Notice 2023-2 does not expressly

address the forfeiture of restricted stock. Under section 3.06(2) of Notice 2023-2, if property is paid for the forfeited stock, the stock is treated as repurchased for an amount equal to the market price on the date of repurchase (regardless of the amount actually paid) because there is a section 317(b) redemption. If no property is paid in exchange for the forfeited shares, the forfeiture is not treated as a repurchase, because the forfeiture is neither a section 317(b) redemption nor treated as an economically similar transaction. However, under both Notice 2023-2 and these proposed regulations, there would be an issuance for purposes of the netting rule when the ownership of the restricted stock transfers to the recipient for Federal income tax purposes. See proposed §58.4501-4(d)(2).

The Treasury Department and the IRS are of the view that, if a covered corporation takes into account an issuance of restricted stock for purposes of the netting rule because a section 83(b) election has been made, a forfeiture of such stock

likewise should be treated as a repurchase. Conversely, if a covered corporation does not take into account an issuance of restricted stock for purposes of the netting rule, a forfeiture of such stock should not be treated as a repurchase. This approach is necessary to preserve consistency in the treatment of issuances and repurchases. Moreover, the economic effect of a forfeiture is similar to that of a repurchase, insofar as the shares are retired (or held as treasury stock) in both cases.

Accordingly, the proposed regulations would treat a forfeiture of restricted stock as a repurchase on the date of forfeiture (in an amount equal to the fair market value of such stock on the date of forfeiture) if such forfeited stock was treated as issued or provided under the netting rule. See proposed §58.4501-2(e)(4)(vi); see also part XII.D of this Explanation of Provisions (discussion of a proposal to provide similar treatment with regard to forfeitures of stock issued as part of an earnout or to satisfy an indemnification obligation).

It is the view of the Treasury Department and the IRS that stock received by a covered corporation or specified affiliate pursuant to a clawback agreement (that is, a contractual provision that requires an employee to return vested stock) is economically similar to restricted stock forfeited to the covered corporation after failure to vest. Accordingly, these proposed regulations also would provide that, if the stock were treated as issued or provided under the netting rule, then the clawed back stock would be treated as repurchased on the date of clawback (in an amount equal to the fair market value of such stock on such date). See proposed §58.4501-2(e)(4)(vi).

III. Valuation and Timing

A. Valuation

1. Overview

Under sections 3.06(2) and 3.08(5) of Notice 2023-2, the fair market value of stock repurchased or issued (other than stock issued or provided to an employee) is the market price of the stock on the date the stock is repurchased or issued, respectively. Thus, if the price at which

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the repurchased stock is purchased differs from the market price of the stock on the date the stock is repurchased, the fair market value of the stock is the market price on the date the stock is repurchased.

The Treasury Department and the IRS continue to be of the view that this approach is more consistent with the plain language of the statute, and simpler for the IRS to administer and for taxpayers to apply, than an approach that defines fair market value by reference to the amount paid to repurchase stock. For example, under Notice 2023-2, adjustments are not required for transaction costs or non-arm’s-length transactions, and special rules are not needed for situations in which stock is redeemed for consideration other than cash (such as a non-publicly traded note).

Section 3.08(3)(c) of Notice 2023-2 describes a special rule for valuing stock issued or provided to employees. The fair market value of such stock is the fair market value of the stock, as determined under section 83, as of the date the stock is issued or provided to the employee, as determined under section 3.08(3)(b) of Notice 2023-2. See part XI.G.7 of this Explanation of Provisions (discussion of valuing stock issued or provided to an employee or other service provider).

In section 6.01(2) of Notice 20232, the Treasury Department and the IRS requested comments on whether the fair market value of stock repurchased or issued should be an amount other than the market price of such stock. In section 6.01(6) of Notice 2023-2, the Treasury Department and the IRS also requested comments on whether a method should be provided for determining the market price of stock that is traded on multiple established securities markets and, if so, what modifications to the rules described in sections 3.06(2)(a)(i) and 3.08(5)(a) (i) of Notice 2023-2 (concerning acceptable methods for determining the market price of repurchased or issued stock that is traded on an established securities market) would be required.

2. Valuation in Arm’s-Length Transactions

Consistent with the approach described in Notice 2023-2, stakeholders generally

recommended that the fair market value of stock repurchased or issued should be the market price of the stock on the day of the repurchase or issuance, respectively. However, one stakeholder also recommended that covered corporations be required to determine fair market value based on the actual price the covered corporation pays or receives, if the repurchase or issuance is (i) from or to an unrelated party, (ii) for cash or cash-equivalents, (iii) negotiated at arm’s length, and (iv) not pursuant to a pre-existing option contract or other arrangement (for example, an accelerated share repurchase agreement) that involves the delivery of stock at a price other than the stock’s market price at delivery.

Similarly, another stakeholder recommended an exception to the general fair market value rule for repurchases that result from a tender offer or other, similarly negotiated transaction that sets a transaction price prior to the closing date. According to the stakeholder, it is common for the transaction price and the market price on the closing date to differ, and it is not clear why the value of a repurchase should be determined based on the market price rather than the transaction price.

The Treasury Department and the IRS continue to be of the view that an approach that references the market price of stock on the date the stock is repurchased or issued, respectively, is more consistent with the plain language of the statute, and would be simpler to administer, than an approach that references the amount paid to repurchase the stock. Moreover, the Treasury Department and the IRS are of the view that the two approaches likely would result in approximately similar values for most repurchases of publicly traded stock. Consequently, the proposed regulations would provide that the fair market value of stock repurchased or issued is the market price of the stock on the date the stock is repurchased or issued, respectively. See proposed §§58.4501-2(h)(1) and 58.45014(e)(1).

3. Valuation in Bankruptcy or Insolvency Workouts

Another stakeholder recommended that, in the case of a bankruptcy or insolvency workout, the fair market value of

repurchased stock should equal the value of the recovery shareholders are entitled or permitted to receive under the bankruptcy or insolvency workout, rather than the market price of the stock. The stakeholder recommended this approach because the market price of the stock will take the debt restructuring into account and, thus, may be much higher than the recovery value.

However, the Treasury Department and the IRS are of the view that the proposed regulations should not adopt special valuation rules for financially troubled companies. As discussed in part XIII of this Explanation of Provisions, the Treasury Department and the IRS are of the view that distributions of cash or other non-qualifying property (that is, property that is not permitted to be received under section 354 or 355 of the Code without the recognition of gain or loss) by troubled companies to their shareholders in exchange for their stock should be subject to the stock repurchase excise tax. Moreover, section 4501 contains no indication that special valuation rules for financially troubled companies would be necessary or appropriate to carry out the purposes of the stock repurchase excise tax. The Treasury Department and the IRS are of this view because the exchange would be a section 317(b) redemption and providing a special rule would not be necessary or appropriate to carry out the purposes of section 4501.

4. Valuation of Publicly Traded Stock

a. In general

One stakeholder recommended that taxpayers be permitted (but not required) to determine the market price of publicly traded stock based on one or more commonly accepted valuation methods, such as daily volume-weighted average price (VWAP), daily average high-low price, or daily closing price. Under the stakeholder’s recommendation, a taxpayer would be required to consistently apply the taxpayer’s chosen method to all its repurchases and issuances throughout the taxpayer’s taxable year. According to the stakeholder, this approach would be consistent with established Federal tax valuation standards for the fair market value of publicly traded securities.

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Sections 3.06(2)(a)(i) and 3.08(5)(a) (i) of Notice 2023-2 describe an approach that would require taxpayers to determine the market price of repurchased or issued stock, respectively, that is traded on an established securities market by applying one of four methods: (i) the daily volume-weighted average price as determined on the date the stock is repurchased or issued; (ii) the closing price on the date the stock is repurchased or issued; (iii) the average of the high and low prices on the date the stock is repurchased or issued; and (iv) the trading price at the time the stock is repurchased or issued. Sections 3.06(2)(a)(iii) and 3.08(5)(a)(iii) of Notice 2023-2 describe an approach that would require the market price of such stock to be determined by consistently applying one of the foregoing methods to all repurchases and issuances throughout the covered corporation’s taxable year (other than stock issued to employees). Another stakeholder expressed appreciation for the flexibility provided under the approach described in sections 3.06(2)(a) and 3.08(5)(a) of Notice 2023-2.

The Treasury Department and the IRS agree that commonly accepted valuation methods are an appropriate means of determining the fair market value of publicly traded stock for purposes of repurchases and issuances under section 4501. Accordingly, consistent with Notice 20232, the proposed regulations would include four such methods: (i) daily VWAP; (ii) daily closing price; (iii) daily average high-low price; and (iv) trading price when stock is repurchased or issued. Consistent with Notice 2023-2, to facilitate the IRS’s ability to administer and enforce the stock repurchase excise tax, the Treasury Department and the IRS are of the view that taxpayers should be required (rather than merely permitted) to use one of these methods. See proposed §§58.4501-2(h)(2) (ii) and 58.4501-4(e)(2)(ii).

As reflected in sections 3.06(2)(a)(iii) and 3.08(5)(a)(iii) of Notice 2023-2, the Treasury Department and the IRS also agree with the stakeholder that taxpayers should be required to consistently apply the chosen method to all repurchases and issuances throughout the taxable year. See proposed §§58.4501-2(h)(2)(iv) and 58.4501-4(e)(2)(iv). For special rules for valuing stock issued or provided to an

employee or other service provider in connection with the performance of services, see proposed §58.4501-4(e)(5) and part XI.G.7 of this Explanation of Provisions.

b. Stock traded on multiple established securities markets

One stakeholder recommended that a covered corporation with a class of stock that trades on multiple established securities markets should be permitted to select both the valuation method and the exchange to be used in determining the fair market value of the covered corporation’s stock. The stakeholder had considered an alternative approach based on the market price of the shares on the exchange with the highest trading volume on the applicable date, but the stakeholder did not recommend such an approach due to the additional complexity it would create.

The Treasury Department and the IRS are of the view that a covered corporation whose stock is traded on multiple exchanges should determine the fair market value of the covered corporation’s stock by reference to trading on the exchange in the country in which the covered corporation is organized, including a regional established securities market that trades in that country. If the covered corporation’s stock trades on multiple exchanges in the country in which the covered corporation is organized, fair market value is determined by reference to trading on the exchange in that country with the highest trading volume in that stock in the prior taxable year. See proposed §§58.4501-2(h)(2)(v) and 58.45014(e)(2)(v). It is the view of the Treasury Department and the IRS that this approach would better facilitate the IRS’s ability to administer and enforce the stock repurchase excise tax and enable taxpayers to apply the tax with greater certainty.

