Excise Tax on Repurchase of Corporate Stock; Correction

IRS Polishes Stock Buyback Rules with Technical Corrections

The IRS has issued technical corrections to the final regulations (TD 10037) for the 1% Stock Repurchase Excise Tax under Section 4501. These corrections, effective February 11, 2026, are clean-up fixes to regulations published back in November 2025, providing guidance regarding the application of the excise tax on repurchases of corporate stock made after December 31, 2022. Section 4501, enacted as part of the Inflation Reduction Act of 2022, imposes a 1% excise tax on the fair market value of stock repurchased by a "covered corporation" during the taxable year. These technical corrections address specific aspects of the netting rule and its application to recapitalizations, as well as the treatment of retirement plan contributions in calculating the excise tax base.

Refining the Netting Rule for Recapitalizations

As this publication has previously covered, Section 4501, enacted as part of the Inflation Reduction Act of 2022, imposes a 1% excise tax on the fair market value of stock repurchased by a "covered corporation" during the taxable year. These technical corrections address specific aspects of the netting rule and its application to recapitalizations, as well as the treatment of retirement plan contributions in calculating the excise tax base.

The IRS has refined the application of the netting rule regarding "E reorganizations," which are recapitalizations under Section 368(a)(1)(E). Section 368(a)(1)(E) defines a "recapitalization" as a reshuffling of a capital structure within a single corporation. The change centers on § 58.4501–4(f)(3)(i).

• The Delta: The rule now clarifies that stock issued by a recapitalizing corporation in an 'E reorganization' only counts toward the netting rule to the extent it was issued in exchange for other stock of that corporation.

For tax professionals, this means the definition of what qualifies for netting in a recapitalization is tightened. Previously, the rule could have been interpreted more broadly. Now, the IRS is explicitly limiting the netting benefit to only stock issued in direct exchange for other stock of the same corporation during the recapitalization.

Correcting the Math: Retirement Plan Contributions

As we saw, the IRS is tightening the rules around what qualifies for netting in a recapitalization under Section 368(a)(1)(E), which defines an "E Reorganization" as a reshuffling of a corporation's capital structure. The netting benefit is now explicitly limited to stock issued in direct exchange for other stock of the same corporation during the recapitalization.

The IRS also addressed an error in the examples provided in § 58.4501–5, which illustrates the application of the stock repurchase excise tax under Section 4501, enacted as part of the Inflation Reduction Act of 2022. Section 4501 imposes a 1% excise tax on the fair market value of stock repurchased by publicly traded corporations. One key exception to this tax is for stock contributed to an employer-sponsored retirement plan.

The technical correction focuses on Example 20, specifically paragraph (b)(20)(ii), which analyzes the interaction of stock contributions to retirement plans and the reduction in the gross repurchase amount for excise tax purposes. The correction clarifies the calculation of this reduction.

• The Core Change: The reduction in the gross repurchase amount is based on the fair market value (FMV) of the stock at the time it is contributed to the employer-sponsored retirement plan. The corrected example now reflects the proper mathematical calculation.

Here's the corrected math:

• Corporation X contributes two classes of stock to its retirement plan. The FMV of the first class is $1,000x, and the FMV of the second class is $500x.
• The total reduction in the gross repurchase amount is calculated as $1,000x + $500x = $1,500x.

The example then shows the impact on the excise tax base:

• Corporation X had $1,200x in repurchases during the taxable year.
• Because the exception for retirement plan contributions is $1,500x, the excise tax base is reduced to $0 ($1,200x repurchase - $1,500x exception).

The IRS also explicitly stated that the excess contribution ($300x in this example) cannot be carried forward or backward to preceding or succeeding taxable years, citing § 58.4501–2(c)(2)(ii). This reinforces that the benefit of contributing stock to retirement plans to offset the excise tax is limited to the current taxable year.

Impact on Corporate Tax Compliance

The IRS's technical corrections provide welcome clarity for corporations navigating the stock buyback excise tax under Section 4501, enacted as part of the Inflation Reduction Act of 2022. This tax imposes a 1% excise tax on the fair market value of stock repurchased by publicly traded corporations.

• Winners:
  • Corporations engaging in E reorganizations, as defined by Section 368(a)(1)(E), which are recapitalizations involving changes to a corporation's capital structure, now benefit from clearer netting guidance. This allows them to more accurately calculate the excise tax base, reducing potential errors and disputes with the IRS.
  • Corporations contributing stock to retirement plans can rely on a corrected calculation example provided by the IRS. This ensures that the amount excluded from the excise tax base for such contributions is properly determined.

While these changes are framed as "technical corrections," their impact on corporate tax compliance is significant. Accuracy in the base calculation for the 1% excise tax remains critical. As clarified in § 58.4501–5(b)(20)(ii), amounts exceeding the gross repurchase amount may not be carried forward or backward. Therefore, understanding the application of the netting rule and the exceptions for retirement plan contributions is crucial for corporations seeking to minimize their excise tax liability and avoid penalties.