WRITTEN TESTIMONY OF THE STAFF OF THE 

JOINT COMMITTEE ON TAXATION

ON THE REPORT OF INVESTIGATION OF

ENRON CORPORATION AND RELATED ENTITIES

REGARDING FEDERAL TAX AND COMPENSATION ISSUES,

AND POLICY RECOMMENDATIONS

Presented by

Lindy L. Paull

Chief of Staff of the

JOINT COMMITTEE ON TAXATION

At a Hearing of the

SENATE COMMITTEE ON FINANCE

On February 13, 2003

February 13, 2003

JCX-10-03
ii

CONTENTS

Page

INTRODUCTION ..........................................................................................................................1

WRITTEN TESTIMONY OF THE STAFF OF THE JOINT COMMITTEE 

ON TAXATION AT A HEARING OF THE SENATE COMMITTEE 

ON FINANCE ON FEBRUARY 13, 2003 ....................................................................................2

I. GENERAL OVERVIEW OF THE INVESTIGATION .............................................................3

A. Scope and Methodology of the Investigation ........................................................................ 3

B. Summary of Income Tax Information and Tax-Motivated Structured Transactions............. 4

1. Summary of selected tax information................................................................................ 4

2. Enron’s development and use of tax-motivated structured transactions............................ 7

II. GENERAL OBSERVATIONS..................................................................................................9

III. GENERAL FINDINGS AND RECOMMENDATIONS RELATING TO 

BUSINESS TAX MATTERS.......................................................................................................13

A. General Findings Relating to Business Tax Matters............................................................ 13

1. Cost-benefit analysis with respect to tax motivated transactions .................................... 13

2. Business purpose.............................................................................................................. 13

3. Accommodation parties................................................................................................... 13

4. Tax advisors..................................................................................................................... 13

5. Generally accepted accounting principles relating to 

accounting for Federal income taxes................................................................................... 14

6. Disclosure of tax-motivated transactions......................................................................... 14

7. Continued use of certain structured transactions............................................................. 14

B. Recommendations Relating to Corporate Tax Issues.......................................................... 15

1. Curtail duplication of losses............................................................................................. 15

2. Strengthen rules preventing acquisitions made to evade or avoid Federal income tax ... 15

3. Strengthen the extraordinary dividend rules.................................................................... 16

4. Provide guidance on the replication of earnings and profits in a consolidated group ..... 16

C. Recommendations Relating to Partnership Tax Issues........................................................ 17

1. Strengthen disclosure of disguised sales.......................................................................... 17

2. Strengthen partnership allocation rules............................................................................ 17

3. Provide guidance regarding transfers of partial partnership interests.............................. 17
iii

4. Provide rules for the appropriate interaction between partnership rules and corporate 

stock nonrecognition rules................................................................................................... 17

D. Recommendations Relating to International Tax Issues...................................................... 19

1. Modify the rules for allocating subpart F income............................................................ 19

2. Modify the interaction between the subpart F rules and the passive 

 foreign investment company rules................................................................................... 19

3. Strengthen the earnings stripping rules............................................................................ 20

4. Require annual information reporting with respect to disregarded entities..................... 20

E. Recommendation Relating to Financial Asset Securitization Investment Trusts................ 21

1. Repeal financial asset securitization investment trust rules............................................. 21

F. Recommendation Relating to Corporate-Owned and Trust-Owned Life Insurance............ 22

1. Repeal grandfather rules for pre-June 20, 1986 contracts............................................... 22

G. Recommendations Relating to Structured Financing Transactions..................................... 23

1. Modify the rules relating to the characterization and treatment of debt and equity ........ 23

2. Modify the rules relating to disqualified indebtedness.................................................... 23

IV. PENSION AND COMPENSATION ARRANGEMENTS....................................................24

A. Overview of Pension and Compensation Arrangements..................................................... 24

1. Overview.......................................................................................................................... 24

2. Enron’s qualified retirement plans................................................................................... 24

3. Other compensation arrangements................................................................................... 25

B. General Observations With Respect to Pensions and Compensation.................................. 29

C. Findings and Recommendations Relating to Pension and 

 Compensation Arrangements............................................................................................... 31

1. Cash balance plans........................................................................................................... 31

2. Blackout periods under qualified plans............................................................................ 31

3. Investments under 401(k) plans....................................................................................... 32

4. Nonqualified deferred compensation............................................................................... 33

5. Stock-based compensation............................................................................................... 34

6. Employee loans................................................................................................................ 34

7. Split-dollar life insurance contracts................................................................................. 35

8. Limitation on deduction of compensation in excess of $1 million.................................. 35
1

INTRODUCTION

This document,1 prepared by the staff of the Joint Committee on Taxation (“Joint 

Committee staff”), is the written testimony of Lindy L. Paull, Chief of Staff, Joint Committee on 

Taxation, at the hearing of the Senate Committee on Finance on February 13, 2003 relating to the 

Joint Committee on Taxation staff investigation relating to Enron Corporation and related 

entities. The testimony describes and summarizes the Joint Committee on Taxation staff's 

official report of the investigation (the "Report"). 2 This investigation began in February 2002 at 

the request (by letter dated February 15, 2002) of Senator Max Baucus and Senator Charles E. 

Grassley of the Senate Committee on Finance.

 

1

 This document may be cited as follows: Joint Committee on Taxation, Written 

Testimony of the Staff of the Joint Committee on Taxation on the Report of Investigation of 

Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and 

Policy Recommendations (JCX-10-03), February, 13, 2003.

2

 Joint Committee on Taxation, Report of Investigation of Enron Corporation and 

Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations

(JCS-3-03), February 2003.
2

WRITTEN TESTIMONY OF THE STAFF OF THE

JOINT COMMITTEE ON TAXATION

AT A HEARING OF

THE SENATE COMMITTEE ON FINANCE

ON FEBRUARY 13, 2003

My name is Lindy L. Paull. As Chief of Staff of the Joint Committee on Taxation (“Joint 

Committee”), I am pleased to have the opportunity to appear before you today to transmit and 

summarize the Joint Committee staff’s official Report of its investigation of Enron Corporation 

and related entities (“Enron”).3 

This Report, which was requested by Senator Max Baucus and Senator Charles E. 

Grassley, is the culmination of one year of extremely hard work of the Joint Committee staff. I 

would like to express my sincere appreciation for the herculean effort of our staff in conducting 

this investigation and writing the Report in a timely manner, while at the same time performing 

their normal legislative duties throughout the year. This was a massive project and I am grateful 

for the dedication of each member of the Joint Committee staff who worked on the investigation 

and the Report.

The Report consists of three volumes and is about 2,700 pages in length. Volume I (723 

pages) contains the actual report of the investigation, which includes general observations, 

findings, and recommendations; a description of the methodology and scope of the investigation; 

a history of Enron; a detailed discussion of certain of Enron’s tax-motivated business 

transactions; and a detailed discussion of Enron’s pension plans and compensation arrangements.

Volumes II and III contain four Appendices to the Report, totaling 1,968 pages. The 

Appendices provide a variety of documents relating to the investigation, including detailed 

documentation relating to Enron’s tax-motivated transactions, copies of the tax opinion letters 

provided with respect to Enron’s tax-motivated transactions, and information relating to Enron’s 

pension plans and other compensation arrangements.

 

3

 Except as otherwise indicated, all references to “Enron” refer to Enron Corporation and 

its affiliates, and all references to “Enron Corp.” refer specifically to the parent company.
3

I. GENERAL OVERVIEW OF THE INVESTIGATION

A. Scope and Methodology of the Investigation

This investigation was a rare opportunity to look inside of one of the ten largest 

corporations in the United States. Enron’s size and broad range of businesses necessarily 

dictated that the topics to be reviewed would have to be selected carefully. As a result, the Joint 

Committee staff review focused on two principal areas: (1) Enron’s use of tax shelter 

arrangements, off-shore entities, and special purpose entities, and (2) the compensation 

arrangements of Enron employees, including tax-qualified retirement plans, nonqualified 

deferred compensation arrangements, and other arrangements, in order to analyze the factors that 

may have contributed to the loss of benefits and the extent to which losses were experienced by 

different groups of employees.

Enron agreed to cooperate with the Joint Committee staff investigation.4 Enron complied 

with requests for information from the Joint Committee staff through the voluntary production of 

documents.

In conducting its investigation, the Joint Committee staff:

• Requested Enron’s income tax returns since 1985;

• Reviewed more than 100 boxes of documents received from Enron in response to 

seven extensive document requests;

• Reviewed more than 40 boxes of documents from the Internal Revenue Service 

(“IRS”) relating to Enron;

• Conducted 46 interviews of current and former Enron employees and other 

individuals with information relevant to the investigation;

• Made four trips to Houston, Texas, to review documents and conduct interviews;

• Reviewed publicly available information relating to Enron, including information 

made available by various Congressional committees, governmental agencies, the 

U.S. Bankruptcy Court for the Southern District of New York, and information 

contained in media reports; and

• Reviewed information provided by the Pension Benefit Guaranty Corporation, the 

Department of Labor, and the Senate Permanent Subcommittee on Investigations.

 

4

 On March 6, 2002, a disclosure agreement was executed by representatives of Enron 

Corp., the Senate Finance Committee, and the Joint Committee staff. Under the terms of the 

disclosure agreement, Enron agreed to the disclosure of its tax returns and tax return information 

that would otherwise be confidential under the Federal tax laws. The Senate Finance Committee 

and Joint Committee staff agreed that any disclosure of information collected during the 

investigation would only be disclosed through official reports, meetings, or hearings of either 

Committee.
4

B. Summary of Income Tax Information and

Tax-Motivated Structured Transactions

Enron is a Houston-based energy and commodities trading company currently under 

Federal bankruptcy reorganization protection. Prior to its bankruptcy, Enron conducted business 

through approximately 3,500 domestic and foreign subsidiaries and affiliates (though some of 

these entities were inactive), and operated in diverse markets and industries such as wholesale 

merchant and commodity market businesses, the management of retail customer energy services, 

the operation of gas transmission systems, and the management of energy-related assets and 

broadband services. Enron reported consolidated financial statement revenues of $101 billion 

for 2000, and ranked seventh on the Fortune 500 list of the country’s largest companies for 2001. 

