The IRS recently issued a revised regulation which provides relief in certain mandatory redemptions from the application of the 1% tax on stock repurchases otherwise subject to tax under Section 4501 of the Internal Revenue Code (the “Code”).

Background: The Inflation Reduction Act, enacted August 16, 2022 (the “IRA”), introduced Section 4501 of the Code. The statute imposed a 1% excise tax on any stock repurchased by domestic public corporations[1] (or their controlled affiliates) during the taxable year. On June 28, 2024, the IRS released final regulations[2] on the 1% tax on stock buybacks, discussed in our Nelson Mullins Tax Report published on July 9, 2024.[3] A “repurchase,” for the purposes of Section 4501, means a redemption where the corporation acquires its stock from a shareholder in exchange for property, whether or not that stock is then cancelled, retired, or held as treasury stock (Section 317(b)). However, the statue provides exceptions when the tax of Section 4501(a) will not apply. The 1% tax will not apply:

• to the extent the repurchase is a part of a reorganization under Section 368(a), if no gain or loss is recognized on the repurchase by the shareholder by reason of the reorganization;
• where the stock is, or the amount of stock equal to the value of the stock repurchased is, contributed to an employer-sponsored retirement plan, employee stock ownership plan, or similar plan;
• if total value of the stock repurchased during the taxable year does not exceed $1,000,000;
• to repurchases by a regulated investment company or real estate investment trust; or
• to the extent treated as a dividend (Section 4501(e)).

The statute was intended to target transactions which return capital to shareholders without issuing new equity (essentially, manipulation of the market without the creation of substantive economic value). However, existing preferred equity structures were caught in the crosshairs without the flexibility to respond to the change in law.  

Prior to the enactment of the IRA, preferred stock, specialized debt instruments, and partnership units in private equity or real estate ventures frequently utilized mandatory redemptions to ensure the private investor had a specific, contractually defined exit path with guaranteed liquidity. With the passage of the IRA, these structures became much less economical though already locked in place.  As a result, several commenters requested the IRS provide relief for such stock issued prior to the August 16, 2022 enactment of the Inflation Reduction Act.

The Revised Regulation: In November 2025, revisions to the final regulations for Section 4501 were released. The IRS agreed with commenters that relief is warranted for stock issued prior to August 16, 2022 where the covered corporation does not have discretion whether to repurchase such stock after that date. Treasury Regulation 58.4501-2(e)(3)(iii) provides this transition relief by excepting stock of a covered corporation issued prior to August 16, 2022 if, at the time the stock was issued through the time of redemption, the stock was subject to either (a) mandatory redemption or (b) a put option by the holder of such stock. This allows those transactions structured prior to the existence of Section 4501 to retain the after-tax economic benefits of their original arrangements by ensuring that, moving forward, the excise tax is not applicable.

Special Purpose Acquisition Companies (“SPACs”) were required under the final regulations to remit the tax on redemptions even though mandatory redemption rights were embedded in shares issued prior to the enactment of the IRA. SPACs and other companies which paid the tax on redemptions and are entitled to relief under the revised regulations should file Form 720-X, “Amended Quarterly Federal Excise Tax Return,” and amended Form 7208, “Excise Tax on Repurchase of Corporate Stock,” explaining the basis for the relief from the tax and requesting a refund of the taxes paid.

If you have any questions about the foregoing or the process for requesting a refund of taxes previously paid, please contact the contributing authors of this Report, John Talcott, Peter Strand, Mike Bradshaw, or any member of the Firm’s tax or securities practice groups.