BUSINESS

Irving’s taxing battle

CHRIS WOOD August 3 1987
BUSINESS

Irving’s taxing battle

CHRIS WOOD August 3 1987

Irving’s taxing battle

BUSINESS

It was his last big deal before retirement in 1972. And Kenneth Colin (K.C.) Irving, now 88, poured into it all the toughness and shrewd negotiating skills that in the previous half-century had enabled the enterprising boy from Buctouche, N.B., to become the Maritimes’ most powerful—and richest—industrialist, the creator of a business empire now estimated to be worth $8 billion. The contracts signed on Aug. 9, 1971, took more than two years to negotiate. And they struck a favorable deal with powerful Standard Oil Company of California (Socal, now Chevron Corp.) for concessions that in less than 60 months would be worth up to $137 million in tax-free dividends. But this week a judge of the Federal Court of Canada begins deliberations that could result in the Bermudan tax shelter crafted by Irving and Socal in 1971 being disallowed. The court’s decision, expected late this year, will decide the ownership of roughly $200 million in disputed taxes and interest.

At the heart of the dispute are three closely related companies: Saint John, N.B.-based Irving Oil Co., the largest refiner and retailer of petroleum products in the Maritimes; Socal, a major shareholder with the Irving family in Irving Oil; and Irving California Oil Co. Ltd. (Irvcal) of Bermuda, a whollyowned subsidiary of Irving Oil. Between 1971 and 1975, following the 1971 agreements between K.C. Irving and Socal, $1.2 billion (U.S.) worth of

Arabian crude oil passed—on paper at least—through Irvcal’s hands, on its way from a Socal subsidiary to Irving Oil’s Saint John refinery. Crude purchased by Irvcal for $2.10 (U.S.) a barrel was resold to Irving Oil at $2.90 (U.S.). The profit—in the form of dividends paid to Irving Oil Co.—was divided equally between Socal and the Irving family.

Lawyers for Revenue Canada claimed in May that the arrangement was a “sham,” designed only to inflate Irving Oil’s costs and reduce its income in order to avoid paying Canadian taxes. Indeed, between 1971 and 1975, Irving Oil reported profits of $130 million but, after various deductions, paid no tax. Then in 1978 Revenue Canada reassessed the company’s tax returns for the period and disallowed nearly $142 million in costs that Irving Oil claimed it had paid to Irvcal for crude.

Irving Oil was allowed only the much lower amount that its Bermudan subsidiary had paid for the oil. Declared government lawyer John Power: “Irvcal was interposed to disguise the true cost of crude.”

Lawyers for Irving Oil reject that charge. They say*that the creation of Irvcal was a concession

proposed by Socal/Chevron when Irving demanded a share in the vast profits being earned by the California company supplying Persian Gulf crude to the Saint John refinery. And Edgar Sexton, a Toronto lawyer who represents various Irving interests, argued in court that far from inflating Irving Oil’s costs, the arrangement helped insulate the company from the effects of the mid-1970s oil shock. Said Sexton: “There was price protection.”

Federal Court Justice Francis Muldoon is expected to take several months to decide which view of Irvcal’s activities is correct. If Muldoon accepts Sexton’s argument, Revenue Canada will have to return about $60 million in taxes to Irving Oil. If Revenue Canada wins the legal battle, it will be able to keep that money and it could demand an additional $60 million from Irving Oil for profits sheltered in Irvcal between 1975 and 1980. The addition of interest will bring the total amount to well over $200 million.

Meanwhile, the case has already shed fresh light on Irving’s hard-driving style, as a businessman and as a parent. In a day-long appearance in court, his son, Arthur, now chairman and president of Irving Oil, described how his father frequently extended the business day to four in the morning. By that hour, Arthur Irving testified, he was too exhausted to keep up with his father’s pace. To his father, Arthur recalled, “business was a game, and he never got tired.” That tireless ambition created a business empire that extends well beyond the family’s 51-percent share of Irving Oil. Other family holdings include all four New Brunswick English-language daily newspapers, a Maritime television chain, the country’s largest drydock—currently building a $3.8-billion fleet of frigates for the Canadian navy—and pulp and paper mills.

The present stubborn legal fight over $200 million clearly reflects the elder Irving’s tenacious business style. According to one case study in 1967, K.C. Irving once had no fewer than 31 civil suits in progress at one time. The family’s persistent approach could keep the current battle before the courts for some time as well. Irving Oil’s Sexton has already warned that if Muldoon rules against the company, his decision will go to appeal.

CHRIS WOOD with MARC

MARC CLARK

KATHRYN HARLEY