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REPORT OF INVESTIGATION OF
ENRON CORPORATION AND RELATED ENTITIES
REGARDING FEDERAL TAX AND COMPENSATION ISSUES,
AND POLICY RECOMMENDATIONS
VOLUME I:  REPORT

By the Staff
of the
JOINT COMMITTEE ON TAXATION

At the Request of
Senator Max Baucus
and
Senator Charles E. Grassley
of the
SENATE COMMITTEE ON FINANCE

February 2003

JCS-3-03

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[VOLUME II:  APPENDICES A & B]   [VOLUME III:  APPENDICES C & D]  

VOLUME I:  REPORT
CONTENTS

Title Page(s)
 
PRELIMINARY PAGES
[ Title Page, Committee Members, Table of Contents ]		 Preliminary pages
 
INTRODUCTION 1
 
EXECUTIVE SUMMARY 2-20
 
A. General Overview of the Investigation 2-4
1. Scope of Report  
2. Methodology and scope of Joint Committe staff investigation  
 
B. Enron's Business Operations and Tax-Motivated Transactions 5-11
1. Summary of selected tax information  
2. Enron's development and use of tax-motivated structured transactions  
3. Enron's foreign subsidiaries and other entities  
 
C. Pension and Compensation Arrangements 12-15
1. Overview  
2. Enron's qualified retirement plans  
3. Other compensation arrangements  
 
D. Summary of General Observations 16
 
E. Summary of Findings and Recommendations 17-20
1. General findings relating to business tax matters  
2. Specific recommendations relating to business tax issues  
3. General findings relating to pensions and compensation  
4. Findings and recommendations relating to pensions and compensation  
 
PART ONE:  GENERAL OBSERVATIONS, RECOMMENDATIONS, AND FINDINGS 21-43
 
I. GENERAL OBSERVATIONS 21-24
 
II. GENERAL FINDINGS AND RECOMMENDATIONS RELATING TO BUSINESS TAX MATTERS 25-35
 
A. General Findings Relating to Business Tax Matters 25-26
1. Cost-benefit analysis with respect to tax motivated transactions  
2. Business purpose  
3. Accommodation parties  
4. Tax advisors  
5. Generally accepted accounting principles relating to accounting for Federal income taxes  
6. Disclosure of tax-motivated transactions  
7. Continued use of certain structured transactions  
 
B. Recommendations Relating to Corporate Tax Issues 27-28
1. Curtail duplication of losses  
2. Strengthen rules preventing acquisitions made to evade or avoid Federal income tax  
3. Strengthen the extraordinary dividend rules  
4. Provide guidance on the replication of earnings and profits in a consolidated group  
 
C. Recommendations Relating to Partnership Tax Issues 29-30
1. Strengthen disclosure of disguised sales  
2. Strengthen partnership allocation rules  
3. Provide guidance regarding transfers of partial partnership interests  
4. Provide rules for the appropriate interaction between partnership rules and corporate stock nonrecognition  
 
D. Recommendations Relating to International Tax Issues 31-32
1. Modify the rules for allocating subpart F income  
2. Modify the interaction between the subpart F rules and the passive foreign investment company rules  
3. Strengthen the earnings stripping rules  
4. Require annual information reporting with respect to disregarded entities  
 
E. Recommendation Relating to Financial Asset Securization Investment Trusts 33
1. Repeal financial asset securization investment trust rules  
 
F. Recommendation Relating to Corporate-Owned and Trust-Owned Life Insurance 34
1. Repeal grandfather rules for pre-June 20, 1986 contracts  
 
G. Recommendations Relating to Structured Financing Transactions 35
1. Modify the rules relating to the characterization and treatment of debt and equity  
2. Modify the rules relating to disqualified indebtedness  
 
III. PENSION AND COMPENSATION OBSERVATIONS, FINDINGS, AND RECOMMENDATIONS 36-43
 
A. General Observations with Respect to Pensions and Compensation 36-37
 
B. Findings and Recommendations Relating to Pension and Compensation Arrangements 38-43
1. Cash balance plan  
2. Blackout periods under qualified plans  
3. Investments under the Enron Savings Plan  
4. Nonqualified deferred compensation  
5. Stock-based compensation  
6. Employee loans  
7. Split-dollar life insurance contracts  
8. Limitation on deduction of compensation in excess of $1 million  
 
PART TWO:  GENERAL BACKGROUND INFORMATION 44-99
 
I. BACKGROUND AND METHODOLOGY 44-55
 
A. Background Information Relating to Joint Committee on Taxation Staff Investigation of Enron 44-46
 
B. Methodology and Scope of Joint Committee Staff Investigation 47-55
 
II. HISTORY OF THE COMPANY 56-99
 
A. Background 56-58
 
B. History of Business Operations 59-69
1. Formative years and the 1985 acquisition of Houston Natural Gas  
2. Transition from natural gas company to diversified energy company:  1986-1995  
3. Transformation to a marketing and logistics company:  1996-2001  
 
C. Recent Financial History 70-87
1. Use of off-balance sheet entities to enhance financial performance measures  
2. Financial performance and liquidity issues  
3. Accounting irregularities, adjustments, and non-recurring charges to earnings for financial reporting periods 1997 to 2001  
4. Illiquidity and failed merger attempts during November 2001  
5. Bankruptcy reorganization and present condition  
 
D. Enron's Federal Income Tax Position 88-99
1. Enron's consolidated Federal income tax filings  
2. Interaction between Enron and the Internal Revenue Service  
3. Enron's Federal income tax payments  
4. Enron's reported present Federal income tax position  
5. Federal income tax claims in Enron's bankruptcy proceeding  
 
