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SPECIAL REPORT
tax notes®

Selected Tax Issues Involving Blank Check Companies

by Victor Hollender
IV. Forming a SPAC: Choice of
Victor Hollender is a
tax partner in the New Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . 40
York office of Skadden, A. PFIC Rules . . . . . . . . . . . . . . . . . . . . . . . 41
Arps, Slate, Meagher & B. Start-Up Exception . . . . . . . . . . . . . . . . 42
Flom LLP. He thanks V. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . 43
Abigail Friedman for
her invaluable We tax lawyers delight in using terminology
assistance in preparing that makes the abstract tangible and breathes life
this report. He also into the structures and entities that we create and
received helpful control. Corporations can be “old and cold,”
comments from “dormant,” “newly created,” or sometimes (but
Jonathan B. Ko, Michael hopefully not) “born to die.” We
J. Mies, and Gregg A.
anthropomorphize and impute purpose to
Noel.
unnatural persons, preoccupy ourselves with
In this report, Hollender explains why and financial “products,” and provide advice that is at
how special purpose acquisition corporations times “strong” and at times “weak.” Every once in
are used as vehicles for initial public offerings, a while a new financial phenomenon comes along
and he analyzes potential tax issues raised by that tests our abstractions and forces us to stretch
those IPOs.
our terminology to address new and unusual
Copyright 2018 Victor Hollender. situations.
All rights reserved. Such is the case with a once again popular
public offering vehicle known as a special purpose
Table of Contents acquisition corporation (SPAC). A SPAC is the
I. Why Use a SPAC? . . . . . . . . . . . . . . . . . . . .23 quintessential “cash box,” owning only cash or
A. Backdoor IPO. . . . . . . . . . . . . . . . . . . . . .24 Treasury securities at its inception. Often referred
B. Inefficiencies of Capital Markets . . . . .24 to as a blank check company, a SPAC embodies a
C. Bringing Private Equity to the Public host of dualities. It is a public vehicle yet often
Markets . . . . . . . . . . . . . . . . . . . . . . . . . . .24 sponsored by private equity players. It is a purely
passive vehicle yet with a specific objective of
II. Basic Description of Securities . . . . . . . . .25
acquiring an active operating business. SPACs
A. Founder Shares . . . . . . . . . . . . . . . . . . . .25
issue a variety of securities with vastly different
B. Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 return profiles, including stock that can lose its
C. Trust Account . . . . . . . . . . . . . . . . . . . . .26 entire value in some circumstances (such as a
D. Who Invests in a SPAC? . . . . . . . . . . . . .26 liquidation), stock with redemption rights for
III. Founder Shares: Cheap Stock and cash, and warrants with strike prices at premiums
Transfer Issues . . . . . . . . . . . . . . . . . . . . . . .26 that can significantly dilute the equity.
A. Cheap Stock . . . . . . . . . . . . . . . . . . . . . . .26
B. Transfers of Founder Shares . . . . . . . . .38 I. Why Use a SPAC?
The popularity of SPACs has come and gone
and come again. Although SPACs have been
around for more than 25 years, their use peaked in

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2007 when a record of approximately $12 billion target effectively becomes a publicly traded
of capital was raised in a single year.1 In 2007 there company without having to go through a formal
8
were 47 SPAC initial public offerings (IPOs), IPO process on its own.
which accounted for 34 percent of all IPOs and 37
percent of the aggregate IPO proceeds for that B. Inefficiencies of Capital Markets
2
year. The use of SPACs is now emerging as a In some cases a SPAC is used because the
3
reinvention of the IPO. After going largely out of sponsor sees the capital markets as inefficient in a
fashion in 2008 and having only one SPAC IPO in particular industry. For example, Social Capital
2009, SPACs began a resurgence a few years later Hedosophia Holdings Corp., a recent SPAC with
and are now taking the financial world by storm. a focus on the technology sector, attracted
In 2017 alone there were 38 SPAC IPOs, with an investors by arguing that the capital markets are
aggregate registration size of more than $11 inefficient and ineffective for companies in the
billion, and three additional SPACs filed IPO technology industry. A SPAC acquirer would be
registration statements in December 2017.4 SPACs better situated to price a technology target in a
started out strong in 2018 with four SPACs filing negotiated deal as opposed to the price obtained
5
IPO registration statements in January. In in an IPO, in which there is often high shareholder
addition to becoming more frequent, SPAC IPOs turnover and significant run-up in the price in the
are also increasing in size and are likely to surpass first few days. Moreover, the significant time and
6
those levels in the near future. Increasingly, well- effort required by an IPO process is likely
known private equity firms are sponsoring distracting to target management. In most private
7
SPACs. companies, management is preoccupied with
running the day-to-day operations of the business
A. Backdoor IPO
and does not have the substantial amount of time
A SPAC business combination typically required to prepare for and complete an IPO.
involves an acquisition (or other combination
transaction) of a private company. The sponsor C. Bringing Private Equity to the Public Markets
seeks out a worthwhile target acquisition — A further business rationale underlying the
perhaps seeing it as undervalued. The target sees use of a SPAC is the ability to bring a private
significant value in the SPAC as a public company equity-type structure to the public capital
with a listing on a nationally recognized stock markets. Several private equity firms, such as
exchange. Through a business combination, the Carlyle, Fortress, Gores, and TPG, have
sponsored SPACs recently. They view a SPAC as a
way to increase their access to equity capital
outside the typical private equity model.9 The
private equity firm sponsors a SPAC and
1
subscribes for founder shares that are in some
Bloomberg LP, “Dealogic LLC” (2017); and “SPAC Analytics”
(2017); and James Mackintosh, “The Modern IPO Is Useless. Let’s
ways similar to a carried interest issued by a
Reinvent It,” The Wall Street Journal, Sept. 25, 2017. private equity fund. Unlike a carry, however, the
2
Bloomberg, supra note 1. founder shares dilute public shareholders’
3
Mackintosh, supra note 1. Social Capital Hedosophia Holdings interests immediately upon an initial business
Corp. closed what it deemed “IPO 2.0” after raising $690 million in
September 2017. The sponsor chose the ticker symbol IPOA for what it combination and do not depend on future profits
plans to be the first of many SPACs it will sponsor — eventually realized beyond the initial investment. As a check
sponsoring SPACs through IPOZ.
4
Intelligize, “Registered Offerings” (2017).
5
Bloomberg, supra note 1.
6 8
Tom Zanki, “SPACs Grabbing Bigger Share of IPO Market,” A recent example of a target using the SPAC as a backdoor way to
Law360, Nov. 22, 2017. Two different SPACs completed $690 million go public is the business combination involving GP Investments
offerings in 2017: Social Capital Hedosophia Holdings Corp. and TPG Acquisition Corp. and Rimini Street Inc. Rimini Street had tried
Pace Energy Holdings Corp. Silver Run Acquisition Corp. II raised $900 unsuccessfully to go public on its own on two separate occasions. After a
million in a March 2017 offering. business combination with GP Investments Acquisition Corp., in which
7 the surviving public entity took the name Rimini Street, it finally
Michael J. Mies and Gregg A. Noel, “The Resurgence of SPACs in a
obtained a listing as a public company on the NASDAQ.
Quiet IPO Market,” Skadden, Arps, Slate, Meagher & Flom LLP (Apr. 26, 9
2016). Mies and Noel, supra note 7.

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on the immediate dilution, public shareholders liquidation. Founder shares are subject to transfer
can exercise redemption rights in connection with restrictions, usually for one year after the
the business combination and receive back their completion of a business combination.
initial investment in cash if they are not satisfied
that the business combination will create B. Units
sufficient value. This gives the public investor a A typical SPAC-offering security consists of a
“second look” at the time of a business unit. Generally, each unit has an offering price of
combination. Many SPACs have had numerous $10 and is made up of one common share and half
investors exercise their redemption rights, or one-third of one warrant. Each whole warrant
requiring sponsors to either obtain other sources generally entitles the holder to purchase one
of capital (such as through private investments in common share at an exercise price of $11.50 per
public equity) or transfer or forfeit a portion of share. The shares and warrants comprising each
their founder shares or private placement unit begin trading separately shortly after the
warrants to induce investors not to redeem. offering, and holders can separate their units into
the underlying components at that time.
II. Basic Description of Securities
1. Public shares.
Although the terms of each SPAC may differ,
SPACs commonly issue the following types of Public shareholders generally have the right
securities. to redeem all or a portion of their shares in
connection with the completion of an initial
A. Founder Shares business combination for a redemption price
equal to the aggregate amount then on deposit in
Founder shares are issued shortly after a the SPAC’s trust account divided by the number
SPAC is formed (or in connection with the of then-outstanding public shares. A SPAC has a
formation of the SPAC) and before the filing of the pre-defined life span of usually two years. If the
registration statement with the SEC. The sponsor SPAC is unable to complete an initial business
purchases the shares for a de minimis price (for combination within that time, the SPAC will
example, $0.002 per share), generally an amount either liquidate or request an extension of time
sufficient to fund a portion of the organizational from its shareholders to continue its efforts to
costs of the entity. Founder shares usually have complete a business combination. Public
the same rights as the shares owned by the public. shareholders are given redemption rights similar
However, holders of founder shares generally to those described above in connection with an
agree to vote their founder shares in favor of any extension request.
initial business combination subject to a
shareholder vote. 2. Warrants.
Founder shares automatically convert into As described above, each unit contains a
public shares at the completion of an initial portion of a warrant. Each whole warrant entitles
business combination. The conversion ratio the holder to purchase one share at a stated price
results in the founder shares equaling, in the per share. The warrants may be exercised at any
aggregate, on an as-converted basis, 20 percent of time following the later of one year following the
the outstanding shares in existence after the close closing of the offering or 30 days after the
of the IPO. As a result, the founder shares completion of an initial business combination.
automatically dilute the public shareholders after The warrants expire five years after the
the business combination is completed. Before the completion of an initial business combination, or
completion of the business combination, founder earlier in the event of a redemption or liquidation.
shares constitute junior equity and are typically The sponsor usually agrees to purchase a set
subordinate to the public shares in that they are amount of warrants (or, in some cases, units) in a
not entitled to any of the cash in the trust account private placement occurring simultaneously with
that holds the proceeds from the IPO. Further, the closing of the IPO, typically referred to as the
founder shares have no redemption rights, either sponsor’s “at-risk amount” (generally
in connection with a business combination or constituting around 3 to 4 percent of the SPAC’s

