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IRS Amends Tax Shelter Regulations for Private Confidentiality Agreements

Corporate Update
May 2004

Last year the Internal Revenue Service (IRS) issued final regulations requiring taxpayers to disclose certain transactions as tax shelters. The regulations identified six categories of "reportable transactions." Tax-motivated transactions offered to taxpayers under conditions of confidentiality are one type of transaction targeted by the IRS. Since their enactment, these regulations have been subject to an overly broad application to confidential transactions. Consequently, the IRS recently amended the regulations to scale back the circumstances under which a confidential transaction must be disclosed.

Unfortunately, under last year's final regulations, many standard non-disclosure or confidentiality provisions or agreements ran the risk of creating a reportable transaction even where there was no tax avoidance purpose. For example, a letter of intent to acquire a business containing a standard non-disclosure provision was considered a tax shelter unless it provided a specific exception that allowed disclosure of the transaction's tax treatment. Since the regulations were issued, such agreements often have included language expressly authorizing disclosure of the tax treatment and tax structure of the transactions to ensure the transaction was not reportable under the tax shelter regulations.

In response to concerns raised by the overly broad application of the regulations to confidential transactions, the IRS recently amended them. Under the new regulations, a confidential transaction is only reportable if:

  1. An adviser limits a taxpayer's ability to disclose the tax treatment or tax structure of a transaction in order to protect the confidentiality of the adviser's strategy; and
  2. The taxpayer has paid an adviser a minimum fee ($250,000 for corporate taxpayers or $50,000 for other taxpayers).

Since the limitation on the ability to disclose must now be imposed by an adviser, most standard confidentiality agreements entered into between parties involved in a transaction will no longer be considered reportable transactions.

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If you have a media request or need an attorney with particular knowledge for comment, please contact Susan Steberl, Director of Marketing, at 414.287.9556 or ssteberl@gklaw.com.

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