Enron cooked its tax returns, too ; Report advises crackdown on firms

Patrice Hill, THE WASHINGTON TIMES
1,009 words
14 February 2003
The Washington Times
A01
English
(Copyright 2003)

Enron Corp. manipulated its tax returns much like it did its books, manufacturing paper losses that enabled it to escape paying taxes for four years even as it boasted of big profits on Wall Street.

That conclusion of the Joint Committee on Taxation's yearlong investigation into Enron's tax records yesterday appears likely to spark a major overhaul of corporate tax law much like the disclosure of Enron's lies to stockholders a year ago sparked a landmark rewriting of securities laws.

Senate Finance Committee Chairman Charles E. Grassley, Iowa Republican, called the panel's 2,700-page report "shocking" and vowed to crack down on corporate manipulators of the tax code and prohibit schemes like Enron's in the future.

"The report reads like a conspiracy novel, with some of the nation's finest banks, accounting firms and attorneys working together to prop up the biggest corporate farce of this century," he said, referring to the now-bankrupt Enron and such tax, financial and legal advisers as Bankers Trust, J.P. Morgan Chase and Vinson & Elkins.

Just as Enron twisted the role of supposedly independent auditor Arthur Andersen into one of an accomplice in a massive securities fraud, it turned its shop of tax preparers "into a profit center where complexity was an ally and bending the rules a partner in the search for more paper gains," Mr. Grassley said.

In one charade that helped Enron generate more than $2 billion in manufactured tax benefits during the late 1990s, Bankers Trust flew an Enron executive to the posh Boca Raton Resort and Club in Florida for a junket during which he apparently did nothing but gamble, play golf, and enjoy leisurely meals and cruises, Mr. Grassley said.

"Money, money, money. Money above honesty in financial accounting and tax-return compliance. Money above professional and business ethics," he said. "It's clear that that's what it's all about."

Mr. Grassley said he was worried that some among the crowd of K Street tax lobbyists gathered at the committee's airing of the report yesterday might get ideas for constructing their own tax schemes from reading the details of Enron's complicated deals.

He said he and Sen. Max Baucus, Montana Democrat and the committee's head last year, are determined to "shut down these tax schemes or anything like them." They made yesterday the effective date of their reforms.

"This report is going to be the genesis of some major changes in the tax code," Mr. Baucus said.

Senate Minority Leader Tom Daschle, South Dakota Democrat, called the report "a call to action." He added, "And we will act."

The report found that Enron constructed 12 large structured transactions with financial partners between 1995 and its December 2001 bankruptcy filing that, rather than having legitimate business purposes, had the goal of generating income for Enron's financial statements through a reduction in taxes.

The deals enabled Enron to avoid paying any federal income taxes between 1996 and 1999, while claiming only $63 million in tax liabilities in 2000 and 2001. During most of those years, the company's book profits and stock price were soaring. Its partners and advisers, meanwhile, earned $88 million in fees.

The deals, with names like "projects Renegade, Tanya, Valor, Condor and Cochise," were designed to enable Enron to deduct the same tax loss twice or to claim depreciation expenses that were not valid, the report said.

An Enron chart stated that the company's cumulative earnings from tax planning amounted to more than $1 billion for 1995 to 1999, and that Enron contemplated that the various tax schemes would operate for years, even decades.

"Enron's behavior illustrates that a motivated corporation can manipulate highly technical provisions of the law to achieve significant unintended benefits," said the report, presented by Lindy L. Paull, chief of staff of the joint committee.

Enron created a small pool of "incestuous" outside advisers who participated in the deals and in many cases gave their legal and financial blessings, knowing that the deals served no legitimate purpose, Mrs. Paull said.

While the parties were technically independent from one another, as required by the tax laws, their only reason for the transactions was the mutual goal of minimizing their taxes, she said.

"We were just shocked by the ability of the company to produce these kinds of results with the complicity of other folks who were willing to go along with them," said Mrs. Paull, who stopped short of saying the companies broke the law.

The complexity and clever timing of the deals apparently prevented the Internal Revenue Service from seeing through them, even though the agency had been auditing Enron's tax returns off and on since 1989, the report found.

"Enron places the spotlight once again on the general ineffectiveness of present law in regulating tax shelters," the report said. "Until the costs of participating in tax-motivated transactions are substantially increased," schemes like Enron's will continue, it said.

Among the reforms recommended by the committee are stiff new penalties for companies and individuals who engage in tax-motivated transactions, "at a minimum."

It also said corporations should be barred from transactions whose only business purpose is "the attainment of financial statement benefits."

George Plesko, business professor at the Massachusetts Institute of Technology, said Enron is not the only corporation that had a huge gap between the tax losses it reported to the IRS and the profits it reported to Wall Street.

The divergence between corporate income reported for tax and accounting purposes grew to more than $159 billion during the late 1990s and suggests that many more corporations are taking advantage of sophisticated tax-avoidance schemes and shelters to improve their financial profiles, he said.

Caption: Amber Williams, deputy clerk of the Senate Finance Committee, distributed copies of a 2,700-page report on an investigation into Enron's tax records. [Photo by AP]

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