Comments on Proposed Stock Repurchase Excise Tax Regulations

June 11, 2024

Aviva Aron-Dine
Acting Assistant Secretary (Tax Policy)
U.S. Department of Treasury
1500 Pennsylvania Avenue N.W.
Washington, D.C. 20220

The Honorable Marjorie A. Rollinson
Chief Counsel
Internal Revenue Service
1111 Constitution Avenue N.W.
Washington, D.C. 20224

Re: Excise Tax on Repurchase of Corporate Stock (REG-115710-22)

Dear Dr. Aron-Dine and Ms. Rollinson:

The U.S. Chamber of Commerce (“Chamber”) welcomes the opportunity to comment on the proposed regulations under section 4501 of the Internal Revenue Code,1 which would provide guidance regarding the applicationof the new excise tax onrepurchasesofcorporatestock madeafter December 31,2022.2 Section4501was enacted as part of the Inflation Reduction Act of 2022 (“IRA”),3 and would affect certain publicly traded corporations that repurchase their stock or whose stock is acquired by certain specified affiliates.

The Chamber commends the Department of Treasury (“Treasury”) and the InternalRevenueService(“IRS”)fortheireffortstoprovidetaxpayerswitha reasonably comprehensive package of proposed guidance regarding the substantive applicationofthenewexcisetax.Atthesametime,however,theChamberis concerned that the proposed regulations would inappropriately expand the levy’s application to certain instruments and transactions not envisioned by Congress.The following comments focus on two particularly problematic aspects of the proposed regulations and provide reasoned, consensus-based recommendations for addressing them in a manner consistent with the underlying statute and congressional intent.

Background

The stock repurchase excise tax was introduced as both a new source of revenue and a means to encourage corporations to reinvest in their businesses and employees rather than repurchase shares.4 Proponents of the measure also sought to addressperceivedtaxavoidanceattheshareholderlevelbytheuseofacorporation’s earnings to reacquire its stock rather than make dividend distributions.5

Section 4501 generally imposes a non-deductible 1% excise tax on the fair market value of stock redeemed by a publicly traded U.S. corporation during the taxableyear,lessthefairmarketvalueofstockissuedbythecorporationduringthat year.6 Aswritten,thetaxgenerallyappliestotherepurchaseof“anystockofthe corporation,”regardlessofwhetherthestockredeemedwasofaclassthatistraded on an established securities market.Recognizing the levy’s potential application to transactions where no opportunity for tax avoidance—real or perceived—exists, however, Congress enumerated six exceptions to this general rule.7 It also directed Treasury to prescribe such regulations and other guidance as are necessary or appropriate “to address special classes of stock and preferred stock.”8 Save for one exceedinglynarrowexception,however,theproposedregulationswouldfailtoheed this congressional command.

ProposedApplicationtoPreferred Stock

Theproposedregulationswoulddefinetheterm“stock”broadlytomeanany instrument issued by a corporation that is stock or treated as stock for federal tax purposesatthetimeofissuance,regardlessofwhethertheinstrumentistradedon an established securities market.9 The sole, limited exception to this expansive definitionwouldbefor“additionaltier1capital,”whichisatypeofpreferredstock meeting specific criteria related to bank regulatory capital qualifications.10 Thus, unless this limited-scope exception for additional tier 1 preferred capital applies, the stock repurchase excise tax would apply to preferred stock in the same manner as to common stock. Such a blanket, reflexive application to preferred stock would contravene congressional intent and warrants reconsideration—especially with respect to plain vanilla and mandatorily redeemable preferred stock, as discussed below.

Plain Vanilla Preferred Stock

When Congress enacted the stock repurchase excise tax in section 4501, lawmakersexplicitlyrecognizedthatpreferredstockmaywarrantspecialtreatment anddirectedTreasurytoprescriberegulationsorotherguidancetoaddressit.The significance of this statutory admonition becomes clear upon considering the characteristics of preferred stock that distinguish it from common stock.

Forfederaltaxpurposes,theterm“preferredstock”generallyreferstostock that,inrelationtootherclassesofstockoutstanding,enjoyscertainlimitedrightsand privileges (generally associated with specified dividend and liquidation priorities) but does not participateincorporate growthto any significant extent.11 By contrast, quintessentially common stock provides for an equal pro rata share of the profits and assets of the corporation with no preference or advantage over other stock.

Redemptions of preferred stock differ from typical stock buybacks in that preferred stock functions more like a fixed income-type instrument than common stock and is oftenredeemable—eithervoluntarilyormandatorily—bytheissuerataspecifiedprice onorafteraspecifieddate.Thelowervolatilityofpreferredstockmakesitamore attractiveinvestment to tax-exempt andinstitutional investors,which areusually the most common holders of preferred stock.