As of December 31, 2000, Enron had approximately 59,000 shareholders of record with respect 

to its outstanding shares of common stock. At the time it filed for bankruptcy on December 2, 

2001, Enron employed approximately 25,000 employees worldwide.

As of December 31, 2001, Enron’s worldwide operations included roughly 250 foreign 

entities that were associated with ongoing businesses. Enron had a total of approximately 1,300 

different foreign entities, including foreign corporations and partnerships that were controlled by 

Enron, as well as other entities in which Enron owned a significant stake. Approximately 80 

percent of Enron’s foreign entities were inactive shells that did not hold and were not engaged in 

or associated with any ongoing business.5

1. Summary of selected tax information

Federal income tax

Enron and certain of its subsidiaries and affiliates filed a consolidated Federal income tax 

return for each year from 1985 through 2001. Based on Enron’s income tax returns without 

regard to audit adjustments, Enron paid approximately $325 million in Federal income taxes for 

1990 through 1995, paid no Federal income taxes for 1996 through 1999, and paid 

approximately $63 million in Federal income tax for 2000 and 2001. 

Table 1, below, lists Enron's Federal tax liability for its taxable years 1996 through 2001, 

as shown on Enron’s Federal income tax returns.

 

5

 Enron created many entities in jurisdictions that do not impose a tax on such entities. In 

particular, as of December 31, 2001, the Enron ownership structure included 441 entities formed 

in the Cayman Islands, a country that has never imposed a corporate income tax. Most of these 

entities were inactive shells not associated with any ongoing business and were largely irrelevant 

for tax purposes.
5

Table 1.–Enron’s Federal Tax Liability, 1996-2001

[millions of dollars]

Year Regular

Tax

Alternative 

Minimum Tax

Total Tax

Per Return

1996 0 0 0

1997 0 0 0

1998 0 0 0

1999 0 0 0

2000 21.3 41.9 63.2

2001 0 0 0*

Totals 21.3 41.9 63.2

* Enron’s tax liability for taxable year 2001 as shown on its return was $13,331.

The IRS uses a coordinated industry case program to coordinate the examination of large 

and highly diversified taxpayers. Enron has been in the coordinated industry case program since 

January 1989. The IRS has completed its examination of Enron’s tax returns through 1995 and 

is currently examining Enron’s 1996 through 2001 tax returns. The IRS adjustments to Enron’s 

taxable years 1988 through 1994 increased Enron’s taxable income by $361 million, which, after 

taking into account net operating loss carryovers from earlier years, resulted in additional tax 

payments of $4.3 million for 1988 through 1994.6 It is impossible to fully assess Enron’s 

ultimate tax liability until the IRS examination of Enron’s tax returns for 1996 through 2001 is 

completed and the bankruptcy court has reviewed the IRS proof of claim, which is expected to 

be filed by March 31, 2003.

Reconciliation of Enron’s financial statement net income and Federal taxable income

Enron reported financial statement net income of $2.3 billion, but tax losses of $3 billion, 

for 1996 through 1999. For year 2000, Enron reported financial statement net income of $1.0 

billion and taxable income of $3.1 billion (before net operating loss carryovers from 1999).

Table 2, below, summarizes the significant adjustments from Enron’s Form 1120, 

Schedule M-1, Reconciliation of Financial Statement Income to Taxable Income, for years 1996 

through 2000. These reconciliations use Enron’s financial statement and tax return information 

as reported or filed, without regard to restatements or audit adjustments. It should be noted that a 

complete analysis of Enron’s book to tax differences cannot be made prior to determination of 

Enron’s ultimate tax liability, which is under review by the bankruptcy court, and without a 

restatement of Enron’s financial statements for these periods to reflect generally accepted 

accounting principles.

 

6

 Although the IRS examination of Enron’s Federal income tax return for 1995 is 

complete, the impact of any IRS adjustments for 1995 will not be known until the examination of 

1996 through 2001 is complete.
Table 2.–Enron Corp. and Subsidiaries: Reconciliation of Financial Statement Income to Taxable Income 1996-2000

[millions of dollars]

1996 1997 1998 1999 2000

Net Income Reported in Consolidated Financial Income Statement1584 105 703 893 979

Less Net Income from Entities not Included in Consolidated Tax Return

Domestic Corporations2-96 -189 -149 -152 -345

Foreign Corporations3-232 -44 -521 -1,110 -1,722

Partnerships4-145 -211 -319 -638 -6,899

-473 -444 -989 -1,900 -8,966

Plus Net Income from:

Intercompany Elimination Made for Books but not for Tax 1,322 1,300 1,884 3,997 13,625

Entities not Controlled for Financial Accounting Included for Tax50 0 14 122 258

1,322 1,300 1,898 4,119 13,883

Book Income Reported on Consolidated Tax Return 1,433 961 1,612 3,112 5,896

Significant Book to Tax Adjustments6

Federal Income Taxes 159 -35 45 -128 193

Net Partnership Adjustments -107 -122 -109 -338 -481

Net Mark to Market Adjustments -118 118 -333 -906 -537

Constructive Sale (section 1259) 0 0 0 0 5,566

Structures Treated as Debt for Tax not for Book (e.g., equity or minority 

interest)

-2 -24 -3 -12 -149

Company Owned Life Insurance Adjustment -19 -24 -27 -35 -20

Stock Options Deduction -113 -9 -92 -382 -1,560

Depreciation Differences -67 -65 -57 -124 -154

Equity Earnings Reversal Per Tax Return -1,183 -1,023 -1,688 -2,868 -5,516

All Other Book to Tax Differences -293 -281 -101 223 -137

Taxable Income Reported on Consolidated Tax Return -310 -504 -753 -1,458 3,101

Notes:

(1) As originally reported. (2) Corporations not meeting 80 percent vote and value test (sec. 1504(a)(2)). The financial accounting to tax return reconciliation in Appendix A contains additional details 

of these amounts. (3) Foreign corporations are not eligible for inclusion in consolidated tax return (sec. 1504(b)(3)). (4) Partnerships are required to file separate Federal income tax returns. The 

financial accounting to tax return reconciliation in Appendix A contains additional details of these amounts. (5) Disregarded entities for Federal tax purposes (Treas. Reg. sec. 301.7701-3) not included 

in consolidated financial statements. The financial accounting to tax return reconciliation in Appendix A contains additional details of these amounts. (6) Amounts as reported in Enron presentation to 

the Joint Committee staff, June 7, 2002. Appendix B contains this presentation. In addition, Appendix A contains further details of Enron’s book to tax adjustments as reported in the tax return.

6
7

2. Enron’s development and use of tax-motivated structured transactions

In the mid-1990’s, Enron’s management began to view the role of its tax department as 

more than managing its Federal income tax liabilities. Rather, Enron’s tax department became a 

source for financial statement earnings, thereby making it a profit center for the company. With 

an emphasis on short-term profitability and cash flow, Enron used various techniques to generate 

current financial statement net income, including tax planning by engaging in 12 large structured 

transactions during the period from 1995 until it filed for bankruptcy. At their core, Enron’s 

structured transactions were designed to permit Enron to take the position that its long-term tax 

benefits could be converted to current or short-term financial statement net income. In most of 

the structured transactions discussed in the Report, the origin of the financial accounting benefits 

was the reduction in Federal income tax that the transaction was anticipated to provide either 

currently or in the future.

The Report tells the story of the development and implementation of each of the 

structured transactions. The transactions are classified into various categories: (1) structured 

transactions that raise corporate tax issues; (2) structured transactions that raise partnership tax 

issues; (3) other structured transactions which implicate international or certain financial 

products provisions; (4) corporate-owned and trust-owned life insurance arrangements; and (5) 

structured financings, including tiered preferred securities, investment unit securities, and 

commodity prepay transactions. Irrespective of the structure used, the structured transactions 

typically used one of two strategies to achieve their tax and financial statement benefits. Several 

of the structured transactions (i.e., Projects Tanya, Valor, Steele, and Cochise) were designed to 

duplicate losses (i.e., deduct the same loss twice) with respect to a single economic loss. The 

other dominant strategy (i.e., Projects Tomas, Condor, Teresa, Tammy I and Tammy II) was to 

shift tax basis from a nondepreciable asset to a depreciable asset with little or no economic 

outlay. Another transaction, Project Apache, was designed to generate tax deductions for what 

was, in essence, the repayment of principal on debt. In two transactions (Projects Renegade and 

Valhalla), Enron received a fee to serve as an accommodation party to another taxpayer who 

expected to derive tax or financial statement benefits from a structured transaction.

Most of the transactions relied on differences between the tax treatment and financial 

accounting treatment of various items so that the tax benefits could be used to generate financial 

statement income. For example, the transactions designed to duplicate losses (i.e., deduct the 

same tax loss twice) would be recorded on the financial statements as producing income (not 

loss). Similarly, the transactions designed to shift tax basis from a nondepreciable asset to a 

depreciable asset would be recorded on the financial statements as producing income.

Table 3, below, summarizes certain tax and accounting information regarding Enron’s 

structured transactions. The table shows that the financial accounting benefits Enron expected to 

derive from the structured transactions were front loaded to provide immediate reporting of 

earnings for its financial statements, even though the bulk of the tax benefits would not be 

derived, if at all, until well into the future. The table lists the promoter of the transaction, the 

primary tax opinion provider, and project fees paid by Enron with respect to each transaction. 

