Deal Point: A corporation is engaged in the business of manufacturing office supplies and of producing business software. Because of the very different natures of the two lines of business, it has been decided that the two businesses could operate more efficiently as two separate entities. The shareholders and board of directors of the corporation agree that the office supply business should be spun-off. There is some concern, however, that the IRS will contend that the two lines of business should have been operated as two separate subsidiaries, rather than being separated altogether, and will therefore determine that increased efficiency is an insufficient business purpose for the spin-off.

Transactional Insurance Solution: The corporation arranges for the spun-off office supply business to secure tax insurance. Although the subsidiary will remain liable to the former parent corporation for any adverse tax consequences, the former parent corporation will be assured that it can meet any tax obligation that might arise from a challenge to the business purpose of the transaction.