Senators Question Tax Shelter Letters

Miers's Law Firm Sold Documents Backing Arrangement the IRS Criticized

With Senate confirmation hearings set for Nov. 7, Supreme Court nominee Harriet Miers pays a courtesy call on Sen. David Vitter (R-La.). (By Charles Dharapak -- Associated Press)

Senators from both parties are pressing Supreme Court nominee Harriet Miers about her former Texas law firm's lucrative business helping to promote tax shelters that were subsequently deemed abusive by the Internal Revenue Service.

The actions of the firm Locke Liddell and Sapp, which Miers headed for much of the 1990s, received glancing scrutiny early this year, when the Senate Permanent Subcommittee on Investigations released a scathing report on the tax shelter industry. The report quoted the legal adviser of a potential investor as blasting the firm for effectively signing off on a "classic 'sham' tax shelter."

Now that the firm's former co-managing partner has been nominated to the Supreme Court, senators are zeroing in on Locke Liddell's efforts.

Sen. Norm Coleman (R-Minn.), the chairman of the investigations subcommittee, said yesterday he is "very seriously concerned" about the firm's sale of cookie-cutter legal opinions, attesting to the legitimacy of tax shelters promoted by accounting giant Ernst and Young. He said he will raise it personally with Miers today.

"I have a high standard for the ethics of a Supreme Court justice," Coleman said. "These were very questionable transactions, and the volume of work done on this was substantial -- in the millions of dollars."

In the late 1990s, as the stock market boomed and the rich accumulated wealth at unprecedented rates, the major accounting firms went into business developing and selling intricate ways to shelter income from taxation. They would then refer clients to prominent law firms such as Locke Liddell, which would issue opinion letters that individuals could present to the IRS as a defense for their actions. The tax shelters involved funneling income through short-lived business partnerships that could be written off as losses.

Sen. Max Baucus (Mont.), the ranking Democrat on the Finance Committee, sent the firm a five-page letter last week, demanding detailed explanations about Locke Liddell's activities on behalf of Ernst and Young's Contingent Deferred Swap tax shelter, which fell under IRS scrutiny in 2000 and was designated as abusive in 2002.

Such an inquiry could spell still more trouble for a nominee already facing questions about her credentials and political beliefs. White House spokesman Dana Perino said the matter was not relevant to Miers's nomination because she was not involved.

"Harriet Miers had nothing to do with the tax shelter transactions at issue, nor did she work with the clients involved. The majority of the relevant transactions took place after Ms. Miers had left the firm," Perino said.

In fact, just over half of the transactions involving Locke Liddell were done while Miers was with the firm, according to John H. McElhaney, a lawyer at the firm. Miers is not a tax lawyer, but as co-managing partner, she should have been aware of such a lucrative part of the firm's business, Senate investigators from both parties said. McElhaney agreed in an interview yesterday that given the flow of money involved -- an average of $1.8 million a year between 1999 and 2001 -- "it's a fair assumption that she was aware" of the activity.

Ernst and Young began work on the Contingent Deferred Swap shelter in 1998, and then enlisted Miers's firm to provide clients with a letter indicating that the shelter "should" be upheld in court, according to the investigations subcommittee.

Typically, Ernst and Young would receive $250,000 per sale. Locke Liddell would get $50,000 or $75,000 a letter, McElhaney said. From 1999 to April 2002, 74 such transactions were sold to 142 taxpayers, with Locke Liddell issuing 132 opinions worth as much as $5.4 million, McElhaney said.