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capital). The proceeds of that placement are III. Founder Shares: Cheap Stock and Transfer Issues
generally used to fund the expenses of the SPAC.
A. Cheap Stock
C. Trust Account
Founder shares are issued to the sponsor of a
The proceeds of an IPO, plus a portion of the SPAC, in connection with or shortly after its
sponsor’s at-risk amount, are deposited by the formation, for a negligible price. Quite often a
SPAC in a trust account. Generally, the funds in sponsor contributes as little as $25,000 to the
the trust account may not be released (except for SPAC in exchange for a fixed number of founder
permitted withdrawal of interest as required to shares. Once the SPAC is formed, the sponsor has
pay any income or franchise taxes or other two monumental tasks ahead. First, the SPAC
specified expenses) until the earlier of the must successfully complete an IPO. Second, the
completion of an initial business combination or SPAC must complete a successful business
the redemptions of any shareholders properly combination. Sponsors typically have significant
exercising their redemption rights in connection financial and deal-sourcing experience in a
with an initial business combination (or extension particular industry or market. The sponsor
request). generally has no employment or management
contract with the SPAC and does not receive any
D. Who Invests in a SPAC? type of compensation or fee for his services.
There are two broad categories of typical Because the founder shares are purchased for
SPAC investor: (1) investors who have faith in the such a small sum and could, in the event of a
sponsor’s ability to create value, and (2) arbitrage subsequent business combination, become worth
investors. In the first category, investors decide to tens (and in some cases, hundreds) of millions of
invest because they are attracted to a particular dollars, there is a question whether the sponsor
manager based on reputation or past should be treated as receiving disguised
performance. For example, William P. Foley,10 compensation for services because of the
chair of the board of Fidelity National Financial acquisition of the founder shares at a bargain
11
Inc., Chinh Chu, a former Blackstone dealmaker, price. This is sometimes referred to as the “cheap
and David Maura,12 chair of Spectrum Brands, stock” issue. Tax practitioners typically advise
have recently sponsored SPACs. In the second that founder shares be issued to the sponsor as
category, arbitrage investors usually buy SPAC soon as practicable after the formation of the
units with no intention of participating in the SPAC — certainly before any registration
initial business combination as shareholders. statement is initially filed with the SEC. At that
Arbitrage investors may believe the warrants are time, not only is an initial business combination
underpriced before a successful business completely speculative, but there is also a real
combination takes place. They may engage in one possibility that the IPO itself will not successfully
of several different strategies that ultimately be completed. As more fully discussed below, as a
result in selling some or all of their shares while result of these significant contingencies (among
retaining the warrants. Both categories of other reasons), there are strong arguments that
investors have an incentive to vote in favor of an the founder shares have no real ascertainable
initial business combination so that their warrants value when issued and purchased by the sponsor
do not expire worthless. and there is therefore no bargain purchase or
disguised compensation in connection with their
issuance.
1. Two extremes and a SPAC in between.
To better understand the cheap stock issue, it
10
is helpful to consider two situations involving the
Reuters, “Blackstone Vet to Launch Largest ‘Blank Check’ IPO
Since Financial Crisis,” Fortune, Mar. 24, 2016.
issuance of founder shares existing at opposite
11
Id. ends of a spectrum where the tax treatments are
12
Bill Meagher, “Fortress Enters SPAC World While Awaiting relatively clear.
SoftBank Closure,” The Deal, Sept. 28, 2017.

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a. Situation 1: Contemporaneous issuance in value. Taxing the entrepreneur at any point
and business combination. before the sale of the equity is inconsistent with
Assume the SPAC issues founder shares to the the realization principles of our income tax
sponsor for only $0.002 per share at the system (as discussed below).
consummation of the business combination when c. The SPAC in between.
the SPAC shares are trading at $10 per share (with The SPAC sits somewhere between the two
the public shareholders having paid $10 for each extremes. Although the IPO and a subsequent
unit in the IPO). A bargain purchase is fairly clear business combination are clearly part of an
in this example. The excess of the fair market intended plan, they are completely speculative
value of the founder shares over the $0.002 price and uncertain when the sponsor receives founder
per share would probably be treated as shares. IPOs are costly and time consuming and
13
compensation for services. The result would depend on several factors beyond the sponsor’s
likely be ordinary income to the sponsor in the control, such as obtaining sufficient public
amount of that excess. A key factor is that the interest and establishing an appropriate price.
property being issued to the sponsor has a clear Even after a successful IPO, there is no guarantee
FMV. The business combination has been the SPAC will be able to complete a subsequent
completed, and the sponsor is assured the business combination. SPACs generally have only
founder shares will not expire worthless. The two years in which to complete an initial business
sponsor in this case is entitled to this bargain price combination — a short time to find a target,
only because of services provided. negotiate a deal, and obtain all required
b. Situation 2: Early-stage entrepreneur. approvals. Any deal remains subject to the
Situation 2 is the case of an entrepreneur in the approval of public shareholders (as well as any
early stages of a start-up. At the outset, required regulatory or other approvals) — factors
determining whether the business will succeed is that are out of the control of the sponsor. If the
completely speculative and extremely difficult to SPAC is unable to complete an initial business
predict. Although an entrepreneur could be the combination in time, it will liquidate, and the
next Steve Jobs, it is also quite possible that the founder shares will be completely worthless. In
start-up will go bankrupt. short, while the success of a SPAC is more likely
Similar to a SPAC sponsor, our entrepreneur is than that of an entrepreneur forming a business in
likely to form an entity to pursue his idea and take his garage, the ultimate success of a SPAC is still
back equity, usually in exchange for providing a speculative and highly contingent when the
small amount of cash to fund initial sponsor purchases the shares.
organizational expenses. At the time of formation, 2. Basic principles of federal income tax law.
the entity has no real and discernible value, and Basic principles of federal income tax law,
neither does the equity. The founder rightly has such as the realization requirement, the taxation
no compensation event upon receiving the equity of human capital, and the taxation of self-imputed
of his business. Because of the speculative nature income, provide a useful framework to analyze
of the start-up business, there is clearly no issues arising in the typical case of founder shares
compensation event as a result of the founder issued by a SPAC.
taking back equity in his own entity at inception.
It may very well be the case that as the start-up a. Realization requirement.
becomes more and more successful over time as a The realization requirement is a fundamental
result of the services performed by the principle underlying our tax system for several
entrepreneur, the stock significantly increases in reasons, including liquidity and valuation
14
value. But importantly, there is no realization considerations. Absent a realization event, a
event and no compensation event for that increase

14
See, e.g., Deborah A. Schenk, “A Positive Account of the Realization
13 Rule,” 57 Tax L. Rev. 355 (2004); and Ilan Benshalom and Kendra Stead,
See, e.g., Beckert v. Commissioner, T.C. Memo. 1978-903. “Realization and Progressivity,” 3 Colum. J. Tax. L. 43, 54 (2011).

