January 6, 2023

SPAC Redemptions: IRS Issues Guidance on Application of Buyback Excise Tax

One of the questions raised by the 1% excise tax on stock repurchases by the Inflation Reduction Act was how it would apply to SPAC redemptions.  The IRS recently issued Notice 2023-2, which provides initial guidance on the application of the excise tax, and this excerpt from a Ropes & Grey memo says that the IRS’s guidance answers some important questions about the treatment of SPAC redemptions:

Following the enactment of the Excise Tax, there was legal and market uncertainty regarding whether the Excise Tax would apply to SPAC redemptions, and notably whether the Excise Tax might apply to SPAC liquidations, as well as who would economically bear the cost of the Excise Tax. In reaction, many SPACs whose term would have expired in early 2023 opted to accelerate their liquidation into 2022, or opted to seek an extension during 2022 so that the redemptions associated with the extension process would occur during 2022. However, uncertainty remained for SPAC sponsors and shareholders regarding liquidations that may occur after 2022, including who would bear the incidence of the Excise Tax if it reduced the amount available to be redeemed from the trust account or otherwise available to the combined company following a de-SPAC.

Significantly, the Notice clarifies that the Excise Tax will not apply to complete corporate liquidations within the meaning of Section 331. There is reason to believe that this exception is intended to apply to the wind up of a SPAC. Nonetheless, it may be unclear whether the wind up of a SPAC would constitute a liquidation under Section 331 without careful attention to planning with respect to the liquidation. In general, the Notice also helpfully provides protection for de-SPAC transactions to the extent shares issued by the SPAC during the year exceed repurchases otherwise subject to the Excise Tax.

The memo discusses the guidance’s application to SPAC liquidations, extensions, de-SPAC transactions and valuation issues associated with redemptions. It notes that although some open questions remain regarding the treatment of other repurchases by a SPAC, including redemptions in connection with an extension, the Notice overall provides helpful guidance for SPACs.

John Jenkins