A lesson in lying
Enron filed for bankruptcy December 2, 2001, becoming the largest entity ever to do so at the time. As the nation’s seventh largest company, the business seemed to be going crazy from 1996-1999. How is it that such a successful company paid no federal income tax during this time?
As a consultant to the Joint Committee on Taxation in the investigation of Enron, Christopher Hanna presented some of his findings and opinions on this issue at SMU Thursday afternoon. Hanna, a law professor and member of the Academy of Distinguished Teachers spoke at a forum entitled “Enron: A Case Study in How to Report Profits and Pay No Taxes.”
In a presentation sponsored by the Academy of Distinguished Teachers, Hanna offered students and faculty a glimpse into the 2,721 page report compiled by the committee, focusing on 12 structured or tax motivated transactions. He also discussed the use of tax shelters and possible lasting effects of the Enron case.
Transactions like those at Enron should be of great concern to the United States government, said Hanna. It appears that in this case, the IRS may have simply been outgunned by a company in the private sector that hired top advisors to create transactions with “tremendous complexity.”
“The IRS is going to have to start paying more attention to companies reporting losses,” he said.
In the committee’s research, the workings of the 12 transactions were investigated, 11 of which were actually carried out before the bankruptcy. The transactions essentially set up an artificial capital loss to offset capital gain, said Hanna. He added that they were not “cookie-cutter” transactions, but instead were specifically tailored to Enron.
“In my opinion, they get progressively more complicated and sophisticated,” Hanna said.
The question then becomes, why enter into these complex transactions if the company is already paying no taxes?
A constant theme in the research, said Hanna, was that Enron treated what would be future tax savings as income and almost immediately posted it on the financial statements. The tax department functioned more as a business operation aiming to add income to the financial statement, said Hanna.
Enron said the 12 transactions were not corporate tax shelters, but it is evident that the transactions were complicated and went undetected for some time.
“I felt it was interesting that they were so complex that the IRS had no idea what was going on,” second year law student Marty Estes said. He attended the lecture because it closely related to classes he is taking this semester. “It could be going on right now. We don’t know how many companies are doing this.”
Estes always saw this as an important educational tool. “In the future, every law student is going to have to know Enron inside and out,” he said.
Another second year law student, Matthew Thomas, also attended to supplement classroom material. “[Hanna] has got a reputation on campus for being an exceptional speaker,” Thomas said.
For additional information on the subject, the three-volume report can be found at http://www.house.gov/jct/pubs03.html.
