Each calendar year, the Internal Revenue Service (IRS) makes modifications and amendments to the tax code, but through each iteration, the Low-Income Housing Tax Credit (LIHTC), Solar Investment Tax Credit (ITC) and Historic Tax Credit (HTC) have remained intact. These credits were created to encourage the flow of private funds into specific solar, low-income housing and historic preservation projects. When a guideline-compliant project is completed and tax credits are generated, taxpayers (e.g. public and private entities, as well as high net worth individuals in certain instances) can apply the credits on their federal and state tax returns.
In many instances, the tax credits are not used by the owner or developer of the project (which creates the credits) and in turn, they are sold to independent third parties (e.g. financial institutions and large public companies). While the tax credits tend to be generated at the “placed in service date” (normally when the project is completed), the developer, owner, or manager must continue to comply with IRS guidelines to avoid the tax credits being recaptured. The “compliance window” can be extended for multiple years after a project is completed, leaving the credit “buyer” with a lengthy exposure related to the recapture from non-compliance. The following flowchart illustrates this process.
There are multiple insurance products in the marketplace that are construction-oriented, but very few focus on the third party financial consequences resulting from non-compliance by the owner or operator. Therefore, in collaboration with other insurance markets, we are offering the Tax Recapture Policy to trigger based on the material non-compliance factors specific to each project/
credit. This is a manuscript policy form that takes language from property, casualty, professional and management liability-oriented contracts to create a unique solution to this very specific issue.
The product targets best in class owners, operators, and managers who are characterized by:
• A management team experienced in the tax credit developments/investments field
• A strong balance sheet and a willingness to ESCROW funds for longer-term compliance/IRS defense
• The proactive use of industry experts in the engineering, valuation, legal, accounting and tax world
• A project approach that is robust and easily repeatable
Who is the Insured?
The limited liability company created specifically for the development project is listed as the Named Insured, as well as the managing member (or tax matter partner). AmWINS can also add a loss payee endorsement listing the institution that is purchasing the tax credits, allowing a paid claim on the policy to be sent directly to that institution.
How long is the policy period?
In general, the policy would incept at the “placed in service” date and the expiration date would mirror the end of the IRS recapture and compliance period for the tax credits (up to an initial period of six years).
What limit can be purchased?
The limits purchased reflect the tax credits generated by the project and can be grossed up to include coverage for the estimated fines and penalties associated with the recapture of the tax credits in instances of a full recapture.
What type of policy will be received?
The policy is a claims-made and reported policy, with any claims payment based on a final (non-appealable) adjudication/ determination in tax court. It is not an All Risk policy – the policy will only respond to specific insurable events (“insurable triggers”) and claims payment will be influenced by the exclusions listed in the policy.
LEGAL DISCLAIMER Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.