Reg. § 58.4501-7 Special rules for acquisitions or repurchases of stock of certain foreign corporations.
(a) Scope This section provides rules regarding the application of section 4501(d) of the Code. of this section provides definitions applicable for purposes of this section. of this section provides rules for computing a section covered corporation's section excise tax liability. of this section provides certain coordination rules related to section . of this section provides certain rules for determining the status of a corporation as an applicable foreign corporation or a covered surrogate foreign corporation. of this section provides certain rules for determining the status of a corporation or partnership as an applicable specified affiliate of an applicable foreign corporation or a specified affiliate of a covered surrogate foreign corporation. of this section provides rules for determining whether a foreign partnership is an applicable specified affiliate. of this section defines the term CSFC repurchase. of this section is reserved. of this section provides rules for determining the date of a section repurchase or a section repurchase. of this section provides rules for determining the fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation that is repurchased or acquired. of this section provides rules regarding the application of certain section exceptions. of this section provides rules regarding the section netting rule. of this section illustrates the application of the rules of this section through examples involving section . of this section illustrates the application of the rules of this section through examples involving section . of this section provides applicability dates for the rules of this section.
(b) Definitions
(1) Application of definitions in § 58.4501-1(b) Any term used in this section but not defined in of this section has the meaning provided in , with the following modifications:
(i) For all definitions provided in other than those described in of this section, any reference in those definitions to a covered corporation is treated as a reference to either a section covered corporation, an applicable foreign corporation, or a covered surrogate foreign corporation, as appropriate based on the context.
(ii) For the definitions of employee and employer-sponsored retirement plan provided in and , any reference to a covered corporation or its specified affiliates is treated solely as a reference to a section covered corporation.
(2) Section 4501(d) definitions The definitions in this apply solely for purposes of this section.
(i) Applicable foreign corporation The term applicable foreign corporation means any foreign corporation the stock of which is traded on an established securities market.
(ii) Applicable specified affiliate The term applicable specified affiliate means 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, as determined under of this section).
(iii) CSFC repurchase The term CSFC repurchase has the meaning provided in of this section.
(iv) Covered surrogate foreign corporation The term covered surrogate foreign corporation means any surrogate foreign corporation (as determined under section 7874(a)(2)(B) of the Code by substituting September 20, 2021 for March 4, 2003 each place it appears) the stock of which is traded on an established securities market, including any successor to the surrogate foreign corporation (as determined under ), but only with respect to taxable years that include any portion of the applicable period with respect to such corporation under section .
(v) Direct partner The term direct partner has the meaning given the term in of this section.
(vi) Domestic entity The term domestic entity means a domestic corporation, a domestic partnership, or a trust within the meaning of section 7701(a)(30)(E) of the Code.
(vii) Expatriated entity The term expatriated entity has the meaning given the term in section and , including any successor (as determined under ).
(viii) Indirect partner The term indirect partner has the meaning given the term in of this section.
(ix) Section 4501(d) covered corporation The term section covered corporation means either—
(A) An applicable specified affiliate of an applicable foreign corporation that is treated as a covered corporation under section by reason of a section repurchase; or
(B) Any expatriated entity with respect to a covered surrogate foreign corporation that is treated as a covered corporation under section by reason of a section repurchase.
(x) Section 4501(d) covered holder The term section covered holder has the meaning provided in of this section.
(xi) Section 4501(d) covered non-stock instrument The term section covered non-stock instrument has the meaning provided in of this section.
(xii) Section 4501(d) de minimis exception The term section de minimis exception has the meaning provided in of this section.
(xiii) Section 4501(d) economically similar transaction The term section economically similar transaction has the meaning provided in of this section.
(xiv) Section 4501(d) exception The term section exception has the meaning provided in of this section.
(xv) Section 4501(d) excise tax The term section excise tax has the meaning provided in of this section.
(xvi) Section 4501(d) excise tax base The term section excise tax base has the meaning provided in of this section.
(xvii) Section 4501(d) gross repurchase amount The term section gross repurchase amount has the meaning provided in of this section.
(xviii) Section 4501(d) netting rule The term section netting rule has the meaning provided in of this section.
(xix) Section 4501(d) non-stock instrument The term section non-stock instrument has the meaning provided in of this section.
(xx) Section 4501(d) reorganization exception The term section reorganization exception has the meaning provided in of this section.
(xxi) Section 4501(d)(1) repurchase The term section repurchase means an acquisition of stock of an applicable foreign corporation by an applicable specified affiliate of the applicable foreign corporation from a person other than the applicable foreign corporation or a specified affiliate of the applicable foreign corporation. A section repurchase includes a clawback or forfeiture of stock of an applicable foreign corporation pursuant to a legal or contractual obligation on the date of forfeiture or clawback (as appropriate), but only if the stock was treated in the current or a prior year as issued or provided by the section covered corporation to its employees in accordance with the section netting rule.
(xxii) Section 4501(d)(2) repurchase The term section repurchase means a CSFC repurchase or an acquisition of stock of a covered surrogate foreign corporation by a specified affiliate of the covered surrogate foreign corporation.
(c) Computation of section 4501(d) excise tax liability for a section 4501(d) covered corporation
(1) Imposition of tax Except as provided in of this section (regarding the section de minimis exception), the amount of excise tax imposed pursuant to section on a section covered corporation (section excise tax) for a taxable year equals the product obtained by multiplying—
(i) The applicable percentage; by
(ii) The section excise tax base of the section covered corporation for the taxable year determined in accordance with of this section.
(2) Section 4501(d) de minimis exception
(i) In general A section covered corporation is not subject to the section excise tax with regard to a taxable year of the section covered corporation if, during that taxable year, the aggregate fair market value of all section repurchases with respect to all applicable specified affiliates of the applicable foreign corporation or all section repurchases by the covered surrogate foreign corporation and all specified affiliates of the covered surrogate foreign corporation, as applicable, does not exceed $1,000,000 (section de minimis exception).
(ii) Determination A determination of whether the section de minimis exception applies with regard to a taxable year of a section covered corporation is made before applying—
(A) Any section exception under of this section; and
(B) Any adjustments pursuant to the section netting rule under of this section.
(3) Section 4501(d) excise tax base
(i) In general With regard to a section covered corporation, the term section excise tax base means the dollar amount (not less than zero) that is obtained by—
(A) Determining the aggregate fair market value of, as applicable, all section repurchases or section repurchases during the section covered corporation's taxable year (section gross repurchase amount);
(B) Reducing the section gross repurchase amount by the fair market value of stock repurchased or acquired in all section repurchases or section repurchases, as applicable, during the section covered corporation's taxable year to the extent any section exceptions apply in accordance with of this section; and then
(C) Further reducing the section gross repurchase amount by the aggregate fair market value of, as applicable, stock of the applicable foreign corporation or stock of the covered surrogate foreign corporation to the extent the section netting rule applies in accordance with of this section.
(ii) Taxable year determination
(A) In general The determinations under of this section are made separately for each section covered corporation and for each taxable year of such section covered corporation.
(B) No carrybacks or carryforwards Reductions under and of this section in excess of the section gross repurchase amount with regard to a section covered corporation may not be carried forward or backward to preceding or succeeding taxable years of the section covered corporation.
