Friday, February 14, 2003

Tax Moves by Enron Said to Mystify the I.R.S.
Enron and other big companies have escaped taxes in recent years through financial maneuvers so complex that the Internal Revenue Service has been unable to understand them, the Senate Finance Committee will be told this morning by Congressional tax experts who spent nearly a year going over Enron's tax returns.

In a report to the committee, the experts will explain that companies can avoid taxes by exploiting differences in the rules governing the two sets of books that all companies must keep, one for shareholders and the other for the I.R.S., according to people who have seen the report.

These differences between what are known as book accounting and tax accounting can be used to make taxes disappear, but only through costly transactions that create risks for shareholders that are not disclosed.

Current laws are ineffective at stopping the use of such transactions, whose only purpose is to avoid taxes, according to four people who had access to the report's findings.

Enron, the Houston-based energy trading company, was one of the most politically connected businesses in the country, with ties to President Bush and many other federal officials. Its name became synonymous with corporate scandal when its stock price collapsed and it sought bankruptcy protection in December 2001. Enron's chief financial officer is awaiting trial on fraud and other charges.

The report's disclosures on corporate tax avoidance, and its details on executive compensation, "are eye-popping," said Senator Max Baucus, Democrat of Montana, the ranking minority member of the Senate Finance Committee and one of only two people who would speak publicly yesterday about its contents.

"The report paints quite a shocking picture of Enron's tax gimmicks and structured transactions and executive compensation," Mr. Baucus said. "Bad as Enron is going to come out, the deeper concern is this is just not Enron alone. It involves lots of other companies and how they inundated the I.R.S., out-complexed the I.R.S. The I.R.S. just cannot handle the complexity of some of these transactions."

Enron created 881 offshore subsidiaries, 692 of them in the Cayman Islands, as part of its strategy to avoid taxes.

The committee chairman, Senator Charles E. Grassley, Republican of Iowa, called the report "an absolute barn-burner."

At a confirmation hearing for new Tax Court judges yesterday, Senator Grassley said the report "provides for the first time the complete story of Enron's efforts to manipulate its taxes and accounting."

"The report is very disturbing in its findings," he added. "From this report, I'm worried about the Tax Court blessing highly artful interpretations of the code."
http://www.nytimes.com/2003/02/13/business/13ENRO.html

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