BP Settlement With Government May Follow Pattern of Allowing Companies to Write Off Costs of Wrongdoing

A new white paper released today by U.S. PIRG examines a persistent pattern of companies that sign settlements with the government for their wrongdoing, then deduct the settlement costs as a normal business expense on their taxes. The white paper comes as the nation anticipates a multi-billion dollar settlement announcement between BP and the federal government for the massive oil spill in the Gulf of Mexico.

The Department of Justice has refused to comment on whether a settlement with BP would allow the company to write off their settlement expenses on their taxes. Most past government settlement agreements have failed to prevent companies from taking this tax deduction, but there is precedent for the alternative. For example, in 2010 a Securities and Exchange Commission settlement with Goldman Sachs stipulated that the company could not deduct the settlement payments on its taxes.

"The standard practice of allowing companies to write off their settlement expenses represents a significant and largely invisible subsidy for corporate wrongdoing. When a company makes payments because it created an oil spill, a mortgage meltdown, or products that kill people, it shouldn't turn around and treat those payments as a normal business expense. When companies deduct settlement costs, it adds insult to public injury. Taxpayers end up picking up the tab for the lost revenue," said Phineas Baxandall, Senior Analyst for Tax & Budget Policy at the U.S. Public Interest Research Group.

Congress has long established that fines and penalties should not be tax-deductible because those payments are meant to serve as punishment and deterrent for wrongdoing. Settlement costs, on the other hand, are routinely written off as a normal cost of doing business unless tax-deductibility is explicitly forbidden. However, in cases such as the BP spill where extensive investigation has found the company has committed wrongdoing, allowing such a tax deduction seems inappropriate and only lessens the effectiveness of the settlement agreement as a penalty and as a deterrent to future wrongdoing. BP has already reduced its tax bills by approximately $10 billion by writing off other payments related to the oil spill.

The white paper released today details over 100 large corporate settlements. In most cases, no information is readily available as to which companies deducted these costs from their taxes.

In a recent letter from Chris Jones, whose brother Gordon Jones died in the Deepwater Horizon explosion that set off the Gulf spill, Jones writes that, "BP is telling us, through its claim of millions of dollars in tax credits, that Gordon and his fellow co-workers are merely business casualties that entitle BP to offset its losses."

A copy of the white paper can be downloaded at https://uspirg.org/reports/usp/rogues-gallery-major-corporate-legal-sett...