Did The Inflation Reduction Act Create A SPAC Tax?

• Published date: 26 September 2022
• Subject Matter: Corporate/Commercial Law, Tax, Corporate and Company Law, Income Tax, Corporate Tax, Shareholders
• Law Firm: Cooley LLP
• Author: Mr William Corcoran, Stephanie Gentile, Todd Gluth, Eileen Marshall, Calvin Lee, Joe Mandry and Patrick Sharma

On August 16, 2022, House Resolution 5376, the Inflation Reduction Act (IRA), was signed into law. An August 11 Cooley client alert explains some of the tax provisions contained in the IRA, including the 1% excise tax on certain stock buybacks, which may impact special purpose acquisition companies (SPACs) at key points in their life cycle. This blog post highlights the potential application of the excise tax to SPACs.

Overview of the excise tax

The excise tax may apply if a publicly traded US corporation¹ "repurchases" any of its own stock from its shareholders after December 31, 2022. For this purpose, a "repurchase" includes any transaction that is a "redemption" for US federal income tax purposes, and any transaction that the Treasury Department determines is economically similar to such a transaction. This definition would generally include, but is not limited to, corporate buybacks and other transactions in which the corporation acquires its stock from a shareholder in exchange for cash or property.

The excise tax generally is assessed on the difference between the fair market value of any stock of the corporation that is repurchased and the fair market value of any stock of the corporation that is issued in the same taxable year. In other words, for purposes of determining the amount to which the excise tax applies, stock issuances in a taxable year are "netted" against stock repurchases in the same taxable year and, therefore, mitigate the impact of the excise tax under what's known as the "netting rule." Thus, the excise tax would not apply in any taxable year in which the fair market value of stock issuances exceeds the fair market value of stock repurchases.

Examples of same-year issuances that could mitigate the excise tax under the netting rule include the following:

• Public offerings of stock, including a SPAC's initial public offering.
• Private investment in public equity offerings.
• Stock issued to acquire other companies in acquisitive transactions.
• Stock issued as compensation, including upon option exercises.
• Stock issued upon warrant exercises or convertible debt conversions.

The excise tax rules contain certain exceptions, none of which by their terms are likely to apply to the types of SPAC stock repurchases that typically occur prior to, or concurrent with, a SPAC business combination - also known as a "deSPAC transaction" - or a liquidation of a SPAC.²

Application of the excise tax to SPACs

A SPAC issues publicly traded stock to...