SPACs Need Urgent Relief From Buyback Tax, Industry Says

Published by Chandra Wallace

December 15, 2022

With only two weeks to go before the 1 percent excise tax on stock buybacks goes into effect, the special purpose acquisition company (SPAC) industry is pushing for guidance that exempts SPACs from the tax.

The tax will have “deleterious impacts” on SPACs and their shareholders, the SPAC Association wrote December 14 to Lily Batchelder, Treasury assistant secretary for tax policy. The group requested an in-person meeting with Treasury officials to discuss a potential exemption for SPACs or, in the alternative, a process through which the companies can apply retroactively for waivers of the tax on a company-by-company basis.

The buyback tax, enacted by the Inflation Reduction Act (P.L. 117-169), wasn’t intended to apply to stock redemptions that happen when a SPAC simply returns the invested funds to shareholders, either in a liquidation or when the shareholders opt out of owning shares in a post-merger entity formed by the SPAC and its target company, the group argued. Those redemptions are obligations built into the SPAC formation documents, and so are “wholly separate from a voluntary corporate decision to repurchase shares” in order to affect a company’s stock price, it wrote.

Application of the tax to SPACs “will come with several unintended consequences that will harm capital markets” in the United States, and “litigation is likely to occur and soar” as SPAC stakeholders fight over which of them is on the hook to pay the tax, according to the letter.

The group pointed out that current SPAC sponsors and several of the association’s members are weighing whether to liquidate before the tax goes into effect on January 1, 2023.

The full article can be read here.