A stakeholder also suggested that the section 4501(d) proposed regulations should require the domestic entity partner to be related (within the meaning of section 267 of the Code) to the applicable foreign corporation in order to be consistent with the purpose of the stock repurchase excise tax, which (in the stakeholder’s view) was to impose a tax on repurchases or acquisitions of stock of publicly traded corporations and persons related to them.

The Treasury Department and the IRS are of the view that a de minimis threshold would be appropriate to address compliance and administrability concerns regarding the determination of when direct or indirect ownership by domestic entity partners causes a foreign partnership to be an applicable specified affiliate. Accordingly, the section 4501(d) proposed regulations would provide that a foreign partnership with one or more direct or

indirect domestic entity partners is not considered an applicable specified affiliate if the domestic entities hold, directly or indirectly, in aggregate, less than five percent of the capital and profits interests in the foreign partnership. See proposed §58.4501-7(h)(5).

The Treasury Department and the IRS also are of the view that, because the statute does not require any relationship between the direct or indirect domestic entity partner and the applicable foreign corporation of which the foreign partnership is a specified affiliate, no such relationship is required. The addition of such a relatedness requirement in the section 4501(d) proposed regulations would be a departure from the statutory structure. However, the de minimis rule would provide a minimum threshold of direct or indirect domestic ownership required for treating a foreign partnership as an applicable specified affiliate.

4. Domestic Entity

A stakeholder recommended that a domestic entity that is a disregarded entity and holds an interest in a partnership should not itself be treated as a partner. The statute does not treat a “true” U.S. branch as a domestic entity; therefore, the Treasury Department and the IRS agree with this recommendation. See proposed §58.4501-7(b)(2)(x) (definition of “domestic entity”).

5. Filing Requirements

Section 6.02(6) of Notice 2023-2 requested comments on whether the foreign partnership or the domestic entity partner should be required to file the Form 720 and pay the stock repurchase excise tax. Several stakeholders recommended that the domestic entity partner be required to file the stock repurchase excise tax return and pay the stock repurchase excise tax. One stakeholder requested guidance regarding the level of diligence required to determine whether a foreign partnership has a direct or indirect domestic entity as a partner. The stakeholder recommended that the diligence process should not impose undue burdens and expense on taxpayers given the limited application of the stock repurchase excise tax to acqui

Bulletin No. 2024–20 1123 May 13, 2024

sitions of applicable foreign corporation stock by foreign entities.

The stakeholder therefore recommended that, assuming a 10 percent de minimis partner threshold and a related-party requirement (discussed in part XVI.F.2 of this Explanation of Provisions), the domestic entity partner(s), rather than the foreign partnership, should be required (i) to determine the applicability of the stock repurchase excise tax, and (ii) to report and pay the stock repurchase excise tax on the full amount of the stock acquisition. The stakeholder noted that imposing the reporting and payment obligation on domestic entities does not raise the jurisdictional, enforcement, and collectability challenges that arise when such obligations are imposed on the foreign partnership, and that regulations could impose joint and several liability on the domestic entity partner(s). The stakeholder also recommended that the section 4501(d) proposed regulations provide procedures describing how a domestic entity may determine whether it holds the requisite ownership interest in a foreign partnership and whether the stock repurchase excise tax applies, and suggested rules similar to the safe harbor rules for determining whether a domestic entity holds an interest in a CFC in Rev. Proc. 2019-40, 2019-43 I.R.B. 982. However, the stakeholder acknowledged that, if the 10 percent de minimis threshold and related-party requirements were not adopted, then a relatively small indirect domestic partner would not be able to file the stock repurchase excise tax return as it would be unlikely to have the requisite information. In the stakeholder’s view, imposing the full excise tax on such partners would be unfair. Accordingly, the stakeholder recommended that, in this scenario, domestic partners only should be required to pay their allocable share of stock repurchase tax, although the stakeholder acknowledged that this approach could be complex and impracticable.

The Treasury Department and the IRS do not agree that the domestic entity partner should be required to file Form 720 and pay the section 4501(d) excise tax. Under the statute, the foreign partnership is the entity that is the applicable specified affiliate, which, in turn, is the entity that is liable for the section 4501(d) excise

tax. The Treasury Department and the IRS continue to evaluate adding items relevant to the section 4501(d) excise tax to other existing tax return forms, including forms that at least certain domestic entity partners may otherwise be required to file.

