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.

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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.