(4) Section 4501(d)(1) repurchases or section 4501(d)(2) repurchases before January 1, 2023 Section repurchases and section repurchases before January 1, 2023, are neither included in the section excise tax base of a section covered corporation nor taken into account in determining the applicability of the section de minimis exception.
(d) Section 4501(d)(2) coordination rules
(1) Coordination rule for section 4501(d)(1) repurchases and section 4501(d)(2) repurchases To the extent any CSFC repurchase or acquisition of stock of a covered surrogate foreign corporation by a specified affiliate of the covered surrogate foreign corporation would be both a section repurchase and a section repurchase absent this , the CSFC repurchase or acquisition will only be a section repurchase.
(2) Coordination rule for multiple section 4501(d) covered corporations
(i) In general Except as provided in of this section, each section covered corporation with respect to a covered surrogate foreign corporation is liable for any section excise tax with respect to section repurchases that occur during a taxable year of the section covered corporation.
(ii) Full payment and reporting by a section 4501(d) covered corporation If there are multiple section covered corporations with respect to a covered surrogate foreign corporation, then provided that one of those section covered corporations pays the amount of section excise tax determined under of this section with respect to all section repurchases that occur during the paying section covered corporation's taxable year and fulfills the filing obligations for the taxable year with respect to such section repurchases, no other section covered corporation with respect to the covered surrogate foreign corporation is liable for section excise tax related to such section repurchases.
(e) Status as applicable foreign corporation or covered surrogate foreign corporation
(1) Initiation date A corporation becomes an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, at the beginning of the corporation's initiation date (that is, the date on which stock of the corporation begins to be traded on an established securities market).
(2) Cessation date A corporation ceases to be an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, at the end of the corporation's cessation date (that is, the date on which all stock of the corporation ceases to be traded on an established securities market).
(3) Rules regarding F reorganizations
(i) Inbound F reorganization In the case of a foreign corporation that transfers its assets or that is treated as transferring its assets to a domestic corporation in an F reorganization (as described in ), the corporation is not treated as a domestic corporation until the day after the reorganization.
(ii) Outbound F reorganization In the case of a domestic corporation that transfers its assets or that is treated as transferring its assets to a foreign corporation in an F reorganization (as described in ), the corporation is not treated as a foreign corporation until the day after the reorganization.
(iii) Treatment of F reorganizations For purposes of the stock repurchase excise tax regulations, the transferor corporation and the resulting corporation (each as defined in 2(m)(1) of this chapter) in an F reorganization are treated as the same corporation.
(f) Status as an applicable specified affiliate or a specified affiliate of a covered surrogate foreign corporation
(1) Timing of determination The determination of whether a corporation or partnership is an applicable specified affiliate of an applicable foreign corporation, or a specified affiliate of a covered surrogate foreign corporation, as applicable, is made at the time the stock of the applicable foreign corporation or covered surrogate foreign corporation is acquired or provided by the applicable specified affiliate or a specified affiliate of a covered surrogate foreign corporation, respectively, whenever such determination is relevant for purposes of this section.
(2) Determination of indirect ownership Except as provided in of this section, a corporation or partnership is treated as indirectly owning stock in a corporation or holding capital or profits interests in a partnership equal to the corporation's or partnership's proportionate percentage of stock owned or capital or profits interests held through other entities.
(g) Foreign partnerships that are applicable specified affiliates
(1) In general A foreign partnership is an applicable specified affiliate of an applicable foreign corporation, if—
(i) More than 50 percent of the capital interests or profits interests of the foreign partnership are held, directly or indirectly, by the applicable foreign corporation; and
(ii) Under the rules described in through of this section, at least one domestic entity is a direct or indirect partner with respect to the foreign partnership.
(2) Direct or indirect partner Except as provided in and of this section—
(i) A domestic entity is a direct partner with respect to a foreign partnership if it directly owns an interest in the foreign partnership; and
(ii) A domestic entity is an indirect partner with respect to a foreign partnership if the domestic entity owns an interest in the foreign partnership indirectly through—
(A) One or more other foreign partnerships;
(B) One or more foreign corporations controlled by one or more domestic entities within the meaning of of this section; or
(C) An ownership chain with one or more entities described in and of this section.
(3) Control of a foreign corporation For purposes of of this section, a foreign corporation is controlled by one or more domestic entities, if more than 50 percent of the total combined voting power of all classes of stock of such corporation entitled to vote or the total value of the stock of such corporation is owned, directly or indirectly, in aggregate, by one or more domestic entities.
(4) Indirect interests held through applicable foreign corporations Solely for purposes of of this section, if an applicable foreign corporation owns, directly or indirectly, stock of a foreign corporation or an interest in a foreign partnership, a domestic entity is not treated as indirectly owning stock of the foreign corporation or an interest in the foreign partnership solely by reason of owning, directly or indirectly, stock of the applicable foreign corporation.
(5) De minimis domestic entity (direct or indirect) partner A foreign partnership that has one or more domestic entities as direct or indirect partners is not considered an applicable specified affiliate if the domestic entities hold, directly or indirectly, in aggregate, less than 10 percent in each of the capital interests and profits interests in the foreign partnership.
(h) CSFC repurchase
(1) Overview This provides rules for determining whether a transaction is a CSFC repurchase for purposes of this section. of this section provides a general rule regarding the scope of such term. of this section provides an exclusive list of transactions that are section redemptions but are not CSFC repurchases. of this section provides an exclusive list of transactions that are section economically similar transactions. of this section provides a non-exclusive list of transactions that are not CSFC repurchases.
(2) Scope of CSFC repurchases For purposes of this section, a CSFC repurchase means solely—
(i) A section redemption with respect to stock of a covered surrogate foreign corporation, except as provided in of this section; or
(ii) A section economically similar transaction described in of this section.
(3) Certain section 317(b) redemptions that are not CSFC repurchases This provides an exclusive list of section redemptions that are not CSFC repurchases for purposes of the section excise tax.
(i) Section 304(a)(1) transactions The deemed distribution by an acquiring corporation (within the meaning of section 304(a)(1) of the Code) that is a covered surrogate foreign corporation in redemption of stock of the acquiring corporation (resulting from the application of section to an acquisition of stock by such acquiring corporation), regardless of whether section or (d) of the Code applies to the acquiring corporation's deemed distribution in redemption of its stock.
(ii) Leveraged buyouts and take-private transactions A redemption by a covered surrogate foreign corporation that occurs as part of a transaction in which the covered surrogate foreign corporation ceases to be a covered surrogate foreign corporation.
(iii) Stock issued prior to August 16, 2022 A redemption by a covered surrogate foreign corporation of stock of the covered corporation issued prior to August 16, 2022, if, at the time such stock was issued, the stock was subject to—
(A) Mandatory redemption by the covered surrogate foreign corporation; or
(B) A unilateral put option by the holder of such stock.
(iv) Payment by a covered surrogate foreign corporation of cash in lieu of fractional shares A payment by a covered surrogate foreign corporation of cash in lieu of a fractional share of the stock of the covered surrogate foreign corporation, if—
(A) The payment is carried out as part of a transaction that qualifies as a reorganization under section 368(a) of the Code or a distribution to which section 355 of the Code applies, or pursuant to the settlement of an option or a similar financial instrument (for example, a convertible debt instrument or convertible preferred share);
(B) The cash received by the shareholder entitled to the fractional share is not separately bargained-for consideration (that is, the cash paid by the covered surrogate foreign corporation in lieu of the fractional share represents a mere rounding off of the shares issued in the exchange or settlement);
(C) The payment is carried out solely for administrative convenience (and, therefore, solely for non-tax reasons); and
(D) The amount of cash paid to the shareholder in lieu of a fractional share does not exceed the fair market value of one full share of the class of stock of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, with respect to which the payment of cash in lieu of a fractional share is made.
