NEW YORK, NOV. 16 -- The Securities and Exchange Commission last year entered into secret-letter agreements concerning payment of back income taxes with lawyers for jailed investment banker Dennis B. Levine and others because the SEC was worried about unfavorable publicity over its position on taxes, sources said today.

During negotiations with attorneys for admitted insider trader Levine and several of Levine's associates, SEC lawyers chose to address the tax issue in private-letter agreements -- rather than in the main settlement documents released publicly -- because they were concerned that the public would focus on the SEC's position on the tax issue, rather than on the law enforcement aspects of the cases, the sources said.

Levine and an admitted confederate in his insider trading ring, Robert Wilkis, are battling the SEC over the disposition of $14.9 million in illegal insider stock trading profits the pair has surrendered to the SEC.

Lawyers for Levine and Wilkis say their clients' tax bills -- which come to more than $14 million, or about the total of the funds disgorged to the SEC -- should be paid before any other claims. But the SEC wants to use some of the $14.9 million to satisfy investors who were defrauded by the pair's illegal trading activity.

Sources said that SEC lawyers were concerned that if the letter agreements on taxes were disclosed publicly when the landmark insider trading cases were announced last year, public attention would be diverted to the fact that the huge sums forfeited by Levine and Wilkis might be used entirely to pay their taxes. The SEC received widespread favorable publicity over its settlement with Levine -- at the time the case was the largest insider trading settlement in U.S. history.

The contents of the letter-agreements on taxes signed during secret settlement negotiations between Levine, Wilkis and the SEC have never been disclosed. Defense and SEC lawyers disagree about whether the letters obligate the SEC to pay Levine and Wilkis's back taxes before other claims.

Levine has pleaded guilty to illegally trading stocks based on inside information about upcoming corporate takeover events and also to evading taxes on his profits. Levine has turned over $11.6 million in assets to a court-appointed receiver, attorney Sheldon I. Goldfarb. Wilkis has forfeited $3.3 million.

SEC enforcement chief Gary Lynch said today he did not believe the SEC kept the letter-agreements private because it was concerned about unfavorable publicity over the tax issue. "It was very clear early on that tax claims could be made," Lynch said. "There was never as far as I know any attempt to hide that in any way."

Lynch said the letter agreements were not disclosed publicly because they "simply stated what the interpretation was that was in the {settlement} agreement. ... Comfort was sought on the fact that tax payments could be eligible claims."

In a related development, as part of a court-supervised process designed to dispose of the Levine and Wilkis assets, the SEC today proposed a plan under which about $8 million of the $14.9 million forfeited by Levine and Wilkis would be used to pay investors who were defrauded by the pair's illegal stock trading. Under the SEC's proposed plan, about $7 million of the available funds would be used to pay back taxes owed by the two men.

The SEC's proposed plan is "an attempt to recognize that they {Levine and Wilkis} have good claims and that investors have good claims," said Thomas Newkirk, the SEC's chief litigation counsel.

Attorneys for Levine and Wilkis have vowed to fight in court any plan that does not provide for full payment of the pair's back taxes. Martin Flumenbaum, Levine's attorney, said last week that the SEC promised during settlement negotiations that back taxes would be paid out of any funds turned over to the SEC. Lawyers for the SEC have said that no such promises were made.

The dispute will be aired before a federal judge at a hearing scheduled for Dec. 18.