{"id":35398,"date":"2016-04-09T08:44:01","date_gmt":"2016-04-09T12:44:01","guid":{"rendered":"https:\/\/stateofthenation2012.com\/?p=35398"},"modified":"2016-04-09T08:44:49","modified_gmt":"2016-04-09T12:44:49","slug":"in-bps-final-20-billion-gulf-settlement-u-s-taxpayers-subsidize-15-3-billion","status":"publish","type":"post","link":"https:\/\/stateofthenation2012.com\/?p=35398","title":{"rendered":"In BP’s Final $20 Billion Gulf Settlement, U.S. Taxpayers Subsidize $15.3 Billion"},"content":{"rendered":"

Robert W. Wood ,\u00a0<\/span>CONTRIBUTOR
\nForbes.com<\/span><\/p>\n

Now that a\u00a0judge has approved BP\u2019s $20 billion settlement over the 2010 gulf oil spill,<\/a>\u00a0it is appropriate to look at the overall societal costs, as well as the bottom line to BP. And at tax time, people understandably think about their own taxes, too. The government struck a\u00a0$20 billion settlement with BP<\/a>, which is a big number. Yet\u00a0BP should be able to deduct\u00a0the vast majority, a whopping $15.3 billion, on its U.S. tax return. That means American taxpayers are contributing quite a lot to this settlement, whether they know it or not.<\/p>\n

BP can write off the\u00a0natural resource damages payments, restoration, and reimbursement of government costs. Only $5.5 billion\u00a0is labeled as\u00a0a non-tax-deductible Clean Water Act penalty.\u00a0One big critic of the deal is U.S. Public Interest Research Group, which often rails against tax deductions by corporate wrongdoers. U.S. Public Interest Research Group has asked the Justice Department\u00a0to deny tax deductions for BP and other corporate defendants. U.S. PIRG\u2019s has a research report on\u00a0settling for a lack of accountability<\/a>\u00a0that details\u00a0the tax deductions corporations can claim for legal\u00a0settlement.<\/p>\n

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In this June 3, 2010 file photo, a Brown Pelican sits on the beach at East Grand Terre Island on the Louisiana coast after being drenched in oil from the BP Deepwater Horizon oil spill. A federal judge in New Orleans granted final approval on Monday, April 4, 2016, to an estimated $20 billion settlement, resolving years of litigation over the spill. (AP Photo\/Charlie Riedel, File)<\/p>\n<\/div>\n<\/blockquote>\n

However,\u00a0a change to the tax code may be the only way to get there. The proposed Truth in Settlements Act (S. 1898<\/a>) would require agencies to report after-tax settlement values. Another bill,\u00a0S. 1654<\/a>, would restrict tax deductibility and require agencies to spell out the tax status of settlements.\u00a0The present tax code allows businesses to deduct damages, even punitive damages. Restitution and other remedial payments are also fully deductible.<\/p>\n

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Only certain fines or penalties are nondeductible. Even then, the rules are murky, and companies routinely deduct payments unless it is completely clear that they cannot.\u00a0U.S. PIRG released a statement<\/a>\u00a0in response to the finalized BP oil spill settlement\u00a0that allows\u00a0the\u00a0$15.3 billion tax deduction:<\/p>\n

Though we are glad that the protracted settlement to address BP\u2019s actions in relation to the 2010 Gulf Oil Spill has finally concluded, and injured parties can begin to be made whole again, we are disappointed that BP will yet again be able to claim its settlement payments as ordinary cost of doing business tax deductions.<\/p>\n

$15.3 billion of the settlement qualifies as a tax deduction, earning the oil giant a tax windfall for what amounts to gross negligence. Despite thousands of comments from ordinary Americans calling on the Department of Justice to deny these tax write offs, BP will still be able to claim the settlement as business as usual. This not only shifts the burden of the deal onto ordinary taxpayers, but it also sends the wrong message.<\/p>\n

The Department of Justice had an opportunity to set a precedent in this case, and we are disappointed that the agency chose to instead continue subsidizing BP\u2019s wrongdoing.\u201d<\/p><\/blockquote>\n

Explicit provisions in settlement agreements that say $___ cannot be deducted can clear up the inherent ambiguity in legal settlements. That is one reason the Justice Department is often seeing taxes\u00a0raised. Sometimes, the defendant is able to finesse the issue. For example,\u00a0Bank of America\u2019s legal settlement\u00a0over soured mortgage securities was a\u00a0historic $17 billion<\/a>, but it\u00a0steered around DOJ\u2019s policy regarding explicitly denying\u00a0tax deductions.<\/p>\n

Some lawmakers and consumer advocates say the Justice Department and federal regulators need to take taxes into account in settlements. Even\u00a0touting settlement figures in announcements should be more clear, so people do not think a business is paying it all, if the after tax cost is\u00a0less.\u00a0For businesses, most legal expenses and most payments to resolve litigation are deductible.<\/p>\n

However,\u00a0fines and penalties paid to the government are often not deductible.Section\u00a0162(f)<\/a>\u00a0of the tax code prohibits deducting \u2018\u2018any fine or similar penalty paid to a government for the violation of any law.\u2019\u2019 Despite punitive sounding names, though, some fines and penalties are considered remedial and deductible. That allows some flexibility. As a result, some defendants insist that their settlement agreement confirms that the payments are\u00a0not\u00a0penalties and are\u00a0remedial.<\/p>\n

Explicit provisions about taxes in settlement agreements are becoming more common. For example, the DOJ expressly prohibitted<\/a>\u00a0Credit Suisse from deducting its $2.6 billion settlement for helping Americans evade taxes. The\u00a0BNPP terror\u00a0settlement<\/a>\u00a0also\u00a0states that BNPP will not claim a tax deduction. By contrast, BP has done well, and not just over this $20 billion.<\/p>\n

BP wrote off the cost of its $32 billion cleanup effort after the spill, costing American taxpayers roughly\u00a0$10 billion. However, the Justice Department\u00a0reached a $4 billion criminal settlement with BP over its role in the deaths of 11 workers on\u00a0the oil rig when it exploded. That $4 billion was explicitly made nondeductible.<\/p>\n

___
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