Did Enron Pay Taxes: Deciphering a Corporation's Tax Status Using Financial Statement Information

Abstract

The much publicized collapses of Enron Corporation and WorldCom, Inc. have heightened the discussion regarding the need for more consistency between measures of book and taxable income and the adequacy of the current annual report disclosure of a publicly-traded corporation's tax status. As a result of the speculation and confusion about whether these corporations paid federal income taxes despite reporting billions of dollars of book income, commentators and members of Congress are calling for, or at least questioning the need for, publicly traded companies to be required to make their federal income tax returns (or relevant summary information) available to government agencies and perhaps even shareholders and employees. In this paper we demonstrate how available financial statement data can be used to guesstimate a publicly-traded corporation's tax status. In so doing, we summarize the existing financial accounting literature on income tax disclosure and point out the gaps in such disclosure that make it difficult (impossible) to precisely discern the corporation's federal income tax status. We hope the methodology and ensuing discussion help legislators, government agencies, academic researchers, and analysts better understand current disclosure rules and evaluate whether these rules provide sufficient information about a corporation's financial accounting and tax status. If anything comes from this exercise, we hope the reader will appreciate that reliance on the company's taxes currently payable as a measure of the corporation's current year tax status can be very misleading, despite the theoretical underpinnings of the term as defined in FAS 109.