Embattled Texaco Inc., which has already agreed to pay $3 billion to Pennzoil Co. in order to emerge from bankruptcy, said Wednesday that it has been notified by the Internal Revenue Service that it might owe $6.5 billion in back taxes.
Texaco said other oil giants, especially Exxon Corp., Chevron Corp. and Mobil Corp., could also face huge dollar penalties if the potential IRS claim is upheld. Much of the tax bill stems from purchases of crude oil from Saudi Arabia in 1979-81, Texaco said.
Texaco divulged the potential tax burden in a written statement, but IRS officials refused comment, and the exact nature of the claim was unclear.
Texaco said it has financial reserves to pay some of the back taxes, but the Saudi oil matter was apparently a surprise.
"Texaco must feel like Job," said an oilman with corporate ties to the company.
The company is preparing a reorganization plan to present to stockholders as a prelude to coming out of bankruptcy, and it insisted Wednesday that the IRS matter doesn't "present any reason for delay."
The IRS case arose during an audit of the company in connection with the bankruptcy proceedings, Texaco said. It is part of the preparation of disclosure documents before shareholders vote on a Texaco-Pennzoil plan to settle their dispute over the 1984 purchase of Getty Oil.
Texaco said it was advised that the IRS staff "plans to present an indication" of its findings to date on tax issues going back to 1965, and that "This accumulation of items . . . totals approximately $6.5 billion."
Texaco said a "significant" part of the $6.5 billion is based "on a recently developed theory concerning the handling of crude oil purchased from Saudi Arabia during the period 1979, 1980 and 1981. . . . The theory appears to be that despite the prices set by the government of Saudi Arabia and mandated for resale of its crude oil during 1979-1981, Texaco nevertheless should have accounted for this crude oil as if it had been sold at prices higher than the mandated official Saudi prices."
In effect, said Philip Verleger Jr. at the Institute for International Economics in Washington, D.C., the IRS is demanding of Texaco the opposite of what was mandated at the time by both the Saudis and the U.S. oil price control regulations in effect at the time. "This is the most asinine statement by the IRS I have ever heard," said Verleger.
The 1979-81 period saw crude oil prices skyrocket from $12 a barrel to as high as $40 a barrel. However, the Saudis, seeking to restrain the price run-up, maintained an official price that ran $4 to $8 per barrel below market prices, and sold crude to its production partners at the lower prices with the proviso that they pass those savings through to customers.
Saudi oil is produced and sold by Arabian American Oil Co., known as Aramco, now controlled by the Saudi government. The Aramco partners are Texaco, Chevron, Exxon and Mobil, which are the major purchasers of crude from Aramco.
In addition to the Saudi insistence that its customers pass on the discount from market prices, Verleger said the U.S. Department of Energy mandated it under price control regulations. That meant that at the gasoline pumps, the Aramco members were undercutting competitors by as much as 10 cents a gallon, an anomaly that came to be known as "the Aramco advantage."
Today's dispute apparently centers on the transfer tax, in this case the tax levied against a multinational oil company as it transfers equity in crude oil to its domestic operations, said Verleger.
"The IRS is proposing a Catch-22," said Verleger. "Say the world price is $35 a barrel but you buy it at $25 so they make you sell it at $25, plus transportation and other charges. Now the IRS is saying it should have been taxed at $35."
Texaco said that "due to the handling of the crude oil at the official government prices and under the directions for resale which applied, and which were conditions of the purchase arrangements, and for other reasons, the company believes it should not be responsible for any additional U.S. taxes on these transactions."
It said the IRS has not yet indicated how much of the $6.5 billion total is accounted for by the Saudi Arabia crude oil purchase issue, but the company believes it accounts for "a significant portion of the total." It said its financial reserves already on the books "should be adequate to cover potential liabilities other than" the new Saudi-related matter.
Chevron claimed to know nothing about it, but Mobil and Exxon said they believe the IRS position hasn't any merit.
Certain They Owe No Tax
"Exxon has told the IRS that we are certain we owe no taxes under this new IRS theory," Exxon said in a statement. "The IRS has not indicated they will seek any amount from Exxon under this theory. We have not set aside any reserve in respect to this new theory since we believe no amount is due."
Texaco last week said it was expecting higher tax liabilities as a result of the government's accelerated review of several open issues because of the bankruptcy case, and indicated that about $800 million was being set aside to cover increased tax levies. The issues included a reduction in available foreign tax credits, the tax treatment of past losses, and disputes with the DOE stemming from the oil price regulations of the 1970s.
The government has recently slapped major oil companies with hundreds of millions of dollars in penalties resulting from its review of the old price-control regulations--penalties which economist Verlager said highlight the incongruity of the IRS position because they illustrate that oil companies were being forced to pass on savings to customers at the time.