(4) Section 4501(d) economically similar transactions This provides an exclusive list of transactions that are economically similar to section redemptions solely for purposes of the section excise tax (each, a section economically similar transaction) and, therefore, are taken into account as CSFC repurchases for purposes of this section.
(i) E reorganizations
(A) In general Except as provided in of this section, in the case of an E reorganization in which the recapitalizing corporation is a covered surrogate foreign corporation, solely the recapitalizing corporation's acquisition of its stock pursuant to the plan of reorganization in exchange for property that is not permitted to be received by the recapitalizing corporation's shareholders under section 354 of the Code without the recognition of gain.
(B) Exception of this section does not apply to the extent that—
(1) The distribution of such property is treated as a distribution with respect to the recapitalizing corporation's stock under ; or
(2) The exchange is with respect to preferred stock with dividends in arrears and is treated under or -2(e)(5) of this chapter as a deemed distribution to which sections 301 and 305(b)(4) of the Code apply.
(ii) Split-offs In the case of a split-off by a distributing corporation that is a covered surrogate foreign corporation, the acquisition by the distributing corporation of its stock in exchange for property.
(iii) Certain forfeitures and clawbacks of stock
(A) In general In the case of a forfeiture or clawback of stock of a covered surrogate foreign corporation pursuant to a legal or contractual obligation, the forfeiture or clawback is a section repurchase on the date of forfeiture or clawback (as appropriate) if the stock was treated as issued or provided under of this section and the forfeiture or clawback of the stock (as appropriate) is described in or of this section.
(B) Stock for which a section 83(b) election was made The stock was subject to a substantial risk of forfeiture within the meaning of section 83(a) of the Code on the date the stock was issued or provided, the service provider made a valid election under section with regard to the stock, and the forfeiture resulted from the service provider failing to meet the vesting condition.
(C) Clawbacks On the date the stock was issued or provided, the stock was subject to a clawback agreement, and a clawback of the stock resulted from the occurrence of an event specified in the clawback agreement.
(5) Transactions that are not CSFC repurchases This provides a non-exclusive list of transactions each of which is not a CSFC repurchase for purposes of this section.
(i) Complete liquidations A distribution by a covered surrogate foreign corporation—
(A) In complete liquidation of the covered surrogate foreign corporation to which section or (or both) applies;
(B) Pursuant to a resolution or plan of dissolution of the covered surrogate foreign corporation that is reported on an original (but not a supplemented or an amended) IRS Form 966, Corporate Dissolution or Liquidation (or any successor form); or
(C) Pursuant to a deemed dissolution of the covered surrogate foreign corporation (for instance, pursuant to a deemed liquidation under ).
(ii) Distributions during taxable year of complete liquidation or dissolution A distribution by a covered surrogate foreign corporation during a taxable year of the covered surrogate foreign corporation, if the covered surrogate foreign corporation—
(A) Completely liquidates during the taxable year (that is, has a final distribution during the taxable year in a complete liquidation to which section or (or both) applies);
(B) Dissolves during the taxable year pursuant to a resolution or plan of dissolution as reported on an original (but not a supplemented or an amended) IRS Form 966, Corporate Dissolution or Liquidation (or any successor form); or
(C) Is deemed to dissolve during the taxable year (for instance, pursuant to a deemed liquidation under ).
(iii) Divisive transactions under section 355 other than split-offs
(A) In general Subject to of this section, a distribution by a distributing corporation that is a covered surrogate foreign corporation of stock of a controlled corporation qualifying under section that is not a split-off.
(B) Exception regarding non-qualifying property in spin-offs A distribution by a distributing corporation that is a covered surrogate foreign corporation of other property or money in exchange for stock of the distributing corporation is a repurchase by the distributing corporation if it occurs in pursuance of a transaction qualifying under section in which the distribution by the distributing corporation of stock of the controlled corporation is with respect to stock of the distributing corporation.
(iv) Non-redemptive distributions subject to section 301(c)(2) or (3) A distribution to which section applies by a covered surrogate foreign corporation to a distributee, if the distribution—
(A) Is subject to section or (3); and
(B) The distributee does not exchange stock of the covered surrogate foreign corporation (and is not treated as exchanging stock of the covered surrogate foreign corporation for Federal income tax purposes).
(v) Acquisitive reorganizations In the case of an acquisitive reorganization in which the target corporation is a covered surrogate foreign corporation, the acquisition by the target corporation of its stock pursuant to the plan of reorganization in exchange for property that is received by the target corporation's shareholders under section 354 or 356 of the Code.
(vi) Net cash settlement of an option contract
(A) In general Subject to of this section, the net cash settlement of an option contract or other derivative financial instrument with respect to stock of a covered surrogate foreign corporation.
(B) Exception regarding net cash settlement of an option contract or other derivative financial instrument treated as stock The net cash settlement of an instrument in the legal form of an option contract or other derivative financial instrument that is treated as stock of a covered surrogate foreign corporation for Federal tax purposes at the time of issuance is a repurchase.
(i) [Reserved]
(j) Date of section 4501(d)(1) repurchase or section 4501(d)(2) repurchase
(1) General rule In general, stock of an applicable foreign corporation or a covered surrogate foreign corporation is treated as acquired in a section repurchase or a section repurchase, as applicable, on the date on which ownership of the stock transfers to the specified affiliate of the applicable foreign corporation, the specified affiliate of the covered surrogate foreign corporation, or the covered surrogate foreign corporation, as applicable, for Federal income tax purposes.
(2) Regular-way sale A regular-way sale of stock of an applicable foreign corporation or a covered surrogate foreign corporation (that is, a transaction in which a trade order is placed on the trade date, and settlement of the transaction, including payment and delivery of the stock, occurs a standardized period of time, as set by a regulator, after the trade date) is treated as acquired in a section repurchase or a section repurchase, as applicable, on the trade date.
(k) Fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation that is repurchased or acquired
(1) In general The fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is acquired in a section repurchase or a section repurchase is the market price of the stock on the date of the section repurchase or the section repurchase (as determined under of this section). That is, if the price at which the repurchased or acquired stock is purchased differs from the market price of the stock on the date the stock is repurchased or acquired, the fair market value of the stock is the market price on the date the stock is repurchased or acquired.
(2) Stock traded on an established securities market
(i) In general If stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is acquired in a section repurchase a or section repurchase with respect to a section covered corporation is traded on an established securities market, the section covered corporation must determine the market price of the stock by applying one of the methods provided in of this section. For purposes of this , stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is treated as traded on an established securities market if any stock of the same class and issue of stock is so traded, regardless of whether the shares repurchased or acquired are so traded.
(ii) Acceptable methods The following are acceptable methods for determining the market price of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, traded on an established securities market:
(A) The daily volume-weighted average price as determined on the date the stock is acquired in a section repurchase or section repurchase.
(B) The closing price on the date the stock is acquired in a section repurchase or a section repurchase.
