TAX TIP FOR THE M&A CROWD
Byron Egan, that plain talkin’ Texan (resident in the Dallas office of JacksonWalker), gave a taaallllkkk (said with the best Texas drawl you can muster) yesterday addressing the IRS’s new tax shelter disclosure rules.
As Byron noted, the topic of his presentation could well have been titled “The Law of Unintended Consequences.” If you read further you’ll see why. If you just want the “magic language” it’s towards the end of this blog. Be advised though, we are told by responsible sources that the IRS has declined to bless this or any other language attempts to accommodate the IRS rules. If there are any IRS staffers out there you might let us know if we’re getting close. Gulp, I hope that revelation (and subsequent very tiny bit of levity) doesn’t get me flagged for an audit. Hey, it was Wilson’s idea to put that in! That’s spelled W I L S O N C H U.
Here’s the text of Byron’s materials provided at yesterday’s presentation. I checked with Byron and even though he has a copyright on this material (and what good lawyer wouldn’t) he is ok with you using the “magic language”):
DRAFTING CONFIDENTIALITY AGREEMENTS AFTER
IRS REPORTABLE TRANSACTION REGULATIONS
Byron F. Egan, Dallas, TX*
On February 28, 2003, the Internal Revenue Service (“IRS”) issued final regulations relating to the disclosure of certain reportable transactions, the registration of certain tax shelters and tax shelter list maintenance requirements. T.D. 9046, 2003-12 I.R.B. 614 (February 28, 2003). These regulations impose a special reporting requirement that could require the reporting of ordinary commercial transactions to the IRS as tax shelters IF they contain typical confidentiality provisions. These new IRS regulations are leading many people to revise their confidentiality agreements to exclude from confidentiality matters relating to tax treatment or tax structure of transactions.
While the purpose of these regulations is to require taxpayers to report tax shelter transactions, the regulations were drafted so broadly that they could apply to certain commercial transactions that do not involve a tax shelter. One of the provisions of the new regulations requires reporting to the IRS of transactions subject to conditions of confidentiality with respect to the tax treatment or tax structure of the transaction (as those terms are broadly defined in the regulations), including certain acquisition agreements, settlement agreements, employment agreements and private placement memoranda. There are limited exceptions (i) where the restrictions on disclosure of tax treatment or tax structure are necessary to comply with applicable securities laws or (ii) for a taxable or tax free acquisition of (x) historic assets of a corporation that constitute an active trade or business or (y) more than 50% of the stock of a corporation, provided that the parties must be permitted to disclose the tax treatment and tax structure of the acquisition transaction no later than the earlier of: (A) the date of the public announcement of discussions relating to the transaction, (B) the date of the public announcement of the transaction, or (C) the date of the execution of an agreement to enter into the transaction. The regulations further grant a presumption of nonconfidentiality if there is a written disclosure authorization in the form provided by the regulations that excludes from confidentiality matters relating to the tax treatment or tax structure of the transaction. See Overview of Reportable Transaction Regulations by William H. Hornberger (July 24, 2003), which can be found at http://www.jw.com/site/jsp/featureinfo.jsp?id=10.
Set forth below is a form of disclosure authorization intended to conform to these IRS regulations:
(c) Certain Tax Information. Notwithstanding anything herein to the contrary and except as reasonably necessary to comply with applicable securities laws, any of Buyer, Seller or any Shareholder (and each employee, representative or agent of any of Buyer, Seller or any Shareholder) may disclose to any and all Persons, without limitation of any kind, the U.S. federal income tax treatment (as defined in Treas. Reg. § 1.6011-4) and U.S. federal income tax structure (as defined in Treas. Reg. § 1.6011-4) of the transactions contemplated by this Agreement and all materials of any kind (including opinions or other tax analyses) that are or have been provided to any of Buyer, Seller or any Shareholder relating to such tax treatment or tax structure.
* Copyright© 2003 by Byron F. Egan. All rights reserved. Byron F. Egan is a partner of Jackson Walker L.L.P. in Dallas, Texas. Mr. Egan is a former Chairman of the Texas Business Law Foundation and is also former Chairman of the Business Law Section of the State Bar of Texas and of that Section’s Corporation Law Committee. Mr. Egan is Vice-Chair of the ABA Business Law Section’s Negotiated Acquisitions Committee and former Co-Chair of its Asset Acquisition Agreement Task Force, which published the ABA Model Asset Purchase Agreement with Commentary (2001). He is also a director of the Texas General Counsel Forum and a member of the American Law Institute.
The author wishes to acknowledge the contributions of the following in preparing this paper: William H. Hornberger of Jackson Walker L.L.P. in Dallas, Texas.
Welcome my friends to another slippery slope.
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