This dichotomyismost acuteinthecaseofstraightor“plainvanilla” preferred stock.Corporate stock with the following four characteristics is considered plain vanilla preferred stock for federal tax purposes: (1) nonvoting; (2) limited and preferred as to dividends and without participation in corporate growth to any significant extent; (3) limited redemption and liquidation premium rights; and (4) nonconvertible.12 With such characteristics, redemptions of plain vanilla preferred stock are qualitatively akin to repaying a class of debt and bear no resemblance to the type of opportunistic stock repurchases that Congress sought to curtail with the new stock repurchase excise tax.

Mandatorily Redeemable Stock

As discussed above, a corporation’s decision to repurchase preferred stock is qualitativelydifferentfromthedecisiontorepurchasecommonstock.Insomecases, however,itisn’tadecisionatall:thecorporationmayberequiredtorepurchasestock pursuanttoamandatoryredemptionprovision(e.g.,amaturitydateonwhichthe company must repurchase the stock) or a unilateral put option of the shareholder.13 Applying the new excise tax to the redemption of such stock would be inappropriate because the redemption is neither withinthe control of nor susceptible to any timing manipulation by the issuing corporation.14 By definition, such redemptions are the antithesis of the opportunistic stock repurchases that Congress sought to curtail in enacting section 4501 and should therefore be excluded from its application.

The preceding paragraphs illustrate how the proposed regulations would require inappropriate applications of the stock repurchase excise tax beyond its intended purpose while imposing retroactive tax increases on issuing corporations. They would also effectively impose a new tax on the ability of companies to raise capital without issuing debt or diluting the interests of existing shareholders— includingmanyretirees,tax-exempts,andinstitutionalinvestors—makingitharderfor companiestofinancecapital-intensiveprojectsthatdrivejobcreation.Itisclearfrom the debate around the new excise tax that these outcomes would contravene congressional intent and therefore, warrant a different approach in final regulations.

The Chamber respectfully urges Treasury and the IRS to reconsider their proposed applicationof thestock repurchase excise tax to redemptions of preferred stock— especially plain vanilla and mandatorily redeemable preferred stock, as set forth above.

The Proposed Funding Rule

In enacting the new stock repurchase excise tax, Congress provided special rulesforitsapplicationtoacquisitionsofstockofcertainforeigncorporations.One of these rules appears in section 4501(d)(1), which applies “[i]n the case of an acquisition of stock of an applicable foreign corporation by a specified affiliate of such corporation.” Under this rule, the acquisition of a foreign publicly traded corporation’s stock by a U.S. specified affiliate of the corporation will be treated as a repurchase subject to the stock repurchase excise tax.15

While the statute by its terms applies only to acquisitions of an applicable foreign corporation’s stock by a U.S. specified affiliate of that corporation, the proposed regulationswould expand the application of the stock repurchase excise tax to repurchases made by the foreign corporation itself.Under the proposed “funding rule,”aU.S.specifiedaffiliateofanapplicableforeigncorporationwouldbetreatedas acquiring stock of the applicable foreign corporation to the extent the U.S. affiliate “funds by any means (including through distributions, debt, or capital contributions), directly or indirectly, a covered purchase with a principal purposeof avoiding the section 4501(d) excise tax.”16 Here, the Chamber shares the view expressed by numerous other stakeholders that the proposed funding rule is not supported by the text of thestatute andwouldcontravene congressionalintent.17 Treasury andthe IRS should withdraw the proposed funding rule and omit it from the final regulations.

Application to Ordinary Course Transactions

Should Treasury and the IRS ultimately decide to retain the proposed funding rule in the final regulations, the Chamber would respectfully urge Treasury and the IRS to expressly preclude its application to ordinary course transactions.Treasury’s own pressreleasecharacterizes the proposed funding rule as “atargeted anti-abuse rule” toensurecomplianceby foreign-parentedmultinationalcorporations“without ordinary course intercompany funding transactions among their corporate affiliates being inadvertently captured.”18 As described below, however, the proposed funding rule would do just that to typical cross-border cash pooling arrangements.

A covered “funding” for purposes of the proposed funding rule is extremely broad and would include the transfer of funds “by any means.”19 A covered funding would therefore include payments made by a U.S. subsidiary to its foreign parent, including cash sweeps under a cross-border cash pooling arrangement.Cash poolingis a generally accepted and often necessary treasury management tool that allows multinational corporate groups to maximize the use of internal funds through centralizing such funds at one designated entity (cash pool entity).Generally, each company in the cash pooling arrangement will have their cash “swept” on a regular basis(e.g.,everynight),whichusuallytakestheformofaloanfromtheoperating entitiesthatgeneratethecashtoaholdingcompanythatactsasthecashpoolentity. Under the proposed funding rule, however, if the cash pool entity is a foreign corporation,adailycashsweepfromanyU.S.subsidiarycoldbeconsideredacovered funding.This is alarming because every foreign parented multinational group with U.S. subsidiaries anda cashpool entity that operates a typical cash pooling arrangement would be subjected to the new stock repurchase excise tax.

