SPACs Stinking, Taxes Sinking
As Owens put it in blunt terms, many SPACs have performed “shittily.”
Or, as The Wall Street Journal put it in January, “Shares of half of the companies that finished SPAC deals in the last two years are down 40% or more from the $10 price where SPACs typically begin trading, erasing tens of billions of dollars in startup market value.”
But there’s a silver lining for those who held qualified small business stock beforehand. The shares might have started at $10 after the SPAC deals, but if they went back down, as many SPAC shares have, they still fell under the threshold for qualified small business stock treatment. So if a stock went up after a SPAC deal and then tanked afterward, there was still a tax benefit.
“For clients who sold it at $9 a share, they didn’t pay any tax on the gain because they sold it for less than $10 a share,” Owens said. And this particular e-commerce stock got hit hard. After an initial bounce, it has fallen to under $2 a share.
There are a few other stipulations worth noting for qualified small business stock. The company can’t have gross assets of more than $50 million at the time of share issuance (the e-commerce company in question eventually did reach that threshold sometime in 2019 or early 2020). Section 1202 explicitly leaves out “any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees.”
The problems with the tax filings aren’t just with the clients or their companies. Mason and Owens said that even the brokerage companies handling the shares mess up the filings.
“This is just one piece of the puzzle for what we did with this company,” said Owens. “We identified errors with W-2s and misreported cost basis to help our clients make sure that their stock plan transactions were reported accurately on their tax return ... where there was non-accurate reporting of their cost basis for sales that occurred because of the split. Even for folks that didn’t have QSBS, we were able to save a ton of money because of these sorts of issues.
“Basis for stock plan stuff is a mess across the board.”
Mason added that one of his clients had a 1099 showing a $700,000 loss on the sale of his stock in the e-commerce company. “Which is the exact opposite. He paid peanuts for them, probably $25,000, and the proceeds were $1.2 million, but because the brokerage didn’t know the actual basis, they just took the basis from the old brokerage when it was transferred over. ... So just put in the fair market value on the date of the transfer. And since the stock went down, the IRS thinks he has a $700,000 loss. We had to override that on the tax return and say, ‘Actually, no, he has a $1.2 million gain and it’s all qualified QSBS.’
“So it’s playing with fire with all this stuff. ... It’s just a landmine for advisors.”