The table tells a broader story as well -- from 1995 until Enron filed for bankruptcy, Enron 

achieved more than $2 billion in tax and financial accounting benefits and paid approximately 

$88 million in fees paid to advisors and promoters.
Table 3.–Benefits and Fees of Enron’s Various Structured Transactions (1995-2001)

[millions of dollars]

Project

Name

Financial 

Accounting 

Income 

through 20011

Total

Projected 

Financial 

Accounting 

Income2

Federal Tax 

Savings 

through 

20013

Total

Projected 

Federal Tax 

Savings4

Promoter Primary Tax 

Opinion Provider

Total Project 

Fees6

Tanya (1995) 66 66 66 66 Arthur Andersen Arthur Andersen 0.5

Valor (1996) --- 82 82 82 Arthur Andersen Arthur Andersen 0.1

Steele (1997) 65 83 39 78 Bankers Trust Akin, Gump, Strauss, 

Hauer & Feld 11

Teresa (1997) 226 257 (76) 263 Bankers Trust King & Spalding 12

Cochise (1998) 101 143 --- 141 Bankers Trust McKee Nelson, Ernst 

& Young 16

Apache (1998) 51 167 51 167 Chase Manhattan Shearman & Sterling 15

Tomas (1998) 37 113 95 109 Bankers Trust Akin, Gump, Strauss, 

Hauer & Feld 14

Renegade (1998)51 1 --- --- Bankers Trust --- ---

Condor (1999) 88 328 --- 332 Deloitte & Touche Vinson & Elkins 10

Valhalla (2000)516 64 --- --- Deutsche Bank Vinson & Elkins ---

Tammy I (2000) --- 406 --- 414 Deloitte & Touche Vinson & Elkins 9

Tammy II (2001) --- 369 --- 370 --- --- ---

Totals 651 2,079 257 2,022 N/A N/A 87.6

Notes:

(1) Financial accounting income does not reflect the reversal of many of the reported income amounts due to Enron’s bankruptcy filing; (2) Source information for 

projected financial accounting income is the November Structured Transactions Group Summary of Project Earnings & Cash Flows, November 2001 contained in 

Appendix B to the Report, except Project Valor. Due to Enron’s bankruptcy filing, it is likely that many of the financial accounting benefits will not be realized; (3) 

Federal tax savings computed using a 35 percent tax rate. Because Enron had net operating losses for many of the years the benefits resulted in increased net 

operating losses rather than an immediate reduction in taxes; (4) Source information for projected Federal income tax savings is the November Structured 

Transactions Group Summary of Project Earnings & Cash Flows, November 2001 contained in Appendix B to the Report, except Project Valor; (5) Enron was an 

accommodation party to Bankers Trust and Deutsche Bank (the successor to Bankers Trust) in Projects Renegade and Valhalla, respectively. Enron was paid $1.375 

million for engaging in Project Renegade. Enron’s fee for participation in Project Valhalla was in the form of an interest-rate spread on the offsetting loans; and (6) 

Project fees are based on contractual agreements between Enron and the counterparty. Due to Enron’s bankruptcy filing, not all payments have been received by the 

counterparty to each agreement. 

8
9

II. GENERAL OBSERVATIONS

Enron entered the 1990s as a rapidly growing company with an ambition to grow faster 

and larger and to change the nature of its business from an “old” economy energy company to a 

“new” economy firm with diverse interests and global reach. Enron’s desire to grow pushed 

Enron’s leaders to find ways to increase reported earnings and thereby drive up Enron’s stock 

price, which would fuel further growth. Ultimately, the reported picture of the company failed to 

comport with the underlying economic reality and Enron notoriously collapsed.

The Report’s detailed analysis of Enron’s structured transactions reveals a pattern of 

behavior showing that Enron deliberately and aggressively engaged in transactions that had little 

or no business purpose in order to obtain favorable tax and accounting treatment. For Enron’s 

leaders, financial statement income became paramount, and Enron announced to the world its 

target of $1 billion in net income for year 2000.7 As Enron’s management realized that taxmotivated transactions could generate financial accounting benefits, Enron looked to its tax 

department to devise transactions that increased financial accounting income. In effect, the tax 

department was converted into an Enron business unit, complete with annual revenue targets. 

The tax department, in consultation with outside experts, then designed transactions to meet or 

approximate the technical requirements of tax provisions with the primary purpose of 

manufacturing financial statement income. The slogan “Show Me the Money!” exemplified this 

effort.8 However, a bona fide business purpose, that is, a purpose other than to secure favorable 

tax and accounting treatment, was either lacking or tenuous in many of the transactions and 

clearly was not the impetus for the transactions.9

Viewed in their entirety, Enron’s structured transactions not only pushed the concept of 

business purpose to the limit (and perhaps beyond) but also highlight several general issues about 

the nature of the tax system and a corporation’s attitude towards it. Enron’s behavior illustrates 

 

7

 According to Kenneth L. Lay: “Enron achieved its earnings and operational goals in 

1996, the first year of our ENRON 2000 initiative to reach net income in excess of $1 billion and 

achieve a minimum double digit growth in annual earnings per share.” Press Release, Enron 

Corp., Enron Reports 12 Percent Increase in 1996 Earnings Per Share, to $2.31 Per Share 

(January 21, 1997), at http://www.enron.com/corp/pressroom/releases/1997/12per.html (last 

visited February 11, 2003). Enron’s reported net income in 2000 (before restatements) was $979 

million.

8

 This is documented by Enron presentation materials titled “Show Me the Money! 

Project Steele Earning Benefits.” The expected pre-tax operating earnings from this transaction 

was approximately $133 million. The Project Steele materials in Appendix B contain the 

document.

9

 Nearly all of the reviewed transactions are vulnerable to attack under judicial or 

administrative anti-abuse and anti-avoidance doctrines. Many of the reviewed transactions 

shared common characteristics, such as claiming the same tax loss twice in order to generate a 

financial statement benefit, and the shifting of tax basis from a nondepreciable asset to a 

depreciable asset.
10

that a motivated corporation can manipulate highly technical provisions of the law to achieve 

significant unintended benefits. Remarkable in many respects was Enron’s ability to parse the 

law to produce a result that was contrary to its spirit and not intended by Congress or the 

Treasury Department.

In transaction after transaction, Enron obtained sophisticated advice and in most instances 

received assurances that the proposed transaction “should” comply with technical tax law 

requirements. Often, these assurances were based on highly technical interpretations of the law 

even though the transaction produced surprising and questionable results. Many of the opinions 

hinged on a determination that the transaction had sufficient business purpose. Enron 

represented the business purpose of the transaction, and Enron’s counsel did not bother to look 

beyond the representation. Troubling is the lack of responsibility or independent assessment that 

some advisors showed in evaluating Enron’s stated business purpose.10 In one case, the advisors 

were involved in the promotion of the transaction and the creation of its ostensible “business 

purpose.” It would not be surprising if this collusion also existed in other transactions.

For many transactions, Enron picked from the same small pool of outside advisors. In 

some cases, if one advisor from the pool was not advising Enron in a particular deal, that advisor 

advised the other party (the promoter) to the transaction. Thus did incestuous relationships 

evolve among the participants in many of the reviewed transactions, with the result that Enron 

even acted as an accommodation party to deals designed primarily by Enron’s advisors to benefit 

others.

A critical component of many of Enron’s structured transactions was the involvement of 

an accommodation party such as an Enron employee or the party promoting the transaction. 

Such parties were not related to Enron from an ownership standpoint, but their interests were 

aligned with Enron and they shared the same objectives as Enron for purposes of the 

transactions. The tax law generally assumes that unrelated parties to a transaction are 

independent and therefore will negotiate the terms of a deal consistent with their best (and 

selfish) interests. Typically, the tax law views parties as related by reference to entity ownership 

or family relationship. However, if nominally unrelated parties have the same interests and 

 

10 The following statement by the managing partner of Enron’s primary legal counsel, 

Vinson & Elkins, suggests that this minimal level of review perhaps was not unintentional. 

With regard to the related party transactions, it is important to consider the role of 

legal counsel. If a transaction is not illegal and it has been approved by the 

appropriate levels of a corporation’s management, lawyers, whether corporate 

counsel or with an outside firm, may appropriately provide the requisite legal 

advice and opinions about legal issues relevant to the transactions. In doing so, 

lawyers are not approving the business judgment of their clients. Likewise, 

lawyers are not responsible for the accounting treatment of the transactions. 

Statement of Joseph C. Dilg, managing partner at Vinson & Elkins, in testimony before 

the House Committee on Energy and Commerce (March 14, 2002), available at 

http://energycommerce.house.gov/107/hearings/03142002Hearing511/hearing.htm.
11

objectives, the paradigm breaks down. Enron’s activities show that, in general, when 

transactions can be structured by parties that have the shared goal of obtaining favorable tax 

treatment, the tax rules do not function as intended and may produce undesirable results.

In addition, rules that ordinarily produce sensible results generated a tax benefit for Enron 

because of the way Enron utilized its own stock in many transactions. Just as the tax law 

generally assumes that the interests of unrelated parties to a transaction will be adverse, the tax 

law also generally assumes that a corporation uses its stock as a source of capital. Enron, 

however, repeatedly used its stock in a way that yielded a financial statement benefit from a 

permanent tax savings.

Paradoxically, the legislative and regulatory systems permitted Enron to enter into 

transactions that policymakers either had prohibited by law or questioned by regulation. 

Congress abolished the tax advantages of certain types of transactions, but nevertheless 

permitted corporations such as Enron to take advantage of transitional rules to engage in the 

transactions despite the imminent change to the law. Enron also was free to ignore proposed 

Treasury Regulations (some of which were longstanding) that, if finalized by the Treasury, 

would have stripped Enron of some of its tax positions.

