Miers's Firm Backed Sham Shelter, Senate Report Says

Bloomberg | October 10, 2005

The Dallas law firm headed by U.S. Supreme Court nominee Harriet Miers helped accounting firm Ernst & Young LLP sell a sham tax shelter in 1999 by providing letters to shield customers from IRS penalties, a Senate investigation found.

The Senate Permanent Subcommittee on Investigations said in February that the firm, Locke, Liddell & Sapp, provided ``deficient'' opinion letters to support the shelter, which was used to convert highly taxed ordinary income into lower-taxed capital gains. Ernst & Young sold the shelter to more than 132 taxpayers, netting fees of more than $27.8 million, the report said. The Internal Revenue Service banned the transaction in May 2002.

``In the 1990s and the early 2000s, the IRS did not move real fast in this area,'' said Joe Kristan, a Des Moines, Iowa, certified public accountant who tracks tax shelters. ``You could sell a lot of these things before the IRS found out about them.''

Locke, Liddell & Sapp's endorsement of the tax shelter may complicate Miers's quest for Senate confirmation to the Supreme Court given that she headed the firm in 1999 and President George W. Bush emphasized that in nominating her. Republicans and Democrats have questioned Miers's qualifications for the high court and conservatives have expressed doubts about her positions on abortion and other issues.

Locke, Liddell & Sapp ``issued legal opinions'' for the shelters and typically received $50,000 in fees for each letter, the Senate report said. The law firm's involvement was disclosed by the journal Tax Notes. Miers was co-manager of the firm from 1999 to 2001.

Abusive Shelters

The Senate began cracking down on abusive tax shelters in 2004 with legislation that bans specific transactions, enacts new rules of conduct for tax professionals and imposes new penalties on tax shelter promoters. Lawmakers plan more anti-shelter legislation, Senate Finance Committee Chairman Charles Grassley has said. Grassley, who is also a member of the Senate Judiciary Committee that will review Miers's nomination, couldn't be reached for comment today.

Miers isn't a tax attorney and ``was not tied to this in any way,'' said Jerry Clements, head of Locke, Liddell & Sapp's litigation department. Clements said the firm ``stands by our reputation for high quality legal work in the tax field, and we stand by the advice and opinions we gave these clients.''

``The transactions involved appropriate tax strategies,'' White House spokesman Allen Abney said, noting that the firm said Miers, in any event, wasn't involved with the shelter.

Deferred Swap

The laws firm's role made it easier for Ernst & Young to sell the tax shelter, called a Contingent Deferred Swap, the Senate report said.

Most tax shelters sold during the late 1990s featured an opinion letter from a law firm that was designed to limit penalties by giving the taxpayer plausible grounds to deny knowledge that anything was improper.

At least one unidentified Ernst & Young client dubbed the transaction a ``classic sham tax shelter'' and criticized the ``weak legal analysis'' provided by Locke, Liddell & Sapp, the Senate report said.

Ernst & Young paid a $15 million fine to settle a case with the IRS over its tax shelter promotions in July 2003.

Last modified October 11, 2005