Consequently, the section 4501(d) proposed regulations would not provide special filing or liability rules with respect to an applicable specified affiliate that is a foreign partnership with a direct or indirect domestic entity partner. Rather, such an applicable specified affiliate would be subject to the general requirements that apply to all entities that are section 4501(d) covered corporations. The section 4501(d) proposed regulations also would not include diligence procedures for determining an entity’s status as an applicable specified affiliate. The Treasury Department and the IRS are of the view that relevant diligence considerations may vary based on the particular facts and circumstances, and so specific guidelines would be neither appropriate nor practical.

G. AFC repurchases and CSFC repurchases

Proposed §58.4501-7(j) would provide rules for determining whether an acquisition by an applicable foreign corporation of its stock is an “AFC repurchase” and whether an acquisition by a covered surrogate foreign corporation of its stock is a “CSFC repurchase” for purposes of proposed §58.4501-7. These rules are based on the rules in proposed §58.4501-2(e) for determining whether a transaction is a repurchase for purposes of proposed §58.4501-2. These rules are relevant for purposes of determining whether there is a covered purchase that could be subject to the proposed funding rule and whether a covered surrogate foreign corporation’s repurchase of its stock is subject to section 4501(d)(2).

H. Date of section 4501(d)(1) or section 4501(d)(2) repurchase; fair market value of stock

Proposed §58.4501-7(k) would provide rules for determining the date on which a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase occurs.

These proposed rules generally reflect the rules in proposed §58.4501-2(g), except that the rule in proposed §58.4501-7(k) (4) would provide that stock subject to a covered purchase to which the funding rule applies is treated as acquired by the applicable specified affiliate on the later of the date of the covered funding or the covered purchase. See part XVI.D.2.b of this Explanation of Provisions.

Proposed §58.4501-7(l) would provide rules for determining the fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is subject to a section 4501(d)(1) repurchase or a section 4501(d)(2) repurchase. These rules generally follow the rules in proposed §58.4501-2(h) for determining the fair market value of stock of a covered corporation that is repurchased.

I. Section 4501(d) statutory exceptions

1. In General

Section 4501(d) operates by modifying the general rules in section 4501(a) and (c). Because section 4501(d) operates in this manner, the section 4501(e) exceptions can be relevant to transactions subject to section 4501(d), except in one respect described in part XVI.I.2 of this Explanation of Provisions.

Proposed §58.4501-7(m) would provide rules for determining the applicability of the statutory exceptions (section 4501(d) statutory exceptions), other than the section 4501(d) de minimis exception, to transactions that are subject to section 4501(d). The rules in proposed §58.45017(m) are based on the rules in proposed §58.4501-3, with certain modifications discussed in part XVI.I.2 of this Explanation of Provisions. For a discussion of the section 4501(d) de minimis exception, see part XVI.B.2 of this Explanation of Provisions.

2. Application of Section 4501(d) Statutory Exceptions

The section 4501(d) reorganization exception would apply only with respect to stock of an applicable foreign corporation repurchased in an AFC repurchase that is a section 4501(d)(1) repurchase

May 13, 2024 1124 Bulletin No. 2024–20

and to stock of a covered surrogate foreign corporation repurchased in a CSFC repurchase that is a section 4501(d)(2) repurchase. See proposed §58.4501-7(m) (2). The Treasury Department and the IRS are of the view that, based on the statutory language and the operation of section 4501(d), the relevant “stock” for purposes of applying the section 4501(d) reorganization exception is the stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable. The references to “stock” in section 4501 refer to stock of the types of corporations subject to the excise tax that is repurchased or acquired—that is, covered corporations, applicable foreign corporations, and covered surrogate foreign corporations. Thus, the plain language of the statute demonstrates that “stock” for purposes of the section 4501(d) reorganization exception can only be stock of the applicable foreign corporation or covered surrogate corporation, as applicable. In accordance with this plain meaning, the Treasury Department and the IRS are of the view that the section 4501(d) reorganization exception only applies to repurchases and acquisitions of the equity of the corporation that is traded on an established securities market.

The stock contribution exception would apply only with respect to contributions 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. See proposed §58.4501-7(m)(3). The section 4501(d) proposed regulations would limit the employer-sponsored retirement plan exception to contributions to the employer-sponsored retirement plans of the section 4501(d) covered corporation to be consistent with the scope of the section 4501(d) netting rule, which only allows netting of stock provided by an applicable specified affiliate or an expatriated entity to its respective employees.

