January 12, 2004

Ding-Dong The Witch is Dead!

Thanks to IRS tax-shelter regs imposed mid-last year, we deal lawyers were begrudgingly modifying confidentiality provisions of most agreements, including acquisition related agreements, exclude certain tax-related matters. Under those regulations, participation in a “confidential transaction” resulted in reporting and record-keeping requirements. To avoid these burdens, parties were being advised to expressly authorize disclosure of tax treatment and tax structure.

GOOD NEWS!! On December 29, 2003, the IRS issued new regulations that significantly change what is considered to be a “confidential transaction” for these purposes. Under the new regulations, the definition of a “confidential transaction” is limited to transactions in which an advisor who is paid a significant fee places a limitation on disclosure of the tax treatment or tax structure of the transaction. Confidentiality obligations that are imposed solely by the parties to a transaction will not cause a transaction to be a “confidential transaction” for purposes of these regulations. There is some uncertainty about how these new rules will be applied to transactions in which a participant is both an advisor and a principal, such as certain financial transactions in which a commercial bank or investment bank is both an advisor and a party to the transaction.

These new regulations are effective for transactions entered into on or after December 29, 2003, and they may also be relied on for transactions entered into on or after January 1, 2003 and before December 29, 2003. Accordingly, the tax confidentiality carve-out language that had become standard in commercial agreements is generally not needed. In addition, the failure to include the language (or the inclusion of ineffective language) in prior agreements should not have any adverse consequences.

Thanks to Vicki Martin, tax partner at Haynes and Boone, for this guest blog.