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taxpayer may not have the liquid assets necessary Increases in value generated by human capital are
to pay taxes. The realization requirement generally not taxed until there is a clear
provides a liquidity event that will presumably realization event — for example, until wages are
give the taxpayer the liquidity necessary to pay earned or the definitive result of human effort
taxes. The realization requirement also avoids (such as stock or a patent or other form of
valuation questions by not imposing tax until intellectual property) is sold to a third party.
there is a market event that establishes a reliable Treating human capital differently is justified for
indicator of the value of property or services to be several reasons.
taxed. Valuing human capital is difficult. What is the
When the founder shares are issued, it is proper time to value one’s human capital, and
extremely difficult to conclude that there is any how do you determine tax basis in human capital?
sort of realization event. The sponsor would have It is nearly impossible to value human capital
no liquidity to pay taxes on any compensation when that valuation is based on services to be
income when the founder shares are purchased or provided in the future because of outside
even later in the process, after the SPAC completes contingencies beyond the control of the taxpayer.
its IPO or, as a result of lock-up restrictions Liquidity is also a consideration. One is generally
generally applicable to the founder shares, even unable to borrow against human capital, and
upon the completion of a subsequent business forcing a taxpayer to sell other assets or earn
combination. Also, because of the contingencies wages with which to pay taxes is market
related to the founder shares ever having distortive. By not taxing human capital until
significant value, it is difficult to value them. realization through market earnings, the federal
Under the realization requirement, the sponsor income tax system avoids these concerns.
should have no taxation event until he sells the For a SPAC, the contribution of the sponsor is
founder shares in a market transaction. in the form of human capital. The sponsor brings
b. Human capital. his reputation, relationships, management, and
deal-sourcing abilities to the SPAC in hopes of
Another long-standing principle of federal
carrying out a successful IPO and consummating
income tax law is that human capital is treated
15 a business combination. Any increase in the value
differently from other forms of capital. For
of the founder shares results from those efforts.
example, one is generally able to deduct or
Attempting to value the founder shares before an
capitalize an investment in physical capital used
16 actual liquidity event would be extremely
in a trade or business. However, one is generally
difficult, and imposing a tax on the sponsor
unable to deduct or capitalize an investment in
would present liquidity problems because the
one’s human capital (for example, advanced
17 sponsor would have no earnings with which to
degrees and other forms of educational training).
pay the tax. Thus, the principles concerning the
special treatment of the taxation of human capital
(or lack thereof) under the federal income tax
15
See, e.g., John A. Litwinski, “Human Capital Economics and
system provide further support for not taxing the
Income,” 21 Va. Tax. Rev. 183 (2001); Philip F. Postlewaite, “Fifteen and sponsor on the receipt of founder shares.
Thirty-Five: Class Warfare in Subchapter K of the Internal Revenue
Code: The Taxation of Human Capital Upon the Receipt of a Proprietary c. Imputed income.
Interest in a Business Enterprise,” 28 Va. Tax Rev. 817 (2008); David S.
Davenport, “The ‘Proper’ Taxation of Human Capital,” Tax Notes, Sept. Not taxing so-called imputed income is
16, 1991, p. 1401; Brian E. Lebowitz, “On the Mistaxation of Investment
in Human Capital,” Tax Notes, Aug. 12, 1991, p. 825; and Mark P. Gergen,
another long-standing principle of the federal
“Pooling or Exchange: The Taxation of Joint Ventures Between Labor and income tax system. Imputed income may be
Capital,” 44 Tax L. Rev. 519 (1988).
16 considered the fruits of one’s own human capital.
See, e.g., sections 162 and 263.
17 Not taxing human capital absent a market
In some specific cases, an individual may be able to claim a trade or
business deduction for expenditures for educational expenses that (1) realization event supports not taxing imputed
maintain or improve skills required by the individual in his employment income. For example, a builder could buy a lot,
or trade or business, or (2) meet express requirements of the individual’s
employer or requirements of applicable law or regulations that are a build a house, and live in the house for years and
condition to the individual’s employment. Importantly, an individual never have tax consequences unless and until he
must already be engaged in a trade or business to claim the deduction.
See sections 162 and 263; and reg. sections 1.162-5 and 1.212-1(f). sells the house. The imputed income from the

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labor used to build the house is deferred and Although the outside adviser had not brought
converted into capital gain on any subsequent sale a deal to Frankenmuth, Berckmans began
of the house. The same imputed income principle discussions with Iroquois in 1954 regarding a
applies to an entrepreneur working on a new potential asset acquisition. Berckmans hired an
business idea. That entrepreneur may toil away investment banking firm, Shields & Co., to advise
for years at building his business but will not be on financing the acquisition of Iroquois.
taxed on any imputed income while building the Berckmans then developed a plan whereby
business. NewCo would issue stock in an IPO and use the
For a SPAC, the sponsor provides services to cash proceeds to purchase and consolidate both
the SPAC before an IPO when the SPAC is wholly Frankenmuth and Iroquois. Berckmans and
owned by the sponsor. Taxing the sponsor on any Shields would form an underwriting group to
income from those services would be inconsistent carry out the IPO, the public would pay $9.50 per
with the principles of not taxing human capital share in the IPO, and Shields would be offered the
and imputed income. NewCo stock at a price of $1 per share. The
Shields underwriting plan indicated that the
3. Relevant case law.
closing of the IPO would be simultaneous with a
Although there is little law on point regarding closing of NewCo’s acquisition of the
the sponsor’s purchase of founder shares, several Frankenmuth and Iroquois assets. Shields was not
of the cases discussed below illustrate well the obligated to purchase any NewCo stock if
fundamental principles regarding imputed Berckmans was not under a long-term
income and human capital that are firmly employment contract with NewCo at the closing
embedded in our tax system. One case in of the IPO.
particular bears remarkable similarities to a The key steps in the timeline of the IPO and
typical SPAC situation. business acquisitions occurred in quick
a. Berckmans. succession, as follows:
In Berckmans,18 the taxpayer subscribed for • September 1954: Berckmans discusses a
common stock of a corporation (NewCo) by potential acquisition of Iroquois.
paying $1 per share, its par value. At the time of • November 1954: Berckmans develops a plan
the purchase, NewCo (which had no assets at the to have NewCo acquire the assets of
time) had a plan to acquire the assets of two other Frankenmuth and Iroquois and starts
corporations, Frankenmuth Brewing Co. and planning the IPO. Shields is engaged for
Iroquois Beverage Corp., each actively engaged in financing and underwriting assistance.
the brewery business. Bruce Berckmans had been • March 1955: The decision to offer NewCo
a well-known executive in the brewery industry stock to the public for $9.50 per share is
with significant experience before becoming the made. Berckmans and Shields agree to
president, general manager, and director of acquire stock of NewCo for $1 per share.
Frankenmuth. He was employed by • April 13 and 15, 1955: Iroquois and
Frankenmuth under a long-term employment Frankenmuth send letters of intent to
contract. As advised by Berckmans, Frankenmuth NewCo regarding a sale of all their assets to
began seeking expansion opportunities in 1952 NewCo.
and retained an outside adviser to find potential • April 15, 1955: Berckmans and Shields
target businesses. In 1953, under the direction of purchase the stock of NewCo for $1 per
Frankenmuth, NewCo was formed as a shell share.
corporation. Berckmans believed NewCo would • April-May 1955: Purchase agreements for
serve as an acquisition vehicle for Frankenmuth’s the NewCo asset acquisitions are executed.
business expansion. • May 4, 1955: Shields forms an underwriting
group for the IPO.
• May 7, 1955: Berckmans enters into a long-
term employment contract with NewCo.
18
Berckmans v. Commissioner, T.C. Memo. 1961-100.

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• May 12, 1955: The registration statement for testimony of the IRS’s expert appeared to be
NewCo is filed with the SEC. “influenced by hindsight knowledge about the
• May 31, 1955: The SEC declares the NewCo successful completion of a complex series of
registration statement effective. An transactions.” Declining to take a hindsight
underwriting agreement for the IPO is approach, the Tax Court determined that the
executed. NewCo stock was worth no more than $1 per
• June 3, 1955: The IPO is completed at $9.50 share when Berckmans purchased it.
per share, and the asset acquisitions close. Several factors relevant to the founder shares
As a result of the IPO, 500,000 shares of of a SPAC were key to the Tax Court’s opinion:
NewCo stock were sold for $9.50 per share to the Shell corporation. NewCo was a shell
public. NewCo had successfully become a corporation with no business, earnings, or assets
publicly traded company conducting the brewery other than the $60,000 Berckmans and Shields
businesses of Frankenmuth and Iroquois. paid in exchange for its shares. Even though all
Approximately 45 days before the completion of indications were that NewCo would have an IPO
the IPO and the asset acquisitions, Berckmans and and acquire two businesses, what mattered to the
Shields acquired 60,000 shares of NewCo stock for Tax Court was NewCo’s profile at the time
$60,000 ($1 per share). The end result of this rapid Berckmans and Shields purchased their shares.
series of transactions was Berckmans and Shields Existence of plan. Berckmans had a plan from
owning stock in a public company for which they the outset that NewCo would issue its stock in an
paid $1 per share shortly before the public paid IPO and serve as an acquisition vehicle through
$9.50 per share for the same company. which he would capitalize on his reputation,
The IRS asserted that Berckmans had ordinary knowledge, and past industry experience to
income as compensation for services through a expand Frankenmuth’s existing business. Despite
bargain purchase in the year of his acquisition of the existence of a clear plan for NewCo stock to
the stock for $1 per share based on the stock evolve into a valuable brewery business, the Tax
having an FMV of $9.50 per share (the public Court concluded that there were significant
offering price). The Tax Court, however, held that contingencies to the acquisitions when
because of all the contingencies, the proper value Berckmans purchased his stock and that the
of the stock remained at $1 per share until the time likelihood of successful acquisitions was too
of the IPO, and thus Berckmans did not have any uncertain to bear on the value of the stock at the
compensation income from a bargain purchase. time of the purchase. A significant point
The Tax Court noted that: (1) valuation is a emphasized by the Tax Court was that there was
question of fact; (2) as of the date Berckmans no executed underwriting agreement when
acquired the NewCo shares, NewCo was an Berckmans purchased his shares and that the
inactive shell corporation; and (3) although there shares had not in fact been registered with the
were letters of intent to purchase the assets of SEC. When Berckmans purchased his NewCo
Frankenmuth and Iroquois (and there was a well- stock, NewCo stock could not have legally been
baked business acquisition plan in place for each offered to the public, and any number of
of those targets), the business acquisitions were contingencies outside Berckmans’s control could
subject to meaningful contingencies. have prevented an IPO.
The Tax Court considered testimony from The typical SPAC structure bears a strong
expert witnesses on the valuation of the NewCo resemblance to the Berckmans facts. When the
shares. While Berckmans’s expert witnesses sponsor purchases founder shares, there is no
focused on the contingencies concerning the executed underwriting agreement to sell shares.
transactions, the uncertainties of a successful IPO The SPAC will not yet have even filed a
and business combination, and the fact that registration statement with the SEC, and its shares
NewCo stock would be worthless absent an IPO, therefore cannot be legally offered to the public.
the IRS’s expert witness saw very little probability Although a SPAC is formed solely for the purpose
of any contingency that would not be resolved in of completing an IPO and engaging in a later
favor of NewCo. The Tax Court found that the business combination, there are significant

