Kenneth Lay, Deceased Enron CEO, Triumphs Over IRS in Tax Court

Kenneth Lay, the deceased chief executive officer of Enron Corp., defeated the Internal Revenue Service in the agency’s bid to collect $3.9 million from his estate and his wife, the U.S. Tax Court ruled.

The case decided yesterday involved 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 Lay 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 for no gain, 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, generating no taxable income.

Goeke wrote in the decision that the agency’s position was incorrect, and he 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 annuities transaction is well documented, and all actions of the parties to the transaction reflect that Enron purchased the annuity contracts for $10 million,” he wrote. “The Lays properly reported the transaction on their 2001 tax return as a sale of the annuity contracts.”

Tax Dispute

Charles Egerton, the attorney who represented the estate and Linda Lay in the tax case, said in a telephone interview today that the dispute over the annuity lingered after other issues regarding the Lays’ taxes were resolved. He described his client as delighted.

“She’s been through an awful lot over the past 10 years,” said Egerton, an attorney at Dean, Mead, Egerton, Bloodworth, Capouano & Bozarth P.A. in Orlando, Florida.

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 trading company plunged into bankruptcy, following revelations of widespread accounting fraud.

Conviction Thrown Out

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.

The U.S government continues to pursue a $12.6 million civil forfeiture case against Linda Lay, which was initiated three months after her husband’s death. The Justice Department sued to recover $10.1 million from a family investment partnership, as well as $22,680 in cash and at least $2.5 million from the couple’s penthouse condominium in Houston.

Linda Lay has been trying to sell the 12,827-square-foot, Italian Renaissance-inspired condo unit since 2009. The property is now priced at $7.99 million, according to a Houston real estate-listings website, a significant increase from the $4.75 million valuation it carried on local tax rolls in 2007, the year after Ken Lay died.

Alisa Fanelli, a Justice Department spokeswoman, didn’t immediately respond to a request for the status of the government’s forfeiture case against Linda Lay.

‘Criminal Proceeds’

The government claims Lay “derived more than $95 million in criminal proceeds from trading Enron stock, manipulating his Enron line of credit and receiving an incentive bonus” as the company was spiraling into insolvency, according to court filings in the forfeiture case.

An FBI agent who investigated Lay claimed Enron’s founder paid off the remainder of his Houston mortgage with “million- dollar payments of criminal proceeds” less than a week after Enron’s bankruptcy.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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