Enron also excelled at making complexity an ally. Many transactions used exceedingly 

complicated structures and were designed to provide tax benefits significantly into the future. 

For any person attempting to review the transaction, there would be no easy way to understand 

its terms or purpose. Rather, a reviewer would be required to parse details from a series of deal 

documents, make assumptions about the parties’ intent in future years, and only then apply 

technical rules to the transaction to test for legitimacy. In short, Enron had the incentive and the 

ability to engage in unusually complicated transactions in order to preclude meaningful review. 

Corporations like Enron have an inherent advantage over the IRS. Enron structured its 

deals with the advice of sophisticated and experienced lawyers, investment bankers, and 

accountants. Assertions of attorney-client privilege hinders the ability of the IRS to obtain many 

of the most instructive documents, which impedes the IRS’s ability to audit the transaction. 

Some of the transactions resulted in the payment of some income tax in the early years, with 

significantly larger deductions to follow in later years. This pattern makes it less likely that the 

IRS will identify and challenge the transaction. Further, Enron’s recent position as a company 

with significant net operating losses worked to its advantage in IRS examination. A company 

with significant losses generally is of less immediate concern to the IRS because the losses will 

offset any increased taxable income arising from the audit. Thus, the IRS has less incentive to 

investigate and devote resources to such examinations. Enron’s activities show that the IRS 

cannot minimize the importance of loss companies on examination because to do so would 

ignore a breeding ground for tax-motivated transactions that also could be used by taxpaying 

companies.

Enron’s aggressive interpretation of business purpose, the cooperation of accommodation 

parties, the protections provided by tax opinions, the complex design of transactions -- all were 

factors that encouraged Enron to engage in tax-motivated transactions. Thus, Enron places the 

spotlight once again on the general ineffectiveness of present law in regulating tax shelters. Tax 

shelters are in many ways a product of the ambiguity of complex provisions of law, lack of 
12

administrative guidance, or inconsistent interpretations of the law by courts. Tax shelters often 

involve the juxtaposition of unrelated, incongruous Code provisions in a single transaction or a 

series of connected transactions. Taxpayers use the complexities of the system to their 

advantage and perform a clinical assessment of the risks and benefits of an action, often 

concluding that the low risk of effective enforcement (including the low risk of penalties) easily 

is outweighed by the promised benefits.11 Until the costs of participating in tax-motivated 

transactions are substantially increased, corporations such as Enron will continue to engage in 

transactions that violate the letter or the spirit of the law.

 

11 For detailed information of the present law rules and judicial doctrines applicable to 

tax-motivated transactions and related recommendations and developments, see e.g., Joint 

Committee on Taxation, Background and Present Law Relating to Tax Shelters (JCX-19-02), 

March 19, 2002; Joint Committee on Taxation, Study of Present-Law Penalty and Interest 

Provisions as Required by Section 3801 of the Internal Revenue Service Restructuring and 

Reform Act of 1998 (including provisions relating to Corporate Tax Shelters) (JCS-3-99), July 

22, 1999; Temporary Treasury regulations (T.D. 9017) to section 6011 (October 22, 2002); 

Temporary Treasury regulations (T.D. 9018) to section 6012 (October 22, 2002); Joint 

Committee on Taxation, Description of the "CARE Act of 2003," (JCX-04-03), February 3, 2003; 

Symposium: Business Purpose, Economic Substance and Corporate Tax Shelters, 54 SMU L. 

Rev. 1 (2001).
13

III. GENERAL FINDINGS AND RECOMMENDATIONS 

RELATING TO BUSINESS TAX MATTERS

A. General Findings Relating to Business Tax Matters

The Joint Committee staff believes that the transactions that are the subject of the Report 

demonstrate the need for strong anti-avoidance rules to combat transactions that might satisfy the 

technical requirements of the tax statutes and administrative rules, but that are conducted for 

little or no purpose other than to generate income tax or financial statement benefits. 

Accordingly, the Joint Committee staff makes the following findings and recommendations.

1. Cost-benefit analysis with respect to tax motivated transactions

The Joint Committee staff believes that stronger measures are necessary to discourage 

transactions that lack a non-tax business purpose or economic substance. Such measures, 

however designed, must significantly increase the economic risk to taxpayers of entering into 

tax-motivated transactions. Under the present system, the expected tax benefits from these 

transactions typically far outweigh the associated costs. Taxpayers will continue to engage in 

tax-motivated transactions unless and until there is a meaningful change in this cost-benefit 

analysis. At a minimum, taxpayers that engage in tax-motivated transactions should be subject 

to substantial penalties.

2. Business purpose

The Joint Committee staff believes that attainment of financial statement benefits based 

solely on Federal income tax savings is not a valid business purpose for purposes of evaluating a 

transaction or arrangement under Federal income tax laws. 

3. Accommodation parties

The tax laws should not permit the use of accommodation parties such as employees, 

consultants, or advisors, to serve as a party in a transaction or arrangement to permit a taxpayer 

to achieve Federal income tax benefits. The Joint Committee staff recommends that severe 

penalties be imposed on the accommodation party and on the taxpayer who engages the 

accommodation party.

4. Tax advisors

The Joint Committee staff is concerned about the willingness of tax advisors to render 

opinions that rely on factual representations that the advisor knows, or has reason to believe, are 

incorrect, incomplete, or inconsistent with the facts. Many tax-motivated transactions cannot 

occur without the complicity of a tax advisor who is aware of all the relevant facts, yet chooses 

to ignore them and instead relies on the taxpayer’s purported factual representations. The 

Treasury Department and IRS should have a broad array of sanctions to impose on advisors who 

render such opinions, and they should impose stiff sanctions on these advisors (and when 

appropriate, on the advisor’s employer or partners). In addition, the relevant State licensing 
14

authority should be notified when these sanctions are imposed, and the licensing authority also 

should discipline the advisor as appropriate.

5. Generally accepted accounting principles relating to accounting for Federal income taxes

The Joint Committee staff is concerned that businesses are engaging in tax-motivated 

transactions primarily to obtain financial accounting benefits. The accounting benefits result 

solely from the manipulation of the Federal income tax laws to create permanent book-tax 

differences. The Joint Committee staff further believes that this activity may be occurring 

because of certain aspects of the financial accounting rules governing accounting for income tax 

expense. Thus, the Joint Committee staff recommends that those responsible for promulgating 

the accounting standards evaluate whether changes are warranted to the rules governing 

accounting for income taxes.

6. Disclosure of tax-motivated transactions

The Joint Committee staff is concerned that the use of multiple entities in connection 

with tax-motivated transactions, coupled with the inherent complexity of these transactions and 

the delayed timing of the tax benefits, makes it exceedingly difficult for the Treasury Department 

and the IRS to timely identify and properly evaluate these transactions. The Joint Committee 

staff believes that taxpayers should be required to make a detailed disclosure of any taxmotivated transaction on a timely basis, irrespective of whether the transaction has immediate tax 

return effect.

7. Continued use of certain structured transactions

The Joint Committee staff is concerned that the publication of the Report may encourage 

taxpayers and promoters to engage in transactions similar to those described in the Report. The 

Joint Committee staff recommends that the Congress and Treasury Department take appropriate 

action as soon as practicable.
15

B. Recommendations Relating to Corporate Tax Issues

1. Curtail duplication of losses

General rule preventing duplication of losses12

A single economic loss should not be deducted more than once. The Joint Committee 

staff recommends limiting a corporation’s basis in property acquired in a tax-free transfer (or 

reorganization) to its fair market value. Alternatively, the Joint Committee staff recommends 

expanding the sec. 358(h) basis reduction rule.

Specific rule preventing duplication of losses relating to real estate mortgage investment 

conduit residual interests13

Under the statutory rules regarding the taxation of a real estate mortgage investment 

conduit (“REMIC”), generally phantom income is allocated to REMIC residual interest holders. 

The phantom income allocation inevitably creates built-in losses to the holders of the REMIC 

residual interests, thus making such interests a natural component for transactions designed to 

duplicate a single economic loss. As such, the Joint Committee staff recommends that either a 

corporation’s basis in REMIC residual interests acquired in a tax-free transfer (or reorganization) 

be limited to its fair market value or that a transferor’s basis in the stock received in exchange for 

REMIC residual interests be limited to the fair market value of the REMIC residual interests.

2. Strengthen rules preventing acquisitions made to evade or avoid Federal income tax14

Section 269 disallows certain tax benefits if a taxpayer acquires direct or indirect control 

of a corporation for the principal purpose of Federal income tax evasion or avoidance. The Joint 

Committee staff recommends expanding section 269 to apply to acquisitions of equity interests 

in a corporation, without regard to whether such interests provide to the acquirer control of the 

corporation, if the principal purpose of the acquisition is the evasion or avoidance of Federal 

income tax.

The Joint Committee staff also recommends expanding section 269 to disallow tax 

benefits that can be obtained through either controlling or non-controlling interests in a 

corporation, if the principal purpose of the transaction in which the benefits are acquired is the 

evasion or avoidance of Federal income tax.

 

12 Further discussion of this recommendation is provided in the descriptions of the 

transactions known as Project Tanya and Project Valor in Part Three of the Report.

13 Further discussion of this recommendation is provided in the descriptions of the 

transactions known as Project Steele and Project Cochise in Part Three of the Report.

14

 Further discussion of this recommendation is provided in the description of the 

transaction known as Project Cochise in Part Three of the Report.
16

3. Strengthen the extraordinary dividend rules15

The extraordinary dividend rules were amended in 1997 to prevent a corporate 

shareholder from structuring a redemption transaction with a related party to take advantage of 

the dividends received deduction. The Joint Committee staff recommends that the extraordinary 

dividend rules should be further strengthened.

