Tax Liability Arising Due to Confidentiality Clauses in Settlement Agreements

Geoff Trachtenberg

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Did you know that a confidentiality clause can have tax consequences? This was the subject of a United States Tax Court opinion in Amos v. IRS (2003), the case where Dennis Rodman kicked a courtside TV cameraman in the groin.

The Court held that, if a portion of a settlement is attributable to a confidentiality agreement, that portion is taxable.

It is not clear what the long-term effects are for this holding, but there are ways to deal with it. For example, you will want to make sure any clause in a settlement agreement provides that the confidentiality agreement is mutual, and that no additional consideration is being paid for it. In the alternative, you should negotiate an additional and specific amount being paid in consideration for a confidentiality clause, recognizing the tax implications.

Obviously, consult a tax professional for up to date tax advice on this type of issue.