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Hawaii won’t pursue tax fraud lawsuit against ChevronTexaco Legal review finds assumptions by economists incorrect in light of evidence Bruce Dunford Associated Press Writer
State attorneys announced July 21 that they will not file a lawsuit against ChevronTexaco Corp., noting allegations by two economists that the giant oil company cheated Hawaii out of millions of tax dollars were “grossly inaccurate.”
The Chicago-based law firm of Winston & Strawn, which offered to sue ChevronTexaco on a contingency-fee basis, determined through a comprehensive review that there was no evidence of wrongdoing by ChevronTexaco, Hawaii First Deputy Attorney General Richard Bissen told a news conference.
Former Hawaii Democratic Gov. Ben Cayetano initiated action on a possible lawsuit just before leaving office in December after allegations of an oil-pricing scheme were raised last September in a paper published by two accounting professors.
University of Hawaii Professor Jeffrey Gramlich and University of Michigan Professor Emeritus James E. Wheeler accused ChevronTexaco of failing to pay $3.25 billion in taxes, including $536 million to the state of Hawaii.
“Despite the professors' best intentions and motivations, we now know that because of confidential information that was not available to them, or of which they were unaware, their assumptions were incorrect in light of the actual evidence in this case,” Bissen said.
Report said oil sold at inflated prices The professors' report accused Chevron and Texaco of funneling profits through an offshore joint venture in Indonesia to avoid taxes during the past 30 years and paying inflated prices for crude oil that could have led to higher gasoline prices in Hawaii. They said it involved the purchase of Indonesian crude oil at inflated prices and “under the table” kickbacks in the form of price rebates and free oil from the Indonesian government, allowing the companies to evade federal and state taxes by overstating their costs of doing business and taking a credit on foreign taxes paid on overstated revenue.
Because oil was sold to the companies' domestic subsidiaries at inflated prices, gasoline refined and manufactured from that oil was likely sold at inflated amounts, according the Gramlich and Wheeler.
The two companies, which merged in 2001 to become ChevronTexaco, have denied the allegations. Legislature urged pursuit of case The state Democratic-controlled Legislature in late April passed a concurrent resolution urging Gov. Linda Lingle to pursue the case, which could include recovery of back taxes, interest and other penalties.
Hawaii Deputy Attorney General Hugh Jones said July 21 that the Western Hemisphere Allowance from the Indonesian government which the professors said the joint venture, Caltex, received as a “kickback” for 21 years was only received for three years.
Even if the professors were accurate as to the inflated value of the oil and that its apportioned tax burden to Hawaii was for the entire 20 years, the state's claim against Chevron would only total $3.65 million and Texaco's would be $396,540, Jones said.
He said both companies have paid their owed taxes, amounts of which are confidential.
Lingle praised the attorney general's office for its deliberative process to determine if any taxes were owed, even though “there was some feeling at the Legislature that this was a quick way to get some money into the state coffers.”
“While it would have been nice, we wanted it clear we were not going to pursue something if there is no evidence there,” she said. “We think it's important for the state to establish with the public that we're not going to abuse the power of the government and go after someone, but at the same time if we determine someone is avoiding taxes we're going to make certain they pay.” Allegations unrelated to 1998 lawsuit Lingle said any criticism about the decision not to sue ChevronTexaco which has been a contributor to her political campaign and the Republican Party will be deflected by the process used and the fact that the law firm recommending against the lawsuit was hired by the Cayetano administration.
“They didn't base their conclusion on who Chevron supports or doesn't support, they based their conclusions on the facts and the evidence,” she said.
As for the Internal Revenue Service's audit of Chevron that resulted in a 1994 settlement for $675 million cited by the professors, the bulk of that settlement was unrelated to the Indonesian oil pricing, Jones said.
The professors' allegations against Chevron were unrelated to the state's lawsuit in 1998 against Chevron and Texaco before they merged, alleging they conspired with other oil companies to fix gasoline prices in Hawaii. That lawsuit sought $2 billion in damages but was settled last January for $35 million.
Attorney General Mark Bennett, who represented Texaco as a lawyer during that case, recused himself from the tax investigation to avoid conflicts of interest.
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