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contingencies outside the control of the sponsor there is no compensation event when the sponsor
that make the IPO and a subsequent business purchases founder shares.19
combination contingent. Also, the plan in Berckmans was much more
Berckmans was more susceptible to a specific and concrete than the typical SPAC
compensation argument than a typical sponsor structure because the identity of the targets was
because he was an actual employee of NewCo already known and substantial negotiations with
under a long-term employment contract and had their management had occurred. Moreover,
been under a long-term employment contract Berckmans acted not only as sponsor but also was
with Frankenmuth for several years before the part of the management of one of the targets. For
series of transactions. Berckmans’s employment a SPAC, although a potential industry for a
was so crucial that Shields was not obligated to business combination may be identified at the
purchase NewCo stock if Berckmans was not outset, no specific targets are identified and no
employed by NewCo under a long-term contract discussions with any potential targets have taken
at the closing of the IPO. Because Berckmans was place. Any business combination is completely
already a salaried employee of Frankenmuth and speculative and subject to significant
NewCo, the Tax Court could have maintained contingencies not only when the founder shares
that Berckmans’s purchase of NewCo stock was a are issued but also even later, when the IPO is
bargain purchase resulting in additional completed. Berckmans provides quite favorable
compensation income to Berckmans as an support for the position that a sponsor does not
employee of NewCo and Frankenmuth. Further, have a bargain purchase resulting in
Frankenmuth paid an outside adviser to seek compensation income by reason of purchasing
potential acquisition options at the same time founder shares at issuance.
Berckmans was actively seeking acquisition b. Differentiating Berckmans: Husted.
options for Frankenmuth. Presumably, the
outside adviser recognized compensation income In Husted,20 the Tax Court held that a taxpayer
for the fee it received. The Tax Court could have had compensation income as a result of a bargain
argued that the bargain purchase of NewCo stock purchase when the value of the stock purchased
was compensation income from either of was determined to exceed the price paid for that
Frankenmuth or NewCo since it was provided to stock. The taxpayer, William Husted, was an
Shields and Berckmans for services similar to the expert in the corporate finance and acquisitions
services rendered by the outside adviser in sector. He reported his occupation as “business
exchange for a fee. promotion” on his tax returns and claimed
business expense deductions for costs incurred in
For a SPAC, unlike in Berckmans, the sponsor
connection with his business acquisition and
is at no point an employee of the SPAC. There is
finance transactions.
no contract between the sponsor and the SPAC
specifically requiring the sponsor to provide Husted purchased stock of two corporations
employment-type services to the SPAC, and the (NewCo and Old PubCo) for $1 and $3 per share,
sponsor is free to abandon the SPAC at any time.
Thus, there is no clear employer-employee nexus
19
for a SPAC and a sponsor as there was in Even if there were an employer-employee relationship between a
SPAC and a sponsor, that would not be fatal to a compensation analysis.
Berckmans — making the argument stronger that In Everhart v. Commissioner, 26 B.T.A. 318 (1932), the taxpayer was
engaged in the business of selling syndicate interests as a representative
or financial agent of an oil and gas company. The taxpayer received
commissions from the company for his sales (and reported those as
income). The taxpayer was also allowed to purchase an interest from the
company for a price that was two-thirds of the price that investors paid
for those interests. The taxpayer’s usual commission was equal to the
one-third discount. The taxpayer considered the price differential a
discount, and the commissioner sought to tax the price differential as
compensation income from the employer to the taxpayer as a result of a
bargain purchase. The Board of Tax Appeals concluded that the taxpayer
purchased the interest as a personal investment and that there was no
compensation income resulting from a bargain purchase, even though
the taxpayer was an employee.
20
Husted v. Commissioner, 47 T.C. 664 (1967), acq., 1968-2 C.B. 1.

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respectively, as part of a plan to repackage and sell for $3 per share; (3) Old PubCo would
the assets of another corporation (Dorsey-A) in a distribute all its assets other than $300,000 in
series of transactions that involved a public stock cash and government securities; and (4) Old
offering and a business combination with Old PubCo would acquire all the stock of
PubCo ultimately holding the Dorsey-A assets NewCo and offer its stock to the public (for
through NewCo. At the time of those purchases, it at least $10 per share).
was believed that Old PubCo stock would be • February 27, 1959: Husted executes an asset
offered to the public at a much higher price than purchase agreement with Dorsey-A.
Husted paid. When Husted purchased his • March 12, 1959: NewCo is formed to
NewCo stock for $1 per share, he entered into an complete the Dorsey-A purchase.
agreement with Old PubCo under which he • March 20, 1959: Old PubCo files a
would exchange his NewCo stock for Old PubCo registration statement with the SEC to
stock upon NewCo acquiring all the assets of achieve a public offering of its securities.
Dorsey-A. The Old PubCo stock, however, was • April 8, 1959: Husted purchases Old PubCo
subject to repurchase by Old PubCo if the stock for $3 per share. Old PubCo stock was
transactions did not occur. trading on the American Stock Exchange for
Old PubCo was an existing holding company $10.50 at that time.
in many ways similar to a SPAC. Old PubCo was • April 15, 1959: Husted purchases NewCo
publicly traded. Old PubCo only held $300,000 stock for $1 per share. Husted assigns the
cash and government securities at the time of the assets purchase agreement to NewCo.
business acquisition. Old PubCo was actively Husted enters into an agreement with Old
seeking a profitable operating business to acquire PubCo to exchange his NewCo shares for
and expended significant effort to ensure the Old PubCo shares on the closing of the
transactions would in fact occur. acquisition by NewCo of Dorsey-A.
Key dates in the timeline of the relevant • April 21, 1959: An underwriting agreement
discussions and transactions are as follows: is executed for the Old PubCo stock
• February 1958 to spring and summer 1958: offering, conditioned on NewCo acquiring
Husted is informed Dorsey might be for Dorsey-A and Old PubCo acquiring
sale. Husted conducts diligence on Dorsey- NewCo.
A, discusses a possible acquisition with • April 23, 1959: Old PubCo’s SEC registration
management, and negotiates the statement becomes effective, and stock
acquisition. begins trading at $11 per share.
• August 21, 1958: Husted and Dorsey-A • April 30, 1959: NewCo acquires Dorsey-A
management agree to a tentative price for and all the NewCo stock is exchanged for
the acquisition. Old PubCo stock.
• November to December 1958: Husted The Tax Court began its discussion by citing
tentatively arranges financing and instructs Supreme Court precedent on the tax
lawyers to form NewCo to acquire Dorsey- consequences of a bargain purchase. It cited the
A. Husted approaches an underwriter to principle of Palmer21 that one does not ordinarily
arrange the proposed NewCo public realize income as a result of a bargain purchase
offering; subsequently, Old PubCo is and that the mere fact that one obtains a good deal
considered as the acquisition vehicle. does not result in a taxable event. The Tax Court
• December 1958: Husted and Old PubCo then provided an exception for the principle,
management discuss Old PubCo’s 22
made clear by the Supreme Court in Smith, that a
acquisition of Dorsey-A through NewCo. A taxpayer does have taxable income from a bargain
tentative letter of intent is sent to Old PubCo purchase when the bargain is intended to
under which (1) NewCo would acquire the
assets of Dorsey-A; (2) NewCo would issue
its stock to Husted for $1 per share, and 21
Palmer v. Commissioner, 302 U.S. 63 (1937).
Husted would purchase Old PubCo stock 22
Commissioner v. Smith, 324 U.S. 177 (1945).

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compensate the purchaser. Finally, the Tax Court compensate him (resulting in compensation
cited LoBue23 for the principle that a bargain sale of under Smith and LoBue). The Tax Court ultimately
stock to an employee is a compensatory found that the bargain purchases were made with
transaction. Consistent with the Supreme Court a compensatory intent. It looked at what Husted
precedent cited by the Tax Court, two did before acquiring his Old PubCo stock: He
determinations were necessary: whether Husted “spent substantial time and effort” in arranging
had a bargain purchase and, if so, whether the Old PubCo’s ultimate acquisition of Dorsey-A,
bargain purchase was intended to compensate including negotiating the transaction agreements,
Husted. arranging for financing and underwriting, and
To determine whether there was a bargain having assistants prepare plans for the
purchase, the Tax Court examined the value of the arrangements that would have to be made in
24
relevant shares. It acknowledged that there were connection with the acquisition. Old PubCo was
contingencies to the overall series of transactions, seeking an opportunity to acquire a profitable
but it did not regard them as especially operating business, and Husted provided that
significant. Importantly, unlike the corporation in opportunity.
Berckmans, (1) Dorsey-A was an operating entity The facts in Husted can be distinguished from
with existing assets, and (2) Old PubCo was an those in Berckmans on several grounds. First, in
existing publicly traded company with a share Berckmans NewCo was a shell company with no
trading price of $10.50 per share when Husted operating history. In contrast, Husted’s purchased
purchased its stock for $3 per share (and when he stock was either (1) stock in NewCo, which had a
purchased for $1 per share the NewCo stock that right to acquire an existing operating business
would be exchanged for Old PubCo stock on a (Dorsey-A) that would be exchanged for Old
share-for-share basis). Further, when Husted PubCo stock (which was publicly traded at the
purchased the Old PubCo and NewCo stock, time) upon NewCo’s acquisition of Dorsey-A or
there was an executed purchase agreement for (2) stock of Old PubCo — an existing publicly
Husted to acquire Dorsey-A. On the date Husted traded company whose shares were trading for
purchased NewCo stock, an agreement was $10.50 per share at the time.
executed for Husted’s NewCo stock to be Second, in Berckmans a registration statement
exchanged for Old PubCo stock, with Old PubCo with the SEC had not yet been filed when
acquiring Dorsey-A (by acquiring all the stock of Berckmans purchased his NewCo stock. In
NewCo). Also, unlike in Berckmans, Old PubCo contrast, Old PubCo was already listed and
filed a registration statement with the SEC trading on a public stock exchange before any of
regarding its public offering almost three weeks the transactions in question. Further, the
before Husted purchased Old PubCo stock and registration statement for the Old PubCo public
nearly a month before Husted purchased NewCo stock offering in connection with the Dorsey-A
stock. The Tax Court found that the overall series acquisition was filed with the SEC almost three
of transactions was the “evolution and weeks before Husted purchased Old PubCo stock,
consummation of the plan that . . . was merely the and nearly a month before he purchased NewCo
final step in a plan designed to vest ownership of stock.
the [Old PubCo] stock in [Husted] at a cost of only Third, Husted considered himself a
$1 per share,” resulting in a bargain purchase. professional in the business of corporate
After concluding that there was a bargain
purchase, the Tax Court determined the intent
underlying the bargain purchase to ascertain 24
whether Husted was a wise or fortunate investor On the NewCo stock that was exchanged for Old PubCo stock, the
Tax Court took a substance-over-form approach and concluded that
(resulting in no taxable event under Palmer) or if there was no real business purpose for which Old PubCo would agree to
instead the bargain element was intended to exchange its stock (which was to be publicly offered for at least $10 per
share) for an equal number of NewCo shares that Husted had purchased
for $1 per share on the same day — especially given that the exchange
“had been planned at a time when [NewCo] did not even exist.” The Tax
Court found that the “only realistic explanation for the agreed-upon
23 exchange ratio is that Husted was being provided with further
Commissioner v. LoBue, 351 U.S. 243 (1956). compensation for his services in arranging the acquisition” of Dorsey-A.