4. Provide guidance on the replication of earnings and profits in a consolidated group16

A distribution is treated as a dividend to the extent of a corporation’s earnings and profits. 

The Joint Committee staff believes that guidance is needed to address situations in which a 

consolidated group attempts to create or replicate earnings and profits in a manner inconsistent 

with the purpose of the consolidated return rules.

 

15 Further discussion of this recommendation is provided in the description of the 

transaction known as Project Teresa in Part Three of the Report.

16 Further discussion of this recommendation is provided in the description of the 

transaction known as Project Teresa in Part Three of the Report.
17

C. Recommendations Relating to Partnership Tax Issues

1. Strengthen disclosure of disguised sales17

The Joint Committee staff recommends that the period for which disclosure is required 

under the disguised sale regulations should be extended beyond two years, and a more detailed 

disclosure of the source of permanent book-tax differences should be required. For example, 

extending the disclosure requirement to seven years, the period applicable to contributions and 

distributions under the pre-contribution gain rules, could make a facts and circumstances 

determination by the IRS both more likely to occur and easier for the IRS to administer. 

2. Strengthen partnership allocation rules18

Partnership allocations between members of the same affiliated group (and, in general, 

related parties) may not have the same economic consequences as allocations between unrelated 

partners. As a result, related partners can use the partnership allocation rules inappropriately to 

shift basis among assets. The Joint Committee staff recommends strengthening of the anti-abuse 

rules relating to partnership allocations for property contributed to a partnership, especially in the 

case of partners that are members of the same consolidated group, to ensure that the allocation 

rules are not used to generate unwarranted tax benefits.

3. Provide guidance regarding transfers of partial partnership interests19

The transfer of partial partnership interests among related partners can result in 

inappropriate basis shifts among the partners. The Joint Committee staff believes that guidance 

is needed regarding the apportionment of tax basis upon the transfer of a partial partnership 

interest (particularly when the transfer involves related parties). 

4. Provide rules for the appropriate interaction between partnership rules and corporate 

stock nonrecognition rules20

The interaction of the partnership basis adjustment rules and the rules protecting a 

corporation from recognizing gain on its stock can give rise to unintended tax results. 

Transactions based on this interaction generally purport to increase the tax basis of depreciable 

assets and to decrease, by a corresponding amount, the tax basis of the stock of a partner. 

 

17 Further discussion of this recommendation is provided in the description of the 

transaction known as Project Tomas in Part Three of the Report.

18 Further discussion of this recommendation is provided in the description of the 

transaction known as Project Condor in Part Three of the Report.

19 Further discussion of this recommendation is provided in the description of the 

transaction known as Projects Tammy I and Tammy II in Part Three of the Report.

20 Further discussion of this recommendation is provided in the description of the 

transaction known as Project Condor in Part Three of the Report.
18

Because the tax rules protect a corporation from gain on the sale of its stock (including through a 

partnership), the transactions enable taxpayers to duplicate tax deductions at no economic cost. 

The Joint Committee staff recommends that either (1) the rules protecting a corporation from 

recognizing gain on its stock should be modified to limit the nonrecognition of any gain if the 

gain is attributable to a decrease in the tax basis of the stock resulting from the partnership basis 

adjustment rules, or (2) that the partnership basis adjustment rules should be altered to preclude 

an increase in the basis of an asset to the extent the offsetting basis reduction would be to stock 

of a partner (or related party).

In addition, the Joint Committee staff believes that the proposed regulations under section 

337, relating to partnership acquisitions of stock of a corporate partner, would preclude taxpayers 

from engaging in these types of transactions. The Joint Committee staff recommends that final 

regulations on this subject should be issued expeditiously.
19

D. Recommendations Relating to International Tax Issues

1. Modify the rules for allocating subpart F income21

Treasury regulations contain highly mechanical rules for allocating the earnings and 

profits of a controlled foreign corporation for subpart F purposes. Special allocation abuses 

similar to those that have been encountered in the partnership taxation area also are possible in 

the context of controlled foreign corporations under these rules. In particular, a company may 

attempt to specially allocate subpart F income to tax-indifferent parties. The Joint Committee 

staff believes that this tactic is inconsistent with the purposes of subpart F and that the results 

that it purports to produce are inappropriate. The Joint Committee staff recommends adding an 

exception to the mechanical allocation method set forth in the regulations for cases involving 

allocations of earnings and profits to tax-indifferent shareholders made for tax-avoidance 

purposes.

2. Modify the interaction between the subpart F rules and the passive foreign investment 

company rules22

In 1997, Congress enacted rules to mitigate the complexity and uncertainty that arose 

when a foreign corporation met the definitions of both the controlled foreign corporation rules of 

subpart F and the passive foreign investment company rules, thus requiring shareholders to 

negotiate two sets of anti-deferral rules in connection with the same investment. The 1997 

legislation largely eliminated this overlap by providing that a controlled foreign corporation 

generally is not treated as a passive foreign investment company with respect to a “U.S. 

shareholder” of such controlled foreign corporation within the meaning of subpart F. Because 

this exception from the passive foreign investment company rules is based on a person’s status as 

a U.S. shareholder, as opposed to the person’s likely taxability under subpart F, situations may 

arise in which a U.S. shareholder of a controlled foreign corporation with mainly passive assets 

and passive income can take the position that no tax liability arises under either subpart F or the 

passive foreign investment company rules. 

The Joint Committee staff believes that the exception to the passive foreign investment 

company rules for U.S. shareholders of controlled foreign corporations should be geared more 

closely to the U.S. shareholder’s potential taxability under subpart F, as opposed to mere status 

as a U.S. shareholder within the meaning of subpart F. Accordingly, the Joint Committee staff 

recommends adding an exception to the 1997 overlap-elimination rule for cases in which the 

likelihood that a U.S. shareholder would have to include income under subpart F is remote. 

 

21 Further discussion of this recommendation is provided in the description of the 

transaction known as Project Apache in Part Three of the Report.

22 Further discussion of this recommendation is provided in the description of the 

transaction known as Project Apache in Part Three of the Report.
20

3. Strengthen the earnings stripping rules23

The lack of final regulations under the earnings stripping tax rules has created a void in 

an area in which more definitive guidance is needed. Proposed regulations provide that entities 

or arrangements established with a principal purpose of avoiding the earnings stripping rules 

should be recharacterized or disregarded. The Joint Committee staff believes that this proposed 

anti-abuse rule would change a company’s cost-benefit assessment of certain tax-motivated 

transactions, and thus recommends that the rule be finalized expeditiously.

4. Require annual information reporting with respect to disregarded entities24

Present law requires no ongoing information reporting with respect to entities that are 

disregarded pursuant to a “check the box” entity classification election. Although the IRS is 

alerted of the existence and classification of each entity at the time the election is made, there is 

no regime of ongoing information reporting with respect to these entities. On the one hand, this 

lack of separate information reporting may be appropriate, given that the entities are supposed to 

be “disregarded” for Federal tax purposes pursuant to the election. Nevertheless, it is widely 

recognized that the application of the “check the box” regulations in the international setting 

raises a number of issues that the IRS is addressing through guidance and on audit.

The Joint Committee staff believes that a regime of annual information reporting with 

respect to entities disregarded pursuant to a “check the box” election would significantly enhance 

the IRS’s ability to administer the international tax rules and to identify and address specific 

issues that arise in applying the “check the box” regulations in the international area. 

 

23 Further discussion of this recommendation is provided in the description of the 

transaction known as Project Apache in Part Three of the Report.

24 Further discussion of this recommendation is provided in the description of Enron’s 

use of foreign entities in Part Three of the Report.
21

E. Recommendation Relating to Financial Asset Securitization Investment Trusts25

1. Repeal financial asset securitization investment trust rules

Recent commentary suggests that the financial asset securitization investment trust 

(“FASIT”) rules, which were first enacted in 1996, are not widely used in the manner envisioned 

by the Congress and thus have failed to further their intended purposes. The Joint Committee 

staff believes that the abuse potential inherent in the FASIT vehicle far outweighs any beneficial 

purpose that the FASIT rules may serve, and thus recommends that these rules be repealed.

 

25 Further discussion of this recommendation is provided in the description of the 

transaction known as Project Apache in Part Three of the Report.
22

F. Recommendation Relating to Corporate-Owned

and Trust-Owned Life Insurance26

1. Repeal grandfather rules for pre-June 20, 1986 contracts

In light of the growth in interest incurred on debt under life insurance contracts that 

remains deductible due to a grandfather rule applicable to pre-June 20, 1986, corporate-owned 

and trust-owned life insurance contracts, the Joint Committee staff recommends termination of 

the grandfather rule for such contracts.

 

26 Further discussion of this recommendation is provided in the description of Enron’s 

corporate-owned and trust-owned life insurance contracts in Part Three of the Report.
23

G. Recommendations Relating to Structured Financing Transactions27

1. Modify the rules relating to the characterization and treatment of debt and equity

The proper characterization of financial instruments for Federal income tax purposes as 

either debt or equity has been a longstanding problem. This problem has been exacerbated in 

recent years by the escalation in the amount and variety of hybrid financial instruments that have 

characteristics of both debt and equity. Therefore, the Joint Committee staff recommends that 

the rules concerning the Federal income tax characterization of financial instruments as either 

debt or equity should be reviewed in a comprehensive way. There are several possible 

alternative approaches that are available in considering such changes to present law, including:

(1) Conform the tax characterization of hybrid financial instruments to the 

characterization that is used for other reporting purposes, such as financial 

accounting, so that the non-tax characterization determines the tax 

characterization.

(2) Strengthen the requirements for debt characterization, similar to the approaches 

proposed by the Treasury Department in 1996 and 1997, which may include 

altering or more precisely articulating the debt-equity factors listed in section 385. 

