Greenmail, as the Internal Revenue Code defines it for purposes of the section 5881 excise tax, is consideration a corporation, or a person acting in concert with it, transfers to directly or indirectly acquire its own stock from a shareholder, under an offer that was not made on the same terms to all shareholders. Two facts about the shareholder finish the definition: the stock was held for less than 2 years before the agreement to transfer it, and that shareholder, or someone acting in concert with that shareholder, or a person related to either of them, had made or threatened a public tender offer for the corporation at some point in the 2 years ending on the date of the acquisition (26 U.S.C. § 5881(b)). All three conditions have to hold.
Greenmailing names the practice. Greenmail is the consideration that changes hands at the end of it.
What Counts as Greenmail
Each piece of the test has a fixed meaning in the same section. The holding period is determined under section 1223, and it runs to the date the shareholder enters into the agreement to make the transfer rather than to the date the stock actually moves (26 U.S.C. § 5881(b)(1)).
A public tender offer is any offer to purchase or otherwise acquire stock or assets in a corporation where the offer was or would be required to be filed or registered with a federal or state agency regulating securities. A person is related where the relationship would cause losses to be disallowed under section 267 or 707(b) (26 U.S.C. § 5881(c)).
The section also closes two routes around it. Payments made in connection with, or in transactions related to, an acquisition are treated as paid in that acquisition, so a premium routed through a side transaction is still part of the acquisition being tested (26 U.S.C. § 5881(b)).
Stock is also deemed to have been acquired indirectly by the issuing corporation if it is sold to an entity related to that corporation, a controlled subsidiary for example, so the transfer still counts as an acquisition by the issuer (IRS, Instructions for Form 8725).
Two familiar repurchase mechanics fail the selective-terms element. A pro-rata self-tender is made to every holder on the same terms, and an ordinary open-market repurchase is not made under an offer to shareholders at all, so neither is an acquisition pursuant to an offer that was not made on the same terms to all shareholders (26 U.S.C. § 5881(b)(3)).
A repurchase from a holder who has owned the stock for 2 years or more fails the holding period on its own (26 U.S.C. § 5881(b)(1)). Where the reacquired shares then sit in the equity section is a separate question, worked through in treasury shares.
Who Owes the Tax
The person who receives greenmail owes the tax, not the corporation that paid it. The statute imposes on any person who receives greenmail a tax equal to 50 percent of gain or other income of that person by reason of the receipt, and it applies whether or not that gain or other income is recognized (26 U.S.C. § 5881(a) and (d)).
The tax is also nondeductible. No deduction is allowed for taxes imposed by chapter 54 (26 U.S.C. § 275(a)(6)), which is the chapter this section sits in (26 U.S.C. § 5881).
The Return That Reports It
Form 8725, Excise Tax on Greenmail, is where the recipient reports and pays the 50% excise tax imposed under section 5881 on the gain or other income realized on the receipt of greenmail (IRS, About Form 8725).
The filing is one-off rather than annual. A separate Form 8725 goes in for each agreement made to transfer stock, and it is due by the 90th day following receipt of any portion of the greenmail (IRS, Instructions for Form 8725).
None of this is historic. The rule reaches consideration received after December 22, 1987 (26 U.S.C. § 5881, Effective Date note), and the form that carries it was last revised in December 2025 (IRS, Form 8725).
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