Texaco’s Tax Bill May Total Less Than $1 Billion
Texaco Inc. suggested late Friday that back taxes owed to the federal government likely would total less than $1 billion, not the $6.5 billion originally suggested two months ago.
The oil giant made the suggestion in an announcement that it had reached a framework agreement to review all tax claims with the Internal Revenue Service.
The agreement removed one of the last remaining impediments to Texaco’s efforts to extricate itself from federal bankruptcy protection.
The nation’s third-largest oil company sought bankruptcy court refuge nearly a year ago because of a protracted court struggle with the much smaller Pennzoil Co., which held a $10.3-billion damage claim against Texaco.
Pennzoil won the mammoth judgment from a Texas jury that decided Texaco had wrecked Pennzoil’s agreement to buy part of Getty Oil Co. in 1984 by acquiring Getty itself.
Last December, Pennzoil agreed to drop the claim in exchange for $3 billion in cash, setting in motion a complex process under which Texaco would emerge from bankruptcy as a smaller restructured company.
But under the bankruptcy laws, Texaco’s other creditors had to state their estimated claims against the company before it emerged from bankruptcy. In January, the IRS, as a priority creditor, indicated that Texaco might owe $6.5 billion in back taxes, based on an audit of the company for 1965 through 1986.
If the IRS were correct, industry analysts said, the back taxes would likely have crippled the company.
The IRS claim stemmed from a theory the agency had developed that would have raised the market value of Saudi oil handled by Texaco during some of the years in question. Theoretically, the IRS might have demanded Texaco pay taxes on what the company would have earned had it sold the oil for a higher price.
Although analysts were certain the final tax bill would total much less, the agreement announced Friday marked the first time a figure in the $1-billion range was suggested.
Under the agreement, Texaco will make cash deposits against tax claims totaling $1 billion over a four-year period, with the first installment of $200 million on the date its bankruptcy reorganization is approved and $200 million thereafter on each of the next four anniversary dates.
Texaco’s announcement implied the final bill might even be less than $1 billion because of a provision that any leftover money will be returned to the company. The company also downplayed the significance of the IRS claim compared to the taxes Texaco pays during the course of one year.
“The amount of the deposits provided for in the agreement, which cover outstanding tax claims spanning a period of 13 years, should be viewed in the context of the $3.8 billion in direct taxes the company incurred in 1987 alone on its $35.8 billion in business revenue worldwide,” Texaco said.
Ellen Murphy, public affairs director for the IRS in Washington, said the $1-billion figure represented only money to be deposited for claims, and “obviously it’s too soon to say what size liability we’re talking about.”
Nevertheless, accountants familiar with IRS policies on large back-tax claims suggested that, if the agency felt Texaco might owe more than $1 billion, it would have demanded a bigger deposit.