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acquisitions, as evidenced by his tax returns. founder shares and is not performing any services
Husted had no intention of staying with a for “another” at the time of the purchase. The
company post-acquisition and resale. He sought court emphasized the valuation of the stock and
out distressed operating companies only to determined that only the value at the time of
repackage the businesses and quickly sell them to purchase was relevant.
investors. Berckmans, however, intended to d. Eaton.
expand operations in the brewery business in a
manner he thought was the future of success in As illustrated throughout this report,
the brewing industry. Berckmans had been transactions that increase value in shares through
involved in the brewing business for a significant services performed by shareholders for their own
length of time and planned to remain in that corporations do not necessarily result in a
26
business. compensation event. In Eaton, for example, the
court held that events that substantially increased
Husted is fundamentally different from
the value of shares of a corporation shortly after
Berckmans. In the former, an existing operating
their purchase (even though part of a plan to
company hired the equivalent of an investment
achieve specific synergies) were not to be
banker (Husted) to arrange the sale of a company
considered. The taxpayer and his two brothers
to the public. The nature of the services provided
formed a corporation (NewCo) on November 28,
were akin to a fee, and providing compensation
1928. The three brothers contributed $300 to
for those services through a bargain purchase of
NewCo in exchange for all its outstanding
publicly traded stock was clearly compensation.
common stock. Approximately two weeks later,
On the other hand, the formation of a NewCo to
the brothers paid an additional $15,000 to NewCo
undergo a public offering and ultimately acquire
in exchange for additional shares of common
a target company is fundamentally different. For
stock. Separately, the brothers were equal co-
a SPAC, the sponsor performs services on behalf
partners in a restaurant business and owned all
of his own newly formed company, not a
the shares of a corporation (LandCo) that owned
preexisting entity that is attempting to sell itself.
the land on which the restaurant operated. The
c. Trust Co. of Georgia. brothers were planning to transfer the restaurant
25
Trust Co. of Georgia is another case supporting and land to NewCo, retain a significant interest in
the position that there is no bargain purchase or NewCo, and bring in outside investors to provide
compensation issue with respect to the founder working capital for the business. Security brokers
shares. There, the taxpayer purchased stock of a were retained to arrange for the issuance of
new corporation (NewCo) for $5 per share one NewCo shares in connection with the
week before it was offered to the public for $40 per contemplated transactions and to sell NewCo
share. In response to the IRS’s argument that the shares to outside investors.
taxpayer had income as a result of the bargain On January 2, 1929, the brothers transferred
purchase of stock, the court held that the taxpayer the restaurant to NewCo in exchange for
did not in fact have any income and that any later preferred stock, which was sold through the
gain on the stock could not be considered (in security brokers to outside investors. On January
whole or in part) compensation income. The court 8, 1929, LandCo transferred the land to NewCo in
stated that what is meant by the term exchange for preferred stock, which was
“compensation for services” is compensation for distributed to the brothers in liquidation. The
services “performed for another,” when the brothers then sold the NewCo preferred stock to
service provider is paid by that other. The outside investors through the security brokers. In
taxpayer had not been hired by anyone to do the aggregate, the brothers paid approximately 10
anything. Rather, the taxpayer merely purchased cents per share for their NewCo common stock.
stock — similar to a sponsor who acquires The question in the case came down to whether
the taxpayer should have included any income

25
Trust Co. of Georgia v. Rose, 25 F.2d 997 (N.D. Ga. 1928), aff’d, 28 F.2d 26
767 (5th Cir. 1928). Eaton v. White, 70 F.2d 449 (1st Cir. 1934).

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27
resulting from his purchase of NewCo common Husted, and Messing (discussed below), whether
stock for 10 cents per share in December 1928 a registration statement has been filed with the
based on the increased value brought to the shares SEC appears to be where courts have drawn the
by the January contributions. line. In Berckmans and Messing, no registration
The IRS argued that the series of transactions statement had been filed (although an IPO was
should be collapsed so that the brothers, in a contemplated in each case) when the relevant
single transaction, sold the restaurant and land in stock was purchased. In Husted, however, a
exchange for NewCo preferred stock (which was registration statement had been filed, and the
converted into cash) and NewCo common stock court considered that in its determination of the
at FMV (the NewCo common stock purchased by value of the relevant stock. Given that one cannot
the brothers for 10 cents per share). The court legally offer securities to the public and complete
disagreed and emphasized that even though the an IPO without having an effective registration
NewCo common stock appreciated as a result of statement, the filing of that document is a logical
the restaurant and land contributions, that place to draw the line.
appreciation was never realized by the brothers. 4. Principles from other areas.
Therefore, the court concluded, the taxpayer did
not have income on the NewCo common stock. a. Gift tax context.
Even though the brothers contemplated the later In the gift tax context, the Tax Court in Messing
transactions, which would enhance the value of concluded that later events did not affect prior
NewCo common stock, it was improper to take valuations in a case in which the taxpayer gifted
those transactions into account when the brothers stock of a privately held corporation to his
purchased their NewCo common stock. children shortly before the corporation filed a
An economic increase in value in the common registration statement with the SEC and
stock, even as a result of planned transactions, is completed an IPO. The taxpayer asserted that the
not alone a sufficient realization event to justify value of the stock on the date of transfer to his son
taxation. Similarly, for a SPAC, the sponsor was $10 per share, based on the price others had
purchases stock whose value subsequently paid for the stock in arms-length transactions at or
increases when the public acquires their common around that time (not in a public offering). The
shares in the IPO. As with a SPAC, Eaton involved taxpayer had contemplated an IPO of the
the creation of a special purpose company to both corporation before making the gifts, had engaged
raise capital and acquire an active business. a securities firm to assist with the IPO, and
The cases described above embody the anticipated the stock would be offered to the
fundamental tax law principles discussed earlier. public. A mere few months after the stock was
An issuance of stock whose value increases as a gifted, public investors paid $36.66 per share. In a
result of the subsequent efforts of its shareholders question of the valuation of the gifted stock, the
should not be taxed as compensation upon Tax Court emphasized that the gifts of stock were
issuance. The value is too speculative, and there is made before the IPO, when it was privately
no liquidity with which to pay any tax that would traded stock, and that “a publicly traded stock
be imposed. Further, although performing and a privately traded stock are not . . . the same
services for another results in compensation, animal. . . . The essential nature of the beast is
building a business and creating and enhancing different.”
the value of a capital asset for oneself or one’s own b. Taxation of profits interests received for
corporation clearly does not. services.
Another important principle that can be Founder shares are in many respects similar to
gleaned from the cases above is that filing a partnership interests in future profits (pure
registration statement with the SEC is an profits interests). In both cases, the holder is not
important milestone. As illustrated in Berckmans, entitled to any proceeds or assets if the entity

