Intricate tax transactions enabled Enron to inflate its profits by nearly $1 billion between 1995 and 2001, exaggerating the size and scope of its operations, The Washington Post reported Wednesday after obtaining internal company documents from Enron’s former top tax executive.

In 2000, tax schemes rather than trading and energy transportation services boosted Enron’s profits 30%, or $296 million, Robert J. Hermann told the Post, adding that the tax transactions were entirely legal. Hermann, who quit last week as Enron’s general tax counsel in a reorganization move, detailed how Enron worked with prominent law firms and banks to transfer loans, securities and company assets among various subsidiaries and special partnerships to achieve desired tax savings. Each dollar of tax savings was counted as a dollar of after-tax profit.

Enron’s tax strategies are coming under tough scrutiny by Congress and the company is facing federal investigations into possible securities fraud. The FBI searched Enron’s tax offices in January and confiscated shredding machines.

Hermann said he became uneasy in recent years as more of Enron’s profits came from one-time tax deals. Enron’s tax division was under pressure to show earnings by reducing corporate tax costs. “It got to the point I was being asked to come up with a larger and larger number,” Hermann told the Post. He said last year he finally protested to his boss, Chief Accounting Officer Richard A. Causey, when the number got up to $300 million. “We have to come up with a way to get this through earnings — through regular business,” he said.

Hermann told the Post that former CEO Jeffery Skilling approved the tax transactions in small meetings with Causey, Hermann and another company tax executive. All Skilling wanted to know were the risks involved. He didn’t care about the details, Hermann said.

The tax issues are complicating the bankruptcy process by making it more difficult for attorneys to determine the exact worth of Enron’s assets and operations.

Hermann said that since 1995 there were 11 major tax transactions, each with either hurricane-type code names beginning with the letter “t” (for tax), such as Tomas, Teresa and Tammy, or named after Hermann’s favorite golf courses, Apache, Renegade and Conchise, near his vacation home in Arizona.

The first tax deal engineered in 1995 by Hermann’s group was called “Tanya.” It generated a $66 million tax gain. To accomplish it, Enron created a new unit run by several company officials and gave it responsibility for managing deferred compensation and post-retirement programs for Enron employees. The unit issued preferred stock and transferred the stock to Enron, which then sold the stock back to the officers at a loss, creating the tax deduction. The officers ultimately returned the stock to Enron. The Post said documents show the Internal Revenue Service reviewed the deal but never challenged it.

The tax transactions had a variety of structures. Some allowed Enron to book income up front on tax savings that otherwise would have been realized over a number of years. Others provided low-tax dividend income through offshore entities. Together they provided $1 billion in profit from 1995 through September 2001 and were ultimately expected to contribute $1.9 billion in earnings over 30 years with most of the gains in 2004.

In the “Teresa” transaction, Enron got a $225 million multi-year tax savings and a corresponding boost in after-tax earnings through a commonly used “synthetic lease” arrangement on its Houston office tower. Enron, which rented the building from J.P. Morgan Chase, created a series of intercompany and offshore transactions that generated nearly $1 billion in deductions and depreciation on the building.

Hermann said Enron was aided by prominent law firms, banks and Arthur Andersen, all of which signed off on the deals, and indicated Enron would prevail if the IRS decided to challenge them. Hermann said the tax savings were summarized in footnotes in the company’s annual report in compliance with Securities and Exchange Commission disclosure rules. He said analysts never asked about the huge tax savings.

Hermann said he refused to let Enron use common tax structures because of the risk that they could be attacked by the IRS as abusive tax shelters with no legitimate business purpose. “We wanted something under the radar screen…,” he told the Post. However, given the widespread investigation, Hermann expects the government to mount a major attack on these deals as abusive tax shelters.

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