• Gone Are The Tax Confidentiality Waivers
  • January 23, 2004
  • Law Firm: Pepper Hamilton LLP - Philadelphia Office
  • Early in 2003, the IRS released rules about "reportable transactions" (see our March 2003 Client Alert). One of the categories of reportable transactions included transactions that were bound by terms of confidentiality. Due to the vague scope of the rules, but the potentially significant penalties for failing to disclose participation in a reportable transaction, taxpayers strived to disclaim any "tax confidentiality." The disclaimers were put into letters of intent, term sheets, confidentiality agreements, PPMs and contracts that were labeled "confidential."

    The IRS received a barrage of comments on the overreaching effect of the regulation and the need to modify the rules to better capture the information that it was seeking.

    On December 29, 2003, the IRS released revised regulations that significantly narrow the scope of confidential transactions required to be reported. Under the revised rules, "confidential" means a transaction in which a tax advisor places a limitation on disclosure by the taxpayer of the tax treatment or the tax structure of the transaction, and in which the advisor has received a minimum fee.

    The new rules apply retroactively to January 1, 2003, so transactions in which you may not have included the tax confidentiality waiver are not reportable transactions.

    Are confidentiality waivers still necessary?

    No. Taxpayers may stop including tax confidentiality waivers in PPMs, LOIs, Term Sheets, Confidentiality Agreements and other contracts.

    Do you need anything from your tax advisor?

    If a tax advisor to the transaction is providing tax advice that is referred to as "proprietary" or "exclusive", or requests with a wink and a nod that you not disclose it to another person, you should request a specific waiver of confidentiality, to be able to confirm to the IRS that there wasn't an agreement as to the non-disclosure of the information.