This approach also could involve changing the manner in which such factors are 

applied so that certain financial instruments that exhibit (or lack) certain features

are presumptively characterized as equity rather than indebtedness. In any event, 

section 385 should be amended to apply more broadly to interests in noncorporate entities, as well as corporations.

(3) Provide restrictions on the proportionate amount of yield payments on hybrid 

financial instruments that may be deducted as interest. The proportionate amount 

of deductible yield payments could be determined under such an approach by 

reference to one or more factors (or some combination thereof), such as the length 

of the term to maturity of the instrument or the number of months that the issuer 

could defer yield payments under the terms of the financial instrument.

(4) Reduce or eliminate the disparate taxation of interest and dividends (for both 

issuers and holders of financial instruments) that creates the market for hybrid 

financial instruments.

2. Modify the rules relating to disqualified indebtedness

The interest expense disallowance rules for disqualified indebtedness apply to 

transactions involving stock in another corporation only if the taxpayer controls the other 

corporation by virtue of owning more than 50 percent (by vote or value) of the outstanding stock 

of such corporation. The Joint Committee staff recommends that the 50-percent related party 

threshold under these rules should be eliminated.

 

27 Further discussion of these recommendations is provided in the description of Enron’s 

structured financing transactions in Part Three of the Report.
24

IV. PENSION AND COMPENSATION ARRANGEMENTS

A. Overview of Pension and Compensation Arrangements

1. Overview

Enron’s compensation arrangements received considerable media attention in the 

aftermath of the Enron bankruptcy. Some of this attention has focused on the broad-based 

retirement plans maintained by Enron that receive special tax benefits (“qualified retirement 

plans”). For many Enron employees, the benefits provided under these plans were the primary 

source of retirement income. Attention has also focused on the overall compensation 

arrangements of Enron, particularly the compensation provided to executives. The Report 

addresses both aspects of Enron’s compensation arrangements.

2. Enron’s qualified retirement plans

Overview of Enron qualified plans

Enron maintained three main qualified retirement plans: the Enron Employee Stock 

Ownership Plan (“ESOP”); the Enron Retirement Plan, which was modified and renamed the 

Enron Cash Balance Plan; and the Enron Savings Plan.

The Enron ESOP was invested primarily in Enron stock. 

The Enron Retirement Plan provided a benefit based on a participant’s compensation and 

years of service. The Enron ESOP and Enron Retirement Plan were designed as a floor-offset 

arrangement, under which benefits earned by a participant under the Enron Retirement Plan were 

reduced or “offset” by the benefits received by the participant under the Enron ESOP.

The floor-offset arrangement was frozen after 1994 and was phased out over the period 

1996 through 2000. During that period, the value of the account balance in the ESOP was 

locked in, and an offset for benefits accrued under the Enron Retirement Plan during 1987 

through 1994 was set permanently based on Enron stock prices at specified times. As a result of 

the locking in of the offset and the subsequent decline in the value of Enron stock, many plan 

participants did not receive the same level of benefits they would have received if the offset 

feature had remained unchanged. The locking in of the offset is currently under review by the 

IRS.

In 1996, the Enron Retirement Plan was renamed the Enron Cash Balance Plan and the 

traditional defined benefit plan formula was replaced with a cash balance formula. The Enron 

Cash Balance Plan has been under review by the IRS National Office since 2000, pursuant to a 

1999 directive that all cash balance plan conversions be referred to the IRS National Office 

pending clarification of applicable rules.

The Enron Savings Plan is a 401(k) plan. Participants could make elective deferrals and 

after-tax contributions to the Enron Savings Plan, and had a range of investment choices 

available for their contributions, including Enron stock. In addition, Enron made matching 
25

contributions based on employee elective deferrals. The matching contributions were invested in 

Enron stock pursuant to the plan terms; participants could elect to invest the matching 

contributions in another investment after attaining age 50.

Many Enron Savings Plan participants lost considerable amounts of retirement savings 

due to the high level of investment in Enron stock. Significant amounts of plan assets were 

invested in Enron stock even though the Enron Savings Plan offered approximately 20 

investment options other than Enron stock, consisting of a broad range of alternatives offering 

various risk and return characteristics.

Employee investment in Enron stock was generally encouraged by Enron. Even as the 

price of Enron stock declined during 2001, management told employees of a bright future for 

Enron. For example, Kenneth L. Lay was consistently optimistic in his predictions for the future 

of Enron stock, even when an employee specifically asked about Enron stock in the context of 

the Enron Savings Plan.

The decline of Enron’s stock price and Enron’s subsequent bankruptcy has affected the 

benefits that Enron employees are or may be entitled to under the Enron qualified plans. Most of 

the media attention regarding the effect of the bankruptcy on employees’ benefits related to the 

significant plan holdings in Enron stock, particularly in the Enron ESOP and the Enron Savings 

Plan. 

Issues reviewed with respect to Enron qualified plans

The Joint Committee staff reviewed in detail certain issues relating to the Enron qualified 

plans, including: (1) the locking in of the value of the ESOP offset under the Enron Retirement 

Plan; (2) the conversion of the Enron Retirement Plan into the Enron Cash Balance Plan; (3) 

investment of the Enron ESOP in Enron stock; (4) a change in recordkeepers under the Enron

Savings Plan that resulted in a “blackout” period in October and November 2001 during which 

plan participants could not make investment changes while the price of Enron stock was falling; 

(5) the reasons behind the level of investment of Enron Savings Plan assets in Enron stock; and 

(6) allegations made in early 2002 by Ms. Robin Hosea, a former Enron contract and full-time 

employee, that payments were made from Enron’s employee benefit funds for purposes 

unrelated to employee benefits.

3. Other compensation arrangements

In general

In addition to the attention given to the Enron qualified retirement plan issues, attention 

has been focused on the various compensation arrangements of Enron, particularly those of 

officers and other executives. This focus has been both on the magnitude of compensation paid 

to certain executives and on the various forms of compensation used by Enron.

Enron had a pay-for-performance compensation philosophy. Employees who performed 

well were compensated well. Enron’s compensation costs for all employees, and especially for 

executives, increased significantly over the years immediately preceding the bankruptcy.
26

Executives of Enron were extremely highly compensated. Table 4, below, shows 

information compiled by the IRS, which is based on information provided by Enron, on 

compensation of the top-200 highly compensated employees for 1998 through 2000. 

Compensation for the top-200 increased over recent years, particularly in the area of stock 

options. 

Table 4.–Compensation Paid to the Top-Paid 200 

Employees for 1998-200028

Year Bonus Stock Options Restricted 

Stock

Wages Total

1998 $41,193,000 $61,978,000 $23,966,000 $66,143,000 $193,281,000

1999 $51,195,000 $244,579,000 $21,943,000 $84,145,000 $401,863,000

2000 $56,606,000 $1,063,537,000 $131,701,000 $172,597,000 $1,424,442,000

Overview of Enron’s executive compensation arrangements

Executive compensation at Enron was generally comprised of base salary, annual 

incentives, and long-term incentives. Enron’s long-term incentive program was designed to tie 

executive performance directly to the creation of shareholder wealth. The long-term incentive 

program provided for awards of nonqualified stock options and restricted stock. Certain 

executives were eligible to participate in nonqualified deferred compensation arrangements. 

Enron also had special compensation arrangements for certain individuals.

Nonqualified deferred compensation plans

Certain executives were given the opportunity to participate in nonqualified deferred 

compensation arrangements. Participants were eligible to defer all or a portion of salary, bonus, 

and long-term compensation into Enron-sponsored deferral plans. The plans provided an 

opportunity to delay payment of Federal and State income taxes and earn a tax-deferred return on 

deferrals. Many executives took advantage of the opportunity to defer amounts that would 

otherwise have been included in income currently.

Nonqualified deferred compensation was a major component of executive compensation 

for Enron. Documents provided by Enron show the approximate amounts deferred under all 

deferred compensation plans for the top-paid 200 employees for the years 1998-2001. Amounts 

deferred in these years are shown in the following table.

 

28 The information provided by the IRS includes some inconsistencies. In reproducing 

the summary data, the Joint Committee staff attempted to reconcile inconsistencies and included 

the data that appears to be accurate. Amounts are approximates.
27

Table 5.–Amounts Deferred by Top-Paid 200 Employees 1998-2001

Year

Amounts Deferred Under All Deferred 

Compensation Plans for the Top-200

(millions of dollars)

1998 $13.3

1999 19.7

2000 67.029

2001 54.4

In late 2001, prior to Enron’s bankruptcy filing, early distributions were made to certain 

participants from two of Enron’s nonqualified deferred compensation plans. These distributions 

totaled more than $53 million.

Stock-based compensation

Enron used stock-based compensation as a principal form of compensation for 

executives. Enron’s stock-based compensation programs included nonqualified stock options, 

restricted stock, and phantom stock. The amount of income attributable to stock options and 

restricted stock is shown in Table 4, above. Enron’s deduction for compensation attributable to 

the exercise of nonqualified stock options increased by more than 1,000 percent from 1998 to 

2000. Enron’s directors were also compensated partially in Enron stock.

Pre-bankruptcy bonuses

In the weeks immediately preceding the bankruptcy, Enron implemented bonus 

programs: one for approximately 60 key traders and one for approximately 500 employees that 

Enron claimed were critical for maintaining and operating Enron going forward. In order to 

receive a bonus under one of these programs, the employee had to agree to repay the bonus, plus 

an additional 25 percent, if the employee did not remain with Enron for 90 days. The combined 

cost of the programs was approximately $105 million.

Special compensation arrangements

Enron had certain compensation arrangements for limited groups of people or for specific 

individuals. For example, Enron had a Project Participation Plan for employees in its 

international business unit.