The section 4501(d) proposed regulations would apply the section 4501(e) (4) exception for certain repurchases by a dealer in securities in the ordinary course of the dealer’s business based on the rules in proposed §58.4501-3(e). See proposed §58.4501-7(m)(4). For this purpose, the exception would apply to any repurchas

ing or acquiring entity that is a dealer in securities, whether such entity is an applicable foreign corporation, covered surrogate foreign corporation, or a specified affiliate of either.

The section 4501(d) proposed regulations would provide that the exception for RICs and REITs does not apply to a section 4501(d) repurchase or section 4501(d)(2) repurchase because each of an applicable foreign corporation or a covered surrogate foreign corporation will not qualify as a RIC or a REIT. See proposed §58.4501-7(m)(5).

The dividend equivalence exception in proposed §58.4501-7(m)(6) generally reflects the exception in proposed §58.4501-3(g), including that the exception would apply to repurchases (as defined in proposed §§58.4501-2(e) and 58.4501-7(j)) but not to acquisitions by specified affiliates. However, with respect to the rebuttable presumption of no dividend equivalence, proposed §58.45017(m)(6)(ii) would differ regarding how a section 4501(d) covered corporation may rebut the presumption, because section 4501(d) covered corporations are not the entities that are engaging in the repurchase for purposes of determining dividend equivalence. Further, unlike covered corporations, certain applicable foreign corporations or covered surrogate foreign corporations may not have relevant Federal income tax return filing requirements.

3. Feedback Received

One stakeholder requested clarification that the exceptions in section 4501(e) apply with respect to stock acquisitions or repurchases under section 4501(d). The section 4501(d) proposed regulations would implement that request in the manner described in part XVI.I.2 of this Explanation of Provisions.

One stakeholder recommended that, if an applicable specified affiliate uses stock of the applicable foreign corporation as consideration in a transaction, its acquisition of the applicable foreign corporation stock should not be subject to section 4501(d)(1) as a matter of policy because the total amount of outstanding equity of the applicable foreign corporation would not be changed as a result of the two transactions taken together. The

Treasury Department and the IRS are of the view that this recommendation is contrary to the plain language and statutory structure of section 4501(d)(1). However, in appropriate cases, transfers of applicable foreign corporation stock may qualify for a section 4501(d) statutory exception.

J. Section 4501(d) netting rule

1. Overview

Section 4501(d)(1)(C) and (d)(2) (C) provide that the adjustment in section 4501(c)(3) is determined only with respect to stock issued or provided by the section 4501(d) covered corporation to employees of the section 4501(d) covered corporation. Proposed §58.45017(n) would provide rules for applying the section 4501(d) netting rule. Proposed §58.4501-7(n) would clarify that the section 4501(d) netting rule applies only to stock of the applicable foreign corporation or 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.

These proposed rules are generally based on the rules in proposed §58.45014, except that proposed §58.4501-7(n) generally would incorporate the provisions of proposed §58.4501-5 relating to the issuance or provision of stock to employees in connection with the performance of services.

2. Feedback Received

a. Relevant stock

Section 6 of Notice 2023-2 requested comments on whether, for purposes of the section 4501(d) netting rule, there are any circumstances in which stock of the applicable specified affiliate or expatriated entity should be taken into account in addition to, or in lieu of, the stock of the applicable foreign corporation or covered surrogate foreign corporation, respectively.

One stakeholder recommended that, because the statute uses the term “issued by,” and an applicable specified affiliate or

Bulletin No. 2024–20 1125 May 13, 2024

expatriated entity can issue only its own stock, stock of the applicable specified affiliate or expatriated entity, as applicable, should be taken into account for purposes of the section 4501(d) netting rule. The stakeholder also recognized that an applicable specified affiliate could provide the stock of the applicable foreign corporation to its employees, or an expatriated entity could provide the stock of the covered surrogate foreign corporation to its employees.

The Treasury Department and the IRS are of the view that, based on the statutory language, the relevant “stock” referenced in section 4501(d)(1)(C) and (d)(2)(C) is stock of the applicable foreign corporation and covered surrogate foreign corporation. All antecedent references to “stock” in section 4501(d) refer to stock of the applicable foreign corporation and covered surrogate foreign corporation. More broadly, all other references to “stock” in section 4501 refer to stock of the types of corporations subject to the excise tax that is repurchased or acquired—that is, covered corporations, applicable foreign corporations, and covered surrogate foreign corporations. Further, if an applicable specified affiliate or expatriated entity transfers to an employee treasury stock of an applicable foreign corporation or a covered surrogate foreign corporation, that transfer could be interpreted to constitute an issuance of that stock within the meaning of the statutory language.