27
Messing v. Commissioner, 48 T.C. 502 (1967), acq., 1968-2 C.B. 1.

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liquidates immediately after the interest is business combination, the founder shares become
transferred. The IRS’s current position and the worthless. Even following a business
historical treatment of the receipt of pure profits combination, the value of the founder shares is
interests provide principles that are helpful, and speculative because they will be based on the
at least analogous, in analyzing any potential success of the post-business-combination SPAC.
cheap stock issue associated with founder shares. Under a liquidation valuation, therefore, the
In Rev. Proc. 93-27, 1993-2 C.B. 343, and Rev. founder shares have no value when issued to the
Proc. 2001-43, 2001-2 C.B. 191, the IRS provided a sponsor. Although the revenue procedures and
safe harbor for partnership profits interests case law dealt with partnership profits interests,
received in exchange for services. A profits the liquidation valuation method also applies for
interest is defined as an interest that does not interests issued by a corporation.
29
entitle the recipient to any share in the assets of In St. John, the court relied on Berckmans
the partnership if the partnership sells all its (which, as discussed above, involved stock in a
assets and liquidates, as determined when the corporation) in using a liquidation valuation and
recipient receives the profits interest. Specific concluding that the taxpayer did not have income
exceptions apply, however, when the profits on the receipt of a pure profits interest. As with a
interest: SPAC, the interest in that case was a subordinated
• relates to a substantially certain and interest that was not entitled to receive any assets
predictable stream of income from of the partnership on liquidation until other
partnership assets (such as income from partners recouped their initial contributions. Also
high-quality debt securities or a high- similar to a SPAC, the operations of the
quality net lease); partnership had not yet started when the interest
• is disposed of by the partner within two was received, and, as emphasized by the court,
years of receiving the interest; or any success of the business was completely
• is a limited partnership interest in a publicly speculative. The court held that the value of the
traded partnership. interest received was zero — the liquidation value
of the interest. The St. John court also relied on
A few important principles can be gleaned
additional cases illustrating the use of a
from these revenue procedures. First, if the profits
liquidation value method for a corporation.30
interest is substantially certain to lead to a stream
of steady income, its value is not speculative, and c. Personal goodwill not corporate asset:
it should not be given tax-free treatment. Second, Martin Ice Cream.
if the taxpayer is able to monetize the profits In the typical SPAC, the sponsor uses its
interest shortly (within two years), it is goodwill, experience, and relationships to attract
questionable whether the profits interest was public investors and source, negotiate, and
really incapable of being valued at the time of complete a subsequent business combination. It
transfer. Underlying the treatment of pure profits could be argued that the founder is contributing
interests is the concept that future profits are so those personal intangibles to the SPAC. Under
speculative and contingent that it is only proper that theory, the founder shares could have
and administrable to use a liquidation valuation significant value, which could in turn result in a
method to determine their value upon receipt.28 bargain purchase by the sponsor. However, case
Founder shares are quite similar to law illustrates that personal goodwill does not
partnership profits interests. As with partnership
profits interests, founder shares are not entitled to
29
any assets of the SPAC before a business St. John v. United States, No. 82-1134 (C.D. Ill. 1983).
30
combination. If a SPAC liquidates before a See Estate of Garrett v. Commissioner, No. 35955 (1953) (using the
liquidation value method for a corporation that had ceased active
operations); and Learner v. Commissioner, T.C. Memo. 1983-122 (using the
liquidation value method to value the shares of stock of a corporation
28
when there were reasonable prospects that the corporation would be
For a detailed discussion of the history and evolution of the liquidated). In those cases, the courts made no attempt to distinguish the
taxation of partnership profits interests, see William S. McKee, William use of a liquidation value method for a corporation from its use for a
F. Nelson, and Robert L. Whitemire, Federal Taxation of Partnerships and partnership, suggesting that the liquidation value method is a general
Partners, para. 5.02 (4th ed. 2007 and Supp. 2017-4). valuation principle that applies equally in each case.

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constitute a corporate asset, especially when opportunity. Those opportunities, however, are
generated before and independent of the generally not viewed as property for tax
32
existence of the relevant corporation. purposes. For example, in Crowley, the Tax Court
Martin Ice Cream31 stands for that proposition. held that a taxpayer was not taxable on income
A father and son were shareholders of Martin Ice earned by a partnership as a result of the taxpayer
Cream Co. (MIC), an ice cream distributor. MIC’s directing business opportunities to the
business success was largely attributable to the partnership or generating business for the
close personal relationships that the father had partnership. This was true even though all the
developed and maintained for decades with business directed or generated could have been
customers. A company initiated negotiations with performed by the taxpayer rather than the
MIC to acquire rights to distribute MIC products partnership. In Hogle,33 the Tax Court concluded
to MIC customers. MIC formed a subsidiary and that income realized by trusts as a result of gains
transferred those rights to the subsidiary in and profits on securities trading conducted by the
exchange for all the stock of the subsidiary. MIC grantor of the trusts did not constitute a taxable
immediately distributed the stock of the gift. The corpus of the trusts consisted of trading
subsidiary to the father in exchange for his stock accounts directed by the grantor. Although the
in MIC. The father then sold the stock of the trusts would benefit from the trading direction of
subsidiary to the company that wished to acquire the grantor, that trading was not a transfer of
the rights held by the subsidiary. The distribution property constituting a gift from the grantor to the
was held to be taxable, so one of the issues in the trusts.
case was whether the benefits of the personal 5. Are the founder shares really options?
relationships developed by the father were assets
Arguably, founder shares are effectively
of MIC or instead were owned by him. The Tax
options to acquire SPAC public shares that can
Court noted that the father had never entered into
only be exercised upon the completion of a
any agreements with MIC through which his
business combination. After all, founder shares
relationships and goodwill became the property
are not entitled to any distributions, nor are they
of MIC (such as an employment agreement) and
entitled to any liquidation proceeds. Only upon
that the father’s customer relationships and
the completion of a business combination do the
goodwill were thus owned by him.
founder shares automatically convert into public
Under the Martin Ice Cream analysis, the
shares. If the founder shares are treated as
sponsor — not the SPAC — would be treated as
options, they could give rise to ordinary income.
the owner of the sponsor’s goodwill, experience,
Case law and a revenue ruling support
and relationships, and the value of the SPAC
respecting the founder shares as stock.34 In
would not reflect the sponsor’s goodwill, 35
Carlberg, shareholders of target corporations
experience, or relationships. Under the Martin Ice
received common stock of an acquirer and a
Cream reasoning, however, it is important that
nonvoting “certificate of contingent interest” for
there be no agreement between the sponsor and
additional acquirer stock. The shares underlying
the SPAC concerning those intangibles (such as an
the certificates were authorized and specifically
employment agreement) that could create a
set aside as a way for the acquirer to reserve for
valuable asset in the SPAC.
contingent liabilities of one of the targets. The
d. Business opportunity not property. shares underlying the certificates were reduced as
An argument could be made that the founder they were used to satisfy the liabilities. The holder
shares have significant value on the theory that of a certificate was entitled to receive its allocable
the SPAC possesses a valuable business
32
Crowley v. Commissioner, 34 T.C. 333 (1960), acq., 1961-2 C.B. 3.
33
Hogle v. Commissioner, 7 T.C. 986 (1946), aff’d, 165 F.2d 352 (10th Cir.
1947).
34
See also Robert Willens, “What Restrictions on Voting Rights Will
Affect Voting Stock Status?” 75 J. Tax’n 208 (1991).
31 35
Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998). Carlberg v. United States, 281 F.2d 507 (8th Cir. 1960).

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portion of the underlying shares after six years for business combination, founder shares, as with the
no additional payment. The government argued rights at issue in Carlberg, Hamrick, and Rev. Rul.
that the certificates were not stock (and 66-112, can only ever give rise to stock.
constituted boot in the reorganization). The court Immediately upon a business combination,
disagreed. Important to the court’s conclusion founder shares convert automatically into public
was that the certificates could become only stock shares for no additional consideration. Moreover,
and no other form of property. Further, the founder shares have other significant indicia of
certificates automatically entitled the holder to equity, possessing voting and governance rights,
stock based on a determined time and for no including rights to elect directors to the board. If
additional consideration. The only logical the founder shares were determined to be options,
conclusion, therefore, was that the certificates the SPAC would be left without any real stock
were stock or “nothing,” and the court outstanding (at least until an IPO).
determined the certificates were stock.
36
Similarly, in Hamrick, two inventors formed a B. Transfers of Founder Shares
new corporation and transferred patent rights to The sponsor may use founder shares as
it in exchange for stock and rights to receive consideration to enable the SPAC to complete a
additional stock contingent on the earnings of the business combination. The sponsor may transfer
corporation (subject to a cap) for the seven years or forfeit founder shares to induce public
following the formation of the corporation. The investors to vote in favor of a business
government argued that the contingent rights combination and not exercise redemption rights.
were not stock but instead other property that The sponsor may also transfer or forfeit founder
would be taxable boot to the inventors. The Tax shares to target shareholders in a subsequent
Court disagreed and held that the rights to receive business combination to help bridge a value gap.
additional stock were not boot because the holder The question arises whether any of these
of those rights could only ever receive stock for transactions results in a taxable disposition.
them.
1. Contribution of founder shares to capital:
In Rev. Rul. 66-112, 1966-1 C.B. 68, the IRS
Fink.
addressed a similar issue when determining
whether an interest constituted stock or other There is Supreme Court authority supporting
property. In that ruling, X Corp. and Y Corp. the position that a forfeiture of stock is a
equally owned stock in M Corp., and Y sought to nontaxable contribution to capital. In Fink,37 the
acquire X’s M stock. Because M was closely held, taxpayers (controlling shareholders of a closely
it was difficult to value the M stock. In held corporation) voluntarily surrendered some
consideration for X’s M stock, Y exchanged 40,000 of their shares to the corporation, reducing their
shares of its own voting stock and entered into an combined percentage ownership from 72.5
agreement under which X had a right to receive percent to 68.5 percent. The shares were
additional Y voting stock in each of the four years surrendered to increase the attractiveness of the
following the transaction in which M met corporation to outside investors. The taxpayers
specified income thresholds. The additional stock received no consideration for their surrendered
right was not assignable and could only ever give stock. At issue was whether the taxpayers were
rise to additional Y voting stock. The IRS entitled to a loss deduction for the shares
concluded that because the right was not surrendered. The IRS denied the loss, concluding
assignable and could only ever give rise to Y that the share surrender was a contribution to the
voting stock, this additional stock right did not capital of the corporation. The Tax Court
constitute other property. sustained the commissioner’s position but was
Although founder shares do not participate in
distributions or liquidation proceeds before a
37
Commissioner v. Fink, 483 U.S. 89 (1987), rev’g 789 F.2d 427 (6th Cir.
1986), rev’g T.C. Memo. 1984-418. See also Schleppy v. Commissioner, 601
F.2d. 196 (5th Cir. 1979) (holding that a non-pro-rata stock surrender by
36 majority shareholders to improve the financial condition of the
Hamrick v. Commissioner, 43 T.C. 21 (1964), acq., 1966-2 C.B. 3. corporation was a contribution to the capital of the corporation).

