As a result of new IRS regulations, confidentiality language in agreements must be modified to avoid triggering mandatory disclosure requirements. In accordance with the Treasury Department's efforts to address the proliferation of corporate tax shelters, the IRS has recently issued final regulations, effective March 4, 2003, which require all taxpayers to disclose "Reportable Transactions" on their tax returns. To comply with the disclosure requirement disclosure statement, Form 8886 must be attached to the tax return for the year in which the reportable transaction takes place and must also be sent to the Office of Tax Shelter Analysis. Furthermore, to ensure consistency in reporting, the regulations require that material advisors maintain a list of investors who purchased an interest in a transaction, in addition to copies of documents, advice and other information for the same type of transactions that taxpayers are required to disclose.

A material advisor is defined as any person who makes or provides a written or oral statement concerning the tax consequences of a potentially abusive Tax Shelter and receives a minimum fee of $250,000 if all participants are corporations (other than an S-Corp) in connection with the transaction and a minimum of $50,000 for any non-corporate transaction.

The problem is the all encompassing IRS definition of a "Reportable Transaction". The regulations describe six broad categories of transactions that are considered "Reportable Transactions" that require disclosure:

• Transactions offered under conditions of confidentiality
• Specially listed transactions that relate to tax shelters
• Transactions with contractual protection
• Loss transactions
• Transactions with significant book/tax differences
• Transactions involving brief asset holding periods

Therefore, any transaction can be classified as a reportable transaction by the mere fact that it is offered under conditions of confidentiality. The transaction will be categorized as reportable regardless of the tax characteristics of the transaction and whether or not there are tax-related motivations present or not. The term "Transaction" is extremely broad and encompasses virtually every type of agreement. Employment agreements, change of control agreements, license agreements and settlement agreements are all transactions that may fall under the purview of the new disclosure.

The regulations do provide a safe harbor presumption against confidentiality if every person who makes an oral or written statement concerning the potential tax benefits of a transaction provides written authorization to disclose. Generally, the authorization must be without limitation of any kind from the onset of discussions for the presumption to be applicable. Therefore, with the exception of special rules applying to M&A transactions, the presumption will not be available where parties enter into a release of confidentiality restrictions at the time of execution of the agreement.

With respect to potential acquisition of business assets from a corporation or of more than 50% of the stock of a corporation that conducts an active business that the acquirer intends to continue, the authorization to disclose the tax treatment and tax structure can be postponed until the earlier of a public announcement of the transaction, a public announcement of discussions relating to the transaction or the execution of an agreement to enter into the transaction (which will generally be a definitive agreement and which should not include a non-binding letter of intent). The regulations also permit restrictions that are reasonably necessary to comply with the securities laws.

Therefore, as a matter of course, confidentiality language in most agreements should be modified to include language permitting disclosure of the tax treatment and tax structure of the agreement and the transactions contemplated thereunder to avoid being subject to the disclosure and list maintenance rules. We suggest that the following provision be added to all confidentiality provisions:

Notwithstanding anything herein to the contrary, any party to this Agreement (and its employees, representatives or agents) may disclose to any and all persons, without limitation, the tax treatment and tax structure of the transactions contemplated by this Agreement, and all materials of any kind (including opinions or other tax analyses) related to such tax treatment and structure.

Since the rules are already effective, you should consider modifying the confidentiality provisions of any agreements that have already been executed.