Enron also had arrangements for a small number of employees or in some cases just one 

employee. One executive, Mr. Lou Pai, received the use of a 1/8 fractional interest in a jet 

aircraft Hawker 800 as part of his compensation. A few employees received loans (or lines of 

credit) from Enron or split-dollar life insurance arrangements. Enron purchased two annuities 

from Mr. Lay and his wife as part of a compensation package for 2001. Certain executives were 

 

29

 According to the documents provided by Enron, in 2000, Mr. Lay deferred $32 million 

under the 1994 Deferral Plan in 2000.
28

allowed to exchange interests in plans for large cash payments or stock options and restricted 

stock grants.

Employee loans

From time to time, Enron extended loans to a few executives. Information provided to 

the Joint Committee staff indicates that loans were made to at least eight Enron employees, 

including Mr. Lay and Mr. Jeffrey Skilling. Mr. Lay was provided with a $7.5 million line of 

credit with the company. The aggregate amount withdrawn pursuant to his line of credit from 

1997 through 2001 was over $106 million. In 2001 alone, Mr. Lay engaged in a series of 25 

transactions involving withdrawals under the line of credit totaling $77.5 million, of which all 

but $7.5 million was repaid. Mr. Skilling was loaned $4 million by Enron in 1997. Half of the 

loan was repaid in 1999 and the other half in 2001.

Purchase and reconveyance of Mr. Lay’s annuity contracts

In September of 2001, the Compensation Committee of the Enron Board of Directors 

agreed to an “insurance swap transaction” under which Enron agreed to purchase two annuity 

contracts from Mr. and Mrs. Lay for $10 million and also agreed to reconvey the annuity 

contracts back to Mr. Lay if he remained employed with Enron through December 31, 2005. If 

Mr. Lay left Enron prior to that date, the reconveyance would still take place in four events: (1) 

retirement with the consent of the Board; (2) disability; (3) involuntary termination (other than 

termination for cause); or (4) termination for “good reason.” Mr. Lay’s counsel indicated in a 

letter to the Joint Committee staff that they could not give a legal opinion about the current status 

of the annuity contracts and indicated their understanding that the characterization of Mr. Lay’s 

termination with Enron for purposes of severance benefits was still under review.

Split-dollar life insurance arrangements

Enron entered into split-dollar life insurance arrangements with Mr. Lay ($30 million and 

$11.9 million), Mr. Skilling ($8 million), and Mr. Clifford Baxter ($5 million).
29

B. General Observations With Respect to Pensions and Compensation

Enron’s stated philosophy was a pay for performance approach to compensation; those 

who performed well were paid well. Enron implemented this approach with a broad array of 

compensation arrangements for its executives that included base pay, bonuses, and long-term 

incentive payments. In 2000, total compensation for the 200 highest paid employees of Enron 

was $1.4 billion dollars ($1.2 billion of which was attributable to stock options and restricted 

stock). In the same year, Enron reported $975 million of financial statement net earnings.

Enron’s approval of compensation packages for its executives rested almost entirely with 

internal management. Although the Compensation Committee of the Board of Directors 

formally approved both the total amount of compensation paid to executives and the form of 

such compensation, the Compensation Committee’s approval generally was a rubber stamp of 

recommendations made by Enron’s management. Missing was an objective assessment of the 

value added by top executives; compensation was typically deemed to be justified if it appeared 

to be consistent with what other companies paid executives. Targets for compensation were 

sometimes set, but in practice the total amount paid frequently exceeded the targets. The 

Compensation Committee went through the motions of satisfying its role as objective evaluator 

of reasonable pay by commissioning “independent” studies with respect to Enron’s 

compensation arrangements; in some cases, the studies appeared to be designed to justify 

whatever compensation arrangement management wanted to adopt.

The lack of scrutiny of compensation was particularly prevalent with respect to Enron’s 

top executives, who essentially wrote their own compensation packages. In some cases, 

although going through the formalities of reviewing arrangements, the Compensation Committee 

merely rubber stamped what was presented. In other cases, the Compensation Committee either 

never reviewed certain arrangements for executives, or performed such a cursory review that

they were not fully aware of what they were approving. For example, a former chairman of the 

Compensation Committee could not remember an arrangement under which an Enron executive 

was awarded a fractional interest in an airplane as a form of compensation.

There was no indication that Enron’s Compensation Committee ever rejected a special 

executive compensation arrangement brought to them. Indeed, the Compensation Committee 

used studies, sometimes commissioned after the fact, to justify the compensation arrangements 

for top executives. As a result, Enron’s top executives earned enormous amounts of money and 

even used the company as an unsecured lender. For example, from 1997 through 2001, Mr. Lay 

borrowed over $106 million from Enron through a special unsecured line of credit with the 

company.

Enron did not appear to maintain consistent or centralized recordkeeping with respect to 

compensation arrangements in general and executive compensation in particular. Enron could 

not provide documentation relating to many of Enron’s special compensation arrangements for 

its top executives. When asked about compensation arrangements in interviews, current and 

former Enron employees with responsibility for such matters had no knowledge of certain 

aspects of executives’ compensation, particularly in the case of special arrangements. Although 

Enron represented that it properly reported income with respect to employee compensation 

arrangements, the lack of recordkeeping made it impossible to verify whether this was true.
30

Enron’s heavy reliance on stock-based compensation, both with respect to executives and 

with respect to rank and file employees, caused significant financial loss when Enron’s stock 

price collapsed. As part of a philosophy that a large portion of executive compensation should 

depend on shareholder return, Enron rewarded executives with huge amounts of stock options, 

restricted stock, and bonuses tied to financial earnings. In addition, a strong company culture 

encouraging stock ownership by all employees led to high investments in Enron stock by 

employees through the Enron Corp. Savings Plan (the “401(k)” plan). In the end, when Enron’s 

stock price plummeted, Enron’s employees and executives lost millions of dollars in retirement 

benefits under Enron’s qualified plans and nonqualified deferred compensation arrangements and 

through the loss of value of stock that had been received as compensation for services. Although 

some executives suffered losses that appear stunning in amount, many executives also reaped 

substantial gains from their compensation arrangements. Enron’s rank and file employees in 

many cases lost virtually all of their retirement savings because they believed statements made 

by Enron’s top executives up to the very end that Enron was viable and that Enron’s stock price 

would turn around.
31

C. Findings and Recommendations Relating to

Pension and Compensation Arrangements

1. Cash balance plans

In converting the Enron Retirement Plan into a cash balance plan, Enron did not adopt 

many of the plan features that gained media attention in the 1990s when several large plans were 

converted to cash balance plans. Enron did not adopt a “wearaway” and took steps to protect the 

expectation interests of plan participants close to retirement under the old plan formula. The 

review of the plan has been pending in the IRS National Office for almost three years pursuant to 

a 1999 IRS moratorium on the issuance of determination letters for cash balance conversions 

pending clarification of applicable legal requirements. The Treasury Department has recently 

issued proposed regulations which, when finalized, would address many, but not all issues 

relating to cash balance plans.

The Joint Committee staff believes that the lack of clear guidance with respect to cash 

balance plan conversions and cash balance plans in general creates uncertainty for employers and 

employees. Thus, the Joint Committee staff recommends that clear rules with respect to such 

plans should be adopted in the near future.

2. Blackout periods under qualified plans

Enron implemented a change of recordkeepers under the Enron Savings Plan in October 

and November of 2001. As part of this change, plan participants experienced a “blackout” 

period of approximately two and one-half weeks during which investment changes could not be 

made. During this time, the price of Enron stock fell from $15.40 to $9.98.

Changes in plan recordkeepers or other third-party service providers is a normal part of 

qualified retirement plan operations. The Joint Committee staff review of the change in 

recordkeepers with respect to the Enron Savings Plan indicates that Enron had legitimate reasons 

for changing recordkeeepers, and undertook an extensive search in order to find a new 

recordkeeper that would meet its needs.

The main issue raised with respect to the change in recordkeepers under the Enron 

Savings Plan is whether plan fiduciaries, including the Enron Savings Plan Administrative 

Committee, acted in accordance with their fiduciary obligations in implementing the blackout 

period or whether they should have stopped the blackout from occurring given the falling price 

of Enron stock and its financial circumstances. Members of the Administrative Committee 

interviewed by the Joint Committee staff indicated that they viewed their responsibilities as 

relatively narrow, and did not focus on the possible effects of the proposed blackout on plan 

participants until after the blackout had begun. Whether there was a breach of fiduciary 

responsibilities in this case will be resolved through litigation.

The blackout also raises questions regarding whether plan participants received notice of 

the blackout sufficient to allow them to make appropriate decisions in anticipation of the 

blackout. The information reviewed by the Joint Committee staff indicates that Enron provided 

a variety of advance notices to plan participants explaining the proposed blackout. The Joint 

Committee staff did not undertake to review whether all participants in fact received notice of 
32

the blackout; however, the Joint Committee staff determined that not all participants received the 

same notices. In particular, certain active employees received additional reminders of the 

blackout that were not sent to other participants.

The Sarbanes-Oxley Act of 2002, enacted after the Enron bankruptcy, includes a notice 

requirement with respect to blackout periods under qualified plans. Thus, the Joint Committee 

staff does not recommend further legislative changes in this area at this time.

3. Investments under 401(k) plans 

Many Enron Savings Plan participants lost considerable amounts of retirement savings 

due to a high level of investment in Enron stock. Plan design features which required Enron’s 

matching contributions to be invested in Enron stock contributed to the significant investment in 

Enron stock. Other factors may also have played a role, including a lack of understanding of the 

importance of diversification and the actions (or inactions) of plan fiduciaries. The Joint 

Committee staff believes that an overwhelming factor was a corporate culture that actively 

promoted investment in Enron stock. 