5. Valuation of Privately Owned Stock

One stakeholder recommended that the market price of privately owned stock should be determined under general valuation principles for privately owned securities. Another stakeholder recommended that the market price of privately owned stock should equal the amount paid for such stock. According to this second

stakeholder, valuation experts often disagree, and the transaction price typically is viewed as the best evidence of the value of privately owned stock. Further, allowing corporations to use the amount paid in valuing privately traded stock would relieve corporations from the need to evaluate whether there is a difference between the amount paid and the market price of such shares on the date on which ownership transfers for Federal income tax purposes.

Under the approach described in sections 3.06(2)(b) and 3.08(5)(b) of Notice 2023-2, stock that is not traded on an established securities market would be valued on the date of repurchase or issuance under the principles of §1.409A-1(b) (5)(iv)(B)( 1 ). Section 1.409A‑1(b)(5)(iv) (B)( 1 ) provides, in part, that the fair market value of stock as of a valuation date means a value determined by the reasonable application of a reasonable valuation method, and that the determination of whether a valuation method is reasonable (or whether an application of a valuation method is reasonable) is made based on the facts and circumstances as of the valuation date. Section 1.409A-1(b)(5)(iv) (B)( 1 ) further provides that the amount paid is one factor to be considered under a reasonable valuation method. The Treasury Department and the IRS are of the view that the proposed regulations should implement the approach described in Notice 2023-2 and should not provide a separate rule that would permit taxpayers to use the amount paid, in and of itself, in determining the value of privately traded stock. See proposed §§58.4501-2(h)(3) and 58.4501-4(e)(3). For special rules for valuing stock issued or provided to an employee or other service provider in connection with the performance of services, see proposed §58.4501-4(e)(5) and part XI.G.7 of this Explanation of Provisions.

As with publicly traded stock, the Treasury Department and the IRS are of the view that repurchases and issuances of privately traded stock should be valued consistently. Specifically, the proposed regulations would provide that the same valuation method must be used for all repurchases and issuances of privately owned stock belonging to the same class throughout the covered corporation’s taxable year, unless the application of that

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method to a particular repurchase or issuance would be unreasonable under the facts and circumstances as of the valuation date. See proposed §§58.4501-2(h)(3)(ii) and 58.4501-4(e)(3)(ii). For special rules for valuing stock issued or provided to an employee or other service provider in connection with the performance of services, see proposed §58.4501-4(e)(5) and part XI.G.7 of this Explanation of Provisions.

6. Annual Valuation Convention

A stakeholder also questioned whether covered corporations should be permitted to use an annual valuation convention to determine a single, uniform value for all repurchases and issuances during a taxable year. According to the stakeholder, an annual valuation convention would eliminate the distortive effects of stock price volatility. In addition, such approach would simplify netting because the use of the same price for all repurchases and issuances in the taxable year would allow netting to be computed based on the number of shares repurchased versus issued.

However, the stakeholder also acknowledged that converting the netting rule into such a “share count” rule would be in tension with the statutory requirement to value shares based on fair market value. The stakeholder also noted that volatility later in the year could cause a covered corporation’s stock repurchase excise tax liability to rise or fall dramatically after issuances or repurchases earlier in the year, and that other Code provisions typically do not allow values to be averaged over such a long period.

The Treasury Department and the IRS agree with the stakeholder that adoption of an annual valuation convention in the proposed regulations would be inconsistent with the statutory requirement under section 4501(c)(3) to value shares based on fair market value. Accordingly, the proposed regulations would not adopt the stakeholder’s annual valuation convention.

B. Timing of issuances and repurchases

1. In General

The approach described in sections 3.06(1)(a) and 3.08(2) of Notice 2023-2

generally provides that stock is treated as repurchased or as issued or provided, respectively, at the time at which ownership of the stock transfers for Federal income tax purposes. In turn, the approach described in sections 3.06(2) and 3.08(5) of Notice 2023-2 provides that the fair market value of stock repurchased or issued is the market price of the stock on the date the stock is repurchased or issued, respectively.

One stakeholder recommended that, consistent with the approach described in section 3.08(2) of Notice 2023-2, stock generally should be treated as issued for purposes of the netting rule when tax ownership of the stock transfers to the recipient of the stock, rather than when the stock is issued for corporate law or financial statement purposes.

The Treasury Department and the IRS agree with the stakeholder’s general recommendation and continue to be of the view that stock generally should be treated as repurchased when tax ownership of the stock transfers to the covered corporation or to the specified affiliate (as appropriate). Therefore, the proposed regulations generally would retain this approach. See proposed §§58.4501‑2(g) (1) and 58.4501-4(d)(1). For specific timing rules applicable in particular situations, see proposed §58.4501-2(g) (2), (3), and (4), and for special timing rules for stock issued or provided to an employee or other service provider in connection with the performance of services, see proposed §58.4501-4(d)(2) and part XI.G.6 of this Explanation of Provisions.

2. Repurchase Pursuant to an Economically Similar Transaction

Under the rule described in section 3.06(1)(b) of Notice 2023-2, stock repurchased in an economically similar transaction is treated as repurchased when the shareholders of the covered corporation exchange their stock in the covered corporation. Consistent with part III.B.1 of this Explanation of Provisions and section 3.06(1)(b) of Notice 2023-2, the proposed regulations would provide that stock repurchased in an economically similar transaction described in proposed §58.4501‑2(e)

(4) is treated as repurchased on the date the shareholders of the covered corporation exchange their stock in such corporation. See proposed §58.4501-2(g) (2).

3. Repurchase Pursuant to a Constructive Specified Affiliate Acquisition

For a discussion of the timing rule for repurchases pursuant to a constructive specified affiliate acquisition, see part XIV.D of this Explanation of Provisions.

4. Accelerated Share Repurchase Agreements

Although Notice 2023-2 does not describe special rules for accelerated share repurchase (ASR) agreements, section 3.09(15), Example 15, of Notice 2023-2 illustrates the application of the timing rules summarized in part III.B.1 of this Explanation of Provisions in the context of an ASR agreement. That example explicitly is limited to situations in which, based on the terms of the agreement and the facts and circumstances, the date on which shares are delivered by the bank to the covered corporation is the date on which tax ownership of the shares is transferred for Federal income tax purposes. As a result, the delivery date in the example is the repurchase date. The example illustrates the general principle that the date on which tax ownership of the shares is transferred for Federal income tax purposes, which is generally based on the particular ASR agreement and the facts and circumstances of a transaction, is the repurchase date.

Several stakeholders requested guidance regarding the treatment of ASR agreements for purposes of the stock repurchase excise tax. In an ASR agreement, a corporation that wants to repurchase its outstanding shares from the market will make an initial cash payment to an investment bank in exchange for a certain number of shares. To deliver the shares to the corporation, (i) the investment bank first will borrow shares from stock lenders, and then (ii) over the term of the ASR agreement, the bank will purchase shares from the market and use such

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shares to gradually return the stock owed to the stock lenders.

The price the corporation ultimately pays for its shares under the ASR agreement generally is based on an averaging of the VWAP of the shares on specified days over the term of the agreement. Upon final settlement of the agreement, the bank may be required to deliver additional shares or cash to the corporation, or the corporation may owe additional purchase price to the bank, depending on the VWAP of the shares over the term of the agreement.

Several stakeholders recommended treating the initial delivery of shares by the bank to a covered corporation under an ASR agreement as a repurchase at the time of delivery, rather than at the time the bank purchases the shares from the market. Based on the plain language of section 4501(a), one stakeholder also recommended determining the amount of the repurchase by reference to the fair market value of the shares delivered on the date of delivery, rather than by reference to the initial payment amount under the ASR agreement. If the bank delivers additional shares to the covered corporation (or the covered corporation issues shares to the bank) upon final settlement of the ASR agreement, the stakeholder recommended that such delivery (or issuance) also should be considered as a repurchase (or an issuance) of shares for purposes of the stock repurchase excise tax, with the fair market value of the repurchase (or issuance) determined on that date.

The stakeholders’ recommendations are consistent with Notice 2023-2, including section 3.09(15), Example 15, to the extent that the ASR agreement involved is one in which the date the shares are delivered by the bank to the covered corporation is the date on which tax ownership of shares is transferred for Federal income tax purposes. In such a situation, the date the shares are delivered would be the repurchase date. However, because the determination of the date on which tax ownership of shares is transferred is an inherently factual question, the Treasury Department and the IRS are of the view that no special rule should be included in the proposed regulations to determine the repurchase date for ASR agreements, and

the proposed regulations would retain the approach described in Notice 2023-2. See proposed §§58.4501-2(h)(1), 58.45014(e)(1), and 58.4501-5(b)(15) ( Example 15 ).

5. Other Forward Contracts

A stakeholder also requested guidance on how the stock repurchase excise tax applies to other forward transactions (either variable or fixed price) in which a corporation agrees to acquire or issue its stock for delivery in a future trade. The stakeholder recommended that the stock repurchase excise tax and the netting rule generally should be applied based on the fair market value of the shares at the time of their actual acquisition or issuance by the corporation. However, if the stock underlying the transaction is treated as immediately acquired or issued under Federal income tax principles (for example, if the corporation effectively acquires the benefits and burdens of stock ownership upon entering into the forward contract), the timing rules for purposes of the stock repurchase excise tax (for example, the date used for determining fair market value) should follow those Federal income tax principles.

The Treasury Department and the IRS agree with these recommendations as they relate to the determination of the date stock is treated as repurchased and the fair market value of that stock. As previously discussed, the proposed regulations generally would use Federal income tax principles to determine the date on which stock is treated as repurchased or issued. Additionally, under the proposed regulations, the fair market value of stock repurchased or issued generally would equal the market price of the stock on the date the stock is repurchased or issued. See proposed §§58.4501-2(h)(1) and 58.45014(e)(1). For a discussion of the application of the netting rule to forward contracts or other instruments not in the legal form of stock, see part XI.C.9 of this Explanation of Provisions.

6. Stock Issued or Provided to an Employee or Other Service Provider

For a discussion of the timing rules for stock issued or provided to an employee

or other service provider, see part XI.G.6 of this Explanation of Provisions.

