THE SENATE

S.R. NO.

21

TWENTY-SECOND LEGISLATURE, 2003

S.D. 1

STATE OF HAWAII

 
   


SENATE RESOLUTION

 

urging the state to pursue litigation against chevrontexaco for NONPAYMENT OF TAXES.

 

WHEREAS, a 2002 report by Professor Jeffrey D. Gramlich and Professor James E. Wheeler of the University of Michigan and University of Hawaii alleges that Chevron and Texaco conspired with Caltex and the Government of Indonesia (GOI) to evade the payment of billions and millions of dollars in federal and state income taxes, respectively; and

WHEREAS, prior to merging in October, 2001, as ChevronTexaco, Chevron and Texaco each owned fifty per cent of the joint venture Caltex, which produces oil in Indonesia; and

WHEREAS, the alleged tax evasion scheme involved domestic subsidiaries of Chevron and Texaco buying Indonesian crude oil from Caltex (of which the oil companies were equal shareholders) at deliberately inflated prices set by the Indonesian government; and

WHEREAS, the cost of sales deductions claimed by the oil companies' domestic subsidiaries on their federal and state income tax returns were based on these inflated oil prices; and

WHEREAS, additionally, as shareholders of Caltex, Chevron and Texaco received dollar-for-dollar U.S. foreign tax credits for Indonesian income taxes paid by Caltex on its dividend income; and

WHEREAS, when Caltex received free crude oil from the GOI's wholly-owned oil company as kickbacks for the excessive Indonesian income taxes it paid on its inflated earnings, Chevron and Texaco paid no U.S. taxes on this in-kind income; and

WHEREAS, the oil received by Caltex was, in turn, sold to the oil companies' domestic subsidiaries at the inflated price, resulting in a further tax windfall to the GOI and additional inflated income for Caltex; and

WHEREAS, to compensate for the inequity that arose when one of the oil company shareholders purchased more overpriced oil than the other, its parent holding company received monthly "special dividends" from Caltex, which were in effect rebates that were paid prior to any regular dividend payments; and

WHEREAS, the "special dividend" payments may have violated Securities Exchange Commission shareholder reporting requirements; and

WHEREAS, the Gramlich/Wheeler report estimates that under this scheme, Chevron and Texaco allegedly evaded $89.4 million and $15.2 million, in annual federal and state income taxes, respectively, before interest and possible penalties; and

WHEREAS, the tax underpayments apparently occurred from 1970 to 2000, thereby potentially resulting in total federal and state income tax underpayments of $2.771 billion and $471.2 million, respectively; and

WHEREAS, according to a state report, between 1990 and 1997, nearly thirty-six per cent of Hawaii's imported crude oil came from Indonesia, and therefore, a strong likelihood exists that ultimately, Hawaii consumers overpaid for gasoline; and

WHEREAS, according to news reports, a ChevronTexaco spokesperson responding to the above allegations claimed that the tax issues had been fully examined and resolved by the Internal Revenue Service (IRS) and that the tax payments to Indonesia had been found appropriate; and

WHEREAS, in 1994, Chevron agreed to pay the IRS $675 million to settle an audit covering only the years 1979 through 1987, to resolve issues related to the amounts claimed by Chevron as Caltex dividends and deductions for cost of goods sold, and to adjustments in the foreign tax credit to correspond with those sums; and

WHEREAS, a technical advice memorandum issued by the IRS in 1998 precludes a reopening of that settlement for an adjustment unfavorable to the taxpayer unless (1) there is evidence of fraud, malfeasance, collusion, concealment, or misrepresentation of fact; (2) the closing agreement involved a clearly defined substantial error; or (3) failure to reopen the case would be a serious administrative omission; and

WHEREAS, in litigation to enforce the production of documents sought by the IRS in order to determine whether the foreign tax credits claimed by Chevron resulted from sham transactions, U.S. Magistrate F. Steele Langford ordered Chevron to produce almost 130 documents that the court found contained evidence of crimes or fraud; and

WHEREAS, the Gramlich/Wheeler report, authored by individuals with outstanding credentials and nationally-recognized expertise in the fields of accounting and taxation, raises serious and credible allegations of tax fraud by Chevron and Texaco; and

WHEREAS, the State Attorney General's office is in the process of reviewing the merits of this case before determining whether to proceed with litigation, and this process includes the reviewing of documents received to date from the IRS; and

WHEREAS, pending the Attorney General's investigation, and pursuant to a short-term contract that has been extended three times and expires on April 19, 2003, the Chicago-based law firm of Winston and Strawn has been retained by the Attorney General to represent the State in possible litigation; and

WHEREAS, the terms of the retainer agreement provide that Winston and Strawn will underwrite all costs of litigation, unless the State terminates the agreement for any reason, and that its fee will be 20 per cent of the first $100 million awarded, 13 per cent of additional amounts up to $200 million, and 5 per cent of any amounts thereabove; and

WHEREAS, if as alleged, Chevron and Texaco inflated oil prices and evaded taxes, consumers have been harmed through gasoline overcharges and the State has been deprived of badly-needed tax revenues to fund essential government programs and services; and

WHEREAS, the State's fiscal situation, including an estimated $347 million budget shortfall, warrants that the State pursue all reasonable means of obtaining revenues owed thereto; and

WHEREAS, with the merger of Chevron and Texaco in 2001, Caltex financial matters will no longer be separately reported and the resulting lack of transparency may facilitate the commission of illegal activities; and

WHEREAS, if fraud has been and continues to be perpetrated against the State, the Attorney General should take immediate and decisive action to halt and prevent further malfeasance; now, therefore,

BE IT RESOLVED by the Senate of the Twenty-Second Legislature of the State of Hawaii, Regular Session of 2003, that the State Administration is urged to pursue litigation against ChevronTexaco for tax fraud and for the recovery of back taxes due to the State; and

BE IT FURTHER RESOLVED that certified copies of this Resolution be transmitted to the Governor and the State Attorney General.

Report Title:

ChevronTexaco Tax Fraud; Lawsuit Urged