Tax Liability Insurance
What is Tax Liability Insurance?
In short, tax liability (or tax opinion) insurance provides coverage for any identified and supportable tax position. In connection with a transaction, it is often relied upon to cover specified known exposures that are typically excluded from representations and warranties insurance (RWI) coverage, such as deal structure (tax-free reorganizations, spinoffs, etc.) or other historical issues that are flagged during diligence (NOLs, S-corp status, REIT status, transfer pricing, etc.). Outside of a transaction, other applications include coverage for tax credits and strategic tax management.
Why does Tax Liability Insurance matter?
Tax liability insurance is a tool that has been in use since the mid-1980s and, while parties to a transaction have often relied upon tax insurance to navigate tax exposures in M&A transactions and corporate taxpayers are now seeing it as a means to address ongoing business tax risk, its use and demand may increase significantly due to the recently enacted CARES Act. Most notably, the CARES Act allows corporations to carry back NOLs up to five years, allowing corporations to offset taxable income in 2013–2019 with NOLs from 2018–2020 by filing amended returns in order to obtain refunds.