June 11, 2024

CC:PA:01:PR (REG-115710-22)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C., 20044

Re: RIN 1545–BQ60; Notice of Proposed Rulemaking; Excise Tax on Repurchase of Corporate Stock — Procedure and Administration

To Whom It May Concern:

SIFMA¹  submits these comments in response to the Notice of Proposed Rulemaking (the “Proposed Regulations”) interpreting section 4501 of the Internal Revenue Code of 1986 (the “Code”).²  Section 4501 imposes a one percent excise tax on the fair market value of stock repurchased by a publicly traded corporation. This letter focuses on the Proposed Regulations under section 4501(d), and in particular, the revised Proposed Funding Rule (defined below).

I. Introduction

SIFMA’s March 20, 2023 comment letter (attached hereto) on Notice 2023-2, 2023-2 I.R.B. 374 (“Prior SIFMA Comment”) requested that Treasury and the IRS: (1) exempt from section 4501 (and correspondingly the netting rule in section 4501(c)(3)) the redemption or issuance of additional preferred stock that qualifies as tier 1 capital under applicable financial institution regulatory rules; and (2) exempt financial institutions or ordinary transactions from the Prior Funding Rule (defined below). SIFMA members thank Treasury and the IRS for (1) providing an exemption from section 4501 for redemptions and issuances of additional tier 1 capital preferred stock (including for purposes of the netting rule in section 4501(c)(3)), and (2) eliminating the Per Se Rule (defined below) and promulgating in its stead a narrowly tailored Downstream Rebuttable Presumption Rule (also defined below).

For the reasons described below, however, the new Proposed Funding Rule (defined below) is unreasonably overbroad, and presents substantial compliance and administrability challenges. Fundamentally, the Proposed Funding Rule provides insufficient guidance, such that no foreign parented taxpayer could properly compute the amount of section 4501(d) excise tax due or determine with high confidence when such excise tax is owed, particularly for foreign banking groups where funding transactions are integral to the core businesses of banking, lending, and finance. The IRS will similarly face difficulties in fairly and uniformly enforcing the Proposed Funding Rule for the same reasons. We urge Treasury and the IRS to eliminate the unbounded Proposed Funding Rule and retain solely the targeted and narrowly drawn Downstream Rebuttable Presumption Rule.

II. Background

A. Relevant Statutory Provisions

Section 4501(a) imposes an excise tax in an amount equal to one percent of the fair market value of any stock repurchased by a publicly traded corporation. Section 4501(c)(3) provides that the fair market value determined under section 4501(a) shall be reduced by the fair market value of any stock issued by the corporation during the taxable year (the “netting rule”).

Section 4501(d)(1) provides: “In the case of an acquisition of stock of an applicable foreign corporation by a specified affiliate of such corporation (other than a foreign corporation or a foreign partnership (unless such partnership has a domestic entity as a direct or indirect partner)) from a person who is not the applicable foreign corporation or a specified affiliate of such applicable foreign corporation, for purposes of this section – (A) such specified affiliate shall be treated as a covered corporation with respect to such acquisition, (B) such acquisition shall be treated as a repurchase of stock of a covered corporation by such covered corporation, and (C) the adjustment under subsection (c)(3) shall be determined only with respect to stock issued or provided by such specified affiliate to employees of the specified affiliate.”

Pursuant to section 4501(d)(3)(A), an “applicable foreign corporation” is a publicly traded foreign corporation, and pursuant to section 4501(c)(2)(B), a “specified affiliate” of a corporation is any corporation or partnership more than 50 percent of which is directly or indirectly owned by such corporation. Finally, pursuant to section 4501(b), a “covered corporation” is any publicly traded domestic corporation. The effect of these provisions is to provide that a U.S. subsidiary (including a controlled U.S. partnership) of a foreign publicly traded corporation will be subject to the section 4501(d)(1) excise tax if the U.S. subsidiary purchases stock of the foreign parent corporation from someone who is not the foreign parent or another subsidiary of the foreign parent.

Section 4501(f) states that the “Secretary shall prescribe such regulations and other guidance as are necessary or appropriate to carry out, and to prevent the avoidance of, the purposes of this section, including regulations and other guidance . . . (3) for the application of the rules under subsection (d).”

B. Relevant Portions of Notice 2023-2

Section 3.05(2)(a)(ii) of Notice 2023-2 provided that, for purposes of applying section 4501(d)(1), a repurchase was deemed to occur if (i) an “applicable specified affiliate” (i.e., a specified affiliate of an applicable foreign corporation other than a foreign corporation or foreign partnership without a domestic entity partner) funds “by any means (including through distributions, debt, or capital contributions) the repurchase or acquisition of stock of an applicable foreign corporation (or specified affiliate that is not also an applicable specified affiliate)” and (ii) such funding is undertaken for a principal purpose of avoiding section 4501 (collectively, the “Prior Funding Rule”). The Prior Funding Rule also provided that such a principal purpose was deemed to exist if the funding (other than through distributions) occurred within two years of the funded entity’s repurchase or acquisition of stock of the applicable foreign corporation (the “Per Se Rule”).

