Enron Corp.'s 200 highest-paid executives received total compensation of $1.4 billion in 2000, more than triple the amount the year before and more than the company's $979 million in reported corporate profits, according to a three-volume report the congressional Joint Committee on Taxation issued yesterday. The executives' compensation, mostly stock option awards, enabled the Houston company to wipe out nearly all its federal tax obligations that year.
While its compensation strategy was erasing tax bills in the late 1990s, Enron was turning its tax department into a profit center, the report found. Its senior executives joined with leading accounting, banking and legal advisers to manipulate tax laws through complex, concealed transactions that generated $651 million in artificial profit between 1995 and 2001, the report said. Enron paid these advisers $88 million in fees in that six-year period in a relationship the committee called "incestuous."
Sen. Charles E. Grassley (R-Iowa), chairman of the Senate Finance Committee, said at a hearing on the report that he intended to introduce legislation that would bar other corporations and their outside advisers from imitating Enron's "tax schemes," effective with yesterday's hearing. "I don't care if it takes five years to get the legislation passed, the date will hold," he said.
Without new sanctions, the Internal Revenue Service will continue to be outwitted by corporate tax filers, as it was by Enron and its advisers, the report said.
The committee's top Democrat, Sen. Max Baucus (Mont.), endorsed Grassley's pledge, calling the report a "wake-up call" on corporate tax abuse.
One Republican tax lobbyist said the Enron tax report has caused a rush of anxiety among Washington's law firms. Some worry that lawmakers will try to use the joint committee's loophole-closure recommendations to offset some of the cost of President Bush's $665 billion tax cut plan, the lobbyist said. So the business community is gearing up for a major fight.
The joint committee's report, released after a yearlong investigation, "stunned" Lindy L. Paull, the committee's longtime chief of staff, she said.
Hundreds of pages of confidential flow charts describe how Enron engineered swaps of assets and securities between its divisions and some of its financial partners to accelerate billions of dollars in tax deductions.
In some cases, deductions were counted twice. Other deals allowed Enron to deduct loan principal payments, not merely interest. Other transactions appeared to shuffle paper between Enron units, with little of real value changing hands, the committee found.
Grassley called the practices "a little bit short" of racketeering. Paull did not go that far.
"I don't know if you could call it illegal," she said. But Enron and its advisers repeatedly violated the intent of Congress and the Treasury, Paull said. The tax deals can and should be challenged by the IRS or the courts, she added. The IRS is still reviewing Enron's most recent tax returns.
"We know Enron was not the only one," Grassley said. Some of Enron's tax transactions were actively marketed and promoted by banks and accounting firms to other corporate customers, but Paull said she did not know how widespread such tax deals were.
Enron claimed $2.1 billion in profit for 1996 through 1999 on financial statements it filed with the Securities and Exchange Commission and gave to investors. It reported a $3 billion tax loss in those years to the IRS. It paid no federal taxes in those years because of massive tax deductions and credits.
Enron said it earned $979 million in profit for 2000 and reported taxable income of $3.1 billion on its tax returns. All but $64 million of the tax bill was wiped out by prior-year deductions, however.
Enron filed for Chapter 11 bankruptcy protection Dec. 2, 2001, and did not issue financial statements or pay final taxes for that year.
Much of Enron's federal tax obligations were erased by deductions it took for extraordinary grants of stock options to executives, particularly in 2000, when Enron's stock price soared. The committee said this practice appeared to comply with tax rules but said Enron was unable to document special compensation and benefit arrangements that some executives received.
At the same time, Enron linked up with banks and accounting and legal firms to design vastly complex and closely guarded tax-shelter transactions that it used to reduce the taxable income reported on its financial statements.
The former head of Enron's tax department, Robert J. Hermann, who disclosed details on the tax deals to The Post last year, said then that his staff was given increasingly larger profit goals to hit. Inside Enron, it was called "the stretch," he said. The largest tax deals were approved by senior Enron executives and its board.
The cover sheet on one tax deal, code-named Steele, trumpeted "Show Me the Money!"
Each dollar in reduced taxes raised profit by a dollar, and from 1995 to 2001, Enron's tax deals added $651 million in artificial profit to its financial reports made to shareholders, the committee said.
These deals had no effect on Enron's actual taxes paid but painted a picture for investors of a much healthier company, the committee said.
Enron could not have produced the tax-shelter deals without the "complicity" of key advisers, the committee said.
Bankers Trust Corp. and the Arthur Andersen LLP accounting firm were among those that designed and marketed the tax shelters to the Houston company, whose tax staff then spent up to a year to refine the deals. One Bankers Trust memo describes a "conference" hosted by the bank for Enron executives at a Florida resort with travel via corporate jet, a dinner cruise, and golf and tennis lessons. A spokesman for Deutsche Bank AG, which acquired Bankers Trust, declined to comment.
The deals required -- and received -- letters of support from some of the nation's most prominent law practitioners, at firms such as King & Spalding LLP, Vinson & Elkins, and Akin Gump Strauss Hauer & Feld LLP. On the major tax deals, the law firms advised that the deals "should" comply with tax law, a finding that allowed Enron to carry out the deals.
"At a minimum, they turned a blind eye to critical facts," Paull said.
William F. Nelson, a former King & Spalding lawyer who now practices in Washington and provided advice to Enron on several transactions, defended the work he and colleagues did. "We don't give tax advice that is incorrect at any time," he said in a recent interview.
Spokesmen for the other law firms could not be reached yesterday.
The lawyers "did not bother" to question Enron's assurances that the tax deals had valid business purposes -- a key, though loosely defined, condition in the tax rules, the committee said. The Enron tax deals had no purpose other than to manipulate tax law to inflate earnings and avoid taxes, Paull said.
The report said that one firm -- which the committee staff identified as Arthur Andersen -- colluded with Enron in manufacturing a business "purpose" for one tax transaction. "It would not be surprising if this collusion also existed in other transactions," the report said.