IV. Definitions of “Covered Corporation,” “Established Securities Market,” and “Specified Affiliate”

A. Becoming or ceasing to be a covered corporation

1. Overview

In section 6.02(2) of Notice 20232, the Treasury Department and the IRS requested comments on when a corporation should be treated as becoming or ceasing to be a covered corporation, and how repurchases and issuances by a corporation during a taxable year that are prior to the date the corporation becomes a covered corporation or after the date the corporation ceases to be a covered corporation should be treated. For example, the Treasury Department and the IRS have considered the extent to which the term “covered corporation” should apply to a privately held corporation that goes public, or to a publicly traded corporation that goes private, during a taxable year.

One stakeholder recommended that the stock repurchase excise tax base of a corporation that becomes a covered corporation during its taxable year (for example, because of an initial public offering (IPO)) should be increased only for section 317(b) redemptions and economically similar transactions occurring on or after the date the corporation becomes a covered corporation. The stakeholder further recommended that only stock issued by a corporation on or after the date it becomes a covered corporation should be taken into account for purposes of the netting rule.

Similarly, another stakeholder recommended that a corporation’s status as a covered corporation should be determined immediately prior to a repurchase transaction. Thus, for example, a public corporation that becomes a private corporation in a repurchase would be a covered corporation with respect to that transaction.

In contrast, another stakeholder recommended that any redemption that occurs as part of a transaction should be exempt from the definition of “repurchase” if the corporation’s stock no longer is traded on an established securities market immedi

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ately after the transaction. Alternatively, the stakeholder recommended that a corporation’s status as a covered corporation be determined at the end of the repurchase transaction.

2. General Rules

The Treasury Department and the IRS are of the view that, as a general rule, a corporation should be treated as a covered corporation starting at the beginning of the corporation’s “initiation date,” which is the date on which stock of the corporation begins to be traded on an established securities market. Based on the statutory language, the Treasury Department and the IRS are of the view that the traded instrument must be stock of the corporation (as opposed to, for example, “when-issued” trading of interests in to-be-issued shares of stock of the corporation). See, for example, section 4501(b) (defining a covered corporation as a domestic corporation the stock of which is traded on an established securities market). A covered corporation generally would cease being treated as a covered corporation at the end of the covered corporation’s “cessation date,” which is the date on which stock of the covered corporation ceases to be traded on an established securities market.

The Treasury Department and the IRS are of the view that these general rules would be consistent with the statutory language in section 4501 and would facilitate the IRS’s ability to administer and enforce the stock repurchase excise tax. Accordingly, the proposed regulations would incorporate these general rules. See proposed §58.4501‑2(d)(1) and (d)(2)(i).

Under the proposed regulations, in the case of a privately held domestic corporation that goes public, shares issued on or after the initiation date would be counted for purposes of the netting rule under the proposed regulations. In addition, the proposed regulations would provide that any repurchases, issuances, or contributions to an employer-sponsored retirement plan on or after that date would be taken into account in computing the corporation’s stock repurchase excise tax base for that taxable year. In contrast, shares issued before the initiation date would not be counted for purposes of the netting rule,

and any repurchases, issuances, or contributions to an employer-sponsored retirement plan before that date would not be taken into account in computing the corporation’s stock repurchase excise tax base for that taxable year. See proposed §58.4501-4(b)(2).

In the case of a publicly traded domestic corporation that goes private, repurchases of stock on the cessation date would be subject to the stock repurchase excise tax under the proposed regulations, unless one of the statutory exceptions applies. However, any repurchases, issuances, or contributions to an employer-sponsored retirement plan of the corporation’s stock after that date generally would not be taken into account under the proposed regulations in computing the corporation’s stock repurchase excise tax base for that year.

3. Exception Regarding Cessation Transactions That Include Repurchases Pursuant to the Transaction’s Plan

The proposed regulations would contain an exception to the general rule that a corporation should be treated as a covered corporation starting at the beginning of its “initiation date” and ending at the end of its “cessation date.” Under the proposed regulations, if a corporation ceases to be a covered corporation pursuant to a plan that includes a repurchase, and if the corporation’s cessation date precedes the date on which any repurchase undertaken pursuant to the plan occurs, then the corporation would continue to be a covered corporation until the end of the date on which the repurchase occurs. See proposed §58.4501-2(d)(2)(ii). For example, under the proposed regulations, all repurchases of stock of a target covered corporation in an acquisitive reorganization would be subject to the stock repurchase excise tax (if no exception applied), even if the target covered corporation’s stock ceased to be traded on an established securities market prior to the repurchase of the target covered corporation’s stock in the acquisitive reorganization. Under this exception, a covered corporation’s final repurchase transaction pursuant to the plan of reorganization would be included in the stock repurchase excise tax base.

4. Inbound and Outbound F Reorganizations

A stakeholder requested clarification that, consistent with the Federal income tax treatment of a foreign corporation that domesticates in an F reorganization, such a corporation is not a domestic corporation for purposes of the stock repurchase excise tax until the day after that reorganization occurs. See §1.367(b)-2(f)(4) (providing that, in the case of an F reorganization in which the transferor corporation is a foreign corporation, the taxable year of such corporation ends with the close of the date of the transfer). According to the stakeholder, this clarification is important for foreign special acquisition holding companies, which typically domesticate when combining with a domestic business.

The Treasury Department and the IRS agree with the stakeholder. Accordingly, these proposed regulations would clarify that, for purposes of the stock repurchase excise tax, a foreign corporation that transfers its assets to a domestic corporation in an F reorganization (as described in §1.367(b)-2(f)) is not treated as a domestic corporation until the day after the reorganization. Similarly, the proposed regulations would clarify that, for purposes of the stock repurchase excise tax, a domestic corporation that transfers its assets to a foreign corporation in an F reorganization (as described in §1.367(a)-1(e)) is not treated as a foreign corporation until the day after the reorganization. See proposed §58.4501-2(d)(3).

5. Determination of Timing of Events or Transactions

The Treasury Department and the IRS have considered rules to address uncertainty that could arise from the application of the stock repurchase excise tax regulations to a series of transactions or events that occurs across multiple time zones.

The Treasury Department and the IRS request comments on this issue, including specific proposals to address the application of the stock repurchase excise tax regulations to a series of transactions or events that occurs across multiple time zones. The Treasury Department and the IRS encourage comments regarding

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iate” to mean, 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 such corporation, and (ii) any partnership more than 50 percent of the capital interests or profits interests of which is held, directly or indirectly, by such corporation” ( emphasis added ).

The proposed regulations would provide that, for purposes of section 4501(c) (2)(B), “indirect” ownership means a corporation’s proportionate ownership in equity interests through other entities. See proposed §58.4501-2(f)(2)(ii). For example, if P owns 60 percent of the stock of Sub 1, which owns 60 percent of the stock of Sub 2, then P indirectly owns 36 percent (0.6 x 0.6 = 0.36) of the stock of Sub 2.

E. Foreign securities markets

In section 6.02(9) of Notice 20232, the Treasury Department and the IRS requested comments on whether the definition of “established securities market” should be revised to clarify the regulatory requirements under the Securities Exchange Act of 1934 that are most relevant to the determination of whether a foreign securities market is treated as an established securities market and, if so, what type of U.S. securities exchange (including which tier of a securities exchange with multiple tiers) should be the baseline for comparison.

One stakeholder recommended including an exclusive list of foreign securities markets that are treated as established securities markets, on the grounds that tax advisors should not be required to determine whether foreign securities markets have regulatory requirements analogous to those under the Securities Exchange Act of 1934. See §1.7704-1(b).

The Treasury Department and the IRS appreciate the stakeholder’s recommendation. However, the Treasury Department and the IRS are of the view that the development and maintenance of an exclusive list of foreign securities markets that are treated as established securities markets would be outside the scope of the proposed regulations. As a result, the proposed regulations would not include such a list.

the extent to which a proposed approach would facilitate taxpayer certainty and the IRS’s ability to administer and enforce the stock repurchase excise tax regulations.

B. Determining specified affiliate status

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. See section 4501(c) (2)(A); see also section 3.05(1) of Notice 2023-2. Stakeholders have asked when specified affiliate status should be determined. More specifically, stakeholders have asked when valuations should be undertaken for purposes of the 50-percent vote-or-value test in section 4501(c)(2)(B), and whether fluctuations in the value of the (potential) specified affiliate’s stock or partnership interests should be ignored.

The Treasury Department and the IRS are of the view that the determination of whether a corporation or partnership is a specified affiliate should be made whenever such determination is relevant for purposes of section 4501. For example, such a determination would be relevant when the potential specified affiliate acquires stock of a covered corporation or provides stock of the covered corporation to employees of the potential specified affiliate. See proposed §58.4501-2(f)(2) (i).

C. Involvement safe harbor

As defined in section 4501(b), the term “covered corporation” means any domestic corporation the stock of which is traded on an established securities market (within the meaning of section 7704(b)(1)). The rule described in section 3.02(13) of Notice 2023-2 further provides that the term “established securities” market has the meaning provided in §1.7704-1(b).

Section 1.7704-1(b) provides, in part, that the term “established securities market” includes “[a]n interdealer quotation system that regularly disseminates firm buy or sell quotations by identified brokers or dealers by electronic means or oth

erwise” (interdealer system). See §1.77041(b)(5). However, §1.7704-1(d) provides a safe harbor (involvement safe harbor) under which interests in a partnership are not treated as traded on an established securities market within the meaning of §1.7704-1(b)(5) (that is, a partnership will not be a publicly traded partnership solely due to an interdealer system), unless the partnership either (1) “participates in the establishment of the market or the inclusion of its interests thereon,” or (2) “recognizes any transfers made on the market” by redeeming the transferor or admitting the transferee as a partner or otherwise recognizing any rights of the transferee.

A stakeholder noted that shares of corporations may trade over the counter (OTC) or on similar markets, even without the corporation’s involvement, and that certain of those OTC or similar markets may qualify as an interdealer system. As a result, a corporation could be a covered corporation due to independent shareholder actions without the corporation engaging in an affirmative listing on an exchange. The stakeholder requested confirmation that the involvement safe harbor in §1.7704-1(d) applies for purposes of determining whether a corporation is a covered corporation due to an interdealer system, with adjustments as needed for application of this safe harbor to corporations rather than partnerships.

The Treasury Department and the IRS are of the view that the involvement safe harbor should not apply for purposes of the stock repurchase excise tax. The Treasury Department and the IRS view the relationship between a partnership and its partners (a contractual relationship that allows a partnership to set the terms under which interests in the partnership may be validly transferred) as different from the relationship between a corporation and its shareholders (which is determined by the corporate law governing the stock). Accordingly, the proposed regulations would not incorporate the involvement safe harbor.

