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The U.S. Tax Court ruled in favor of deceased Enron Corp. Chief Executive Officer Kenneth Lay, rejecting a bid by the Internal Revenue Service to collect $3.9 million from his estate and his wife.
The case was related to transactions among Lay, his wife, Linda, and Enron that were executed on Sept. 21, 2001. The Lays sold $10 million in annuities to Enron as part of an agreement for him to retake the CEO position, under the stipulation that the annuities would be returned to him if he worked a 4.25-year term. The company didn’t survive that long, and it filed for bankruptcy protection in December 2001.
The IRS contested the Lays’ contention that the annuities were sold to Enron, according to the Tax Court decision by Judge Joseph Goeke. In 2009, the IRS filed a notice of tax deficiency for $3.9 million, arguing that the Lays should have reported the $10 million as income in 2001. Instead, they reported that they sold the annuities to Enron at their cost basis for no gain.
Goeke said in the decision that the agency’s position was incorrect and ruled for Linda Lay and for Kenneth Lay’s estate. The transactions, he wrote, were legitimate, and neither of the Lays nor the estate received any distributions or death benefit from the annuity.
“The benefits and risks of ownership of the annuity contracts were transferred to Enron in the annuities transaction,” he wrote. “The Lays, therefore, properly reported the transaction on their federal income tax return as a sale of the two annuity contracts.”
Lay’s Conviction
Lay, who died in 2006 at age 64, was convicted in May 2006 by a federal jury in Houston. He and the company’s former CEO, Jeffrey Skilling, were found guilty of deceiving shareholders about Enron’s financial condition by hiding debt and losses in a series of off balance-sheet entities.
More than 5,000 jobs and $1 billion in employee retirement funds were wiped out when the world’s largest energy trader plunged into bankruptcy in December 2001, following revelations of widespread accounting fraud.
Lay’s convictions were later thrown out because he didn’t have a chance to appeal the cases before he died.
Enron’s creditors, the government, Lay’s estate and Linda Lay have been involved in a variety of lawsuits since the company’s demise.
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