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Income tax indemnifications are contractual arrangements established between two parties whereby one party will reimburse the other for income taxes paid to a taxing authority related to tax positions that arose (typically) prior to a transaction. Income tax indemnifications can arise from a number of circumstances, including business combinations, spin-offs and IPOs. Common scenarios, including the general direction of indemnification arrangements, are summarized below:
Scenario
Indemnifying
Party
Indemnified
Party
Sale of a subsidiary that previously filed a separate tax return
Seller
Buyer
Sale of a subsidiary that previously filed as part of a consolidated tax return
Seller
Buyer
Spin-off, IPO or carve-out of an entity that previously filed a separate tax return
Previous owner
New entity or shareholders
Spin-off, IPO or carve-out of an entity that previously filed as part of a consolidated tax return
Previous owner
New entity or shareholders
The accounting for indemnification arrangements described in the next sections differs from the accounting that would result if the entity purchased insurance coverage from a third party to mitigate its exposure. In that situation, the entity should consider the guidance in ASC 720-20, Insurance Costs. Indemnification arrangements may also arise in a number of commercial or financing transactions such as leases; however, the accounting for such arrangements is not addressed in this section.
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