Enron Corp. - University of California | Office of The President

797.17 In the words of the Joint Committee Report:
Project Teresa was a synthetic lease arrangement designed to result in an
increase in tax basis in depreciable assets (the most significant asset being the Enron
North office building) with minimal economic outlay. This was accomplished in the
following manner: Enron, through a deconsolidated entity, contributed depreciable
assets and preferred stock of an affiliate to a partnership. Bankers Trust (the
promoter of the transaction) contributed cash to the partnership. Enron affiliates
would periodically acquire (or redeem) the preferred stock from the partnership, with
the acquisition/redemption being treated as a taxable dividend eligible for an 80
percent dividends received deduction. Enron's basis in its partnership interest was
increased by the total amount of the dividend (without regard to the dividends
received deduction). Ultimately, the partnership was to be liquidated in a manner
that would result in Enron receiving the depreciable assets with the increased basis.
Enron would recover this increased tax basis through higher future depreciation
deductions on the Enron North office building and the other depreciable assets.
797.18 Through this deceptive device, Enron and Bankers Trust artificially inflated Enron's
financial statement earnings in excess of $226 million during the period 97-01. For its part, Bankers
Trust "earned" an $11 million fee – paid out through 01.
797.19 There is no doubt that both Bankers Trust and Enron were acting to artificially inflate
Enron's reported financial results, and in violation of tax code requirement that transactions have a
legitimate business purpose other than tax savings. Indeed, the tax opinion prepared by the law firm
King & Spalding states: "'The predominant purpose of Enron and its Affiliates for participating in
[the redemption transaction in Project Teresa] was to generate income for financial accounting
purposes.'"
Project Cochise
797.20 Project Cochise, a variation of Project Steele, was – according to the Joint Committee
Report – "intended to yield Enron a combination of both income for financial statement purposes
and deductions for Federal income tax purposes." Project Cochise was begun in 7/98, and Bankers
Trust delivered an engagement letter on 1/29/99 by which it was to be the exclusive financial advisor
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