Professors rebut state’s
decision on ChevronThey want documents made public that lawyers
relied on in declining to pursue tax charges
Two professors critical of ChevronTexaco Corp.'s tax accounting methods want the state to make public documents the state's lawyers used in exonerating Chevron from tax fraud allegations.
The professors, Jeffrey Gramlich and James Wheeler, also say the state has the ability to change, and should change, the way it calculates Chevron's annual state tax liability to reflect the company's reportedly huge profitability here.
"We hope that the state of Hawaii will recognize that we, as academics, are interesting in finding the truth about this matter," the professors said.
The professors issued a 32-page reply yesterday to the state's decision to drop an investigation into Chevron's tax practices, which was prompted by an accounting report issued by the professors last year.
The report, based on a few documents that became public in a prior battle between Chevron and the Internal Revenue Service, said ChevronTexaco could owe billions in state and federal taxes that were underpaid by Chevron and Texaco through a cost-inflation scheme involving their Indonesian joint venture, Caltex. Chevron and Texaco merged into ChevronTexaco in 2001.
The Chicago law firm Winston & Strawn, hired by the state, rejected such a notion. After reviewing internal Chevron documents and sworn statements, the law firm found that Chevron has already paid a tax adjustment to the state, covering the years 1983 through 1986. It was in the those years, the state says, that Caltex received free oil as a kickback from the Indonesian government, part of the tax scheme.
The professors believe that arrangement lasted much longer, at least between 1970 and 2000, something that they reiterated yesterday.
Winston found that Chevron owes the state nothing, which has been Chevron's position.
In their reply, the professors reiterated their previous arguments for further investigation. They say that because Caltex did receive a kickback, the corporate officers who signed the company's tax returns at the time should face criminal tax evasion charges.
The professors also argue that Winston's advice to drop the case should be dismissed because the law firm has represented Texaco in separate cases.
Hugh Jones, deputy state attorney general, said his office will review the professors' new allegation and discuss it with Winston.
The Hawaii Rules of Professional Conduct, approved by the Hawaii Supreme Court, deal with this kind of conflict as affecting an individual lawyer, not an entire firm. Winston, founded in 1853, has nearly 900 attorneys with offices in New York, London, Washington, D.C., Los Angeles and Paris, among other cities, according to its Web site.
The professors stand by their previous estimate that the state could seek $563 million from Chevron over back taxes, despite the state's contention that Chevron owes nothing.
Kurt Kawafuchi, state tax director, said the state would have to prove fraud occurred.
The state found that the professors did not have access to all of the relevant information in making their estimate, something that the professors admit. They say they'd like to see the state's evidence, which it has not made public.
The state also found the professors erred in assuming that Chevron's tax liability in Hawaii was calculated on the basis of its oil imports here. Rather, the state divides a company's overall income among all the states it operates in.
The professors say the state tax director can and should use a different method to calculate Chevron's Hawaii income, because of the company's past profitability in the islands. Chevron's profits from gasoline sales through Hawaii dealers made up 22 percent of the company's nationwide dealer profits between 1988 and 1995, even though the state represented only 3.1 percent of its sales volume, according to an expert report in a separate state lawsuit. Chevron declines to discuss its Hawaii profitability.
The text of the professors' reply can be found online at www.usm.maine.edu/~gramlich/caltex/reply.htm.
