SPACs Need Urgent Relief From Buyback Tax, Industry Says
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.
Liquidations of SPACs that haven’t identified merger targets are happening at an accelerated rate. Douglas S. Ellenoff of Ellenoff Grossman & Schole LLP estimates that 20 percent of SPACs will liquidate by year-end if no guidance exempting them from the buyback tax issues is released before December 31.
Industry statistics compiled by SPAC Research show only one SPAC liquidation in 2021: Yunhong International, a $69 million initial public offering sponsored by Patrick Orlando, liquidated in November 2021.
In contrast, SPAC Research reports 79 liquidated SPACs in 2022 through December 12, including 23 liquidations during the first nine days of December alone.
Another SPAC sponsored by Orlando is bucking the observed trend toward liquidation: Digital World Acquisition Corp. (DWAC), the SPAC slated to combine with Trump Media & Technology Group, which owns the Truth Social media platform.
The two-year period during which DWAC was required to complete a business combination expired in September, and the merger with Trump Media & Technology Group — announced in October 2021 — wasn’t yet complete.
Instead of abandoning the merger, sponsors mounted a concerted effort to extend the deal period. In November DWAC shareholders approved an extension of time to complete the merger into 2023. Notably, the shareholder-approved amendment to the SPAC documents doesn’t add any provision indicating how the excise tax would be paid or by whom if it applies to redemptions of DWAC shares.
Despite an active SEC investigation and the withdrawal of some private-investment-in-public-equity investors, DWAC stock continues to trade at a higher price than that of any other active SPAC.
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Tax Notes Federal, Dec. 19, 2022, p. 1767
177 Tax Notes Federal 1767 (Dec. 19, 2022)
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