Thus, the plain language of the statute demonstrates that “stock” for purposes of the section 4501(d) netting rule only can be stock of the applicable foreign corporation or covered surrogate corporation, as relevant. In accordance with this plain meaning, the Treasury Department and the IRS are of the view that the section 4501(d) netting rule functions to tailor the section 4501(d) excise tax base to the net reduction of the equity of the corporation that is traded on an established securities market.

Further, the stakeholder acknowledged that, under its recommendation, a partnership that is a section 4501(d) covered corporation would be unable to qualify for the section 4501(d) netting rule with respect to its equity because partnership interests are not “stock.” However, this discontinuity in the application of the sec

tion 4501(d) netting rule would be avoided if “stock” is interpreted to refer to stock of an applicable foreign corporation or a covered surrogate foreign corporation.

The stakeholder further acknowledged that allowing netting under the section 4501(d) netting rule for stock of a section 4501(d) covered corporation would permit the section 4501(d) covered corporation to redeem any such issued stock without application of section 4501 (assuming the applicable specified affiliate or expatriated entity is not itself a covered corporation). The Treasury Department and the IRS are of the view that it is not appropriate to allow stock issuances by section 4501(d) covered corporations to reduce the section 4501(d) excise tax base if the repurchase or acquisition of that stock would not be subject to section 4501.

Accordingly, the section 4501(d) proposed regulations would provide that only stock of the applicable foreign corporation or covered surrogate foreign corporation, as appropriate, is taken into account for purposes of the section 4501(d) netting rule. See proposed §58.4501-7(n)(1).

b. Stock issued or provided by specified affiliates

The section 4501(d) netting rule would apply only with respect to stock issued or provided by the section 4501(d) covered corporation to employees (in connection with the performance of services) of the section 4501(d) covered corporation. See proposed §58.4501-7(n)(1). However, stakeholders recommended that, if the Notice funding rule applies to treat an applicable specified affiliate as acquiring the stock of the applicable foreign corporation when it funds the applicable foreign corporation’s repurchase, the proposed regulations also should provide that the section 4501(d) netting rule applies at least to some degree with respect to stock issued or provided by the applicable foreign corporation to employees of the applicable foreign corporation.

The Treasury Department and the IRS are of the view that such a modification would be inappropriate. The proposed funding rule is intended to prevent an applicable specified affiliate from avoiding the section 4501(d) excise tax through funding transactions. Therefore, the sec

tion 4501(d) proposed regulations should not provide for such an expansion of the section 4501(d) netting rule if the funding rule applies. Furthermore, the Treasury Department and the IRS are of the view that this requested modification to the section 4501(d) netting rule is unwarranted given the narrower scope of the proposed funding rule relative to the Notice funding rule.

One stakeholder also requested clarification as to whether the section 4501(d) netting rule is applied on an entity-by-entity basis or on an aggregate basis. Under an entity-by-entity approach, the section 4501(d) netting rule would be applied separately to each section 4501(d) covered corporation. In contrast, under an aggregate approach, the modified netting rule would be applied on an aggregate basis to all section 4501(d) covered corporations. The stakeholder expressed the view that the entity-by-entity approach arguably is more consistent with the statutory language of the section 4501(d) netting rule, but that the aggregate approach would better achieve the anti-dilutive policy focus of the stock repurchase excise tax and simplify compliance.

The Treasury Department and the IRS agree with the stakeholder that the entity-by-entity approach follows the statutory language of the section 4501(d) netting rule. Section 4501(d)(1)(C) and (d) (2)(C) require the section 4501(d) netting rule to apply “only” with respect to stock issued or provided by “such” applicable specified affiliate or expatriated entity. Therefore, the Treasury Department and the IRS are of the view that the statute provides for an entity-by-entity approach. Furthermore, the Treasury Department and the IRS are of the view that it is not appropriate to expand the section 4501(d) netting rule beyond that statutory scope.

c. Employee-related issues

One stakeholder recommended that, for purposes of applying the section 4501(d) netting rule, employee status alone should be sufficient, and there should be no requirement that the stock be issued or provided to the employee in connection with the performance of services.

The Treasury Department and the IRS do not agree with the stakeholder. The

May 13, 2024 1126 Bulletin No. 2024–20

reference in the statue to “employees” is most naturally read to refer to employees in their capacity as employees providing services to their employer. The requirement that the stock be issued in connection with the performance of services also would prevent potential abuse in situations in which a company could make an individual into a nominal employee and then allow the individual to acquire stock of the applicable foreign corporation or covered surrogate foreign corporation, as applicable.