Furthermore, it is unclear how a taxpayer would establish that transfers of fundsfromtheU.S.affiliatesdidnothavea“principalpurposeofavoidingthesection 4501(d) excise tax” ina cross-border cash poolingarrangement.Treasury andthe IRS explainintheirpreambletotheproposedregulationsthattheydidnotadoptatracing mechanism to determine which funding sources were used for which purposes.In a typical cross-border cash pooling arrangement, where the daily cash sweep is from U.S.entitiesaswellasforeignentities,itwouldbeimpracticabletotracewhichfunds were used for a “repurchase.”

Inviewoftheabove,theChamberwouldrespectfullyurgeTreasuryandtheIRS to issue final regulations clarifyingthat the funding rule will not apply to cross-border cashpooling arrangements.Bythe same logic,Treasury and the IRSshould also makeclearthatthefunding rulewillnotapply tootherordinarycourseintercompany transactions like distributions, royalties, or service payments from a U.S. subsidiary corporation to its foreign parent.And further clarification of whatconstitutes a “principal purpose” for purposes of the funding rule would also be required.

The Chamber appreciates the opportunity to comment on the proposed regulations, and we urge Treasury and the IRS to engage closely with the business community throughout the IRA implementation process.In the interim, we would welcome the opportunity to discuss our comments with you or your colleagues in furtherdetailandprovidewhateveradditionalinformationyoumayrequire.Please contact Sarah Corrigan, the Chamber’s Tax Counsel, at (202) 680-8008 or SCorrigan@USChamber.com.Thank you for your time and attention.

Sincerely,
Watson M. McLeish
SeniorVicePresident,Tax Policy
U.S.Chamberof Commerce

cc:

TheHonorableRonaldL.Wyden,Chairman,CommitteeonFinance,United States Senate
The Honorable Michael D. Crapo, Ranking Member, Committee on Finance, United States Senate
The Honorable JasonT. Smith,Chairman,Committee on Waysand Means, United States House of Representatives
The Honorable Richard E. Neal, Ranking Member, Committee on Ways and Means, United States House of Representatives
ThomasA.Barthold,ChiefofStaff,JointCommitteeonTaxation,UnitedStates Congress

1 Unless otherwise indicated, all textual references to “section” herein are to sections of the Internal Revenue Code of 1986, as amended (“Code”).

2 Excise Tax on Repurchase of Corporate Stock, 89 Fed. Reg. 25980 (proposed April 12, 2024) (to be codified at 26 C.F.R. pt. 58).

3 An Act to provide for reconciliation pursuant to title II of S. Con. Res. 14, Pub. L. No. 117-169, § 10201, 136 Stat. 1818, 1828–31 (2022).

4 See, e.g., 167 Cong. Rec. S6451 (daily ed. Sept. 13, 2021) (statement of Sen. Sherrod Brown introducing S. 2758, the Stock Buyback Accountability Act of 2021, the predecessor to section 4501, citing the perception that companies implement stock repurchase programs to opportunistically drive up their stock price, enrich wealthy shareholders and corporate insiders, and increase the value of executives’ compensation packages).

5 See id.

6 I.R.C. § 4501(a), (c)(3).

7 See I.R.C. § 4501(e)(1)–(6).

8 I.R.C. § 4501(f)(2).

9 Prop. Treas. Reg. § 58.4501-1(b)(29).

10 See Prop. Tres. Reg. § 58.4501-1(b)(29)(ii).

11 See, e.g., Treas. Reg. § 1.305-5(a).

12 See generally I.R.C. §§ 382(k)(6)(A), 1504(a)(4).

13 Mandatorily redeemable shares are often issued to employees by their employer as a form of compensation.

14 The impropriety of applying the stock repurchase excise tax to redemptions of such stock would be especially egregious in cases where the stock was issued prior to the date of the IRA’s enactment.

15 Where a U.S. specified affiliate of an applicable foreign corporation acquires stock of the applicable foreign corporation, section 4501(d)(1) treats the acquisition as a repurchase of the U.S. affiliate’s stock.

16 Prop. Treas. Reg. § 58.4501–7(e)(1).

17 See, e.g., N.Y. St. B. Ass’n Tax Sec., Rep. No. 1494, Report on Proposed Regulations Under Section 4501 8 (June 4, 2024) (observing, inter alia, that the statute makes no reference to an acquisition that is “funded” or made “directly or indirectly” by a specified affiliate, and that Congress obviously could have included such language or written a broader rule if it intended the excise tax to apply to a broader range of transactions involving foreign public companies).

18 U.S. Dep’t of the Treas, Press Release, U.S. Department of the Treasury and IRS Release Proposed Guidance on Stock Buyback Excise Tax to Ensure Large Corporations Pay More of Their Fair Share in Taxes (Apr. 9, 2024), https://home.treasury.gov/news/press-releases/jy2244.

19 Prop. Treas. Reg. § 58.4501–7(e)(1).

About the author

Watson M. McLeish

Watson McLeish is senior vice president for Tax Policy at the U.S. Chamber of Commerce, where he serves as the primary adviser on all tax policy-related matters.

Read more