(C) The average of the high and low prices on the date the stock is acquired in a section repurchase or a section repurchase.
(D) The trading price at the time the stock is acquired in a section repurchase or a section repurchase.
(iii) Date of section 4501(d)(1) repurchase or section 4501(d)(2) repurchase not a trading day For purposes of each method provided in of this section, if the date stock is acquired in a section repurchase or a section repurchase is not a trading day, the date on which the market price is determined is the immediately preceding trading day.
(iv) Consistency requirement The market price of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is traded on an established securities market must be determined by consistently applying one (but not more than one) of the methods provided in of this section to all section repurchases with respect to an applicable foreign corporation or all section repurchases with respect to a covered surrogate foreign corporation, as applicable, in the same taxable year of the applicable foreign corporation or covered surrogate foreign corporation, as applicable (which, if the applicable foreign corporation or covered surrogate foreign corporation, as applicable, does not have a taxable year for Federal tax purposes, is the calendar year).
(v) Stock traded on multiple exchanges
(A) In general A section covered corporation must determine the market price of the stock of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, by reference to trading on the established securities market in the country in which the applicable foreign corporation or covered surrogate foreign corporation, as applicable, is organized, including a regional established securities market that trades in that country.
(B) Stock traded on multiple exchanges in country where corporation is organized If the stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is traded on multiple established securities markets in the country in which the applicable foreign corporation or covered surrogate foreign corporation, as applicable, is organized, a section covered corporation must determine the market price of the stock by reference to trading on the established securities market in that country with the highest trading volume in the stock of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, in the section covered corporation's prior taxable year.
(C) Other cases in which stock is traded on multiple exchanges If stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is traded on multiple established securities markets and neither paragraph (k)(2)(v)(A) nor (B) of this section applies, a section covered corporation must determine the market price of the stock of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, in a manner that is reasonable and consistent under the facts and circumstances.
(3) Stock not traded on an established securities market
(i) General rule If stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is not traded on an established securities market, the market price of the stock is determined as of the date the stock is acquired in a section repurchase or a section repurchase under the principles of .
(ii) Consistency requirement The valuation method for determining the market price of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is not traded on an established securities market must be used for all section repurchases with respect to the same class of stock of an applicable foreign corporation or all section repurchases with respect to the same class of stock of a covered surrogate foreign corporation, as applicable, in the same taxable year of the applicable foreign corporation or covered surrogate foreign corporation, as applicable (which, if the applicable foreign corporation or covered surrogate foreign corporation, as applicable, does not have a taxable year for Federal tax purposes, is the calendar year), unless the application of that method to a particular section repurchase or a particular section repurchase would be unreasonable under the facts and circumstances as of the valuation date within the meaning of .
(4) Market price of stock denominated in non-U.S. currency The market price of any stock of an applicable foreign corporation or a covered surrogate foreign corporation that is denominated in a currency other than the U.S. dollar is converted into U.S. dollars at the spot rate (as defined in ) on the date the stock is acquired in a section repurchase or a section repurchase.
(l) Section 4501(d) exceptions
(1) In general
(i) Overview This provides rules regarding the application of each exception set forth in section (other than the section de minimis exception) and an additional exception applicable to certain investment companies (each, a section exception) to a section repurchase or a section repurchase.
(ii) Reduction of section 4501(d) excise tax base For purposes of determining a section covered corporation's section stock repurchase excise tax base under of this section, the section covered corporation reduces its section gross repurchase amount by an amount equal to the aggregate fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that qualifies for an exception described in this . See of this section.
(iii) Coordination of exceptions If a section repurchase or a section repurchase qualifies for more than one exception described in through of this section, the section covered corporation may reduce its gross repurchase amount under solely a single exception, as determined by the section covered corporation.
(2) Section 4501(d) reorganization exception A section covered corporation reduces its section gross repurchase amount under of this section by an amount equal to the aggregate fair market value of a covered surrogate foreign corporation's stock repurchased from a shareholder in a CSFC repurchase described in or of this section to the extent that the repurchase is for property permitted by section to be received without the recognition of gain or loss on that CSFC repurchase (section reorganization exception).
(3) Stock contributions to an employer-sponsored retirement plan
(i) Reductions to section 4501(d) excise tax base
(A) General rule A section covered corporation reduces its section gross repurchase amount under of this section if the stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, that is repurchased or acquired in a section repurchase or a section repurchase, as applicable, or an amount of stock equal to the fair market value of the stock repurchased or acquired, is contributed to an employer-sponsored retirement plan of the section covered corporation.
(B) Special rule for leveraged ESOPs If a section covered corporation maintains an ESOP with an exempt loan (as described in section 4975(d)(3) of the Code), allocations of qualifying employer securities that are stock of the applicable foreign corporation or covered surrogate foreign corporation from the ESOP suspense account to ESOP participants' accounts that are attributable to employer contributions (and not to dividends) are treated as contributions of stock under this as of the date stock attributable to repayment of the exempt loan is released from the suspense account and allocated to ESOP participants' accounts.
(ii) Classes of stock contributed to an employer-sponsored retirement plan This applies to contributions of any class of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, to an employer-sponsored retirement plan of the section covered corporation, regardless of the class of stock that was repurchased or acquired in a section repurchase or a section repurchase by the section covered corporation.
(iii) Determining amount of reduction to section 4501(d) excise tax base The amount of the reduction under of this section for a section covered corporation is determined as provided in or of this section.
(A) Same class of stock repurchased and contributed If stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is repurchased or acquired in a section repurchase or a section repurchase, as applicable, and stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, that is of the same class is contributed to an employer-sponsored retirement plan of the section covered corporation, the amount of the reduction under of this section is equal to the lesser of—
(1) The aggregate fair market value of the stock of the same class that was repurchased or acquired (as determined under of this section) during the section covered corporation's taxable year; or
(2) The amount obtained by—
(i) Determining the aggregate fair market value of all stock of that class repurchased or acquired (as determined under of this section) in all section repurchases or section repurchases, as applicable, during the section covered corporation's taxable year, reduced by the fair market value of shares of that class of stock that is a reduction to the section excise tax base for the taxable year under a section exception other than this ;
(ii) Dividing the amount determined under of this section by the number of shares of that class repurchased or acquired in all section repurchases or section repurchases, as applicable, during the section covered corporation's taxable year, reduced by the number of shares of that class of stock the fair market value of which is a reduction to the section excise tax base for the taxable year under a section exception other than this ; and
(iii) Multiplying the amount determined under of this section by the number of shares of that class contributed to an employer-sponsored retirement plan of the section covered corporation for the taxable year.
(B) Different class of stock repurchased and contributed
(1) In general Subject to of this section, if stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, of a different class of stock than is repurchased or acquired in a section repurchase or a section repurchase, as applicable, with respect to a section covered corporation is contributed to an employer-sponsored retirement plan of the section covered corporation, then the amount of the reduction under of this section is equal to the fair market value of the contributed stock at the time the stock is contributed to the employer-sponsored retirement plan.
(2) Maximum reduction permitted The amount of the reduction under of this section may not exceed the section excise tax base for the taxable year (determined without regard to any reduction under of this section).
(iv) Timing of contributions
(A) In general The reduction under of this section (that is, the reduction in the section excise tax base), for a taxable year applies to contributions of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, to an employer-sponsored retirement plan during the section covered corporation's taxable year.