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reversed by the Sixth Circuit. The Supreme Court was analyzed as a taxable exchange, whereby A
reversed and held that the shareholders were not recognized gain or loss on the shares deemed
allowed an ordinary loss because a voluntary transferred and B and C recognized income under
38
surrender of shares to the corporation closely section 61.
resembles an investment or contribution to capital 3. Reconciling Fink with Rev. Rul. 73-233.
of the corporation.
It is not uncommon for a sponsor to agree to
2. Surrender of shares as taxable: Rev. Rul. 73- transfer or surrender founder shares to facilitate
233. the completion of a subsequent business
In contrast to the Supreme Court’s conclusion combination.39 While an outright transfer is likely
in Fink, an earlier revenue ruling concludes that a a taxable disposition, the treatment of a forfeiture
surrender of shares to induce other shareholders or surrender of shares is less clear. Although Fink
to approve a merger is a taxable transaction. In may support a tax-free contribution, Rev. Rul. 73-
Rev. Rul. 73-233, 1973-1 C.B. 179, Y Corp. wished 233 raises at least a question regarding taxable
to acquire X Corp. in a merger in exchange for 100 exchange treatment to the sponsor as well as
shares of Y stock. The stock of X was owned by potential income realization to the economic
three individuals, A (60 percent), B (20 percent), recipient of the surrendered shares. It is difficult
and C (20 percent). Under applicable corporate to reconcile the holding of Fink with Rev. Rul. 73-
law, a two-thirds vote of the X shareholders was 233. Fink was decided by the Supreme Court
required to approve the merger. B and C refused nearly 15 years after the revenue ruling was
to vote in favor of the merger unless they would issued, which could suggest that Rev. Rul. 73-233
each receive 25 shares of Y stock. In consideration is limited to its specific facts. A more detailed
for B and C voting in favor of the merger, A consideration and analysis of the facts of Fink and
agreed to permit B and C each to receive 25 shares Rev. Rul. 73-233 provides additional guidance.
of Y stock instead of the 20 shares of Y stock to Peter and Karla Fink had been dominant
which they would have been entitled based on owners of their corporation, Travco Corp., for
their ownership percentages. Under that more than 10 years and had invested a significant
agreement, A contributed one-third of his X stock amount of their own capital in Travco. Travco’s
to the capital of X (reducing A’s stock interest in X financial condition weakened, and, as a result, its
to 50 percent and increasing each of B’s and C’s existing lender placed significant pressure on it to
stock interests in X to 25 percent). The merger was make a payment on its outstanding loan. Travco
unanimously approved and thereafter completed. was unable to make the payment and had three
A, B, and C received, respectively, 50, 25, and 25 options: liquidate, find a new lender, or obtain
shares of Y stock in exchange for their X stock. new capital. Mr. Fink unsuccessfully sought
The IRS determined that the overall additional capital from multiple sources and
transaction was properly viewed as (1) a merger began negotiating with a new lender to replace its
of X into Y, with a distribution of 60, 20, and 20 existing lender. The replacement lender
shares of Y stock to A, B, and C, respectively, in conditioned its extension of credit on Travco
exchange for their X stock, with no gain or loss raising $700,000 of new equity capital. Travco
being recognized to A, B, or C on this exchange then engaged an investment adviser to attract
under section 354; and (2) a transfer by A of five outside investors to raise the required $700,000
shares of Y stock to B and five shares of Y stock to equity capital. To improve Travco’s financial
C in consideration for their voting in favor of the
merger. The transfer of shares from A to B and C
38
See also Rev. Rul. 79-10, 1979-1 C.B. 140, in which the IRS ruled that
a non-pro-rata liquidation was properly viewed as a pro rata
distribution with all shareholders considered to have received their pro
rata share of the distribution, and any excess over a shareholder’s pro
rata share received was considered as payment in a separate transaction.
39
One way or another, the sponsor will reduce his holdings of
founder shares (either by forfeiting the requisite number of founder
shares, which the SPAC will then reissue to an investor, or by directly
transferring founder shares to an investor).

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position in order to attract outside investors and and not providing consideration to any specific
ultimately preserve the business, the Finks investor(s).
surrendered some of their Travco stock. The Tax A more difficult case is when a sponsor agrees
Court noted that the couple “did not surrender to surrender founder shares to the capital of the
stock as a part of any indirect transfer to a third SPAC immediately before or in connection with a
party.” Importantly, there was no specific outside business combination and then, as part of a
investor identified at the time of the surrender. subsequent separately negotiated agreement with
The Supreme Court emphasized that the Finks an investor, issues some or all of those
surrendered their shares only to protect or surrendered shares to the investor in exchange for
increase the value of their investment by voting in favor of the business combination or
obtaining additional capital needed for Travco to providing needed capital. This fact pattern has
continue operating. The Supreme Court was similarities to both Rev. Rul. 73-233 and Fink.
careful in limiting its holding, stating “We Similar to the scenario in Rev. Rul. 73-233, the
conclude only that a controlling shareholder’s sponsor wants the business combination to occur
voluntary surrender of shares, like contribution of and knows that a vote or capital is needed from
other forms of property to the corporation, is not the third-party investor for the business
an appropriate occasion for the recognition of combination to be completed. However, similar to
gain or loss.” Fink, the sponsor surrenders his shares to protect
The sparse facts of Rev. Rul. 73-233 can be his investment, knowing there will likely be no
differentiated from Fink. In the ruling, A was not business combination absent the investor’s vote or
acting to protect its investment. Rather, A agreed capital, and the sponsor’s interest would become
to surrender shares to which it was entitled upon worthless if the SPAC is unable to complete a
a merger in order to induce others (B and C) to business combination and liquidates. The
vote in favor of a merger, which they otherwise surrender and reissuance in that case is crucial to
refused to do. Unlike the Finks, A apparently had the viability of the SPAC. Ultimately, the proper
an explicit agreement with third parties (B and C) analysis of a surrender of founder shares depends
to surrender the relevant amount of its shares to X on the particular facts and circumstances.
to accomplish the merger.
How do Fink and Rev. Rul. 73-233 apply to IV. Forming a SPAC: Choice of Jurisdiction
founder shares? If a sponsor directly transfers A fundamental question at the outset of
founder shares as part of a negotiated agreement forming a SPAC is whether it will be incorporated
to a third-party transferee immediately before or in the United States or offshore (typically the
in connection with a business combination for the Cayman Islands or British Virgin Islands). That
purpose of obtaining the vote or capital of the decision will largely depend on the jurisdiction of
transferee, it is difficult to see the transfer as an intended target. If the target is a U.S. company,
anything other than a taxable disposition. Even if it may be inefficient to have it held by a foreign
there is no actual transfer but a surrender and SPAC, subjecting payments by the U.S. target to
targeted reissuance to the third party, the its foreign parent to U.S. withholding tax at rates
transaction is likely treated as a direct transfer to as high as 30 percent. If the target is a foreign
the third party. In contrast, if a sponsor surrenders company, it may be inefficient to have a U.S. SPAC
founder shares to the capital of the SPAC to owning a foreign subsidiary and subjecting its
enhance its financial profile and there is no earnings to an additional layer of U.S. tax. If a
particular third-party investor that will receive sponsor is certain of the target’s jurisdiction, it
the founder shares, the surrender is close to the may be efficient to form the SPAC in that
facts of Fink. Even when the sponsor surrenders jurisdiction. If the target is a U.S. company,
some of his shares to induce the public forming the SPAC in the United States is likely the
shareholders as a group not to exercise best choice. Similarly, if the target is foreign, a
redemption rights, the sponsor is arguably foreign SPAC is likely the best choice.
protecting his investment in his founder shares If the target is not in a jurisdiction originally
considered, the consequences of changing the

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jurisdiction of the SPAC will need to be ordinary income in each specified year, and an
considered. For example, if a SPAC is originally interest charge would be imposed on the tax
43
formed in the United States and seeks to acquire a liability for each specified year. The PFIC rules
foreign target, it may be difficult to redomicile are particularly harsh for founder shares because
offshore because of the section 7874 anti-inversion the sponsor has minimal basis. Also, section
rules that could continue to treat the SPAC as a 1298(a)(4) provides that to the extent provided in
40
U.S. corporation. Similarly, if a foreign SPAC Treasury regulations, any person that has an
were to seek to acquire a U.S. target, it could option to acquire stock of a PFIC will be treated as
domesticate before the business combination. The owning that stock. Prop. reg. section 1.1291-3 (the
domestication would typically qualify as a tax- option regulations) provides that options on stock
free F reorganization. However, as discussed of a PFIC are themselves treated as stock of a
below, the domestication may raise some PFIC. Holders of SPAC warrants, therefore, may
significant passive foreign investment company also be subject to the PFIC rules.
issues, especially regarding the warrants. Although some elections may be able to
mitigate the adverse PFIC tax consequences upon
A. PFIC Rules a disposition of shares, such as a qualified electing
The PFIC rules present a gating issue for a fund (QEF) election described below, no such
44
foreign SPAC. A SPAC will be considered a PFIC elections are available for warrants. Any holder
for a given tax year if at least 75 percent of its gross of warrants could therefore be required to
income in that tax year is passive income (the recognize gain as ordinary income and subject to
income test) or if at least 50 percent of its assets in an interest charge under the rules described
that tax year, determined based on FMV and above. Further, because the shareholder’s holding
averaged quarterly over the year, are assets held period in the stock received upon exercise of the
for the production of passive income (the asset warrants includes the holding period in the
41
test). Passive income generally includes cash, warrants, a QEF election made on the stock would
dividends, interest, some rents and royalties, and not rid the stock of its PFIC taint absent the
gains from the disposition of passive assets.
42 shareholder recognizing gain or including a
45
Because a SPAC is a blank check company with no deemed dividend amount in a purging election.
operations or assets other than cash proceeds 2. QEF election.
raised in the IPO (passive asset), and no income A U.S. shareholder may make a QEF election
other than possibly interest earned in the trust to mitigate adverse PFIC tax consequences
account (passive income), it is quite likely treated 46
regarding its shares. The U.S. shareholder is then
as a PFIC at the outset unless it can satisfy the required to include in income its allocable pro rata
start-up exception, as discussed below. share of the SPAC’s net capital gains and other
1. Consequences to shareholders. earnings and profits annually, regardless of
A U.S. shareholder in a PFIC must recognize whether those amounts are actually distributed.
gain upon specific distributions referred to as A SPAC is unlikely to have any capital gains or
“excess distributions” and upon a sale or other E&P before a business combination. If there is any
(taxable) disposition of PFIC shares. That gain is interest income earned in the trust account, that
subject to tax at the highest rate applicable to income is probably offset significantly, if not
entirely, by deductions for expenses. The allocable
amount a shareholder would have to include
before a business combination because of a QEF