PART THREE:  DISCUSSION OF SELECTED TAX-MOTIVATED TRANSACTIONS AND BUSINESS ARRANGEMENTS USED BY ENRON 100-403
 
I. STRUCTURED TAX-MOTIVATED TRANSACTIONS 102-289
 
A. Background and Rationale 102-108
 
B. Transactions That Raise Corporate Tax Issues 109-180
1. Discussion of relevant corporate tax laws  
2. Projects Tanya and Valor  
3. Project Steele  
4. Project Cochise  
5. Project Teresa  
 
C. Transactions That Raise Partnership Tax Issues 181-241
1. Discussion of relevant partnership tax law rules  
2. Project Tomas  
3. Project Condor  
4. Projects Tammy I and Tammy II  
 
D. Other Structured Transactions 242-273
1. Project Apache  
2. Project NOly  
 
E. Transactions in Which Enron is an Accommodation Party 274-289
1. Project Renegade  
2. Project Valhalla  
 
II. COMPANY-OWNED AND TRUST-OWNED LIFE INSURANCE 290-303
 
A. Summary 290
 
B. Background, Present Law, Discussion and Recommendations 290-303
1. Background and present law relating to the tax treatment of company-owned life insurance  
2. Enron's COLI and TOLI transactions  
 
III. STRUCTURED FINANCING TRANSACTIONS 304-362
 
A. Background and Rationale 304
 
B. Discussion of Present Law Relating to Certain Structured Financing Transactions 305-312
1. Debt characterization  
2. Constructive sales  
3. Disqualified indebtedness  
4. Straddles  
5. Prepayment transactions  
6. Notional principal contracts  
7. Application of present law to Enron structured financing transactions  
 
C. Tiered Preferred Securities 313-332
1. Brief overview  
2. Background  
3. Discussion  
4. Recommendations  
 
D. Investment Unit Securities 333-345
1. Brief overview  
2. Background  
3. Discussion  
4. Recommendations  
 
E. Commodity Prepay Transactions 346-362
1. Brief overview  
2. Background  
3. Discussion  
4. Recommendations  
 
IV. USE OF FOREIGN ENTITIES BY ENRON 363-388
 
A. Overview of Selected International Tax Rules 363-369
1. In general  
2. Foreign tax credit  
3. Anti-deferral regimes  
4. Transfer pricing  
5. Entity classification  
6. Treaties  
 
B. Enron's General International Tax Posture 370-372
1. Foreign tax credit problems arising from interest allocation rules  
2. Planning techniques addressing the foreign tax credit problem  
 
C. Proliferation of Foreign Entities in Enron's Ownership Structure 373-382
1. Background  
2. General reasons for complex entity structures  
3. The number of foreign entities in Enron's ownership structure  
4. Sources of complexity in Enron's ownership structure  
 
D. Transfer Pricing Issues 383-386
 
E. Recommendation:  Information Reporting with Respect to Disregarded Entities 387-388
 
V. OFF-BALANCE SHEET TRANSACTIONS 389-403
 
A. Overview 389-403
1. Introduction to off-balance sheet transactions  
2. Description of Chewco and JEDI I structure and transactions  
3. Description of LJM1 structure and transactions  
4. Description of LJM2 structure and transactions  
 
PART FOUR:  ISSUES RELATING TO COMPENSATION 404-723
 
A. Overview of Issues Relating to Compensation 404-405
 
B. Overview of Enron Internal Functions Relating to Compensation 406
 
II. QUALIFIED PLANS 407-544
 
A. Overview of Present Law Relating to Qualified Retirement Plans 407-424
1. In general  
2. Types of qualified retirement plans  
3. General rules relating to investment of qualified retirement plan assets  
4. Rules relating to investments of qualified retirement plan assets in employer securities  
5. Other rules  
 
B. Overview of Enron's Qualified Retirement Plans 425-457
1. In general  
2. Recent and pending legal matters involving the Enron qualified plans  
3. Administration of the Enron qualified retirement plans  
4. The Enron Corp. Retirement Plan ("Enron Retirement Plan")  
5. The Enron Corp. Employee Stock Ownership Plan ("Enron ESOP")  
6. The Enron Corp. Cash Balance Plan ("Enron Cash Balance Plan")  
7. The Enron Corp. Savings Plan ("Enron Savings Plan")  
 
C. Discussion of Specific Issues 458-544
1. Phase out of the ESOP offset under the Enron Corp. Retirement Plan  
2. Conversion of the Enron Retirement Plan to the Enron Cash Balance Plan  
3. Enron ESOP Investment in Enron Stock  
4. Change of recordkeepers under the Enron Savings Plan  
5. Investments under the Enron Savings Plan  
6. Allegations of misuse of benefit funds  
 
III. OTHER COMPENSATION-RELATED ISSUES 545-723
 
A. General Overview of Compensation 545-557
 
B. Overview of Executive Compensation Arrangements 558-591
1. In general  
2. Bonuses  
3. Special compensation arrangements  
4. Board of Directors compensation  
 
C. Discussion of Specific Issues 592-723
1. Nonqualified deferred compensation plans  
2. Stock-based compensation  
3. Employee loans  
4. Purchase and reconveyance of Kenneth L. Lay's annuity contracts  
5. Split-dollar insurance arrangements  
6. Limitation on deduction of certain executive compensation in excess of $1 million  
 

[VOLUME II:  APPENDICES A & B]   [VOLUME III:  APPENDICES C & D]  

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Page #/congress/joint/jcs-3-03/vol1/index.html March 28, 2003