(B) Treatment of contributions after close of taxable year For purposes of of this section, a section covered corporation may treat stock contributions to an employer-sponsored retirement plan made after the close of the section covered corporation's taxable year as having been contributed during that taxable year if the following two requirements are satisfied:
(1) The stock must be contributed to the employer-sponsored retirement plan by the filing deadline for the form on which the section excise tax must be reported (applicable form) for that taxable year of the section covered corporation.
(2) The stock must be treated by the employer-sponsored retirement plan in the same manner that the plan would treat a contribution received on the last day of that taxable year of the section covered corporation.
(C) No duplicate reductions Stock contributions that are treated under of this section as having been contributed in the taxable year to which the applicable form applies may not be treated as having been contributed for any other taxable year for purposes of the section excise tax.
(v) Contributions before January 1, 2023 A section covered corporation with a taxable year that both begins before January 1, 2023, and ends after December 31, 2022, may include for that taxable year the fair market value of all contributions of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, to an employer-sponsored retirement plan during the entirety of that taxable year for purposes of applying this .
(4) Repurchases or acquisitions by a dealer in securities in the ordinary course of business
(i) In general Subject to of this section, a section covered corporation reduces its section gross repurchase amount under of this section by an amount equal to the aggregate fair market value of stock acquired in a section repurchase or in a section repurchase if the repurchasing or acquiring entity is a dealer in securities (within the meaning of section 475(c)(1) of the Code) to the extent the stock is repurchased or acquired in the ordinary course of the dealer's business of dealing in securities.
(ii) Applicability The reduction described in of this section applies solely to the extent that—
(A) The dealer accounts for the stock as securities held primarily for sale to customers in the dealer's ordinary course of business;
(B) The dealer disposes of the stock within a period of time that is consistent with the holding of the stock for sale to customers in the dealer's ordinary course of business, taking into account the terms of the stock and the conditions and practices prevailing in the markets for similar stock during the period in which the stock is held; and
(C) The dealer (if it is a covered surrogate foreign corporation) does not sell or otherwise transfer the stock to a specified affiliate of the covered surrogate foreign corporation or the dealer (if it is a specified affiliate of an applicable foreign corporation or of a covered surrogate foreign corporation, as applicable) does not sell or otherwise transfer the stock to the applicable foreign corporation, covered surrogate foreign corporation, or to another specified affiliate of the applicable foreign corporation or covered surrogate foreign corporation, as applicable, in each case other than in a sale or transfer to a dealer that also satisfies the requirements of this .
(5) Repurchases by a RIC or REIT Section does not apply for purposes of section .
(6) CSFC repurchase treated as a dividend
(i) In general A section covered corporation reduces its section gross repurchase amount under of this section by an amount equal to the aggregate fair market value of stock of a covered surrogate foreign corporation repurchased by the covered surrogate foreign corporation in a CSFC repurchase to the extent the CSFC repurchase is treated as a distribution of a dividend under section or .
(ii) Rebuttable presumption of no dividend equivalence
(A) Presumption A CSFC repurchase to which section or applies is presumed to be subject to section or , respectively (and, therefore, is presumed ineligible for the exception in of this section).
(B) Rebuttal of presumption A section covered corporation may rebut the presumption described in of this section with regard to a specific shareholder of the covered surrogate foreign corporation solely by establishing with sufficient evidence that the covered surrogate foreign corporation and the shareholder treat the CSFC repurchase as a dividend for Federal income tax purposes.
(iii) Sufficient evidence requirement
(A) In general To provide sufficient evidence under of this section to establish that the covered surrogate foreign corporation and the shareholder treat the CSFC repurchase as a dividend for Federal income tax purposes, the section covered corporation must—
(1) Establish, based on information known to the section covered corporation (for example, through legal documentation of share ownership, publicly available information, the pro rata nature of the repurchase, or the shareholder certification safe harbor described in of this section), that—
(i) The CSFC repurchase either constitutes a redemption that is treated as a distribution to which section applies by reason of section or has the effect of the distribution of a dividend under section ; and
(ii) The section covered corporation has no knowledge of facts that would indicate that the treatment described in of this section is incorrect;
(2) Treat the CSFC repurchase consistent with the treatment described in of this section, including by withholding the applicable amounts, if required; and
(3) Demonstrate sufficient earnings and profits to treat as a dividend either the redemption under section or the receipt of money or other property under section .
(B) Shareholder certification safe harbor To provide sufficient evidence under of this section to establish that the shareholder treats the repurchase as a dividend for Federal income tax purposes, the section covered corporation—
(1) May obtain certification from the shareholder, in accordance with , that the repurchase constitutes a redemption treated as a distribution to which section applies by reason of section , or that the repurchase has the effect of the distribution of a dividend under section , including evidence that applicable withholding occurred if required; and
(2) Must have no knowledge of facts that would indicate that the shareholder certification is incorrect.
(iv) Documentation of sufficient evidence
(A) Retention and availability of evidence A section covered corporation must retain the evidence described in of this section and make that evidence available for inspection to the IRS if any of the evidence becomes material in the administration of any internal revenue law.
(B) Retention of supporting records The section covered corporation must retain records of all information necessary to document and substantiate all content described in of this section.
(7) Repurchases by a non-RIC '40 Act fund The exception for repurchases by a non-RIC '40 Act fund under does not apply for purposes of section .
(m) Application of section 4501(d) netting rule
(1) In general This provides the section netting rule, under which the section excise tax base with respect to a section covered corporation for a taxable year is reduced only by stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, issued or provided by the section covered corporation to its employees during its taxable year. Any reference in this to issuing or providing stock to an employee refers solely to stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, that is issued or provided by a section covered corporation to an employee in connection with the employee's performance of services in the employee's capacity as an employee of the section covered corporation. The fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is described in this is a reduction for purposes of computing the section covered corporation's section excise tax base. See of this section.
(2) Stock issued or provided outside period of applicable foreign corporation or covered surrogate foreign corporation status Any stock issued or provided prior to the initiation date or after the cessation date of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, is not taken into account under of this section. See of this section (determination of initiation date and cessation date).
(3) Issuances or provisions before January 1, 2023 Except as provided in of this section, a section covered corporation with a taxable year that both begins before January 1, 2023, and ends after December 31, 2022, must include the fair market value of all issuances or provisions of stock during the entirety of that taxable year for purposes of applying of this section for that taxable year.
(4) Stock issued or provided in connection with the performance of services
(i) In general For purposes of this , stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is transferred by the section covered corporation in connection with the performance of services only if the transfer is described in section , including pursuant to the exercise of a nonqualified stock option described in , or is pursuant to the exercise of a stock option described in section 421 of the Code.
(ii) Sale of shares to cover exercise price or withholding
(A) Payment or advance by third party equal to exercise price If a third party pays the exercise price of an option to acquire stock of a covered corporation on behalf of an employee or advances to an employee an amount equal to the exercise price of a stock option that the employee uses to exercise the option, then any stock transferred by the section covered corporation to the third party in connection with exercising the option (as well as any stock transferred by the covered corporation or specified affiliate to the employee) is treated as issued or provided in connection with the performance of the services by the employee.
