On December 27, 2022, the Internal Revenue Service and U.S. Treasury issued Notice 2023-2 (the Notice), which provides interim guidance addressing the 1% excise tax on stock repurchases (the Excise Tax) by certain publicly traded corporations (covered corporations) under Code Section 4501.1 The Excise Tax was enacted into law in the Inflation Reduction Act on August 12, 2022; for an earlier discussion of the Excise Tax, please see New 1% Excise Tax on Stock Repurchases by Publicly Traded Corporations.
Although the Notice does not specifically reference special purpose acquisition companies (SPACs), commentators have widely discussed the impact of the Notice on SPAC liquidations and the ability to use private investment in public equity (PIPE) issuances in connection with a de-SPAC transaction to offset the excise tax base. Less obvious, however, and of particular note, the Notice implicitly allows the fair market value of SPAC stock issued as consideration in the acquisition of a privately held target (as is the case in the significant majority of de-SPAC transactions) to offset any SPAC redemptions in connection with a de-SPAC transaction in the same taxable year.2 This will likely eliminate (or at least reduce) the Excise Tax that would be imposed on SPAC redemptions occurring in the same taxable year as a de-SPAC transaction. This is a welcome outcome in a time when SPAC redemptions are high and PIPE investments are difficult to come by.
Summary of Application of the Notice to De-SPAC Transactions
The Notice provides that the 1% Excise Tax is imposed on the stock repurchase excise tax base of a covered corporation during a taxable year.3 The stock repurchase excise tax base generally equals the fair market value of the stock repurchased by a covered corporation during the taxable year minus (pursuant to the so-called “netting rule”) the aggregate fair market value of stock issued by the covered corporation in the same taxable year.4 Therefore, absent a specific exception in the Notice, a SPAC should be able to reduce the fair market value of redeemed SPAC stock by the fair market value of SPAC stock issued in the same taxable year in a de-SPAC transaction, thereby lowering (or eliminating) its Excise Tax liability.
The Notice, however, does provide such an exception for stock issued by an acquiring covered corporation (including a SPAC) under limited circumstances. Generally, and as described in more detail below, the limited circumstances involve SPAC stock issued in certain tax-free reorganizations with a publicly traded target that reduces the target’s own excise tax base by the fair market value of the SPAC stock issued as merger consideration.5 However, where the target is a privately held company that is not subject to the Excise Tax, the Notice effectively permits the acquiring SPAC to reduce its excise tax base by the fair market value of the stock it issues as merger consideration in the de-SPAC transaction.
More Detailed Analysis
Stock issued by an acquiring covered corporation, such as a SPAC, is treated as not having been issued if it is issued as consideration in an “acquisitive reorganization” that is an “economically similar transaction” subject to the Excise Tax, and the target applies the “qualifying property exception” to its stock repurchase excise tax base.6
The Notice defines an acquisitive reorganization as a transaction that qualifies as tax-free reorganization under certain provisions of the Code, including certain mergers with stock consideration.7 An acquisitive reorganization is an economically similar transaction, however, only if (i) the target is a covered corporation (i.e., publicly traded) or a corporation that undertook an inversion and (ii) the exchange by the target shareholders of their target stock as part of the acquisitive reorganization is a repurchase by the target.8 In the case of a de-SPAC transaction where both the SPAC and the target are public corporations and the transaction is effectuated by a reverse triangular merger intended to qualify as a tax-free reorganization under the Code Section 368(a)(2)(E) (which is typically the case), the SPAC stock is issued in an acquisitive reorganization that is an economically similar transaction. Under the qualifying property exception, because the SPAC stock issued in the transaction is permitted to be received without the recognition of gain or loss, the target is entitled to reduce its own excise tax base by the fair market value of the SPAC stock received by the target shareholders.9
When determining the acquiring corporation’s stock repurchase excise tax base, the Notice prohibits the application of the netting rule if it would result in a double benefit for the issuance of stock (i.e., a benefit for both the target and the acquirer). Therefore, where the target applies the qualifying property exception in calculating its stock repurchase excise tax base, the Notice treats the SPAC stock issued in the de-SPAC transaction as not issued for purposes of calculating the SPAC’s stock repurchase excise tax base.10
In contrast, if the target were a private corporation (or any other entity not otherwise subject to the Excise Tax), the de-SPAC acquisitive reorganization would not be an economically similar transaction.11 Because the target is not subject to the Excise Tax, the qualifying property exception would have no relevance to the target.12 Therefore, there would be no “double benefit” that would prohibit the SPAC from calculating its own stock repurchase excise tax base by netting the SPAC stock issued against SPAC redemptions in the same taxable year.
As a result, in the common de-SPAC transaction with a private target, the acquiring SPAC should generally have no Excise Tax liability in the taxable year of the de-SPAC transaction, as the SPAC stock used as consideration in the transaction generally will exceed the amount of SPAC redemptions in connection with the transaction.
1 References to “Code Section” or the “Code” refers to the U.S. Internal Revenue Code of 1986, as amended.
2 Note that the Notice does not address nor provide relief for certain other de-SPAC transactions, such as the “double-dummy” or “Up-C” transactions. This is because the netting rule has not been expanded to allow for netting redemptions of a covered corporation with issuances by parties related to such covered corporation.
3 Notice 2023-2, 3.03(3).
4 3.03(3)(i)-(iii); 3.08.
5 3.04(4)(a)(i); 3.07(2)(a); 3.08(4)(d).
10 3.08(4)(d). These rules are illustrated in Examples 6 and Example 19 of the Notice. These examples make clear that in a de-SPAC transaction where the target is also a covered corporation, the SPAC stock issued in the de-SPAC transaction in exchange for target stock is not treated as issued for purposes of the Excise Tax as applied to the SPAC and therefore not available to offset redemptions by SPAC shareholders under the netting rule.
11 3.04(4)(a)(i); 4501(b).
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