Preserving Value: Mitigating an Employee Reimbursement Tax Risk

Castle Harbour supported a corporate acquirer in overcoming a tax exposure that surfaced during the acquisition of an aviation services company.

Diligence revealed that the target had been paying its employees per diem allowances and travel reimbursements under an “accountable plan” – a tax-favored arrangement whereby such payments aren’t treated as wages if certain IRS rules are met. The concern was that if the IRS later found the plan to be non-compliant, those routine employee payments could be reclassified as taxable wages, leaving the company on the hook for years of unpaid payroll taxes, interest, and penalties. Castle Harbour drew on its technical tax knowledge to craft an insurance solution transferring this risk. The team prepared a persuasive underwriting submission demonstrating the company’s compliance efforts and obtained a policy affirming the tax treatment of the reimbursements. By insuring this exposure, Castle Harbour allowed the buyer to close the deal without a payroll tax cloud on the horizon – preserving the transaction value and sparing the company from a potentially costly post-closing surprise.

Policy type: Tax Insurance (Buyer-Side)
Size: $100MM – $250MM
Sector: Aviation Services

Buyer type: Strategic (Corporate)
Buyer jurisdiction: U.S.
Seller jurisdiction: U.S.

Preserving a Key Tax Election in an M&A Transaction

Castle Harbour was engaged by a financial sponsor to address a latent tax risk related to a previous acquisition structured under Section 338(h)(10) of the tax code.

In the earlier deal, the buyer had elected to treat a stock purchase as an asset acquisition for tax purposes – a valuable election that provides a stepped-up asset basis – but some of the target’s shareholders rolled a portion of their equity into the new company. This partial equity rollover introduced uncertainty about whether the 338(h)(10) election was technically valid. Drawing on its transactional tax expertise, Castle Harbour helped the client mitigate this risk. The team distilled the issue (the potential failure of the tax election due to the rollover) into a clearly defined insured event and approached the insurance market with a comprehensive analysis from tax counsel. Castle Harbour successfully obtained a tax insurance policy that would protect the client if the IRS ever invalidated the election. This coverage preserved the expected tax benefits of the deal and shielded the client from a significant tax cost that would have arisen if the step-up were lost.

Policy type: Tax Insurance (Buyer-Side)
Size: $100MM – $250MM
Sector: Transportation Services

Buyer type: Financial Sponsor
Buyer jurisdiction: U.S.
Seller jurisdiction: U.S.

Overcoming Complex REIT Tax Hurdles for a Seamless Acquisition

Castle Harbour enabled a strategic acquirer to move forward with confidence on a major acquisition by resolving a technical tax exposure involving a Real Estate Investment Trust (REIT).

During diligence, the target REIT discovered an error in its tax accounting methods that required a change in accounting and triggered a large one-time income inclusion (a Section 481 adjustment). This adjustment raised concerns that the REIT might inadvertently violate complex IRS rules (such as the REIT income tests or distribution requirements), potentially leading to penalty taxes or loss of tax benefits. Castle Harbour worked closely with the company’s tax advisors – even incorporating the guidance of a favorable IRS private ruling – to structure a narrowly tailored insurance policy covering the specific risks arising from the accounting change. By securing coverage for those contingent tax exposures, Castle Harbour removed the remaining uncertainty around the REIT’s tax status. The buyer was able to proceed with a seamless acquisition, assured that any unforeseen tax consequences from the REIT’s compliance correction were fully insured.

Policy type: Tax Insurance (Buyer-Side)
Size: $500MM - $1B
Sector: Telecommunications Infrastructure

Buyer type: Strategic (Corporate)
Buyer jurisdiction: U.S.
Seller jurisdiction: U.S.

Safeguarding a Cross-Border Dividend Plan Amid IRS Scrutiny

Castle Harbour assisted an individual client in protecting a complex cross-border dividend strategy that had come under IRS scrutiny.

The taxpayer had restructured an overseas holding company to take advantage of treaty benefits and claim a large dividend as qualified dividend income taxed at a favorable rate. The IRS challenged this plan – questioning the foreign corporation’s residency and treaty eligibility – which threatened to reclassify the dividend as ordinary income subject to a much higher tax rate. In the midst of active Tax Court litigation, Castle Harbour leveraged its expertise in international tax to secure an insurance policy for the contested position. By isolating the specific treaty and residency issues and highlighting a strong legal opinion in the client’s favor, the team obtained coverage that would pay any additional tax, interest, and penalties if the court ultimately ruled against the taxpayer. This gave the client financial certainty and peace of mind to confidently see the case through, knowing a negative outcome would be mitigated by insurance.

Policy type: Tax Insurance (Litigation Risk)
Size: $50MM – $100MM
Sector: N/A (Individual Taxpayer)

Buyer type: Individual Taxpayer
Buyer jurisdiction: U.S.
Seller jurisdiction: Cyprus

Precision Under Pressure: Insuring a Complex Tax Calculation

In a high-profile corporate separation, a buyer faced uncertainty around the accuracy of a large tax calculation stemming from a taxable spin-off.

The seller’s team had estimated approximately $250 million in taxes due on the spin-off, with the buyer inheriting responsibility for any underpayment or overpayment after closing. Castle Harbour was engaged to transfer this gain variance risk to insurers. Working alongside Big Four accounting advisors who had conducted extensive basis and valuation studies, the team presented a compelling case to underwriters that the tax had been calculated correctly. A bespoke tax insurance policy was negotiated to cover any variance between the estimated tax and the actual amount ultimately owed. This solution gave the buyer comfort that an unexpected shortfall in the tax calculation would be indemnified, allowing the deal to close with certainty and no lingering exposure.

Policy type: Tax Insurance (Contingent Tax Risk)
Size: $1B+
Sector: Hospitality

Safeguarding a Tax-Free Spin-Off: Averting a Billion-Dollar Tax Exposure

A corporate client was undertaking a complex spin-off reorganization ahead of a major acquisition.

The transaction was structured to qualify as a tax-free non-taxable spin-off, but if it failed to meet stringent tax requirements, it could have resulted in nearly $1 billion in combined taxes for the parties involved. Leveraging its deep tax and insurance expertise, Castle Harbour articulated the risk to underwriters and negotiated an innovative insurance solution. The team secured coverage for the client’s portion of the potential tax hit – hundreds of millions of dollars – at favorable terms. This approach mitigated the existential tax risk and gave the client the confidence to proceed, knowing that if the spin-off’s tax-free status were ever successfully challenged, the resulting liability would be covered.

Policy type: Tax Insurance (Contingent Tax Risk)
Size: $1B+
Sector: Hospitality

From Red Flag to Resolution: Insuring a Critical Tax Risk

During a high-paced multi-billion dollar M&A process - a material tax issue threatened to derail the deal: the A target’s valuable S-corporation status was at risk of being retroactively invalidated, which could trigger significant unforeseen tax liabilities.

The team quickly identified the exposure during diligence and mobilized its internal tax specialists to assess the severity of the issue and structure a clear narrative for underwriters. Through close coordination with deal counsel, advisors, and insurance markets, we secured an insurance solution covering the identified S-corp qualification risk. By converting a potential deal-breaker into an insurable exposure, the brokers preserved full deal momentum and provided the buyer with critical protection and peace of mind.

Policy type: Tax Insurance (Buyer-Side)
Size: $500MM – $1B
Sector: Logistics