D. Indirect ownership of specified affiliates

As noted in part I.B of the Background section of this preamble, section 4501(c) (2)(B) defines the term “specified affil

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F. Depository receipts

In section 6.02(10) of Notice 20232, the Treasury Department and the IRS requested comments on how the trading of stock through depository receipts should be treated for purposes of determining whether a corporation is a covered corporation or whether repurchased stock is traded on an established securities market. In response, one stakeholder noted that some applicable foreign corporations with domestic specified affiliates have American depository receipts (ADRs) listed in the United States. The stakeholder requested guidance to clarify that the foreign parent’s ADRs would not cause the domestic specified affiliate to be treated as if the domestic specified affiliate’s stock were traded on an established securities market in the United States.

The Treasury Department and the IRS are of the view that no special rules are needed in response to this request. Section 4501(b) specifically defines the term “covered corporation” to mean “any domestic corporation the stock of which is traded on an established securities market” ( empha- sis added ). Moreover, although Notice 2023-2 does not expressly address ADRs, the definition of “stock” is defined with respect to an instrument issued by the cor- poration . See section 3.02(25) of Notice 2023-2. The proposed regulations would maintain this definition of “stock.” See proposed §58.4501‑1(b)(29).

ADRs that provide full voting rights with respect to the underlying corporate stock, entitle ADR holders to receive any dividends paid on the stock, and permit an ADR holder to surrender an ADR at any time in exchange for the underlying stock, may be treated as direct ownership of the underlying stock. See Rev. Rul. 65-218, 1965-2 C.B. 566. If an ADR is not treated as direct ownership of the underlying stock, it would be characterized in accordance with its substance. In either case, because ADRs are not issued by a domestic specified affiliate, they would not be treated as stock of the domestic specified affiliate.

Publicly available information indicates that many foreign issuers treat ADRs for Federal income tax purposes as direct ownership of their stock. On that basis, under the definition of “stock” in these

proposed regulations, ADRs would be treated as stock of the issuer and would be relevant to determining whether the issuer has stock that is traded on an established securities market. Similarly, global depositary receipts (GDRs) for the stock of domestic corporations that are traded on foreign exchanges may be relevant in determining whether the issuer has stock that is traded on an established securities market. Because the ADRs and GDRs are not issued by a domestic specified affiliate, they would not be treated as stock of the domestic specified affiliate.

Additionally, Congress specifically wrote rules to address situations involving a publicly traded foreign corporation with a domestic specified affiliate, and those rules do not include any provisions treating the domestic specified affiliate as publicly traded as a result of the foreign corporation’s stock trading on an established securities market in the United States. See section 4501(d); see also part XVI of this Explanation of Provisions (discussion of feedback relating to section 4501(d)).

V. Section 301 Distributions

Section 301(a) of the Code generally provides that a distribution of property (as defined in section 317(a)) made by a corporation to a shareholder with respect to its stock is treated in the manner provided in section 301(c). Section 301(c)(1) provides that the portion of the distribution that is a dividend (as defined in section 316) is included in gross income. Section 301(c)(2) provides that the portion of the distribution that is not a dividend is applied against and reduces the adjusted basis of the stock. Section 301(c)(3) generally provides that the portion of the distribution that is not a dividend is treated as gain from the sale or exchange of property to the extent that it exceeds the adjusted basis of the stock.

For purposes of this discussion, an actual distribution subject to section 301(c)(2) or (3) refers to a distribution of property to a shareholder with respect to the corporation’s stock that does not include an exchange of such stock. In contrast, an “in-form” redemption treated as a distribution subject to section 301(c)(2) or (3) refers to a distribution of property to a

shareholder in exchange for the corporation’s stock.

A. Actual distributions subject to section 301(c)(2) or (3)

Stakeholders asked whether an actual distribution (that is, a distribution that does not involve a redemption in form) to which section 301(c)(2) or (3) applies is subject to the stock repurchase excise tax. Stakeholders contended that the stock repurchase excise tax should not apply to such a distribution, because (i) it is not a section 317(b) redemption, and (ii) it is not economically similar to a section 317(b) redemption (for example, it does not decrease the number of shares outstanding). Instead, such a distribution more closely resembles a dividend, which is excluded from the stock repurchase excise tax ( see section 4501(e)(6)).

The Treasury Department and the IRS agree that an actual distribution subject to section 301(c)(2) or (3) is not a repurchase (and, therefore, is not subject to the stock repurchase excise tax) because such a distribution is neither a section 317(b) redemption nor economically similar to such a redemption. Accordingly, and consistent with section 3.04(4)(a) of Notice 2023-2 (which does not include such distributions in the list of economically similar transactions), the proposed regulations would provide that an actual distribution subject to section 301(c)(2) or (3) is not subject to the stock repurchase excise tax. See proposed §58.4501-2(e)(5)(iv).

B. Redemptions treated as distributions subject to section 301(c)(2) or (3)

Stakeholders also asked whether the stock repurchase excise tax applies to an in-form redemption that is treated as a distribution to which section 301(c)(2) or (3) applies. See section 302(d). One stakeholder recommended applying the stock repurchase excise tax to a non-pro rata, in-form redemption that is treated as a distribution to which section 301(c)(2) or (3) applies. However, the stakeholder contended that the stock repurchase excise tax should not apply to a pro rata, in-form redemption that is treated as a distribution to which section 301(c)(2) or (3) applies, because such a redemption is more akin to

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an actual section 301 distribution than a typical section 317(b) redemption. In contrast, another stakeholder recommended that the stock repurchase excise tax should apply to such a transaction because it is a redemption within the meaning of section 317(b) (for example, such a redemption decreases the number of outstanding shares even though the redemption is pro rata).

The Treasury Department and the IRS agree that an in-form section 317(b) redemption treated as a distribution to which section 301(c)(2) or (3) applies is a repurchase based on the plain language of the statute, regardless of whether the redemption is pro rata. Accordingly, and consistent with section 3.04(3) of Notice 2023‑2 (which does not include such transactions in the list of section 317(b) redemptions that are not repurchases), an in-form section 317(b) redemption treated as a distribution to which section 301(c)(2) or (3) applies would be subject to the stock repurchase excise tax under the proposed regulations. See proposed §58.4501-2(e)(3) (providing an exclusive list of section 317(b) redemptions that are not repurchases).

C. Exclusion for pro rata distributions

One stakeholder recommended a general exclusion from the stock repurchase excise tax for distributions made to all shareholders of a covered corporation on a wholly pro rata basis (100 percent pro rata distribution), regardless of whether such distributions involve a redemption in form. According to the stakeholder, such distributions do not implicate most of the policy considerations underlying the tax.

However, the stakeholder noted that adopting this recommendation would require the Treasury Department and the IRS to consider (i) how to determine whether a distribution is 100 percent pro rata if the covered corporation has multiple classes of stock, and (ii) the impact of such distributions on options or convertible debt instruments (to the extent such instruments thereby accrete their proportionate interests in the covered corporation).

The Treasury Department and the IRS disagree with the stakeholder’s recommendation. A redemptive 100 percent pro

rata distribution is a repurchase because the distribution (i) constitutes a section 317(b) redemption or (ii) is an economically similar transaction. Accordingly, the proposed regulations would not provide an exclusion for 100 percent pro rata distributions, except in the case of pro rata distributions in a complete liquidation to which section 331 or 332 (but not both) applies.

VI. Complete and Partial Liquidations

A. Complete liquidations

Section 331(a) of the Code provides that amounts received by a shareholder in a distribution in complete liquidation of a corporation are treated as in full payment in exchange for the stock. Section 332 of the Code provides an exception to the general rule in section 331(a). If the requirements of section 332 are met, no gain or loss is recognized upon the receipt by one corporation of property distributed in complete liquidation of another corporation.

Section 332 applies only if the corporation receiving property in the liquidation satisfies the requirements of section 332(b), including the requirement that the corporation own stock in the liquidating corporation meeting the 80-percent voting and value requirements of section 1504(a) (2) of the Code (80-percent distributee). See section 332(b)(1).

1. Application of Stock Repurchase Excise Tax

Several stakeholders recommended that a complete liquidation by a covered corporation should not be subject to the stock repurchase excise tax because the complete liquidation terminates the covered corporation’s existence. For support, these stakeholders contended that a complete liquidation provides no opportunity for the liquidating corporation to reinvest cash in the corporation’s enterprise, which stakeholders stated Congress may have intended to encourage through the enactment of section 4501. In addition, these stakeholders emphasized that a complete liquidation provides no opportunity for a covered corporation to manipulate the corporation’s earnings per share (EPS)

or other similar metrics, which these stakeholders stated Congress may have intended to discourage through the enactment of section 4501.

As reflected in section 3.04(4)(b)(i)(A) of Notice 2023-2, the Treasury Department and the IRS are of the view that a distribution in complete liquidation of a covered corporation to which either section 331 or 332 (but not both) applies is not a repurchase. Accordingly, the Treasury Department and the IRS are of the view that such distributions should not be subject to the stock repurchase excise tax. See proposed §58.4501-2(e)(5).

2. Determination of Complete Liquidation or Dissolution

Stakeholders also asked whether a distribution is in “complete liquidation” of a corporation for purposes of section 331 if some classes of the liquidating corporation’s stock do not receive a distribution. Section 331 does not define the term “complete liquidation.” Instead, this term is defined in section 346(a) of the Code, which provides that, for purposes of subchapter C of chapter 1, “a distribution shall be treated as in complete liquidation of a corporation if the distribution is one of a series of distributions in redemption of all of the stock of the corporation pur- suant to a plan ” ( emphasis added ).

Stakeholders have questioned whether the definition of “complete liquidation” in section 346(a) requires a distribution on all classes of stock in order for a dissolution of a corporation to qualify as a distribution in complete liquidation to which section 331 applies. These stakeholders based their question on the language of section 332(b)(2), which provides that a distribution is considered in “complete liquidation” within the meaning of section 332 only if “the distribution is by [the liquidating corporation] in complete cancellation or redemption of all its stock.” In addition, these stakeholders referenced Treasury regulations and judicial opinions. See §1.332-2(b) (“Section 332 applies only to those cases in which the recipient corporation receives at least partial payment for the stock which it owns in the liquidating corporation.”); Spaulding Bakeries Inc. v. Comm’r, 252 F.2d 693, 697 (2d Cir. 1958) (emphasizing that “[s]ection 112(b)(6)(C)

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[of the Internal Revenue Code of 1939 (the predecessor statute to section 332)] requires for its application a distribution in complete cancellation or redemption of all stock of the dissolved corporation”), aff’g 27 T.C. 684 (1957); H.K. Porter Co. v. Comm’r, 87 T.C. 689 (1986) (agreeing with the rationale of the Second Circuit’s decision in H.K. Porter and holding that section 332 did not apply to a dissolution because a distribution was made on the dissolving corporation’s preferred stock but not its common stock).

