As discussed in a prior “Did You Know,” pre-closing income tax liabilities have historically not been much concern for the buyer of LLC interests, since the income of LLCs (taxed as partnerships) is not a liability of the target company but its selling partners. However, under the “new” 2018 partnership audit procedures, any tax liability arising from an audit of a partnership (LLC) must be paid by the LLC itself unless the LLC makes a “push out“ election causing the members of the LLC to pay the tax. Therefore, an audit of a pre-closing tax year can result in tax on the LLC itself.

The solve has been for buyers to require partnership equity sellers to agree in the purchase agreement to make a push out election so the risk of the tax liability is on the seller not the buyer. However, now in transactions where the buyer is obtaining rep and warranty insurance, this may become less of a sticking point in negotiations. R&W insurers are willing to consider insuring against entity tax liabilities even without the sellers agreeing to a push out election depending on the seller’s overall organizational structure, the extent of partnership tax due diligence conducted by buyer’s tax due diligence advisors, and the overall tax risk profile of the target partnership. When offered, this coverage typically will not have a meaningful impact on the cost of the insurance. Of course, you will want to confirm with the insurance provider before agreeing on this point.

Bottom Line: The availability of coverage under a R&W policy can now eliminate disagreements over a push out election and at little, if any, additional cost.

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