Senators Question Tax Shelter Letters

Miers was elected president of the firm Locke, Purnell, Rain and Harrell in 1996 and was made co-managing partner in 1999 when Locke Purnell merged with another firm to create Locke Liddell and Sapp. She served in that position until 2001, when she joined the White House staff.

Under the tax shelter arrangement, the client would create a business partnership and transfer income in the form of payments to that partnership. Those payments would then be written off as losses to offset taxable income, according to the investigations subcommittee. The following year, the partnership would be dissolved. Its funds would be treated as capital gains, and thus would be taxed at a lower rate than ordinary income.

McElhaney yesterday stood by the firm's opinion and said no court has ruled the transaction illegal because the federal government has never prosecuted a case to judgment.

"Just because there's been an opinion by the IRS doesn't mean it's illegal," he said.

But Locke Liddell's legal opinion was repeatedly questioned when it was for sale, not just by prospective clients but also by some at Ernst and Young. In September 1999, a client of Ernst and Young was troubled by the firm's legal opinion.

"I have reviewed the materials you provided to me," the client's lawyer wrote in an e-mail to the accounting firm after examining the Locke Liddell opinion letter, "and from all indications, the transaction appears to be a classic 'sham' tax shelter."

On Sept. 8, 1999, one Ernst and Young tax professional complained that the Locke Liddell letter did not comport with Ernst and Young's own opinion about the deal's legitimacy. The shelter could not even be considered "more likely than not" to be upheld in court, let alone that it "should" be upheld, according to the e-mail.

The tax shelter is not the only Locke Liddell-related issue under scrutiny by senators who must consider Miers's nomination.

In 2000, the firm agreed to pay $22 million to settle a lawsuit stemming from the firm's representation of Russell Erxleben, a former University of Texas star football kicker whose foreign currency trading company was alleged to be a Ponzi scheme. Erxleben had bragged that he had the same law firm as then-Texas Gov. George W. Bush, according to Senate investigators.

In 2001, Locke Liddell settled a class action suit for $8.5 million with investors who alleged they were defrauded in a fake bond scheme operated by firm client Brian Stearns, a Texas businessman sentenced to 30 years in prison after he was found guilty on 80 charges, including money laundering and securities fraud.