Introduction
In a significant move to provide clarity on the stock repurchase excise tax, the IRS and the Department of the Treasury have released highly anticipated proposed regulations. The IRS and Treasury are working to establish a comprehensive framework for the administration of the excise tax on the repurchase of corporate stock. This initiative is currently encapsulated in the Proposed Regulations REG-118499-23 (Procedure and Administration)1, released on April 9, 2024.
These newly released proposed regulations provide guidance and clarity on filing and reporting requirements, recordkeeping requirements, and penalties for noncompliance. The purpose of this article is to highlight the procedural aspects of these proposed regulations, shedding light on what corporations can expect in terms of compliance and administration.
Background
Previous Guidance
Prior to the proposed regulations, the IRS provided guidance through Notice 2023-2. The notice aimed to provide taxpayers with interim guidance until the publication of the newly released proposed regulations. Taxpayers were allowed to rely on the rules described in the notice until the issuance of these proposed regulations.
Purpose of the Proposed Regulations
In the context of REG-118499-23, these proposed regulations serve as an interim measure to guide taxpayers and practitioners on how to comply with the procedure and administrative requirements of the excise tax until final regulations are issued. Note however, that while proposed regulations do not have the force and effect of law immediately upon publication, taxpayers may rely upon them until final regulations are promulgated.
Key Procedural Aspects
1. Filing Requirements: The proposed regulations stipulate that any covered corporation, or any entity treated as such, engaging in stock repurchase activities after Dec. 31, 2022, must file a ‘stock repurchase excise tax return’. The proposed regulations confirm that the ‘stock repurchase excise tax return’ means the Form 720, Quarterly Federal Excise Tax Return, accompanied by Form 7208, Excise Tax on Repurchase of Corporate Stock.
- Notably, any covered corporation that makes a repurchase must comply with these reporting requirements, even if every repurchase is eligible for a statutory exception or is offset by issuances.
- Timing - For a covered corporation (or an entity treated as such) with a taxable year ending after Dec. 31, 2022, and before the date final regulations are published, the stock repurchase excise tax return is filed by the due date of the Form 720. This due date is the first full calendar quarter following the publication of the final regulations.
- For example, if a covered corporation had a taxable year ending Dec. 31, 2023, and the date of publication of final regulations were Sep. 16, 2024, the stock repurchase excise tax return for the 2023 taxable year would be filed by Jan. 31, 2025 (the due date of the Form 720 for the calendar quarter ending Dec. 31, 2024).
- After promulgation of the final regulations, the stock repurchase excise tax return would be filed by the due date of the Form 720 for the first full calendar quarter after the taxable year of the covered corporation ends.
- For example, a covered corporation with a taxable year ending Dec. 31, 2024, and if the date of publication of final regulations were Sep. 16, 2024, the stock repurchase excise tax return for its 2024 taxable year would be filed by April 30, 2025 (the due date of the Form 720 for the calendar quarter ending March 31, 2025).
2. Recordkeeping: Corporations subject to the tax are required to maintain comprehensive and detailed records sufficient to accurately establish the amount of repurchases, adjustments, or exceptions (e.g., documentation of repurchases, issuances, options exercise, etc.) These records must be readily available for IRS inspection and retained as long as they may become material in the administration of any internal revenue law.
3. Payment Deadlines: The excise tax must be paid once per taxable year on the Form 720 due for the first full quarter after the close of the taxpayer’s taxable year. The deadline for payment coincides with the filing deadline.
4. Penalties and Compliance: The proposed regulations also outline penalties for non-compliance, including failure to file, failure to pay and understatement of liability. Tax return preparers are also subject to specific requirements and penalties under these regulations.
Conclusion
Corporations should quickly adapt to these new requirements by ensuring robust recordkeeping practices and timely compliance with filing and payment obligations, beginning with any repurchases after Dec. 31, 2022. The framework of the proposed regulations underscores the importance of understanding the nuances of the excise tax and its implications for corporate financial strategies. As the rulemaking process progresses, stakeholders are encouraged to discuss with their tax advisors and engage in the public comment period.
Please note that the information provided in this article is intended for general guidance and informational purposes only. Tax laws and regulations are complex and subject to change, and the application of such laws and regulations can vary widely based on the specific facts and circumstances involved. Therefore, we strongly advise consulting with a qualified tax professional or legal advisor.