The Joint Committee staff believes that the importance of diversification of retirement 

savings cannot be overemphasized. The Joint Committee staff recommends that a variety of 

changes should be made to reduce the likelihood that participants in plans that allow participant 

directed investments will have high concentrations of assets in a single investment.

The Joint Committee staff recommends that plans should provide participants with 

investment education in a manner consistent with fiduciary standards. This should include 

periodic notices describing sound investment practices and individualized notices to plan 

participants whose plan investments are over concentrated in a single asset. 

The Joint Committee staff recommends that plans should not be permitted to require that 

employee elective deferrals or after-tax contributions be invested in employer securities. In 

addition, plan participants should be given greater opportunity to diversify the investment of 

employer matching and certain other employer contributions made in the form of employer 

securities.

The Joint Committee staff recommends certain changes with respect to ERISA fiduciary 

rules. The experience at Enron points out the difficulties that may arise when individuals play 

more than one role, particularly roles as a fiduciary and as an executive of the employer. These 

two roles may conflict and cause confusion among plan participants. The experience at Enron 

demonstrates that plan fiduciaries may have difficulty determining what actions are consistent 

with their dual roles. The Joint Committee staff believes that fiduciary rules should apply to the 

statements of senior executives, whether or not they are otherwise plan fiduciaries, regarding 

qualified plans or plan investments. The Department of Labor should also take steps to educate 

plan fiduciaries regarding their fiduciary duties.

Because of the strong corporate culture that encouraged Enron stock ownership by Enron 

employees, it is not clear that the outcome would have been any different if these measures had 

been in place prior to the bankruptcy. Further, Enron is not alone it its high concentration of 

investment in employer stock. A recent study of 219 large 401(k) plans found 25 plans that had 
33

over 60 percent of their assets invested in employer securities.30 Given these factors, the Joint 

Committee staff is concerned that, absent legal restrictions on the amount of employer securities 

that can be held in defined contribution plans, situations such as Enron’s may occur again. Such 

restrictions would involve a major policy change from present law.

4. Nonqualified deferred compensation

Through Enron’s nonqualified deferred compensation programs, executives were able to 

defer more than $150 million in compensation from 1998 through 2001. The key motivating 

factor in deferring compensation was the desire of Enron’s employees to avoid current income 

inclusion with respect to their compensation. In the weeks preceding the bankruptcy, apparently 

in accordance with the terms of the deferred compensation arrangement, Enron paid executives 

$53 million in accelerated distributions of nonqualified deferred compensation. In addition to 

the accelerated distributions, participants were able to direct investment of their accounts and to 

make subsequent elections to change the timing of distributions.

The nonqualified deferred compensation arrangements of Enron illustrate the common 

practice of allowing executives to defer tax on income, but also to maintain security and control 

over the amounts. Given the significant amounts of compensation deferred by Enron executives, 

it appears that the risks and restrictions associated with deferring compensation were not viewed 

as impediments to deferral. 

Enron’s deferred compensation plans allowed executives to receive benefits similar to 

those of qualified plans. To the extent that it is possible for executives to defer taxes and have 

security and flexibility through nonqualified arrangements, this undermines the qualified 

retirement plan system. If executives can obtain the result they desire through the use of 

nonqualified plans and arrangements, there will be less incentive for companies to maintain 

qualified plans, which will result in rank and file employees losing pension coverage.

Enron allowed its executives to defer significant amounts of compensation even though 

Enron had to forego a current deduction with respect to such amounts. The fact that Enron was 

apparently indifferent to the deferral of its deduction provides further support for the need for 

changes to the tax treatment of nonqualified deferred compensation. Changes to the present-law 

rules regarding the taxation of deferred compensation would reduce the amount of income 

deferred.

Rules should be developed to require current income inclusion in the case of plan features 

that give taxpayers effective control over amounts deferred. The Joint Committee staff believes 

that the existence of plan provisions that allow accelerated distributions, participant-directed 

investment, or subsequent elections should result in current income inclusion. In addition, the 

Joint Committee staff believes that consideration should given to whether rabbi trusts are 

appropriate for deferred compensation and whether the rules relating to such arrangements 

 

30

 See Enron Debacle Will Force Clean Up of Company Stock Use in DC Plans, DC Plan 

Investing (Institute of Management & Administration), at 1-2 (Dec. 11, 2001).
34

should be tightened. The use of programs such as Enron’s deferral of stock options gains and 

restricted stock programs should not be allowed. 

In addition, the Joint Committee staff believes that section 132 of the Revenue Act of 

1978 should be repealed. This would allow the Treasury Department to issue much needed 

guidance in the nonqualified deferred compensation area. The lack of guidance over the last 25 

years has given taxpayers latitude to use creative nonqualified deferred compensation 

arrangements that push the limit of what is allowed under the law.

The Joint Committee staff also believes that reporting of deferred amounts should be 

required to provide the IRS greater information regarding such arrangements.

5. Stock-based compensation

Enron utilized considerable amounts of stock-based compensation, including stock 

options, restricted stock, and phantom stock arrangements. The use of stock-based compensation 

was not limited to executives. Enron had all-employee stock option arrangements and, as 

described above, also facilitated the ownership of Enron stock through Enron’s qualified plans. 

The use of stock-based compensation was part of Enron’s overall compensation philosophy, and 

also reflected the views of the Compensation Committee that a significant amount of executive 

compensation should be dependent on shareholder return.

The amount of compensation generated from stock-based compensation arrangements 

was significant, and increased dramatically over the period 1998 through 2000. Over this period, 

Enron’s deduction attributable to stock options increased by more than 1,000 percent; from $125 

million in 1998 to over $1.5 billion in 2000. Income attributable to restricted stock for the top200 most highly compensated employees rose from $24 million in 1998 to $132 million in 2000.

Although the intent of many of Enron’s stock-based compensation programs was to align 

the interests of shareholders and executives, the Enron experience raises a potential conflict 

between short-term earnings from which executives can reap immediate rewards and longer-term 

interests of shareholders.

In addition, the use of stock options highlights the differences between the treatment of 

stock options for Federal income tax purposes and accounting purposes. The accounting rules 

and the income tax rules have different purposes, and therefore the two sets of rules may be 

necessary in order to accomplish their intended purposes.

In implementing its stock-based compensation programs, Enron appeared generally to 

follow IRS published guidance. Thus, no recommendations are made with respect to such 

programs.

6. Employee loans

While Enron did not have a formal policy regarding employee loans, it nevertheless made 

a variety of loans to certain executives, including top management. The loans raise Federal tax 

issues as well as corporate governance issues. 
35

In some cases, loan agreements provided that the loan would be forgiven if the executive 

stayed with Enron for a certain period of time. For example, such an arrangement was provided 

for Mr. Skilling. 31 While these arrangements were treated by Enron and the executives 

involved as loans, it is difficult to distinguish such arrangements factually from the prebankruptcy bonuses paid by Enron, which had to be repaid if the employee did not remain with 

Enron for a certain period of time and which were treated by Enron as taxable compensation. 

Loans of this type raise the question of whether the arrangement at the outset should have been 

treated as taxable compensation. 

Other loans did not have a provision regarding forgiveness, but were forgiven by Enron. 

In such cases, the amount forgiven was treated as compensation to the executives.

The loan transactions raise corporate governance issues of whether corporate funds are in 

essence being used for personal purposes. A line of credit for Mr. Lay provides an example of 

the issues raised. Pursuant to his $7.5 million line of credit, in a series of 25 transactions in 2001 

alone, Mr. Lay withdrew a total of over $77 million (all but $7.5 million of which was repaid). 

The total amount withdrawn under the line of credit was over $106 million; over $94 million of 

this amount was repaid with Enron stock. Mr. Lay’s attorneys have stated that the loan 

transactions related to Mr. Lay’s personal investment. 

The Sarbanes-Oxley Act of 2002 contains a prohibition on executive loans. Thus, the 

Joint Committee staff is not making any recommendation regarding loans at this time.

7. Split-dollar life insurance contracts

Enron had split-dollar life insurance contracts for three top executives, ranging from $5 

million to $30 million of coverage. The Treasury Department has issued notices and proposed 

regulations offering more detailed guidance than was previously available with respect to split 

dollar life insurance. This guidance generally requires the inclusion in income of the value of the 

economic benefit received by the employee under the arrangement. This guidance provides clear 

rules and should be finalized expeditiously.

8. Limitation on deduction of compensation in excess of $1 million 

The $1 million deduction limitation on the compensation of top executives did not appear 

to have a major effect on the overall structure of Enron’s compensation arrangements or the total 

amount of compensation paid to Enron employees. For 1998 through 2000, total compensation 

for Enron’s top executives was $433.6 million. Although most of this compensation was treated 

by Enron as qualifying for the exception for performance-based compensation (86 percent), 

Enron paid a significant amount of nondeductible compensation during this period ($48.5 million 

which was 11 percent of total compensation).32 Given Enron’s net operating loss carryovers, the 

 

31 Mr. Skilling did not remain with Enron for the period specified in his loan agreement, 

and he repaid the loan. According to Enron, some interest on the loan is still outstanding.

32 As explained in the Report, the compensation numbers presented here are 

approximate, due to inconsistencies in information obtained from Enron. These numbers are 

from information provided by Enron to the IRS.
36

nondeductiblity of this compensation may not have had a significant impact on Enron’s overall 

tax liability.

The $1 million deduction limitation was designed to address corporate governance 

concerns that top executives were receiving excessive compensation. The experience with Enron 

indicates that the limitation is not effective in achieving its purposes. Taxpayers may choose to 

pay nondeductible compensation, and accept the potential adverse tax consequences. In the case 

of Enron, there may in fact be little adverse tax impact.

The Joint Committee staff recommends that the limitation be repealed, and that any 

concerns regarding the amount and types of compensation be addressed through laws other than 

the Federal income tax laws.