Case study: the JCT's Enron report sheds light on the book vs. tax debate.

• Author: Nellen, Annette
• Position: Joint Committee on Taxation

The Joint Committee on Taxation's (JCT's) analysis of Enron's 1996-2000 returns, in Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations (JCS-3-03, February 2003) (Report), gives educators an opportunity to discuss the debate on tax accounting and financial accounting differences and whether current tax disclosure rules require improvement. The Enron Report, available at the JCT'S Website (www.house.gov/jct/ pubs03.html), is daunting, comprising more than 2,700 pages over three volumes. More accessible is the JCT's testimony, 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 2003) (Testimony), which is also available at the JCT's Website.

The Silver Lining

Used as a case study, the Enron Report can stimulate debate over how corporations should report book-tax differences to shareholders. Although it focuses primarily on Enron's tax shelters and compensation arrangements, the Report also provides a reconciliation of the company's financial statement income to taxable income (Table 2 in the Report and the Testimony) and copies of its Schedule M-1 (book-to-tax reconciliation) from its 1996-2000 returns (Appendix A in the Report, Volume 2).

These two items can form the basis of a case study in an introductory or advanced tax class, consistent with the approach recommended by the AICPA Model Tax Curriculum to integrate tax and financial accounting concepts and promote multidisciplinary skills; see Model Tax Curriculum, p. 3, at www.aicpa.org/members/div/career/ edu/introduc.htm. To integrate these two concepts, current teaching methods primarily consist of students transferring appropriate tax-related data from a hypothetical corporation's financial accounting statements to Form 1120 and preparing Schedule M-1 to reconcile the differences; see Dennis-Escoffier et al., Tax Education, "Experiences with the Model Tax Curriculum" TTA, May 2001, p. 340.

Depending on students' sophistication level, educators can modify the Report to address the many aspects of book-tax issues. For example, in an undergraduate tax class, they can focus on Enron's financial statements (e.g., income, balance sheet, cashflows and shareholders' equity) and its "Income Taxes" Note 5 (see Exhibit 1 below) and "Common Stock" Note 11. In a graduate tax course, educators can also fully explore one or more of the company's intricate tax shelters.

Educators can find Enron's annual reports from 1998-2000 at the company's Website (www.enron.com/corp/ investors) . These reports provide financial data for the period analyzed by the JCT...