43
Section 1291.
40 44
For an all-cash deal, a foreign SPAC may successfully avoid the Reg. section 1.1295-1(b)(2)(iii).
anti-inversion rules. A recent example of this is CF Corp.’s acquisition of 45
Fidelity & Guaranty Life, which closed November 30, 2017. See sections 1291 and 1298; and reg. sections 1.1291-9, 1.1291-10,
41 1.1297-3, and 1.1298-3.
Section 1297. 46
42 Section 1295. A mark-to-market election under section 1296 may
Notice 88-22, 1988-1 C.B. 489. also be available to mitigate adverse PFIC tax consequences.

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election would therefore probably be negligible, if retroactive to April 1992. Given that the option
not zero. After the business combination, the regulations and the disposition regulations are
SPAC would likely no longer be a PFIC, and the only proposed and have been proposed for more
shareholder would then not be required to than 25 years, a reasonable position could be
include any QEF inclusions.47 The QEF election taken that under current law they do not apply.49
prevents the shareholder from having to Warrants may still result in adverse PFIC
recognize ordinary income and an interest charge consequences even without a domestication.
on a disposition of its shares. When a foreign SPAC acquires a foreign target,
Under the option regulations and the the holding period for stock received upon
disposition regulations (described below), the exercise of the warrants would include the
50
potential PFIC consequences to U.S. holders of holding period for those warrants. Under a
warrants are especially harsh when a foreign “once a PFIC, always a PFIC” rule provided in
SPAC domesticates in connection with an section 1298(b)(1), the stock received on exercise
acquisition of a U.S. target. Because a QEF election would retain a PFIC taint despite being exercised
48
may not be made for PFIC warrants, a U.S. after a business combination when the SPAC
holder of PFIC warrants could be required to would likely no longer be a PFIC.51
recognize ordinary income subject to an interest
charge on its warrants at the time the SPAC B. Start-Up Exception
domesticates, resulting in a “disposition” of the Under a start-up exception, a foreign
52

warrants by the U.S. holder. The result can be corporation will not be treated as a PFIC for the
especially harsh because in some dispositions, first tax year it has gross income (its start-up year)
such as tax-free reorganizations, the warrant if: (1) no predecessor of that corporation was a
holder would have no cash to pay the tax. PFIC; (2) the corporation establishes to the
Section 1291(f) provides that “to the extent satisfaction of the Treasury secretary that it will
provided in regulations,” gain will be recognized not be a PFIC for either of the first two tax years
“notwithstanding any provision of law.” Prop. following its start-up year; and (3) the corporation
reg. section 1.1291-6 (the disposition regulations) is not in fact a PFIC for either of the first two tax
provides that despite any other code provisions years following its start-up year. Although the
(including nonrecognition provisions), a PFIC start-up exception is intended to allow a new
shareholder is required to recognize gain (as business to start up without being treated as a
ordinary income and subject to the PFIC interest PFIC, the start-up exception has been criticized as
charge) on any direct or indirect disposition of 53
extremely narrow. As a policy matter, a SPAC
PFIC stock, which, under the option regulations, should be entitled to qualify for the start-up
would include a warrant. The disposition exception since its entire purpose is to acquire an
regulations could apply to tax a warrant-for- active business within a relatively short time
warrant exchange under a tax-free F frame, and there is no meaningful concern
reorganization, such as the domestication of a regarding deferral because any passive income
foreign SPAC. earned by the SPAC on its cash or Treasury
Both the option regulations and the securities in the trust account is negligible.
disposition regulations were proposed in 1992
and have not been finalized. If those regulations
were finalized, their effective dates would be 49
The IRS has not issued specific guidance on whether section 1291(f)
and the disposition regulations or section 1298(a)(4) and the option
regulations are self-effectuating, and the preamble to those regulations
does not provide significant guidance.
50
Prop. reg. section 1.1291-3.
51
See T.D. 8750.
52
Section 1298(b)(2).
53
Kimberly S. Blanchard, PFICs, Tax Mgmt. Port. (2012); New York
47 City Bar Committee on Taxation of Business Entities, “Report Offering
Reg. section 1.1295-1(c)(2)(ii).
48 Proposed Guidance Regarding the Passive Foreign Investment
Reg. section 1.1295-1(b)(2)(iii). Company Rules” (Sept. 21, 2009).

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However, given the narrow wording of the start- initial year of existence. The proceeds in the non-
up exception, it may be difficult for a SPAC to interest-bearing account would then generate no
qualify for several reasons. interest income, and the SPAC would have no
The start-up year is the first year in which the gross income. When the proceeds are moved to an
corporation has gross income — regardless of interest-bearing account, the SPAC will have
how long the corporation has been in existence. If gross income, and that tax year will constitute the
the corporation was formed before the first year in start-up year of the SPAC — starting the clock on
which it has gross income, it might already be the start-up exception period.56 Sponsors may also
treated as a PFIC under the asset test, because the give themselves the right to domesticate a SPAC
PFIC determination is based on having either unilaterally before year-end, so that the SPAC’s
income or passive assets. In that case, the once-a- existence as a foreign corporation does not extend
PFIC, always-a-PFIC rule could taint the stock of beyond the intended start-up year.
any U.S. shareholders holding stock before the
start-up year. The IRS has in fact issued field V. Conclusion
service advice that treated a corporation as a PFIC SPACs are becoming increasingly popular in
in a year before its start-up year based on the the capital markets. They have been heralded as a
assets of the corporation in that prior year, new path to bring “unicorns” to the public
regardless of whether the corporation later 57
market, replacing the traditional IPO. Prominent
qualified for the start-up exception.54 private equity firms are taking note and are
Upon formation of a SPAC, the sponsor increasingly looking at SPACs as a viable
purchases founder shares for cash. The SPAC uses structure. SPACs are also attractive to public
all that cash fairly quickly for operating expenses. investors since they are relatively safe
Cash is a passive asset for purposes of the PFIC investments that provide a cash exit in connection
tests and is the only asset of the SPAC at that with a subsequent business combination. Finally,
time.55 Proceeds of an IPO constitute additional SPACs have proven attractive for private
passive assets regardless of whether any interest companies that can obtain a public company
income is earned on the proceeds. Owning solely listing without the costs and inefficiencies of the
passive assets would cause the SPAC to be treated traditional IPO process. 
as a PFIC under the asset test. Under a literal
application of the statute and the above-
mentioned field service advice, the SPAC would
be subject to the PFIC taint regardless of whether
it qualified for the start-up exception in a later
year. This result is highly technical and
inconsistent with the policy of shielding
corporations from PFIC status during their start-
up phase.
Despite the lack of clarity around the start-up
exception, a SPAC may still take some measures
56
to increase its chances of satisfying the exception. In addition to the uncertainty of the interaction of the asset test and
the start-up exception, additional complexities arise regarding the
For example, a SPAC may hold off putting its cash SPAC’s tax years following the start-up year. As noted above, to qualify
into an interest-bearing account, at least for its for the start-up exception, the SPAC must not be a PFIC in either of its
two tax years following its start-up year. Presumably, the SPAC will
acquire an active business in its initial business combination and not be a
PFIC following the business combination. A SPAC’s tax year, however,
54
will generally end upon a domestication. Therefore, the SPAC (assuming
See IRS Field Service Advice — PFIC Issues, 2002 WL 1315676 it meets the PFIC income or asset tests in the relevant year) would not
(2002). qualify for the start-up exception if it domesticates in a tax year
55 following its start-up year because the SPAC will have been a PFIC for
The asset test looks at the nature and value of a corporation’s assets
at the end of each calendar quarter. When the sponsor purchases one of its tax years following its start-up year — i.e., the short year
founder shares during a particular calendar quarter and the SPAC uses ending with the domestication. This result makes the start-up exception
all that cash before the end of that quarter and before the completion of quite narrow. Unless the SPAC domesticates before the close of its start-
an IPO, there is a strong argument that the SPAC would not be a PFIC up year, it would not likely qualify for the start-up exception.
57
under the asset test because the SPAC would have no passive assets (i.e., Nicole Bullock and Tom Braithwaite, “Social Capital Heralds New
no cash) as of the relevant valuation dates. Model for Unicorn IPOs,” Financial Times, Sept. 14, 2017.

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