Insuring tax liabilities.

• Author: Fallon, Geoffrey D.

A new insurance product was recently introduced to provide assistance to financial officers in managing tax liabilities. Tax Opinion Guarantee Insurance permits a company or individual to insure that the tax benefits of a particular transaction will be received. If the IRS denies the tax treatment taken on the return, the policy pays the denied benefits to the taxpayer. As explained below, the premium range for this coverage is approximately 3% to 10% of the policy limit; the carriers underwriting this coverage are reputable and highly rated.

Tax Opinion Guarantee Coverage

Businesses and individuals strive to structure transactions to minimize taxes. But the ever-evolving tax code, coupled with the complexity of business today, results in varying levels of risk about the Service's positions. While letter rulings are a viable option to eliminate this risk, they may not be timely issued; further, the IRS will not issue a ruling for many issues, or no precedent may exist. Further, a taxpayer might not want to disclose a strategy to the Service in a letter ruling request. Tax Opinion Guarantee Coverage provides that if the IRS rejects a taxpayer's position, the insurance company will reimburse the taxpayer for the additional taxes paid.

Coverage

The policy is structured around a particular transaction for which an accountant or attorney has issued an opinion. The opinion need not conclude the Service "will" or "should" allow the position, and may be useful when its level of certitude hovers around "more likely than not" the IRS will decide as concluded in the opinion. The policy is tailored for a single transaction and covers only that. A one-time premium is paid at inception of the policy. The policy period runs until the tax year of the transaction has closed and either the Service accepts the taxpayer's position or the policy pays the insured benefits. Besides paying a benefit equal to the tax benefit denied, the policy may be structured to provide separate limits for interest and penalties, adjustments to state and local taxes and a gross-up for additional taxes owed as a result of receiving payment under the policy.

Coverage is also available for the costs of contesting an IRS determination after a 30-day letter is received. The taxpayer chooses its representative before the Service, as long as the representative is also acceptable to the insurance company.

While each transaction is evaluated separately, a guideline for premium range is 3%...