As stated previously, the Treasury Department and the IRS are of the view that a distribution in complete liquidation of a covered corporation to which section 331 or 332(a) applies should not be treated as a repurchase. In addition, the Treasury Department and the IRS are of the view that a redemption by a covered corporation pursuant to a corporate dissolution of the covered corporation should not be treated as a repurchase. To clarify the intent of Notice 2023-2, the proposed regulations would provide that a distribution in complete liquidation of a covered corporation to which either section 331 or 332(a) (but not both) applies, a distribution pursuant to a plan of dissolution of a covered corporation that is reported on the original (but not a supplemented or an amended) IRS Form 966, Corporate Dissolution or Liquidation (or any successor form), or a distribution pursuant to a deemed dissolution of the covered corporation (for instance, pursuant to a deemed liquidation under §301.7701-3), is not a repurchase and, therefore, is not subject to the stock repurchase excise tax. See proposed §58.4501-2(e)(5)(i). For the treatment of liquidations to which both sections 331 and 332 apply, see proposed §58.4501-2(e)(4)(v)(A) and the discussion in part VI.A.3 of this Explanation of Provisions.

3. Liquidations to Which Both Sections 331 and 332 Apply

The rules described in section 3.04(4) (a)(v) of Notice 2023-2 provide that, if sections 331 and 332 both apply to a complete liquidation, then (i) the distribution to the 80-percent distributee is not subject to the stock repurchase excise tax, but (ii) each distribution to which section 331

applies (that is, the surrender of covered corporation stock by each minority shareholder) is subject to the stock repurchase excise tax. The Treasury Department and the IRS have arrived at this view because the 80-percent distributee is the successor to the transferor corporation (that is, the liquidating subsidiary) following the complete liquidation to which section 332 applies. See section 381(a)(2). In contrast to the 80-percent distributee, minority shareholders that receive liquidating distributions to which section 331 applies terminate their investment in the transferor corporation’s business (that is, are not successors to the transferor corporation).

Moreover, a complete liquidation to which sections 331 and 332 both apply is substantively similar to an upstream reorganization of the liquidating subsidiary into the 80-percent distributee in which the minority shareholders receive only non-qualifying property in exchange for their stock in the liquidating subsidiary. Because such an exchange in an upstream reorganization would constitute a “repurchase” under the proposed regulations, the Treasury Department and the IRS are of the view that the same treatment should apply to liquidating distributions to minority shareholders subject to section 331. See proposed §58.4501-2(e)(4) (v)(A).

4. Distributions During Taxable Year of Complete Liquidation or Dissolution

The rule described in section 3.04(4) (b)(i)(B) of Notice 2023-2 provides that, if a covered corporation or a covered surrogate foreign corporation (as appropriate) completely liquidates and dissolves (within the meaning of §1.331-1(d)(1)(ii)) during a taxable year, no distribution by that corporation during that taxable year is a repurchase. See also proposed §58.45012(e)(5)(ii) (incorporating this provision into the proposed regulations). Stakeholders have requested clarification regarding how this provision interacts with the rule described in section 3.04(4)(a)(v) of Notice 2023-2, which (as previously discussed in part VI.A.3 of this Explanation of Provisions) provides that, in a complete liquidation to which sections 331 and 332 both apply, each distribution to which

section 331 applies is subject to the stock repurchase excise tax. The proposed regulations would clarify the intent of Notice 2023-2 by providing that the rule in proposed §58.4501-2(e)(5)(ii) does not apply if the complete liquidation or dissolution is a transaction to which sections 331 and 332 both apply.

B. Partial liquidations

Section 302(b)(4) of the Code provides that a distribution in redemption of stock held by a shareholder who is not a corporation and in partial liquidation of the distributing corporation receives exchange treatment under section 302(a). For purposes of section 302(b)(4), a distribution will be treated as in partial liquidation of a corporation if the distribution (i) is not essentially equivalent to a dividend (determined at the corporate level rather than at the shareholder level), and (ii) is pursuant to a plan and occurs within the taxable year in which the plan was adopted or within the succeeding taxable year. See section 302(e)(1). A partial liquidation may involve a redemption of stock under section 317(b) in which the shareholder actually, in-form surrenders stock of the corporation in exchange for property (redemptive partial liquidation). A partial liquidation also may involve a constructive redemption of stock in which the shareholder is deemed to surrender stock of the corporation in exchange for property, and that deemed surrender satisfies the redemption requirement of sections 302 and 317(b) (constructive partial liquidation). See H.R. Conf. Rep. No. 760, 97th Cong., 2nd Sess. 530 (1982) (“Under present law, a distribution in partial liquidation may take place without an actual surrender of stock by the shareholders …

[and a] constructive redemption of stock is deemed to occur in such transactions…. The conferees intend that the treatment of partial liquidations under present law section 346(a)(2) and (b) is to continue for such transactions under new section 302(e).”).

1. Partial Liquidations Involving an Actual Redemption of Stock

Several stakeholders requested guidance on whether a redemptive partial liq

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uidation is treated as a repurchase. One stakeholder recommended that a redemptive partial liquidation by a covered corporation should be subject to the stock repurchase excise tax because a non-pro rata redemptive partial liquidation could achieve consequences similar to those that the stakeholder hypothesized section 4501 was intended to counteract. For example, the stakeholder observed that, if a corporation distributes proceeds from the sale of one of its businesses to its shareholders, the corporation has chosen to make that distribution rather than reinvest the proceeds in its business. Another stakeholder agreed that non-pro rata redemptive partial liquidations should be treated as repurchases but contended that 100-percent pro rata redemptive partial liquidations should not be so treated.

The Treasury Department and the IRS are of the view that redemptive partial liquidations should be treated as repurchases because those transactions qualify as section 317(b) redemptions. Moreover, as discussed in part V.C of this Explanation of Provisions, the Treasury Department and the IRS are of the view that no special exception should be provided for 100-percent pro rata redemptions, particularly because section 4501 does not provide such an exception. In addition, such an exception would complicate the IRS’s ability to administer and enforce the stock repurchase excise tax. Accordingly, the proposed regulations would not incorporate these stakeholder recommendations.

2. Partial Liquidations Involving a Constructive Redemption of Stock

Several stakeholders requested guidance on whether a constructive partial liquidation is treated as a repurchase. The stakeholders recommended that constructive partial liquidations should not be treated as repurchases because such transactions neither have the form of an actual redemption nor affect shareholders’ proportionate interests. In addition, those stakeholders asserted that the treatment of constructive partial liquidations as constructive redemptions is imputed in revenue rulings to provide beneficial tax treatment to individual shareholders. The stakeholders further contended that such

redemptions are not motivated by, and do not produce, the economic effects that they contend the stock repurchase excise tax was designed to discourage.

The Treasury Department and the IRS decline to adopt the stakeholders’ recommendation in the proposed regulations. Section 302(b)(4) applies to a distribution “in redemption of stock,” and section 317(b) defines a “redemption” for purposes of section 302. Regardless of whether a redemption is constructive rather than actual, the redemption comprises a section 317(b) redemption to which section 302(b)(4) may apply. Therefore, the Treasury Department and the IRS are of the view that a constructive partial liquidation is a repurchase subject to the stock repurchase excise tax, and the proposed regulations would not provide any special exceptions for such transactions.

3. Dividend Exception and Partial Liquidation Look-Through Rule

For a discussion of the dividend exception and the partial liquidation lookthrough rule in section 302(e)(5), see part X.F.3 of this Explanation of Provisions.

VII. Taxable Transactions

A. LBOs and other taxable “take private” transactions

Under the approach described in Notice 2023-2, unless a statutory exception applies, the target-corporation-funded portion of the consideration in an LBO or other taxable acquisition of the stock of a target corporation would be treated as a repurchase for purposes of computing the target corporation’s stock repurchase excise tax base. See section 3.09(3) and (4) of Notice 2023-2. This approach tracks longstanding Federal income tax treatment by the IRS of such transactions, particularly that cash received by the minority shareholders in such transactions is subject to the provisions and limitations of section 302. See, for example, Rev. Rul. 78-250, 1978-1 C.B. 83 (elimination of minority shareholders’ interest in target corporation through the merger of a transitory subsidiary into target corporation treated as a redemption because tar

get corporation was the source of the cash consideration).

Several stakeholders recommended that payments funded (or deemed funded) by the target corporation in a taxable acquisition of target corporation stock should not be treated as a repurchase. Another stakeholder recommended that any redemption that occurs as part of a transaction should be exempt from the definition of “repurchase” if, immediately after the transaction, the target corporation’s stock no longer is traded on an established securities market. See part IV.A of this Explanation of Provisions (discussing the stakeholder’s recommendation). Alternatively, the stakeholder recommended that a target corporation’s status as a covered corporation be determined at the end of the repurchase transaction. Similarly, another stakeholder recommended that an exemption be created for redemptions undertaken in connection with fully taxable stock dispositions in which target corporation shareholders completely terminate their interest under section 302(b) (3), and as described in Zenz v. Quinlivan, 213 F.2d 914 (6th Cir. 1954). According to the stakeholders, deemed redemptions by a target corporation that is a covered corporation in an LBO or other taxable “take private” transaction do not implicate their view of the congressional policies underlying the stock repurchase excise tax because the purpose of such a transaction is to cash out completely the target corporation’s existing shareholders. For support, these stakeholders highlighted that taxable “take private” transactions do not present an opportunity to manipulate EPS or other financial metrics, which (i) become irrelevant after the target corporation ceases to be a publicly traded entity, and (ii) the stakeholders viewed as a practice that Congress intended to discourage through enactment of the stock repurchase excise tax.

Moreover, in the stakeholders’ view, imposing the stock repurchase excise tax on a fully taxable stock acquisition based solely on the source of the consideration received by the target corporation’s shareholders would create arbitrary distinctions driven by factors that may be commercially focused, such as the target corporation’s desired capital structure and its ability to obtain third-party financing.

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The stakeholders further noted that, if the application of the stock repurchase excise tax to fully taxable stock acquisitions hinges solely on the actual or deemed source of consideration, then parties easily may avoid the tax by borrowing at the acquiring-entity level, buying the target corporation’s shares, and then having the target corporation assume or satisfy the debt after the acquisition.

