CONFIDENTIALITY AGREEMENTS should contain language making clear that the “tax treatment” and “tax structure” of the transaction are not confidential.

CONFIDENTIALITY AGREEMENTS should contain language making clear that the “tax treatment” and “tax structure” of the transaction are not confidential.

April 01, 2003

CONFIDENTIALITY AGREEMENTS should contain language making clear that the “tax treatment” and “tax structure” of the transaction are not confidential.

This is important if the parties want to avoid having to disclose the details of the transaction to the Internal Revenue Service.  Revised corporate tax shelter regulations that the IRS issued in late February identify six broad categories of transactions that the agency considers potential tax shelters.  Such transactions must be reported to the IRS.  One of the triggers for reporting is where the transaction was “offered to a taxpayer under conditions of confidentiality.”

In order to avoid this trigger, it must be clear that “the taxpayer’s disclosure of the tax treatment or the tax structure of the transaction is [not] limited in any manner.” However, there can be restrictions reasonably necessary to comply with securities laws.

The IRS suggested that it would be a good idea to have everyone who “makes or provides a statement, oral or written, to the taxpayer about the potential tax consequences” sign an express written authorization substantially as follows: “The taxpayer (and each employee, representative, or other agent of the taxpayer) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transaction and all materials of any kind (including opinions or other tax analyses) that are provided to the taxpayer relating to such tax treatment and tax structure.”

The IRS wants such authorizations signed within 30 days after the discussions start with the promoter or adviser.  When this is done, the deal will not ordinarily be considered confidential.

Keith Martin