This Time, Taxpayers Shoulder None of $4.5 Billion BP Settlement Deal

Arizona PIRG Education Fund

Unlike earlier settlements from the Gulf Oil spill, the settlement the U.S. Justice Department negotiated with BP stipulated that none of the penalties paid are tax-deductible, according to Lanny Breuer, head of the Dept. of Justice’s criminal division.

“This is great news for taxpayers. In the past, federal agencies have touted big settlement numbers from corporate wrongdoers who claim to have paid their debt to society, but taxpayers quietly lost out as they ended up picking up much of the tab,” said Serena Unrein, Public Interest Advocate for the Arizona PIRG Education Fund. “The Department of Justice deserves a lot of credit for negotiating hard on this issue,” she added.

According to earlier news accounts, BP said it would increase its existing $38.1 billion charge against earnings for the spill by $3.85 billion. The company had already written off almost $10 billion of Gulf spill costs as tax deductions.  If the company had been able to treat the entire new amount as a tax-deductible business cost, then the oil and gas giant could have reduced its future tax bills by over $1.3 billion – a tax benefit that would ultimately be borne by other taxpayers.

“For taxpayers, the BP settlement is $1.3 billion better than it looks,” said Unrein. “Unless the Department of Justice clearly spells out that settlements cannot be tax-deductible, companies that pay these fines and penalties typically deduct them like ordinary business expenses.”

At issue was whether, by agreeing to a settlement, lawyers for BP could then claim that the settlement was not punitive, even though it is clearly for wrongdoing that brought criminal charges. Companies that pay settlements often deduct the payments even when rules suggest they should not, according to a study by the Government Accountability Office. Federal agencies often do not see it as their job to deal with tax issues, and the IRS usually says it cannot interpret the intent of agencies.

BP is expected to pay billions more in a future settlement related to violations of the Clean Water Act and other environmental laws. “Whether or not the future BP settlement will also be free of hidden tax giveaways will depend on whether federal negotiators continue to press hard to protect taxpayers like they did this time,” added Unrein.

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