Sep 15, 2022 - Economy & Business

The new tax on SPACs

Illustration of a dress shoe about to step on an open checkbook.

Illustration: Megan Robinson/Axios

The sagging SPAC market didn't need another problem. But it's got one.

Driving the news: The Inflation Reduction Act includes a 1% excise tax on stock buybacks, and corporate tax attorneys are warning that it could be applied to SPAC redemptions.

  • A newly formed SPAC called Four Leaf Acquisition noted in its IPO registration filing that it won't use funds from its trust (or related accrued interest) to pay an possibly excise taxes.

Backstory: The stock buyback tax wasn't included in President Biden's original Build Back Better legislation, but was added into IRA to help secure the vote of Sen. Kyrsten Sinema (D-Ariz.), who had opposed a change to carried interest tax treatment. In other words, a revenue swap.

What to know: The rule applies to transactions occurring after the end of 2022, and would seem to include SPAC redemptions.

  • SPAC liquidations (i.e., no merger target found) are where the tax could be most acutely felt, since there isn't a PIPE financing to mitigate the costs. It's currently unclear if SPAC trusts, sponsors or unitholders would be responsible for paying the tax, given that this was an unanticipated development.
  • More new SPACs likely will follow Four Leaf's lead on exempting the trusts, but even there it's not known if the sponsor or unitholders would be responsible for the tax.
  • The excise tax also could apply to redemptions into deSPAC transactions, depending on how they're structured.

Look ahead: There's some market hopes that Treasury will issue rules exempting SPACs from the excise tax, although there's been no public movement yet on that front.

  • One driver could be pressure from the very legislators who passed IRA in the first place.
  • Tax Notes yesterday reported that Sens. Ron Wyden (D-Ore.) and Sherrod Brown (D-Ohio) were among many legislators unaware of the tax's SPAC implications until just the past few days.

The bottom line: The $10 SPAC price has suddenly become $9.90.

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