C. Relevant Proposed Regulations

As the Preamble to the Proposed Regulations acknowledges, several stakeholders criticized the Prior Funding Rule and especially the Per Se Rule as overbroad.³ In response, Treasury and the IRS retained a broad principal purpose, anti-avoidance rule but eliminated the Per Se Rule and instead provided a more targeted rebuttable presumption for certain “downstream” funding transactions. With respect to the retained principal purpose test, the Proposed Regulations provide in relevant part that:

An applicable specified affiliate of an applicable foreign corporation is treated as acquiring stock of the applicable foreign corporation to the extent the applicable
specified affiliate funds by any means (including through distributions, debt, or capital contributions), directly or indirectly, a covered purchase with a principal
purpose of avoiding the section 4501(d) excise tax (a covered funding). If a principal purpose of the covered funding is to fund, directly or indirectly, a covered purchase, then there is a principal purpose of avoiding the section 4501(d) excise tax. Whether a covered funding is described in this paragraph (e)(1) is determined based on all the facts and circumstances. A covered funding may be described in this paragraph (e)(1) regardless of whether the funding occurs before or after a covered purchase [the “Proposed Funding Rule”].⁴

An “applicable specified affiliate” is a specified affiliate of an applicable foreign corporation, other than a foreign corporation or a foreign partnership (unless the partnership has a domestic entity as a direct or indirect partner).⁵  A “covered purchase” means an “AFC purchase” (i.e., a section 317 redemption with respect to the stock of an applicable foreign corporation or economically similar transaction) or an acquisition of stock of an applicable foreign corporation by a relevant entity.⁶

Several examples apply this Proposed Funding Rule, including one in which the covered stock purchase occurs more than two years after the covered funding,⁷ and one in which U.S. subsidiaries lend funds to their foreign parent which on-loans funds to a separate foreign subsidiary that buys stock in the foreign parent from an unrelated person.⁸

In place of the deleted Per Se Rule, the Proposed Regulations provide that a principal purpose of avoiding section 4501 is presumed to exist if an applicable specified affiliate funds by any means, directly or indirectly, a “downstream relevant entity,” and the funding occurs within two years of a covered purchase by or on behalf of the downstream relevant entity. (the “Downstream Rebuttable Presumption Rule”).⁹ A “downstream relevant entity” is defined as a relevant entity in which one or more applicable specified entities have a material (i.e., 25 percent or more, direct or indirect) ownership interest.¹⁰ The presumption may be rebutted only if facts and circumstances clearly establish that there was not a principal purpose of avoiding section 4501.¹¹

The Proposed Regulations also provide certain timing and allocation rules with respect to fundings subject to section 4501(d). First, the Proposed Regulations provide that stock of an applicable foreign corporation is treated as acquired on the later date of the covered funding or the covered purchase to which the covered funding is allocated.¹² Second, in a series of allocation rules, the Proposed Regulations stack covered acquisitions against any covered funding before fundings received from other sources.¹³

Finally, in response to comments, Treasury exempted from the Proposed Regulations any redemptions or issuances of preferred stock that qualifies as additional tier 1 capital for purposes of regulatory requirements for regulated financial institutions.¹⁴ Thus, additional tier 1 preferred stock would not be subject to the stock repurchase excise tax under section 4501(a) and the issuance of additional tier 1 preferred stock would not be taken into account for purposes of the netting rules of section 4501(c)(3).¹⁵

 

 

1. SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). [↩]
2. REG 115710-22, 89 Fed Reg. 25,980 (April 12, 2024). [↩]
3. See 89 Fed. Reg., at 26,022 [↩]
4. Prop. Reg. § 58.4501-7(e)(1). [↩]
5. Prop. Reg. § 58.4501-7(b)(2)(iv). [↩]
6. Prop. Reg. § 58.4501-7(b)(2)(i), (vii), (xiv). [↩]
7. 7 See id. at -7(p)(3), Example 3 [↩]
8. See id. at -7(p)(7), Example 7. [↩]
9. See Prop. Reg. § 58.4501-7(e)(2). [↩]
10. See Prop. Reg. § 58.4501-7(b)(2)(xiv). [↩]
11. Prop. Reg. § 58.4501-7(e)(2). [↩]
12. Prop. Reg. § 58.4501-7(e)(3). [↩]
13. Prop. Reg. § 58.4501-7(e)(5)-(7). [↩]
14. See Prop. Reg. § 58.4501-1(b)(29)(ii). [↩]
15. See Preamble, 89 Fed. Reg., at 25,984. [↩]