In addition, the issuance or provision of an instrument that is not in the legal form of stock generally is disregarded for purposes of the section 4501(d) netting rule. An exception is provided if such an instrument is repurchased or acquired in a section 4501(d) (1) repurchase or section 4501(d)(2) repurchase, as applicable, but only if such instrument is issued or provided by the section 4501(d) covered corporation to its employees. The Treasury Department and the IRS are of the view that it is unlikely that an applicable specified affiliate would issue or provide an instrument that is not in the legal form of stock to its employees in connection with the employee’s performance of services in its capacity as an employee. The Treasury Department and the IRS request comments on whether this provision should be retained, deleted, or modified to reflect actual practices of applicable specified affiliate issuing or providing instruments that are not in the legal form of stock as compensation for an employee’s performance of services.

In section 6 of Notice 2023-2, the Treasury Department and the IRS also requested comments on whether, in cases in which a foreign partnership is the applicable specified affiliate, stock issued or provided to any employees of the foreign partnership should be taken into account, or whether the section 4501(d) netting rule should be applied to stock issued or provided only to employees of the domestic entity that is a direct or indirect partner.

One stakeholder recommended against adopting an approach that would distinguish between the treatment of domestic and foreign partnerships that are applicable specified affiliates because that approach would be inconsistent with the

statute, which does not make that type of distinction.

The Treasury Department and the IRS agree with the stakeholder that the section 4501(d) proposed regulations should not distinguish between the treatment of domestic partnership and foreign partnerships in this respect for purposes of the section 4501(d) netting rule. Furthermore, section 4501(d)(1)(C) and (d) (2)(C) apply the section 4501(d) netting rule to “employees of the specified affiliate” and “employees of the expatriated entity” ( emphasis added ). The statute thus provides for netting with respect to stock issued or provided to employees of the applicable specified affiliate or the expatriated entity itself, and not to employees of partners or shareholders of the applicable specified affiliate or expatriated entity.

K. Rules applicable before April 13, 2024 .

Proposed §58.4501-7(o) would provide rules that track section 3.05(2) of Notice 2023-2 and that would apply to transactions occurring on or after December 31, 2022, and before April 12, 2024. See proposed §58.4501-7(r)(2). A section 4501(d) covered corporation may generally choose, in lieu of applying proposed §58.4501-7(o) to this period, to apply the section 4501(d) proposed regulations (other than proposed §§58.4501-7(o) and (r)(1)-(2)), as finalized. See proposed §58.4501-7(r)(3). Thus, a section 4501(d) covered corporation would have this option not to apply the rules in proposed §58.4501-7(o) to any period. See part XVI.L of this Explanation of Provisions (discussion of applicability dates for proposed §58.4501-7).

L. Applicability dates

Proposed §58.4501-7(r)(1) would provide that the section 4501(d) proposed regulations (other than proposed §58.4501-7(o)) generally apply to transactions occurring after April 12, 2024. See section 7805(b)(1)(B) of the Code. Transactions would include a covered purchase after that date to which a covered funding that occurred on or after December 27, 2022, and on or before April 12, 2024 is allocated. See proposed §58.4501-7(e)(1).

Proposed §58.4501-7(r)(2) would provide that proposed §58.4501-7(o) applies to transactions occurring on or after December 31, 2022, and on or before April 12, 2024. See section 7805(b)(1)(C). Transactions would include a covered purchase during this period that is funded by a funding that occurred on or after December 27, 2022, and on or before April 12, 2024. See proposed §58.4501-7(o)(2). Proposed §58.4501-7(r)(3) would provide that a section 4501(d) covered corporation may generally choose instead to apply the section 4501(d) proposed regulations (other than proposed §§58.4501-7(o) and (r)(1)-(2)), as finalized, with respect to transactions occurring after December 31, 2022, subject to a consistency requirement. Transactions would include a covered purchase after December 31, 2022, to which a covered funding that occurred on or after December 27, 2022, is allocated. See proposed §58.4501-7(e)(1).

XVII. Procedure and Administration

Subpart B of part 58, as proposed elsewhere in this issue of the Federal Reg- ister, would add rules on procedure and administration under sections 6001, 6011, 6060, 6061, 6065, 6071, 6091, 6107, 6109, 6151, 6694, 6695, and 6696 of the Code to prescribe the manner and method of reporting and paying the stock repurchase excise tax.

Effect on Other Documents