State won't sue oil firm

By Sean Hao and Gordon Y.K. Pang
Advertiser Staff Writers

The state won't sue ChevronTexaco Corp. for alleged tax evasion, saying there is no evidence the company avoided paying state income taxes or paid inflated prices for oil possibly leading to Hawai'i's high gas prices.

Yesterday's announcement came after an investigation of tax fraud charges made by two Michigan professors last fall. The professors alleged Chevron and Texaco funneled profits through an offshore joint venture to avoid taxes and paid inflated prices for crude oil that could have led to higher prices at the pump.

The allegations led to an investigation by a law firm that delivered its findings to the state attorney general's office in mid-June. The state said it would decide whether to sue ChevronTexaco based on the report, but delayed a decision while it studied the findings.

Chevron and Texaco, which merged to become ChevronTexaco, had denied the charges.

Yesterday, the attorney general's office said even if the allegations were true, the most the two oil companies would owe the state is about $4 million.

That's well below the potential windfall of back taxes of $563 million allegedly owed the state according to accounting professors, Jeffrey Gramlich and James Wheeler.

The Internal Revenue Service took Chevron to court on similar allegations in 1994, and Chevron settled that national case for $675 million.

However, Hugh Jones, a state deputy attorney general, said the law firm Winston & Strawn found no evidence to support allegations that the companies overpaid for oil.

As for allegations of tax fraud, Jones said Chevron already has filed amended Hawai'i tax returns after the Internal Revenues Service made adjustments to oil prices claimed by Texaco between 1983 and 1986.

As a result, "there's no amount of money due to Hawai'i," Jones said. "I'd like to think that the professors had the best of intentions and their theories came to the wrong conclusions."

A statement released by ChevronTexaco said yesterday's announcement affirmed its position that the allegations were without merit.

The state's decision was not a complete surprise. In mid-June, the attorney general's office said it was seeking permission from ChevronTexaco to share confidential tax return information that would support its decision on the matter. That led some to believe that the office would not pursue a case against the oil company.

Gramlich could not be reached yesterday. But Wheeler, now a former University of Michigan professor, remains unconvinced that Chevron and Texaco did no wrong.

He said he planned to ask the Securities and Exchange Commission to look into whether ChevronTexaco filed inaccurate financial data and to seek congressional action.

"There's something here," Wheeler insisted.

The two professors alleged that the oil companies purchased oil at inflated prices from the Indonesian government to avoid U.S. corporate income taxes and receive foreign tax credits, among other benefits.

In addition, the two charged that the Indonesian government gave the companies free oil to offset taxes paid on the overstated value of the oil purchased.

Wheeler said he expected the state's decision, given the pro-business stance of Gov. Linda Lingle's administration and the decision to rely on Winston & Strawn, which typically defends corporations.

ChevronTexaco also has contributed to the political campaigns of Lingle and other state officials.

"Does this thing have political heat? It has a ton of it," Wheeler said.

First Deputy Attorney General Richard Bissen denied politics was involved in the state's decision.

"I'm not aware of anybody having any bias for or against Chevron in this administration," he said. "This has been an independent investigation."

Lingle said she concurred with the decision.

"We posed the question (to advisory counsel): 'Would you have continued this case if it were on a fee basis?' and they said no, they wouldn't," she said. "So it's clear that the evidence that the professors thought was there simply was not."

Lingle also defended the choice of Winston & Strawn and the process used to arrive at a decision.

"The law firm we used was the law firm hired by the previous administration," she said. "We didn't change lawyers, we kept the one that they felt was the best.

"They didn't base their conclusion on who Chevron supports or doesn't support but based their conclusion on the facts and evidence, and their conclusion was there is no case here."

Democrat legislators, concerned that Lingle would not sue ChevronTexaco, passed a resolution earlier this year urging Lingle to pursue the case.

State Rep. Bob Herkes, D-5th (Ka'u, S. Kona) said he was disappointed with the state's decision.

Herkes, vice-chairman of the Consumer Protection and Commerce Committee, said he wanted to review the state's findings before deciding what to do next.

"We had a fairly lengthy hearing by the professors and others that through their studies and investigations found that there was significant grounds for a possible suit against the oil companies," he said.

Reach Sean Hao at 525-8093 or shao@honoluluadvertiser.com.