On Nov. 24, the Treasury Department and Internal Revenue Service issued final regulations (the Final Regulations) regarding the application of the excise tax on repurchases of corporate stock. The Final Regulations significantly modify some of the rules set forth in the formerly proposed regulations (the Proposed Regulations), which we discussed in a prior GT Alert. Consistent with our prior GT Alert on the Proposed Regulations, this GT Alert focuses on certain aspects of the Final Regulations that are relevant to special purpose acquisition companies (SPACs).
Summary
- The Final Regulations, which generally apply to stock repurchases occurring after Dec. 31, 2022, provide an exception for repurchases of certain types of stock issued before the Inflation Reduction Act’s enactment. This exception may be available to SPACs that completed their initial public offerings prior to Aug. 16, 2022.
- Because no similar exception was available under the Proposed Regulations, some SPACs may have filed excise tax returns and calculated their excise tax liability for prior tax years without the benefit of this exception. The preamble to the Final Regulations provides specific guidance for SPACs that would like to file a refund claim in these circumstances.
Exception for Certain Stock Issued Prior to the Inflation Reduction Act’s Enactment
Although the Treasury Department and the IRS received numerous comments requesting exceptions from the excise tax for repurchases of mandatorily redeemable stock and stock that is subject to a unilateral put option, no such exceptions were included in the Proposed Regulations. The Final Regulations, however, provide an exception for repurchases of stock issued prior to Aug. 16, 2022 (i.e., the date of the Inflation Reduction Act’s enactment), if, at the time such stock was issued and continuing until the time of the redemption, the stock was subject to (i) mandatory redemption by the corporation, or (ii) a unilateral put option by the holder.
The Final Regulations do not define the term “unilateral put option.” However, the typical redemption rights of holders of SPAC stock may be viewed as substantially similar to a unilateral put option, and under that view this exception might be available to SPACs that completed their initial public offerings prior to Aug. 16, 2022.
Applicability Dates; Effect on Prior Tax Returns
The Final Regulations generally apply to stock repurchases occurring after Dec. 31, 2022. However, because the Proposed Regulations did not provide the exception described above, many SPACs may have filed excise tax returns and calculated their excise tax liability for prior tax years without the benefit of this exception.
If a SPAC previously filed a Form 7208, Excise Tax on Repurchase of Corporate Stock, applying the Proposed Regulations and wishes to file a refund claim after the effective date of the Final Regulations, the SPAC should consider filing a Form 720-X, Amended Quarterly Federal Excise Tax Return, for the quarter (or previously amended quarter, if applicable) in which the SPAC filed the original Form 720, Quarterly Federal Excise Tax Return, and attach a corrected Form 7208 (with the word “Amended” added to the top of the corrected Form 7208). If a taxpayer other than the SPAC wishes to file a refund claim, the taxpayer should consider filing a claim on Form 8849, Claim for Refund of Excise Taxes, and attach Schedule 6, Other Claims, and a corrected Form 7208.
Conclusion
Given the new exception from the excise that was introduced in the Final Regulations, SPACs that completed their initial public offerings prior to Aug. 16, 2022, and that paid excise tax in prior taxable years should consult with their tax advisors regarding the possibility of filing a refund claim. Further, surviving companies from prior de-SPAC transactions should consult with their tax advisors to determine whether they are in a position to file a refund claim for excise taxes previously paid by a SPAC.