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.

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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.