[ OUR OPINION ]
State is wise not to
pursue oil company suitIT seemed plausible -- one legislator predicted it a "slam dunk" -- that a lawsuit alleging a covert pricing scheme used by ChevronTexaco could provide a jackpot in back taxes to the state of Hawaii. After all, two accounting professors alleged that exposure of the scheme brought the Internal Revenue Service a $675 million settlement of such a lawsuit.
THE ISSUE
The state has decided not to pursue litigation to seek back taxes alleged by two accounting professors to be owed by ChevronTexaco.Before launching such a case, the administration of former Gov. Ben Cayetano prudently called upon a Chicago law firm to look into the allegations, and Governor Lingle appropriately awaited the outcome. The Chicago firm's objective analysis is that the state would have no case. Lingle has correctly chosen to bring the inquiry to a close rather than file a lawsuit against ChevronTexaco.
The allegations surfaced last September in a lengthy New York Times article about a research paper authored by Jeffrey Gramlich, a University of Hawaii accounting professor, and James Wheeler, a former University of Michigan accounting professor now retired in Lanikai. According to their research, Hawaii's tax losses from ChevronTexaco through deals with a subsidiary operating in Indonesia totaled $563 million. The charge could not be ignored.
Gramlich and Wheeler obtained much of their information from hundreds of documents about the Indonesian oil deal that became public record in an IRS lawsuit in federal court in San Francisco that eventually was settled. However, Chevron provided Winston & Strawn, the Chicago law firm, with other internal documents and sworn statements to which the professors had no access.
A report by Hawaii's Attorney General's Office has concluded that the bulk of Chevron's settlement with the IRS was unrelated to Caltex, a joint venture of Chevron and Texaco before their merger. Caltex produces crude oil in a project with an Indonesian government oil company, and the professors alleged that the arrangement produced kickbacks to Chevron and Texaco allowing them to evade U.S. taxes.
The attorney general's report, based on the Winston & Strawn analysis, also concluded that Gramlich and Wheeler made a technical tax miscalculation. Even if the professors had been correct in their economic assumptions, the state would be owed less than $4 million instead of $563 million, according to the attorney general's report. The larger estimate relied heavily on assumptions about the amount of oil brought into the state and the price ChevronTexaco paid.
The attorney general's report added that Chevron had paid back taxes to the state in an amended return covering 1983 to 1986, when the Indonesian kickback arrangement occurred. The professors had no way of knowing about that settlement, since tax returns are confidential.
Wheeler says he does not believe much of the information in the attorney general's report and will review it in the coming days. The public will be interested in an explanation -- mea culpa or otherwise -- from the two academics.
