By Jonathan Stempel

NEW YORK, Nov 29 (Reuters) - A federal appeals court on Thursday threw out the convictions of two former Ernst & Young LLP partners over illegal tax shelters the accounting firm used to help wealthy people evade income taxes.

By a 2-1 vote, a panel of the 2nd U.S. Circuit Court of Appeals in New York found a lack of evidence to support the convictions of tax lawyers Martin Nissenbaum and Richard Shapiro.

The panel affirmed the related convictions of former partners Robert Coplan, also a tax lawyer, and Brian Vaughn, an accountant. It left intact the conviction of a fifth defendant, investment adviser Charles Bolton, who pleaded guilty, but ordered that his fine be reduced.

Nissenbaum had been sentenced to 30 months in prison, Shapiro to 28 months, Coplan to 36 months, Vaughn to 20 months and Bolton to 15 months. All remained free on bail during their appeals. They were sentenced in 2010.

The defendants were charged over their alleged involvement in five tax shelters sold or implemented by Ernst & Young between 1999 and 2001.

Prosecutors said they cost the government $2 billion in taxes by helping people with more than $10 million of taxable income create paper losses, or be taxed at the capital gains rate rather than the higher ordinary income rate.

These shelters were created by an Ernst & Young unit known as VIPER, which stood for "value ideas produce extraordinary results."

Many wealthy people use tax shelters to reduce or defer tax liabilities.

TAX EVASION AND CONSPIRACY

The partners had been convicted in May 2009 on tax evasion and conspiracy charges after a 10-week jury trial. Coplan and Nissenbaum were also convicted of obstructing the IRS, and Coplan and Vaughn of making false statements to that agency.

Bolton pleaded guilty to a single conspiracy charge, but challenged the length of his prison term. He and the government agreed that his fine should be reduced from $3 million to no more than the statutory maximum of $250,000.

Ernst & Young was not charged. It has said it cooperated with authorities.

Circuit Judge Jose Cabranes wrote the majority opinion and was joined by Circuit Judge Joseph McLaughlin. Circuit Judge Amalya Kearse dissented in part, saying she would have upheld Shapiro's conviction and most of Nissenbaum's.

Jerika Richardson, a spokeswoman for U.S. Attorney Preet Bharara in New York, declined to comment.

Nathan Lewin, a lawyer for Nissenbaum, said he was gratified that his client's conviction was reversed.

"We are thrilled that the court reached the right and just result," said Alexandra Shapiro, a lawyer for Richard Shapiro, in an email.

Dennis Riordan, a lawyer for Coplan; Robert Anderson, a lawyer for Vaughn; and Marc Garber, a lawyer for Bolton, did not immediately respond to requests for a comment or had no immediate comment.

Amy Call Well, an Ernst & Young spokeswoman, had no immediate comment.

In 2005, rival accounting firm KPMG LLP narrowly avoided an indictment by reaching a $456 million deferred prosecution agreement with the government in a separate criminal tax shelter case.

The case is U.S. v. Coplan et al, 2nd U.S. Circuit Court of Appeals, No. 10-583.

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