Footnote 8

Insiders intended to accomplish the basis step-up by passing Enron’s interest in the corporateheadquarters building to a partnership, and later distributing the property to an Enron affiliate thathad achieved an increased basis in its partnership interest. Maxey expected the increased tax basisin the partnership interest eventually to be reflected as an increase in the basis of the corporateheadquarters building, and expected that it would result in increased depreciation deductions overa period of 39.5 years. Enron recorded, at the outset, deferred tax assets to reflect these potentialfuture tax benefits, assuming that the building was actually distributed back to Enron in the future.Maxey also testified that recording the deferred tax assets reduced current tax expense and therebyincreased current reported after-tax earnings.492. BT/Deutsche designed the Teresa transaction and promoted it to the Insiders.BT/Deutsche also facilitated the transaction by causing its affiliate to acquire preferred stock in theSPE formed to enable the deal. BT/Deutsche also retained and worked with Arthur Andersen inmanipulating the accounting benefits from the Teresa transaction. In its internal discussions,BT/Deutsche Bank estimated that Teresa would provide $240 million of after-tax income. AsEnron’s exclusive financial advisor with respect to Teresa, BT/Deutsche Bank was initiallypromised a fee of up to $8 million. However, the fee was later reduced to $6.625 million after theInsiders agreed to participate in another tax transaction (Project Renegade) for BT/Deutsche Bank’sbenefit. Project Renegade is discussed below.493. The accounting treatment for which Teresa was created did not accord with GAAP.For one thing, Enron’s ability to realize the future tax benefits it recorded was far from assured.Also, recording Teresa’s tax benefits when they were recorded was premature, since those benefitswould not actually arise until the basis step-up was reflected in the basis of Enron’s corporateheadquarters. Even had it not been premature to record the benefits, Enron should have establisheda valuation allowance or tax cushion.604041v1/007457-159-