Tax Liability Insurance broadly encompasses two types of coverage – Tax Opinion Insurance and Tax Credit Insurance. In either form, this insurance may protect you if a taxing authority ultimately determines that a tax position does not qualify for its intended tax treatment. These policies reduce or even eliminate your exposure by covering losses related to the tax itself, as well as fines, penalties, interest and a gross up amount. Tax insurance can be underwritten and bound relatively quickly, allowing the parties to achieve certainty without seeking a private letter ruling from the IRS.
Tax Opinion Insurance is commonly utilized to address the risks presented by a known tax issue or an uncertain historical tax position. In the context of an M&A transaction, this policy can relieve a point a friction in deal negotiations by the transferring the known or uncertain tax risk to an insurer, thereby reducing or eliminating the need for an escrow. Examples of tax positions insured under a tax opinion policy include S Corp qualification/338(h)(10) elections, net operating loss carryforwards and the intended tax treatment of a corporate reorganization.
Tax Credit Insurance protects tax equity investors from the risk that tax credits are recaptured by a taxing authority. Tax Credit Insurance has become commonplace in the renewable energy space in the last decade. Sponsors of renewable energy projects use tax credit insurance to protect tax equity investors from recapture risk in the event the investor does not qualify for the credits associated with the project or the tax equity structure of the investment and the allocations are not respected. Tax Credit Insurance also insures against recapture risk in connection with other tax credits, including Historic Rehabilitation Tax Credits and Low Income Tax Credits.