Goldman Sachs approached Paramount in 1989 with an idea how to generate capital losses to shelter a large gain the company had from sale of a subsidiary.  Paramount ultimately did the transaction with Merrill Lynch, but not before Eugene Meyers, Paramount senior vice president and tax counsel, had a number of meetings with David Ackert, an investment banker at Goldman Sachs, to understand how the transaction would be structured and the tax risks.  Paramount eventually paid Goldman Sachs $1.5 million for bringing the idea to it.

On audit, the IRS issued a summons to Ackert.  Paramount claimed its conversations with Ackert were protected by attorney-client privilege.  The US court of appeals for the 2d circuit said they were not.  The communications between Meyer and Ackert were not between an attorney and client.

Congress extended a form of attorney-client privilege last year to communications about tax planning with accountants.  However, the privilege does not apply to advice concerning “corporate tax shelters.” The IRS is expected to issue a definition sometime this spring.

Keith Martin