ASATS Case Study: Tax-Free Spin-Off - US $350m Tax Insurance Policy Placed in 2013

Client situation

A public company client -- a leading foreign multinational in the manufacturing industry -- spun off a U.S. business unit. Less than a year later, client sold that unit to a private equity firm.

Taxpayers no longer receive "comfort" rulings on whether a spin-off transaction qualifies for tax-free treatment under Section 355 of the Tax Code. For example, the IRS will not rule on certain key technical aspects such as the "business purpose," "device" and Section 355(e) "plan" requirements.

Potential tax liability was approximately US$ 270m. Due to the magnitude of the risk, client desired tax insurance to protect against a successful IRS challenge of the tax-free nature of the spin-off.

Aon solution

Aon Transaction Solutions structured and secured the largest tax insurance policy placed in the past decade.

US$ 350m limit; US$ 5m retention; 7 year period; US$ 13m premium.

The tax opinion policy covered (1) the full amount (less the retention) of potential U.S. federal and state income taxes, plus interest and penalties, following a successful challenge by the IRS, and (2) a "gross-up" (up to the US$ 350m limit) for the tax on any proceeds received by client under the tax opinion policy.