The Treasury Department and the IRS disagree with the stakeholders’ recommendations. The treatment of such target corporation-funded payments as a redemption within the meaning of section 317(b) follows longstanding Federal income tax principles and guidance. The Treasury Department and the IRS are of the view that there is no compelling reason to deviate from such long-standing principles and guidance or from the express language of section 4501(c)(1), which defines a repurchase, in part, as “a redemption within the meaning of section 317(b) with regard to the stock of a covered corporation.” The Treasury Department and the IRS are of the view that integrating long-standing Federal income tax principles and guidance into the proposed regulations would facilitate taxpayer compliance, as well as the ability of the IRS to administer and enforce the stock repurchase excise tax. Accordingly, the proposed regulations would not adopt the stakeholders’ recommendations regarding taxable stock acquisitions.

Several stakeholders offered alternative recommendations in the event the proposed regulations do not exclude taxable stock acquisitions from the stock repurchase excise tax. One stakeholder agreed with the approach described in Notice 2023-2, under which a taxable stock acquisition is treated as a section 317(b) redemption only to the extent of the consideration sourced from the target corporation. The stakeholder recommended that, for purposes of the stock repurchase excise tax, sourcing should be guided by the same principles that apply to determine the identity of the borrower for Federal income tax purposes. The proposed regulations would retain the approach described in Notice 2023-2.

Another stakeholder recommended that issuances by the target corporation in the same taxable year as the “take pri

vate” transaction, including issuances that occur after the “take private” transaction, should be taken into account for purposes of the netting rule. The Treasury Department and the IRS disagree with this recommendation. As previously discussed, the Treasury Department and the IRS are of the view that, to be consistent with the statutory language in section 4501, stock issued by a corporation after it ceases to be a covered corporation should not be taken into account under the netting rule. See part IV.A of this Explanation of Provisions. Accordingly, the proposed regulations would take into account stock issued by the target corporation in the same taxable year as the “take private” transaction only if that stock was issued during the period in which the target corporation was a covered corporation, as determined under these proposed regulations. See proposed §§58.4501-2(d)(1) and 58.45014(b)(2).

B. Section 304 transactions

1. Section 304(a)(1) Transactions

Section 304(a)(1) of the Code applies if one corporation purchases stock of another corporation from a shareholder or shareholders in control of both corporations in exchange for cash or other property (section 304(a)(1) transaction). If section 304(a)(1) applies, the cash or other property paid to the controlling shareholder or shareholders is treated as a distribution in redemption of the stock of the acquiring corporation. To the extent that the distribution is treated as a distribution to which section 301 applies, (i) the selling shareholder or shareholders are treated in the same manner as if they had transferred the acquired stock to the acquiring corporation in a transaction to which section 351(a) of the Code applies, and then (ii) the acquiring corporation is treated in the same manner as if it had redeemed the stock it was treated as issuing in the transaction.

The approach described in sections 3.04(3)(a) and 3.08(4)(e) of Notice 20232, respectively, provides that a deemed redemption resulting from the application of section 304(a)(1) is neither a repurchase nor an issuance for purposes of the stock repurchase excise tax. Stakeholders

generally agreed with this approach, for several reasons.

First, stakeholders noted that section 304(a)(1) transactions involve no actual contraction in the number of shares of acquiring corporation stock. Second, stakeholders observed that, to the extent the deemed redemption is treated as a distribution to which section 301 applies, the section 304(a)(1) transaction would consist of an offsetting issuance and repurchase of acquiring corporation stock. However, those stakeholders correctly noted that the deemed redemption would be statutorily excluded from the computation of the acquiring corporation’s stock repurchase excise tax base under section 4501(e)(6) to the extent that the deemed redemption is treated as a dividend under section 301(c)(1). As a result, the Federal income tax treatment mandated by section 304(a)(1), combined with the statutory exclusion for dividends under section 4501(e)(6), would manufacture an automatic net issuance.

Finally, one stakeholder claimed that it could be difficult for taxpayers to determine whether section 304(a)(1) applies to public company M&A transactions because publicly traded corporations do not know the identity of their shareholders. For that reason, the stakeholder also contended that it could be difficult for the IRS to administer and enforce the stock repurchase excise tax with respect to section 304(a)(1) transactions.

However, several stakeholders expressed concern that an exemption for all section 304(a)(1) transactions may exclude transactions that (i) satisfy the statutory requirements for section 304 qualification, and (ii) are economically similar to a conventional stock repurchase. As an illustration, the stakeholders presented the following fact pattern. Individual A owns 50 percent of the stock of two public corporations. Individual A sells a portion of its stock in one corporation (that is, the target corporation) to the other corporation (that is, the acquiring corporation). The stakeholders explained that section 304(a)(1) would apply to the sale, but individual A may qualify for sale or exchange treatment under section 302(a) depending on individual A’s actual and constructive ownership of the target corporation following the transaction.

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According to the stakeholder, applying the stock repurchase excise tax may be appropriate in this situation and in other situations in which control of the target and acquiring corporations is not widely dispersed and both corporations remain publicly traded after the transaction.

The Treasury Department and the IRS are of the view that the complexity of regulations applying the stock repurchase excise tax with regard to section 304(a)(1) transactions would outweigh significantly any benefit of applying this tax to those transactions. In addition, the Treasury Department and the IRS are of the view that applying the stock repurchase excise tax to section 304(a)(1) transactions would create significant difficulty for the IRS to administer and enforce the tax, as well as for taxpayers to calculate and report their tax with certainty. Accordingly, the Treasury Department and the IRS are of the view that the stock repurchase excise tax should not apply to a redemption that is deemed to occur by virtue of section 304(a)(1). See proposed §§58.4501-2(e) (3)(i) and 58.4501-4(f)(4).

2. Section 304(a)(2) Transactions

Section 304(a)(2) applies if one corporation (that is, the acquiring corporation) purchases stock of another corporation (that is, the target corporation) from a shareholder of the target corporation in exchange for cash or other property and that target corporation controls the acquiring corporation (section 304(a)(2) transaction). If section 304(a)(2) applies, that property is treated as a distribution in redemption of the stock of the target corporation. The approach described in Notice 2023-2 does not exempt section 304(a)(2) transactions from the application of the stock repurchase excise tax. See generally section 3.04(3) of Notice 2023-2 (excepting solely section 304(a) (1) transactions).

One stakeholder noted that the application of the stock repurchase excise tax to section 304(a)(2) transactions generally is clear and is analogous to the rule treating an acquisition of stock of a covered corporation by a specified affiliate as a repurchase to which the stock repurchase excise tax applies. The Treasury Department and the IRS agree with the stake

holder. Accordingly, the proposed regulations would not exempt section 304(a)(2) transactions from the application of the stock repurchase excise tax.

VIII. Reorganizations

A. Acquisitive reorganizations

1. Overview

The approach described in Notice 2023-2 treats an exchange of target corporation stock by the target corporation’s shareholders in an acquisitive reorganization as an economically similar transaction. See section 3.04(4)(a)(i) of Notice 2023-2. The notice defines an “acquisitive reorganization” as a transaction that qualifies as a reorganization under section 368(a)(1)(A) of the Code (including by reason of section 368(a)(2)(D) or (E)), section 368(a)(1)(C), or section 368(a) (1)(D) (D reorganization) (if the reorganization satisfies the requirements of section 354(b)(1) of the Code). See section 3.02(1) of Notice 2023-2. Under the approach described in Notice 2023-2, the effect of an acquisitive reorganization on a target corporation’s stock repurchase excise tax base is computed by first including in that tax base the fair market value of all target corporation stock exchanged in the transaction, regardless of the type of consideration for which the stock is exchanged. The stock repurchase excise tax base then is reduced under the statutory exception in section 4501(e) (1) (reorganization exception) by the fair market value of the target corporation stock exchanged for property permitted to be received by the target corporation shareholders without recognition of gain or loss under section 354 (that is, qualifying property). Thus, under the approach described in Notice 2023-2, the target corporation generally is subject to the stock repurchase excise tax only to the extent of the fair market value of target corporation stock exchanged for property that is non-qualifying property.

For purposes of this preamble, the term “acquisitive reorganization” includes each transaction described as an acquisitive reorganization in Notice 2023-2 as well as a transaction that qualifies as a reorganization under section 368(a)(1)(G) (if the

reorganization satisfies the requirements of section 354(b)(1)).

Under Federal income tax principles, acquisitive reorganizations involve the following two elements. First, the target corporation transfers all or a portion of its assets to the acquiring corporation in exchange for consideration from the acquiring corporation. Second, the target corporation distributes the consideration received from the acquiring corporation to the target corporation’s shareholders in exchange for their target corporation stock in an actual or deemed liquidation of the target corporation (target redemptive distribution). See, for example, section 361(a) and (c) of the Code (providing for nonrecognition of gain or loss for the target corporation’s transfer of assets in exchange for stock or securities of a party to the reorganization and the target corporation’s distribution of that stock or securities pursuant to a plan of reorganization); section 368(a)(1)(C) and (a)(2)(G) (to similar effect).

2. Feedback Received

a. In general

Several stakeholders recommended that acquisitive reorganizations should not be subject to the stock repurchase excise tax, to any extent. These stakeholders contended that, although a target redemptive distribution in an acquisitive reorganization resembles a section 317(b) redemption, such a transaction should not be subject to the stock repurchase excise tax even if non-qualifying property is provided. See parts VIII.A.2.b and c of this Explanation of Provisions.

b. Stakeholders contend acquisitive reorganizations are not economically similar transactions

Some stakeholders asserted that acquisitive reorganizations are economically distinguishable from a section 317(b) redemption and therefore should not be treated as economically similar transactions. According to these stakeholders, the basic economic nature of an acquisitive reorganization (at least in situations in which the parties to the transaction are unrelated) is a two-company acquisitive

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transaction in which the target corporation shareholders sell the target corporation to the acquiring corporation. In contrast, a section 317(b) redemption is a transaction in which a single corporation acquires its own stock from its shareholders.

