Senators
seek oil suit

Members of a state Senate panel
are pressing Gov. Lingle to seek
back taxes from ChevronTexaco

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By Tim Ruel
truel@starbulletin.com

Consumer protection leaders in the state House and Senate called yesterday for Linda Lingle's administration to pursue a tax fraud case against ChevronTexaco Corp. seeking an estimated $563 million in back taxes.

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An eye-opening report on an alleged tax evasion scheme by ChevronTexaco, coupled with the state's need to fill a $347 million budget shortfall, has made a lawsuit a tempting undertaking.

"I believe it really is a slam dunk," said Sen. Ron Menor, chairman of the Senate Commerce, Consumer Protection and Housing Committee, which held a briefing yesterday.

In the closing days of the Cayetano administration, then-Attorney General Earl Anzai hired a Chicago law firm on a contingency-fee basis to represent the state in investigating a lawsuit against ChevronTexaco. The firm, Winston & Strawn, would pay for all the costs of litigation, and would receive a chunk of any settlement.

Anzai's move followed the September release of a report by accounting professors Jeff Gramlich and Jim Wheeler, which said ChevronTexaco had dodged billions of dollars in state and federal taxes by paying inflated prices for crude oil.

The payments went to Caltex, a joint venture owned by Chevron and Texaco in Indonesia. Although Caltex's profits were taxed at the high Indonesian rate of 56 percent, it received a dollar-for-dollar tax credit from the United States. In addition, Caltex got extra oil from the Indonesian government.

Wheeler said he came across the matter a decade ago when his accounting students raised questions about dividends paid to Chevron and Texaco by Caltex.

In 1994, Chevron settled an Internal Revenue Service investigation into the matter by paying $675 million. Texaco's end of the settlement was not disclosed. The two firms merged in 2001 to form ChevronTexaco, which is now the second-largest U.S. oil company, worth $66 billion.

While ChevronTexaco has said the settlement spelled a close to the case, the professors say that an investigation can be reopened by individual states if there is evidence of tax fraud. So far, no state has sued. The professors argue that Hawaii's high reliance on Indonesian oil -- the state got 36 percent of its oil from that country between 1990 and 1997 -- makes it a prime candidate for recouping funds.

The professors based their report, in part, on scores of documents that became public from the IRS investigation.

But there are still many unanswered questions about ChevronTexaco's dealings in Indonesia, and the professors are hoping state lawsuits will fill in the missing holes. Their estimate of Hawaii's potential tax haul, at $563 million, relies heavily on assumptions about the amounts of oil brought into the state, and the price ChevronTexaco paid.

"The IRS did not do a stellar job in the audit," Wheeler said yesterday. "They did a good job but they were fought all the way through that by Chevron."

Lingle has not yet made a decision to pursue or drop the case. She will be getting a recommendation from senior adviser Randy Roth and Kurt Kawafuchi, the newly named deputy tax director. The efforts of the Attorney General's Office are being headed by Richard Bissen, first deputy attorney general, who served as Lingle's prosecutor when she was mayor of Maui. Mark Bennett, who is Gov. Lingle's attorney general, has recused himself because he represented Texaco in an antitrust lawsuit brought by the state in 1998.

The state has an obligation to review any large-dollar tax case, particularly involving a major publicly held corporation, that is reported by credible sources, Kawafuchi said at yesterday's briefing. Kawafuchi said the Attorney General's Office has made a request for documents from the IRS, but hasn't gotten a response yet.

ChevronTexaco declined an invitation to attend the briefing. In a letter to Menor, Chevron spokesman Albert Chee said: "You should know ... that we take great pride in the integrity, transparency and credibility of our financial practices and reporting. The expectations of our company in this area are justifiably high, and we strive to always meet or exceed those expectations. We have fully met these expectations with respect to all Hawaii tax matters."

Michael Green, local attorney for Winston & Strawn, said the law firm wants to pursue the case. "They see things in this case that may go far beyond what's before this committee," Green said.

The firm is waiting for a go-ahead from the Lingle administration before tackling work on the case.