Enron Corp., aided by its outside legal and accounting advisers, overwhelmed the Internal Revenue Service with complex returns that eliminated nearly all federal tax payments in the last years before its collapse in December 2001, according to a report by congressional investigators to be released at a Senate hearing today.
The report by the Joint Committee on Taxation, which received copies of Enron's tax returns last summer, rebukes banks, law firms and accounting firms that it said helped Enron stretch tax rules to defeat the intent of laws and regulations, according to people familiar with the inquiry.
Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) said the report will provide "the complete story of Enron's efforts to manipulate its taxes and accounting."
Sen. Max Baucus (D-Mont.), the committee's ranking Democrat, agreed. The report paints "a sordid picture of Enron's accounting practices, tax structures and executive compensation," he said.
The report indicates that many of Enron's tax maneuvers were followed to various degrees by several other U.S. companies, people familiar with its contents said. Committee members will cite the report as evidence of a need for tougher restrictions on corporate tax shelters and more disclosure of corporate tax payments.
"It's important to fix abusive tax practices by corporations," Grassley said. "It's a matter of fairness and of helping to rejuvenate the economy by restoring trust in corporate America."
Baucus said congressional investigators concluded that Enron's tax experts and advisers outmatched the IRS, constructing tax deals so complex that the tax authorities "couldn't wind their way through." The committee concluded that the IRS was "overwhelmed," Baucus said.
Sources said the report also criticizes Enron's lavish awards of stock options to key executives. The options grants created deductions that wiped out $390 million in taxes that would otherwise have been due the IRS in 2000, said University of Notre Dame professor Jim Seida, who is one of the experts scheduled to testify at the hearing.
Although Enron said it earned $979 million in 2000 on $101 billion in revenue, it may have paid as little as $34 million in taxes that year, Seida said.
Enron was so effective in wiping out its tax obligations that it was able to use other intricate tax deals to inflate its publicly reported profits, according to internal records provided to The Washington Post last year. Those transactions created deductions that eliminated nearly $1 billion in tax obligations on the company's financial statements, beginning in 1995. Each dollar in lowered taxes meant a dollar of after-tax profit on the financial reports, giving investors the image of Enron as a large and successful company.
Enron's minuscule tax payments could have tipped off investors that the company's operating business results were much lower than what it reported in its financial statements, Seida said. But ordinary investors could not solve that puzzle based on the meager information Enron reported about its tax payments.
The tax footnote in the company's financial statements is indecipherable, Seida said. "It is with all companies."