(B) Advance by third party equal to withholding obligation If a third party advances an amount equal to the withholding obligation of an employee, then any stock transferred by the section covered corporation to the third party (as well as any stock transferred by the covered corporation or specified affiliate to the employee) in connection with this arrangement is treated as issued or provided in connection with the performance of services by the employee.
(5) Date of issuance or provision for section 4501(d) netting rule
(i) In general Stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, is issued or provided to an employee of a section covered corporation as of the date the employee is treated as the beneficial owner of the stock for Federal income tax purposes. In general, an employee is treated as the beneficial owner of the stock when the stock is both transferred by the section covered corporation and substantially vested within the meaning of . Thus, stock transferred pursuant to a vested stock award or a restricted stock unit is issued or provided when the section covered corporation initiates payment of the stock. Stock transferred that is not substantially vested within the meaning of is not issued or provided until it vests, except as provided in of this section.
(ii) Stock options and stock appreciation rights Stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, transferred by a section covered corporation pursuant to an option described in or section or a stock appreciation right is issued or provided by the section covered corporation as of the date the option or stock appreciation right is exercised.
(iii) Stock on which a section 83(b) election is made Stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, transferred by the section covered corporation when it is not substantially vested within the meaning of , but as to which a valid election under section is made, is treated as issued or provided by the section covered corporation as of the transfer date.
(6) Fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation that is issued or provided to employees
(i) In general For purposes of of this section, the fair market value of stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is issued or provided is determined under section as of the date the stock is issued or provided to an employee by the section covered corporation. The fair market value of the stock is determined under the rules provided in section regardless of whether an amount is includible in the employee's income under section or otherwise. For example, the fair market value of stock issued or provided by a section covered corporation to its employee pursuant to a stock option described in section and stock issued or provided by a section covered corporation to an employee who is a nonresident alien for services performed outside of the United States is determined using the rules provided in section .
(ii) Market price of stock denominated in non-U.S. currency The market price of any stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is denominated in a currency other than the U.S. dollar is converted into U.S. dollars at the spot rate (as defined in ) on the date the stock is issued or provided by the section covered corporation to its employee.
(7) Issuances that are disregarded for purposes of applying the section 4501(d) netting rule
(i) In general This lists the sole circumstances in which an issuance or provision of stock by the section covered corporation to its employee is disregarded for purposes of this . The transfers of stock described in through are not issuances or provisions of stock by a section covered corporation to its employees and therefore are not relevant to the section netting rule.
(ii) Stock contributions to an employer-sponsored retirement plan Any stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, contributed to an employer-sponsored retirement plan of the section covered corporation, any stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, treated as contributed to an employer-sponsored retirement plan of the section covered corporation under of this section, and any stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, sold to a leveraged or non-leveraged ESOP, is disregarded for purposes of this .
(iii) Net exercises and share withholding Stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, withheld by a section covered corporation to satisfy the exercise price of a stock option issued to an employee, or to pay any withholding obligation, is disregarded for purposes of this . For example, stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, withheld by a section covered corporation to pay the exercise price of a stock option, to satisfy an employer's income tax withholding obligation under section 3402 of the Code, to satisfy an employer's withholding obligation under section 3102 of the Code, or to satisfy an employer's withholding obligation for State, local, or foreign taxes, is disregarded for purposes of this .
(iv) Settlement other than in stock Settlement of an option contract with respect to stock of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, using any consideration other than stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, (including cash) is disregarded for purposes of this .
(v) Instrument not in the legal form of stock
(A) Issuance or provision of section 4501(d) covered non-stock instrument generally disregarded Except as provided in or of this section, the issuance or provision by a section covered corporation of a section covered non-stock instrument (as defined in of this section, including an issuance or provision before the initiation date or after the cessation date, is disregarded for purposes of the section netting rule.
(B) Definitions The following definitions apply for purposes of this .
(1) Section 4501(d) non-stock instrument A section non-stock instrument is an instrument of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is not in the legal form of stock but that is treated as stock for Federal tax purposes. For the avoidance of doubt, in the case of an applicable foreign corporation or a covered surrogate foreign corporation, as applicable, that is an eligible entity with the meaning of , a section non-stock instrument does not include an instrument that is in the legal form of membership, partnership, or other ownership interests of the eligible entity.
(2) Section 4501(d) covered non-stock instrument A section covered non-stock instrument is a section non-stock instrument issued or provided by a section covered corporation to a section covered holder.
(3) Section 4501(d) covered holder A section covered holder is any person that owns (or under the attribution rules of section 318 of the Code is considered to own) at least 10 percent of the stock of the applicable foreign corporation or the covered surrogate foreign corporation, as applicable, either by vote or value, but only if the section covered corporation has knowledge of facts that would indicate such ownership, including through legal documentation of share ownership, publicly available information, or any other means at the time of the issuance or provision of the section non-stock instrument by the section covered corporation.
(C) Certain instruments treated as issued when repurchased
(1) In general Subject to the identification requirement in of this section, if a section covered non-stock instrument is repurchased by a section covered corporation, the issuance or provision of the instrument is regarded for purposes of the section netting rule at the time of such repurchase based on the fair market value of the instrument when the instrument was issued or provided. Such fair market value is determined under of this section. For purposes of the section excise tax, the delivery of stock pursuant to the terms of a section covered non-stock instrument is treated as a repurchase of the section covered non-stock instrument in exchange for an issuance or provision of the stock that is delivered.
(2) Identification of an instrument not in the legal form of stock The issuance or provision of a section covered non-stock instrument is regarded under of this section only if the section covered corporation identifies the section repurchase or the section repurchase, as applicable, of the section covered non-stock instrument on the return on which the section excise tax must be reported for the section covered corporation's taxable year in which the section repurchase or the section repurchase, as applicable, occurs.
(D) Issuances pursuant to a public offering of this section does not apply to any issuance or provision of a section covered non-stock instrument the offer and sale of which was registered with the SEC.
(n) Section 4501(d)(1) examples The following examples illustrate the application of the rules in this section relating to section . For purposes of the following examples, unless otherwise stated: Corporation FZ is an applicable foreign corporation; each entity has a calendar taxable year, has no direct or indirect owner that is a domestic entity, and is not related to any other entity; each corporation's only outstanding stock for Federal tax purposes is a single class of common stock; the functional currency (within the meaning of section 985 of the Code) of any entity is the U.S. dollar; any acquisition of the stock of an applicable foreign corporation is from a person who is not the applicable foreign corporation or a specified affiliate of the applicable foreign corporation; no stock is transferred to any employee; for examples that expressly provide that stock is transferred to any employee, such transfer is made in connection with the employee's performance of services in its capacity as an employee of the transferor, and the employee is treated as the beneficial owner of the stock for Federal income tax purposes on the date of the transfer; and the section exceptions are inapplicable.
(1) Example 1: Section 4501(d) netting rule with respect to a single applicable specified affiliate
(i) Facts Corporation FZ owns all the outstanding stock of Corporation US1, a domestic corporation. Each of Employee M and Employee P is an employee of Corporation US1. On February 1, 2025, Corporation US1 purchases 100 shares of stock of Corporation FZ when the market price of each share is $8x. On May 15, 2025, Corporation US1 transfers to Employee M 50 shares of stock of Corporation FZ when the fair market value of each share is $5x. On November 1, 2025, Corporation US1 transfers to Employee P 30 shares of stock of Corporation US1 when the fair market value of each share is $9x.