Several stakeholders stated that an acquisitive reorganization between unrelated parties is motivated primarily by bona fide investment and strategic business purposes and does not give rise to any abuse that the stakeholders hypothesized Congress may have intended to discourage through enactment of the stock repurchase excise tax. These stakeholders acknowledged that the exchange of target corporation stock for non-qualifying property in a target redemptive distribution either constitutes or resembles a section 317(b) redemption. However, the stakeholders questioned whether this exchange under Federal income tax principles provides an adequate basis for designating the transaction as “economically similar.” The stakeholders further questioned why a distribution in complete liquidation as part of a reorganization (that is, the target redemptive distribution) should give rise to an economically similar transaction under the approach described in Notice 2023-2 even though a distribution in complete liquidation subject to either section 331 or 332 (but not both) would not. With regard to the latter point, several stakeholders noted that the exchange between the target corporation and its shareholders in a forward merger that failed to qualify as a reorganization would not be subject to the stock repurchase excise tax. See Rev. Rul. 69-6, 1969-1 C.B. 104 (treating such an exchange as a distribution in complete liquidation to which section 331 applies). One stakeholder suggested that the application of this tax should be based upon the substantive Federal income tax characterization of the steps of the transaction, rather than upon the overall Federal income tax characterization of the transaction as a reorganization. For support, the stakeholder contended that their recommendation would mitigate the potential for a more onerous result under the stock repurchase excise tax if the components of such a transaction qualify for reorganization treatment.

Several stakeholders also recommended that transactions that qualify as a

reorganization described in either section 368(a)(1)(B) (B reorganization) or 368(a) (1)(A) by reason of section 368(a)(2)(E) (reverse triangular merger) should not be subject to the stock repurchase excise tax. The stakeholders contended that those types of reorganizations should not be subject to the stock repurchase excise tax based on their view that such transactions, both in substance and in form, involve an acquisition of stock by a third party rather than a repurchase or redemption of target corporation stock.

c. Effect of the statutory exception in section 4501(e)(1)

Stakeholders acknowledged that the inclusion of the statutory exception in section 4501(e)(1) (that is, the reorganization exception) is subject to several interpretations. Several stakeholders acknowledged that the inclusion of this exception in section 4501 could be construed as reflecting congressional intent that all stock exchanged for non-qualifying property in a reorganization should be treated as economically similar to a section 317(b) redemption. However, the stakeholders recommended that the Treasury Department and the IRS not adopt that interpretation.

In contrast, one stakeholder contended that the inclusion of the reorganization exception does not necessarily indicate that Congress intended all non-qualifying property received in any acquisitive reorganization to be subject to the stock repurchase excise tax. Rather, the stakeholder asserted that the application of this statutory exception requires (i) identifying a transaction as a section 317(b) redemption or an economically similar transaction that occurs as part of a reorganization, (ii) applying this statutory exception to exempt the target corporation stock exchanged for qualifying property, and then (iii) subjecting the target corporation stock exchanged for non-qualifying property to the stock repurchase excise tax to the extent gain or loss is recognized. Similarly, several stakeholders contended that the reorganization exception could be given effect by applying this exception only to reorganizations that most closely resemble section 317(b) redemptions, such as split-offs (as defined in part IX

of this Explanation of Provisions) with non-qualifying property, or E reorganizations involving an exchange of the recapitalizing corporation’s stock for newly issued stock and non-qualifying property.

d. Response to stakeholder feedback

The Treasury Department and the IRS are of the view that the recommendations of the stakeholders would be contrary to the statutory language of section 4501. The reorganization exception provides that section 4501(a) does not apply “to the extent that the repurchase is part of a reorganization (within the meaning of section 368(a)) and no gain or loss is recognized on such repurchase by the shareholder under chapter 1 by reason of such reorganization.” Section 4501(e)(1). The Treasury Department and the IRS are of the view that the presence of the reorganization exception in section 4501(e)(1) indicates that exchanges of target corporation stock occurring as part of an acquisitive reorganization are subject to the stock repurchase excise tax. Indeed, this statutory exception would have no effect if the exchange of target corporation stock for non-qualifying property in reorganizations were exempt from the stock repurchase excise tax. Moreover, the Treasury Department and the IRS are of the view that the proposed regulations should not reduce the statutorily mandated scope of the reorganization exception, but rather should give full effect to its language mandating that the reorganization exception applies to all reorganizations “within the meaning of section 368(a).”

The Treasury Department and the IRS also are of the view that implementation of the reorganization exception by reliance on sections 354 and 356 of the Code would provide bright-line rules that taxpayers could apply and the IRS could administer and enforce with certainty. Specifically, every acquisitive reorganization involves a target redemptive distribution to a target corporation shareholder to which section 354 or 356 is applied.

Accordingly, the proposed regulations would treat acquisitive reorganizations as economically similar transactions. See proposed §58.4501‑2(e)(4)(i); see also proposed §58.4501-3(c) (reorganization exception); part X.A of this Explanation

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of Provisions (discussion of reorganization exception). However, the proposed regulations would not subject B reorganizations to the stock repurchase excise tax. See proposed §§58.4501-1(b)(1) and 58.4501-2(e)(4)(i). Lastly, the Treasury Department and the IRS view the distinction between taxable forward mergers and forward mergers qualifying as reorganizations as appropriate because there is a successor to the target corporation in an acquisitive asset reorganization ( see section 381(a)). In contrast, the target corporation in a complete liquidation subject to section 331 ceases to exist for Federal income tax purposes.

B. Sourcing approach to acquisitive reorganizations

Several stakeholders recommended that, if the proposed regulations do not wholly exempt acquisitive reorganizations from the stock repurchase excise tax, this tax should apply to acquisitive transactions solely to the extent that any non-qualifying property is sourced from the target corporation (sourcing approach). According to the stakeholders, to the extent that the consideration used to repurchase target corporation stock is attributable to the acquiring corporation or another third party, the transaction does not represent the target corporation’s redemption of its own stock and therefore should not be subject to the stock repurchase excise tax.

However, another stakeholder contended that the approach in Notice 2023-2 arguably facilitates the administration of the stock repurchase excise tax by treating all exchanges of target corporation stock in a reorganization as a repurchase, irrespective of the type of reorganization, and regardless of the source of consideration. Nonetheless, for the reasons previously discussed in this part VIII.B, the stakeholder contended that a sourcing approach strikes a better balance with the statutory language and with the stakeholder’s opinion that Congress enacted the stock repurchase excise tax to curtail single-entity corporate contractions.

Another stakeholder acknowledged that a sourcing approach could raise issues of administrability, particularly due to the

fungible nature of cash and the fact that the operations of the target corporation and the acquiring corporation often are integrated following an acquisition. The stakeholder noted that these difficulties arguably would be compounded in situations in which a target operating corporation is merged directly into an acquiring operating corporation, although other forms of post-merger integration could present similar challenges.

Notwithstanding these administrative difficulties, these stakeholders contended that a sourcing approach could be administered effectively. One stakeholder stated that the challenges presented by a sourcing approach are not meaningfully different from other issues that have been addressed by longstanding authorities concerning reorganizations. For instance, a sourcing approach is used to determine whether funds distributed to the target corporation’s shareholders prior to a B reorganization are properly treated as non-qualifying property. See, for example, Rev. Rul. 70-172, 1970-1 C.B. 77 (dividend distribution of property sourced from the target corporation treated as separate and distinct from an immediately subsequent B reorganization). With regard to reverse triangular mergers, these stakeholders noted that funds sourced from the target corporation are taken into account for purposes of the “substantially all” test in section 368(a) (2)(E)(i), but not for purposes of measuring the acquisition of “control” under section 368(a)(2)(E)(ii). See §1.368-2(j) (3)(i) and (iii).

The stakeholders also questioned the different treatment under Notice 2023-2 of acquisitive reorganizations and taxable stock acquisitions. These stakeholders observed that, under Notice 2023-2, the stock repurchase excise tax would apply to all consideration consisting of non-qualifying property in an acquisitive reorganization. In contrast, the rules described in Notice 2023-2 provides that the stock repurchase excise tax is imposed in a taxable stock acquisition only to the extent of the consideration sourced from the target corporation. In the stakeholders’ view, this inconsistent treatment is difficult to justify as a policy matter because taxable and tax-free transactions may be economically similar.

The Treasury Department and the IRS are of the view that the stakeholders’ recommendation is not supported by the statutory language of the reorganization exception. The plain language of the reorganization exception contains no reference to the source of the consideration for which the target corporation shareholders exchange their stock in a target redemptive distribution. Instead, the application of the reorganization exception to a target redemptive distribution in an acquisitive reorganization depends only on whether “gain or loss is recognized on such repurchase by the shareholder under chapter 1 by reason of such reorganization.” In other words, under the reorganization exception, the source of the consideration for which the target corporation shareholders exchange their stock in a target redemptive distribution is irrelevant in determining the application of the stock repurchase excise tax to acquisitive reorganizations. Lastly, the Treasury Department and the IRS are of the view that an extra-statutory sourcing rule recommended by the stakeholders would be neither necessary nor appropriate to carry out the purposes of the stock repurchase excise tax.

For the foregoing reasons, the proposed regulations would not incorporate a sourcing approach to determine the application of the stock repurchase excise tax to acquisitive reorganizations. Rather, under the proposed regulations, the stock repurchase excise tax would apply to a repurchase that is part of a reorganization to the extent a shareholder exchanges their stock for non-qualifying property.

C. Commissioner v. Clark

One stakeholder recommended that the stock repurchase excise tax should not apply to any hypothetical deemed issuance and redemption under Clark v. Commissioner, 489 U.S. 726 (1989), because such a transaction either (i) is a fictional transaction that is not within the scope of the tax, or (ii) results in a net zero adjustment pursuant to the netting rule in the case of domestic covered corporations. Another stakeholder also noted that the deemed issuance under Clark would offset the deemed redemption.

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The Treasury Department and the IRS are of the view that Clark should not apply in determining the applicability of the stock repurchase excise tax to non-qualifying property furnished in a reorganization, other than to determine the applicability of the dividend exception ( see the discussion in part VIII.F of this Explanation of Provisions). This view was incorporated into Notice 2023-2, and the proposed regulations likewise would not provide any special rules based on an analogical application of Clark .

D. E reorganizations

1. Treatment of E Reorganizations Under Notice 2023-2

Under the approach described in Notice 2023-2, E reorganizations are treated as economically similar transactions in the same manner as other reorganizations for purposes of the stock repurchase excise tax. Accordingly, a recapitalizing corporation has a repurchase to the extent of the fair market value of the shares exchanged by its shareholders in the transaction. See section 3.04(4)(a)(ii) of Notice 20232. However, the fair market value of the repurchased shares that are exchanged for qualifying property reduces the corporation’s stock repurchase excise tax base. See section 3.07(2)(b) of Notice 2023-2 (applying the statutory exception in section 4501(e)(1) to E reorganizations). As a result, the recapitalizing corporation is subject to the stock repurchase excise tax only to the extent of the fair market value of its shares that are repurchased with non-qualifying property (if any).

