Miers' Firm Helped Ernst & Young Sell Abusive Tax Shelter

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U.S. Supreme Court nominee Harriet Miers headed a Dallas law firm that helped Ernst & Young LLP sell a tax shelter that was later termed abusive, according to a Senate investigation.

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The law firm, Locke, Liddell & Sapp, provided “deficient” opinion letters to support the shelter in 1999, according to the Senate Permanent Subcommittee on Investigations. Before the transaction was banned bv the Internal Revenue Service in 2002, Ernst & Young sold the shelter to more than 132 taxpayers, and earned more than $27.8 million in fees, the report said, according to Bloomberg.

The shelter, called a Contingent Deferred Swap, involved converting ordinary income into capital gains income, which is taxed at a lower rate. The report said that the law firm's opinion letter on the shelter eased the way for Ernst & Young. The letter was designed to give the taxpayer the basis to deny any knowledge of improper actions.

The letter told investors that they "should" be able to beat the IRS in court, the Washington Post reported. Senate investigators said Miers's law firm made about $3.5 million on transactions that were considered “potentially abusive or illegal.” The law firm's involvement was disclosed by the journal Tax Notes.

Miers co-managed the firm from 1999 to 2001, and the issue may serve as a complication as she seeks Senate confirmation for the high court.

Miers isn't a tax attorney and “was not tied to this in any way,” Jerry Clements, head of Locke, Liddell & Sapp's litigation department, told Bloomberg. 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.”

White House spokesman Allen Abney said, “The transactions involved appropriate tax strategies.”

Ernst & Young paid a $15 million fine in July 2003 to settle IRS allegations related to its marketing of tax shelters.

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