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
You will need the Adobe Acrobat Reader installed on your computer to view these PDF files. |
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 | |
Questions or comments regarding this service? Contact the GPO Access User Support Team by Internet e-mail at gpoaccess@gpo.gov;
by telephone at (202) 512-1530 or toll free at (888) 293-6498; by fax at (202) 512-1262.
Page #/congress/joint/jcs-3-03/vol1/index.html March 28, 2003