Additionally, the stock issued by the recapitalizing corporation in the transaction is disregarded for purposes of the netting rule under the “no double benefit rule.” See section 3.08(4)(d) of Notice 2023-2; see also part XI.C.2 of this Explanation of Provisions for a discussion of the no double benefit rule.

2. Feedback Received

Several stakeholders recommended that an exchange of stock for qualifying property in an E reorganization should not be subject to the stock repurchase excise tax. However, the stakeholders

recommended that shares that are repurchased with non-qualifying property in an E reorganization should be subject to the stock repurchase excise tax because the exchange is substantially similar to the redemption of stock for cash, unless the receipt of non-qualifying property is treated as a separate transaction under §1.301-1(j).

3. Exchange of Stock for Qualifying Property in an E Reorganization

The Treasury Department and the IRS disagree with the stakeholders’ recommendation that an exchange of stock for qualifying property in an E reorganization should not be included in the recapitalizing corporation’s stock repurchase excise tax base. As discussed in part VIII.A.2.d of this Explanation of Provisions, the Treasury Department and the IRS are of the view that the reorganization exception would be most appropriately implemented by (i) treating all exchanges of stock between a corporation and its shareholders occurring as part of a reorganization as an economically similar transaction, and then (ii) removing from the corporation’s stock repurchase excise tax base the amount of target corporation stock for which the target corporation shareholders receive qualifying property. The Treasury Department and the IRS also are of the view that adopting uniform treatment for reorganizations would implement the reorganization exception in a manner most consistent with its statutory language (as set forth in section 4501(e)(1)). Lastly, the Treasury Department and the IRS are of the view that this approach would facilitate the IRS’s ability to administer and enforce the stock repurchase excise tax and enable taxpayers to apply the tax with greater certainty.

Accordingly, the proposed regulations would include the stock-for-qualifying property portion of an exchange occurring as part of an E reorganization in the stock repurchase excise tax base, and then exclude that portion in a later step of the stock repurchase excise tax base computation. See proposed §§58.4501-2(e)(4)(ii) and 58.4501-3(c). The Treasury Department and the IRS request comments on the proposed treatment of E reorganizations.

E. F reorganizations

1. Treatment of F Reorganizations Under Notice 2023-2

Under the approach described in Notice 2023-2, F reorganizations are treated as economically similar transactions in the same manner as other reorganizations for purposes of the stock repurchase excise tax. Accordingly, the transferor corporation has a repurchase to the extent of the fair market value of the shares exchanged by its shareholders in the transaction. See section 3.04(4)(a)(iii) of Notice 20232. However, the fair market value of the repurchased shares that are exchanged for qualifying property reduces the corporation’s stock repurchase excise tax base. See section 3.07(2)(c) of Notice 2023-2 (applying the statutory exception in section 4501(e)(1) to F reorganizations). As a result, the transferor corporation is subject to the stock repurchase excise tax only to the extent of the fair market value of its shares that are repurchased with non-qualifying property (if any).

A distribution of non-qualifying property by the transferor corporation in an F reorganization is treated as a separate transaction (for example, under section 302). See §1.368-2(m)(1)(iii) (providing that any distribution of money or other property from either the transferor corporation or the resulting corporation, including any money or other property exchanged for shares, in an F reorganization is treated as an unrelated, separate transaction from the reorganization).

2. Feedback Received

Several stakeholders recommended that F reorganizations should not be subject to the stock repurchase excise tax because the stock issued in an F reorganization does not qualify as “property” within the meaning of section 317(a). These stakeholders contended that no “redemption” could occur within the meaning of section 317(b), and therefore the stock repurchase excise tax should not apply.

For the same rationale as other reorganizations, the Treasury Department and the IRS continue to be of the view that F reorganizations should be treated as economically similar transactions for pur

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poses of the stock repurchase excise tax. See parts VIII.A and D of this Explanation of Provisions (discussing acquisitive reorganizations and E reorganizations). Moreover, the Treasury Department and the IRS are of the view that adopting uniform treatment for reorganizations would reduce complexity for taxpayers and facilitate the IRS’s ability to administer and enforce the stock repurchase excise tax. The proposed regulations reflect this view. See proposed §§58.4501-2(e)(4)(iii) and 58.4501-3(c). The Treasury Department and the IRS request comments on the proposed treatment of F reorganizations.

F. Downstream reorganizations and other related-party reorganizations

Several stakeholders recommended that, if reorganizations generally are not subject to the stock repurchase excise tax under the proposed regulations, related-party reorganizations (such as an acquisition of a publicly traded parent corporation’s stock by a specified affiliate, or a reorganization between two covered corporations under common control) nonetheless should be subject to the stock repurchase excise tax to the extent of the non-qualifying property received by shareholders. One stakeholder suggested that the receipt of non-qualifying property in such transactions is economically identical to a conventional stock repurchase.

The Treasury Department and the IRS agree with stakeholders that such transactions should be subject to the stock repurchase excise tax. However, because reorganizations generally would be subject to the stock repurchase excise tax under the proposed regulations, no special rules are needed to address related-party reorganizations. Accordingly, the proposed regulations would not adopt the stakeholders’ recommendation.

G. Reverse acquisitions involving investment companies

One stakeholder suggested that, if the proposed regulations generally do not apply the stock repurchase excise tax to acquisitive reorganizations, the proposed regulations should apply this tax to certain reverse acquisitions involving a publicly traded acquiring corporation. According to

the stakeholder, if the historical business of a publicly traded acquiring corporation has declined in value to the point that the corporation’s stock is trading based on the net value of its cash and other investment assets, and if the target corporation shareholders as a group will obtain more than 50 percent of the fair market value of the acquiring corporation’s stock in an acquisitive reorganization, then any non-qualifying property received by the target corporation shareholders in the reorganization may resemble a repurchase. Although the stakeholder noted that such transactions are rare, the stakeholder recommended that the Treasury Department and the IRS consider designating such transactions as economically similar.

The Treasury Department and the IRS are of the view that no special rules are required to address these types of transactions because the proposed regulations would not exclude acquisitive reorganizations from the stock repurchase excise tax. Accordingly, the proposed regulations do not incorporate the stakeholder’s suggested provision.

IX. Section 355 Transactions

Under the approach described in Notice 2023-2, a section 355 transaction in which a distributing corporation (within the meaning of section 355(a)(1)(A) of the Code) distributes stock of a controlled corporation (within the meaning of section 355(a)(1)(A)) and, if applicable, other property or money to the distributing corporation’s shareholders in exchange for a portion of the shareholders’ stock in the distributing corporation (split-off) is treated as an economically similar transaction. Accordingly, the distributing corporation has made a repurchase to the extent of the fair market value of the distributing corporation shares exchanged by its shareholders in the transaction. See section 3.04(4)(a)(iv) of Notice 2023-2.

However, the fair market value of the repurchased shares that are exchanged for qualifying property reduces the distributing corporation’s stock repurchase excise tax base, regardless of whether the distribution was carried out as part of a D reorganization. See section 3.07(2) of Notice 2023-2. As a result, the distributing corporation is subject to the stock

repurchase excise tax only to the extent of the fair market value of its shares that are repurchased with non-qualifying property (if any). A distribution by a distributing corporation of stock of a controlled corporation qualifying under section 355 that is not a split-off is not a repurchase subject to the stock repurchase excise tax. See section 3.04(4)(b)(ii) of Notice 2023-2.

A. In general

Several stakeholders recommended that a spin-off (that is, a distribution of stock of a controlled corporation (Controlled) by the distributing corporation (Distributing) to Distributing’s shareholders) to which section 355 applies should not be treated as a repurchase because spin-offs do not involve an exchange of Controlled stock for Distributing stock. The stakeholders also recommended that a split-up (that is, a liquidating distribution in which Distributing distributes the stock of more than one Controlled) or split-off to which section 355 applies, and in which only Controlled stock (and no non-qualifying property) is distributed, should not be treated as a repurchase. For example, one stakeholder found it significant that a split-off without non-qualifying property generally would not reduce the number of shares outstanding or enhance the EPS of Distributing.

In contrast, stakeholders recommended that any non-qualifying property distributed in a split-off to which section 355 applies should be treated as a repurchase to the same extent as if that non-qualifying property were distributed in a redemption under section 302(a), because the source of the cash and the form of the transaction frequently are the same as in a conventional stock buyback. One stakeholder also recommended treating a split-up with non-qualifying property as a repurchase in the same manner.

The Treasury Department and the IRS are of the view that spin-offs and splitups should not be subject to the stock repurchase excise tax. See proposed §58.4501‑2(e)(5)(iii)(A). With regard to a spin-off, the Treasury Department and the IRS are of this view because Distributing does not provide consideration to Distributing’s shareholders in exchange for their Distributing stock (that is, no repurchase

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could be treated as having occurred). With regard to a split-up, the Treasury Department and the IRS are of this view because Distributing completely liquidates as a result of Distributing’s distribution of consideration to its shareholders in exchange for their Distributing stock. The proposed treatment of spin-offs and split-ups is consistent with the proposed treatment of non-redemptive distributions under section 301 and distributions in complete liquidation, which are analogous to spin-offs and split-ups, respectively. Cf. proposed §§58.4501-2(e)(5)(iv) (exempting certain non-redemptive distributions under section 301 from the stock repurchase excise tax); 58.4501-2(e)(5)(i) (exempting distributions in complete liquidation that are exclusively under section 331 or 332 from the stock repurchase excise tax).

However, the proposed regulations would clarify that a distribution by Distributing of non-qualifying property in exchange for Distributing stock in pursuance of a spin-off or a split-up would be a repurchase. See proposed §58.4501-2(e) (5)(iii)(B).

The Treasury Department and the IRS also continue to be of the view that split-offs should be subject to the stock repurchase excise tax. See proposed §58.4501‑2(e) (4)(iv). Accordingly, Distributing would have a repurchase to the extent of the fair market value of the Distributing stock exchanged by Distributing’s shareholders in the transaction. However, the fair market value of the repurchased Distributing stock that is exchanged for qualifying property would be subject to the reorganization exception, regardless of whether the split-off occurred as part of a D reorganization. See proposed §58.4501-3(c). As a result, Distributing would be subject to the stock repurchase excise tax only to the extent of the fair market value of its stock that is repurchased with non-qualifying property (if any).

B. Exchange of Controlled securities in a split-off to which section 355 applies