Confidentiality agreements no longer need to contain boilerplate language allowing the parties to disclose the “tax treatment” and “tax structure” of the transaction.
The Internal Revenue Service requires US corporations and brokers to report transactions that are possible corporate tax shelters. It has issued a list of six factors that it believes may be a sign that a transaction is a tax shelter. If any of them is present in a deal, then the details of the transaction must be reported to the IRS. One of the factors is that the transaction is “offered to the taxpayer under conditions of confidentiality.” In February 2003, the IRS said a general confidentiality clause of the kind found in most deals is enough to require registration as a tax shelter unless it is clear that “the taxpayer’s disclosure of the tax treatment or the tax structure of the transaction is [not] limited in any manner.” Lawyers rushed to put boilerplate language in confidentiality agreements allowing free disclosure of tax structures.
In late December, the IRS conceded that it had cast the net too widely. The agency said it has concluded that disclosure should be required only in situations where advisers are paid a fee of at least $250,000 and the advisers insist on confidentiality. It is not a problem for one of the parties to the transaction to insist on confidentiality, the IRS said.
In the future, engagement letters with advisers should make clear that the adviser is not insisting that the “tax treatment” or “tax structure” of the transaction be kept confidential. No further carve out from confidentiality restrictions is required.