(ii) Analysis Corporation US1 is an applicable specified affiliate. See of this section. Corporation US1's purchase of 100 shares of stock of Corporation FZ on February 1, 2025, is a section repurchase. See of this section. Corporation US1 is a section covered corporation with respect to the section repurchase. See of this section. For purposes of computing Corporation US1's section excise tax base for its 2025 taxable year, the fair market value of the 100 shares of stock of Corporation FZ subject to the section repurchase is $800x. See of this section. Accordingly, the section repurchase increases Corporation US1's section excise tax base for the 2025 taxable year by $800x. 50 shares of Corporation FZ stock are treated as issued or provided to Employee M on May 15, 2025. See of this section. Therefore, Corporation US1's section excise tax base for its 2025 taxable year is reduced by $250x (50 shares × $5x per share = $250x). See of this section. Corporation US1's section excise tax base for its 2025 taxable year is not reduced by the transfer of stock of Corporation US1 to Employee P because the section excise tax base with respect to Corporation US1 can only be reduced by the fair market value of stock of Corporation FZ issued or provided by Corporation US1 to employees of Corporation US1. See of this section. Accordingly, Corporation US1's section excise tax base with respect to these transactions for its 2025 taxable year is $550x ($800x repurchase − $250x issuance = $550x).
(2) Example 2: Section 4501(d) netting rule with respect to multiple applicable specified affiliates
(i) Facts Corporation FZ owns all the outstanding stock of both Corporation US1, a domestic corporation, and Corporation US2, a domestic corporation. Employee T is an employee of Corporation US2. On February 1, 2025, Corporation US1 purchases 100 shares of stock of Corporation FZ when the market price of each share is $8x. On May 15, 2025, Corporation US2 transfers to Employee T 50 shares of stock of Corporation FZ when the fair market value of each share is $5x.
(ii) Analysis Corporation US1 is an applicable specified affiliate. See of this section. Corporation US1's purchase of 100 shares of stock of Corporation FZ on February 1, 2025, is a section repurchase. See of this section. Corporation US1 is a section covered corporation with respect to the section repurchase. See of this section. For purposes of computing Corporation US1's section excise tax base for its 2025 taxable year, the fair market value of the 100 shares of stock of Corporation FZ subject to the section repurchase is $800x. See of this section. Accordingly, the section repurchase increases Corporation US1's section excise tax base for the 2025 taxable year by $800x. Corporation US1's section excise tax base for its 2025 taxable year is not reduced by the transfer of stock of Corporation FZ to Employee T, an employee of Corporation US2, because the section excise tax base with respect to Corporation US1 can only be reduced by the fair market value of stock of Corporation FZ issued or provided by Corporation US1 to employees of Corporation US1. See of this section. Because there is no section repurchase by Corporation US2, the section netting rule does not apply to Corporation US2's transfer of 50 shares of stock of Corporation FZ to Employee T.
(3) Example 3: Foreign partnership that is an applicable specified affiliate
(i) Facts Partnership FP is a foreign partnership in which Corporation FZ, Corporation FB, a foreign corporation, and Corporation US1, a domestic corporation, are partners. Corporation FZ owns 70 percent of the capital interests and profits interests of Partnership FP; Corporation FB owns 20 percent of the capital interests and profits interests of Partnership FP; and Corporation US1 owns 10 percent of the capital interests and profits interests of Partnership FP. On March 1, 2024, Partnership FP purchases 100 shares of stock of Corporation FZ when the market price of each share is $8x.
(ii) Analysis Corporation US1 is a domestic entity. See of this section. Corporation US1 is a direct partner with respect to Partnership FP for purposes of section because Corporation US1 directly owns an interest in Partnership FP and is not a de minimis domestic entity partner with respect to Partnership FP. See and of this section. Accordingly, Partnership FP is an applicable specified affiliate of Corporation FZ because Corporation FZ owns more than 50 percent of the capital interests or profits interests of Partnership FP, and Corporation US1, a domestic entity, is a direct partner of Partnership FP. See of this section. Consequently, Partnership FP's purchase of 100 shares of stock of Corporation FZ is a section repurchase. See of this section. Partnership FP is a section covered corporation with respect to the section repurchase. See of this section. For purposes of computing Partnership FP's section excise tax base, the fair market value of the 100 shares of stock of Corporation FZ subject to the section repurchase is $800x. See of this section. Accordingly, the section repurchase increases Partnership FP's section excise tax base for the 2024 taxable year by $800x. See of this section.
(4) Example 4: Foreign partnership that is not an applicable specified affiliate
(i) Facts The facts are the same as in of this section (Example 3), except that Corporation FZ owns 76 percent of the capital interests and profits interests of Partnership FP; Corporation FB owns 20 percent of the capital interests and profits interests of Partnership FP; and Corporation US1 owns 4 percent of the capital interests and profits interests of Partnership FP.
(ii) Analysis Corporation US1 is not a direct or indirect partner with respect to Partnership FP for purposes of section because Corporation US1 qualifies as a de minimis domestic entity partner. See of this section. Consequently, Partnership FP is not an applicable specified affiliate of Corporation FZ because Partnership FP has no direct or indirect domestic entity partner. See of this section. Accordingly, Partnership FP's purchase of 100 shares of stock of Corporation FZ is not a section repurchase. See of this section.
(5) Example 5: Foreign partnership that is directly owned by foreign corporations and is an applicable specified affiliate
(i) Facts Corporation FZ owns all the outstanding stock of Corporation US1, a domestic corporation. Corporation US1 owns all the outstanding stock of Corporation FB, a foreign corporation. Partnership FP is a foreign partnership in which Corporation FB and Corporation FE, a foreign corporation, are partners. Corporation FB owns 80 percent of the capital interests and profits interests of Partnership FP, and Corporation FE owns 20 percent of the capital interests and profits interests of Partnership FP.
(ii) Analysis Corporation US1 is a domestic entity. See of this section. Corporation US1 owns an interest in Partnership FP indirectly through Corporation FB, a foreign corporation that Corporation US1 controls within the meaning of of this section. Corporation US1 does not qualify as a de minimis domestic entity partner with respect to Partnership FP. See of this section. Thus, Corporation US1 is an indirect partner with respect to Partnership FP for purposes of section . See of this section. Accordingly, Partnership FP is an applicable specified affiliate of Corporation FZ because Corporation FZ indirectly owns more than 50 percent of the capital interests or profits interests of Partnership FP and Corporation US1, a domestic entity, is an indirect partner of Partnership FP. See of this section.
(o) Section 4501(d)(2) examples The following examples illustrate the application of the rules in this section relating to section . For purposes of the following examples, unless otherwise stated: Corporation FZ is a covered surrogate foreign corporation; each domestic entity is an expatriated entity within the meaning of section with respect to Corporation FZ and is not a member of a consolidated group; there are no expatriated entities with respect to Corporation FZ other than as described in the facts; a reference to ownership refers to direct ownership; any repurchase or acquisition of stock is during a taxable year that includes at least a portion of the applicable period with respect to Corporation FZ under section ; each entity has a calendar taxable year; each corporation's only outstanding stock is a single class of common stock; the functional currency (within the meaning of section ) of any entity is the U.S. dollar; no stock is transferred to any employee; for examples that expressly provide that stock is transferred to any employee, such transfer is made in connection with the employee's performance of services in its capacity as an employee of the transferor, and the employee is treated as the beneficial owner of the stock for Federal income tax purposes on the date of the transfer; and the section exceptions are inapplicable.
