On November 21, 2025, the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued final regulations under Section 45011 relating to the one percent stock buyback excise tax (the Final Regulations). This alert summarizes some key aspects of the Final Regulations that are of particular importance to clients of the firm, including significant differences from the prior proposed regulations issued on April 9, 2024 (the Proposed Regulations).2 Of note, the Final Regulations provide that the stock buyback excise tax does not apply to “take-private”/leveraged buyout acquisitions of publicly traded companies, nor does the tax apply to cash and other non-stock property paid as part of the acquisition of a publicly traded company in a tax-free reorganization under Section 368. These changes significantly reduce the impact of the excise tax in M&A transactions involving publicly traded companies.
General Background
The excise tax was enacted as part of the Inflation Reduction Act and was originally signed into law on August 16, 2022. The excise tax generally applies to stock repurchases and “economically similar” transactions undertaken by publicly traded U.S. corporations and certain foreign corporations (collectively, covered corporations), reduced by stock issued by the covered corporation in the same taxable year (the netting rule). On December 27, 2022, Treasury and IRS issued temporary interim guidance regarding certain aspects of the excise tax in the form of administrative Notice 2023-2 (the Notice).3 On April 9, 2024, Treasury and the IRS issued the Proposed Regulations, which largely adopted the approaches in the Notice and addressed various previously unresolved questions regarding implementation of the excise tax.
M&A and Restructuring Transactions
Taxable Acquisitions/Leveraged Buyouts
The Notice and the Proposed Regulations imposed the excise tax on the acquisition of a publicly traded target corporation to the extent that the purchase price is sourced to or funded by the target, even in a take-private transaction in which the target was no longer publicly traded after acquisition. Under the Final Regulations, redemptions by a covered corporation that occur as part of a take-private transaction are not treated as repurchases for purposes of the excise tax, eliminating the need to determine which portion of the consideration is funded by the target.
Tax-Free Acquisitive Reorganizations
The Notice and the Proposed Regulations treated certain reorganizations of publicly traded target companies under Section 368 that involved cash or other non-stock consideration as economically equivalent to a stock buyback and subject to the excise tax under Section 4501. The Final Regulations exempt acquisitive (two-party) reorganizations from the excise tax. In addition, the Final Regulations allow the acquiring corporation in an acquisitive reorganization to reduce its stock repurchase excise tax base by the value of stock it issues in the reorganization.
Recapitalizations
A recapitalization qualifying under Section 368(a)(1)(E) is treated as a repurchase for purposes of the excise tax only to the extent that the shareholders receive cash or other non-stock consideration. However, any cash paid in lieu of fractional shares remain outside the scope of the excise tax. Further, the Final Regulations clarify that debt-for-debt exchanges are not subject to the excise tax because no stock of the recapitalizing corporation is exchanged by its shareholders. Finally, stock issued by the recapitalizing corporation is not treated as issued for purposes of the netting rule.
Spin-Offs and Split-Offs
The Final Regulations confirm that tax-free spin-offs (pro rata distributions) under Section 355 are not subject to the excise tax. For split-offs (non-pro rata distributions) qualifying as tax-free under Section 355, the Final Regulations retain the approach in the Proposed Regulations, which treats the exchange by the distributing corporation shareholders of their distributing corporation stock as a repurchase by the distributing corporation for purposes of the excise tax. Moreover, the Final Regulations provide that stock issued by the controlled corporation in a split-off is not treated as issued for purposes of the netting rule.
Capital Markets Transactions
Non-Participating “Debt-Like” Preferred Stock/Mandatorily Redeemable Stock
The Proposed Regulations did not provide any exceptions for non-participating “debt-like” preferred stock (i.e., non-convertible preferred stock that is limited and preferred as to dividends and does not participate in corporate growth to any significant extent) and mandatorily redeemable stock. To the contrary, the Final Regulations exempt repurchases of non-participating “debt-like” preferred stock (i.e., stock described in Section 1504(a)(4)) from the application of the stock repurchase excise tax and incorporate a grandfather rule for mandatorily redeemable stock and stock subject to a unilateral put option if such stock was outstanding prior to August 16, 2022.
Accelerated Share Repurchase (ASR) Programs
Although there are no explicit rules addressing ASRs, the Final Regulations include Example 15 indicating that shares that are subject to an ASR program are considered repurchased by the covered corporation for excise tax purposes when the shares are delivered to the covered corporation (typically upon initial delivery and again on final settlement).
Convertible Debt/Integrated Call-Spread and Capped-Call Transactions
The Final Regulations explicitly confirm Treasury and the IRS’s view as stated in the preamble to the Proposed Regulations that if a covered corporation enters into an integrated transaction (e.g., a convertible debt integrated with one or more hedges consisting of an option on the covered corporation’s stock), the excise tax rules should apply to each component of the transaction, rather than the integrated transaction as a whole.
Compensatory Transactions
Net Share Settlements
Consistent with the Proposed Regulations, the Final Regulations provide that stock withheld by a covered corporation to satisfy the exercise price of a stock option or to cover any withholding obligation (including federal, state, or foreign tax withholdings) is not treated as issued for purposes of the netting rule.
“Sell to Cover” Transactions
As in the Proposed Regulations, the Final Regulations provide that stock issued by a covered corporation pursuant to a “sell to cover” arrangement (where stock is typically issued to a third-party broker and then sold to satisfy the exercise price of a stock option or the corporation’s withholding obligations with respect to service providers) is treated as issued for purposes of the netting rule.
Restricted Stock
With respect to stock of a covered corporation issued in connection with the performance of services, the Final Regulations affirm the treatment set forth in the Proposed Regulations and provide that such stock is issued for purposes of the netting rule as of the date the service provider is treated as the beneficial owner of the stock under federal income tax law (generally, when stock is substantially vested or a valid election under Section 83(b) has been filed with respect to the stock). If such stock is later forfeited, the Final Regulations treat the forfeiture as a repurchase subject to the excise tax (in an amount equal to the fair market value of the stock on the date of forfeiture). As a result, a corporation may have a potential mismatch (positive or negative) for purposes of the netting rule with respect to the fair market value of restricted stock issued in one taxable year and subsequently forfeited in another taxable year.
Foreign Corporations/Funding Rule
Section 4501(d) provides that the excise tax applies to repurchases of stock of a foreign publicly traded corporation by its U.S. subsidiary. Both the Notice and the Proposed Regulations expanded this rule by applying the excise tax to certain share repurchases by a foreign publicly traded corporation to the extent the repurchase was funded, or deemed to be funded, by a U.S. affiliate of the foreign publicly traded corporation (the so-called Funding Rule). The Final Regulations remove the Funding Rule altogether.
Applicability Date
With certain exceptions, the Final Regulations generally apply to repurchases of stock of a covered corporation occurring after December 31, 2022, and issuances of stock of a covered corporation occurring during taxable years ending after December 31, 2022. A covered corporation that previously filed tax returns relying on the Notice or the Proposed Regulations may file a refund claim after the effective date of the Final Regulations (November 24, 2025).
Contact
For further information regarding the contents of this client alert, please contact Myra Sutanto Shen or any member of the Tax practice at Wilson Sonsini.
The information provided is for informational purposes only, not as legal advice. Readers should reach out to their own tax attorneys for guidance and a full discussion of the new regulations.
Han Shen contributed to the preparation of this alert.