(1) Example 1: Section 4501(d) netting rule with respect to an expatriated entity
(i) Facts Corporation FZ owns all the outstanding stock of Corporation US1, a domestic corporation. Employee M is an employee of Corporation FZ, and Employee P is an employee of Corporation US1. On February 1, 2024, Corporation US1 purchases 100 shares of stock of Corporation FZ when the market price of each share is $8x. On May 15, 2024, Corporation FZ transfers to Employee M 50 shares of stock of Corporation FZ when the fair market value of each share is $5x. On November 1, 2024, Corporation US1 transfers to Employee P 30 shares of stock of Corporation US1 when the fair market value of each share is $9x. On December 15, 2024, Corporation FZ purchases 90 shares of its stock when the market price of each share is $12x.
(ii) Analysis Each of Corporation US1's purchase of 100 shares of stock of Corporation FZ and Corporation FZ's purchase of 90 shares of its stock is a section repurchase. See of this section. Corporation US1 is a section covered corporation with respect to the section repurchases. See of this section. For purposes of computing Corporation US1's section excise tax base, the fair market value of the 100 shares of stock of Corporation FZ subject to the section repurchase on February 1, 2024, is $800x, and the fair market value of the 90 shares of stock of Corporation FZ subject to the section repurchase on December 15, 2024, is $1,080x. See of this section. Thus, the section repurchases increase Corporation US1's section excise tax base for the 2024 taxable year by $1,880x ($800x + $1,080x). See of this section. Corporation US1's section excise tax base for its 2024 taxable year is not reduced by the fair market value of the stock of Corporation FZ transferred to Employee M or the fair market value of the stock of Corporation US1 transferred to Employee P because the section excise tax base with respect to Corporation US1 can only be reduced by the fair market value of stock of Corporation FZ issued or provided by Corporation US1 to employees of Corporation US1. See of this section. Accordingly, Corporation US1's section excise tax base with respect to these transactions for its 2024 taxable year is $1,880x.
(2) Example 2: Section 4501(d)(2) repurchase from the covered surrogate foreign corporation or another specified affiliate of the covered surrogate foreign corporation
(i) Facts Corporation FZ owns all the outstanding stock of each of Corporation US1, a domestic corporation, Corporation FB, a foreign corporation, and Corporation FE, a foreign corporation. On February 1, 2024, Corporation US1 purchases 100 shares of stock of Corporation FZ from Corporation FB when the market price of each share is $8x. On December 15, 2024, Corporation FZ contributes 90 shares of its stock to Corporation FE when the fair market value of each share is $12x.
(ii) Analysis Each of Corporation US1's purchase of 100 shares of stock of Corporation FZ and Corporation FZ's transfer of 90 shares of its stock is a section repurchase. See of this section. Corporation US1 is a section covered corporation with respect to the section repurchases. See of this section. For purposes of computing Corporation US1's section excise tax base, the fair market value of the 100 shares of stock of Corporation FZ subject to the section repurchase on February 1, 2024, is $800x, and the fair market value of the 90 shares of stock of Corporation FZ subject to the section repurchase on December 15, 2024, is $1,080x. See of this section. Accordingly, Corporation US1's section excise tax base with respect to these transactions for its 2024 taxable year is $1,880x. See of this section.
(3) Example 3: Liability with respect to multiple expatriated entities
(i) Facts Corporation FZ owns all the outstanding stock of each of Corporation US1, a domestic corporation, and Corporation US2, a domestic corporation. Employee M is an employee of Corporation US1, and Employee P is an employee of Corporation US2. On February 1, 2024, Corporation US1 purchases 100 shares of stock of Corporation FZ when the market price of each share is $8x. On May 15, 2024, Corporation US2 purchases 40 shares of stock of Corporation FZ when the market price of each share is $9x. On October 15, 2024, Corporation FZ repurchases 50 shares of its stock when the market price of each share is $7x. On November 1, 2024, Corporation US1 transfers to Employee M 30 shares of stock of Corporation FZ when the fair market value of each share is $9x. On November 20, 2024, Corporation US2 transfers to Employee P 30 shares of stock of Corporation FZ when the fair market value of each share is $8x. Corporation US1 pays the entire amount of section excise tax that it owes with respect to all section repurchases relating to Corporation FZ and its specified affiliates that occur during Corporation US1's 2024 taxable year and fulfills its filing obligations for its 2024 taxable year with respect to such section repurchases.
(ii) Analysis Each of Corporation US1's purchase of 100 shares of stock of Corporation FZ, Corporation US2's purchase of 40 shares of stock of Corporation FZ, and Corporation FZ's repurchase of 50 shares of its stock is a section repurchase. See and of this section. Each of Corporation US1 and Corporation US2 is a section covered corporation with respect to the section repurchases. See of this section. For purposes of computing the section excise tax base for each of Corporation US1 and Corporation US2, the fair market value of the 100 shares subject to the section repurchase on February 1, 2024, is $800x; the fair market value of the 40 shares of stock of Corporation FZ subject to the section repurchase on May 15, 2024, is $360x; and the fair market value of the 50 shares of stock of Corporation FZ subject to the section repurchase on October 15, 2024, is $350x. See of this section. Thus, the section repurchases increase each of Corporation US1's and Corporation US2's section excise tax base for the 2024 taxable year by $1,510x ($800x + $360x + $350x). See of this section. 30 shares of Corporation FZ stock are treated as issued or provided to Employee M on November 1, 2024. See of this section. Therefore, Corporation US1's section excise tax base is reduced for its 2024 taxable year by the fair market value of the 30 shares of stock of Corporation FZ transferred on November 1, 2024, or $270x ($9x per share × 30 shares = $270x). See of this section. Corporation US1's section excise tax base for its 2024 taxable year is not reduced by the fair market value of the stock of Corporation FZ that Corporation US2 transferred to Employee P because the section excise tax base with respect to Corporation US1 can only be reduced by the fair market value of stock of Corporation FZ issued or provided by Corporation US1 to employees of Corporation US1. See of this section. Accordingly, Corporation US1's section excise tax base with respect to these transactions for its 2024 taxable year is $1,240x ($1,510x−$270x). See of this section. Because Corporation US1 pays the entire amount of section excise tax that it owes with respect to all section repurchases that occur during Corporation US1's 2024 taxable year relating to Corporation FZ and its specified affiliates and fulfills its filing obligations for its 2024 taxable year with respect to such section repurchases, Corporation US2 is not liable for section excise tax with respect to such section repurchases. See of this section.
(p) Applicability dates
(1) In general Except as provided in and of this section, the provisions of this section apply to transactions that occur after April 12, 2024.
(2) Transition rule for foreign partnership de minimis rule A section covered corporation may choose to apply of this section by replacing the phrase “10 percent” with “five percent” for transactions that occur after April 12, 2024, but before November 24, 2025.
(3) Early application A section covered corporation may choose to apply all the rules of this section to transactions occurring after December 31, 2022, provided that the section covered corporation and all other section covered corporations with respect to the same applicable foreign corporation or covered surrogate foreign corporation, as applicable, consistently apply all the rules of this section with respect to such transactions.