BP's $18.7 Settlement Today for Gulf Spill Appears to Be Mostly Tax Deductible

Today's announcement by the U.S. Department of Justice of a $18.7 billion out-of-court settlement with BP to resolve charges related to the Gulf Oil spill failed to indicate whether the deal will allow the oil giant to write portions off as an ordinary tax deduction - thus, greatly reducing the public value of these payments.

"A judge had declared the oil spill was the result of gross negligence. It is outrageous for BP to treat any portion of these payments as an ordinary business expense. We call on the company to promise that it will not write these payments off as tax deductions," said Phineas Baxandall, Senior Analyst for Tax and Budget Policy at the U.S. Public Interest Research Group. "We also call on the Justice Department to make public the full language of the settlement on its website."

Often settlements are posted alongside press releases on the Department of Justice website, but the DOJ had failed to do this on their press statement at the time of this release. Instead, they provide a fact sheet that gives troubling indications that the true after-tax value of today's settlement with the federal government, five states and 400 local entities may actually be far less than the $18.7 billion trumpeted in the headline of the DOJ statement:

• Only $5.5 billion is indicated explicitly as a penalty under the Clean Water Act. The federal government could have received as much as a $13.7 billion penalty under that Act based on a recent finding by a New Orleans judge that the spill was the result of "gross negligence." Penalties are not tax deductible by law, as opposed to ordinary business compensation or restitution. But 80 percent of this sum is also indicated as heading to states for restoration efforts, which could allow BP to treat it as deductible, unless the settlement language forbids it.
• $13.2 billion of today's settlement is not categorized as a penalty, indicating that it will almost certainly become a tax deduction, unless the settlement explicitly forbids it. If so, this non-penalty portion of the settlement will have an after-tax value of only $8.58 billion, and the whole deal would be worth only $14.08 billion to the public.
• The Justice Department fact sheet indicates that the $8.1 billion earmarked for natural resource damages "includes $1 billion already committed for early restoration," thus indicating a billion dollars of today's announcement is actually just repackaging an earlier concession by the company.
• Because the payments will be made over 18 years, the real value of latter payments will have significantly eroded. Depending on inflation, the value of a billion dollars paid 18 years from now will be far less than a billion dollar payment today.

A bipartisan bill in Congress, The Truth in Settlements Act, in the House and Senate would require federal agencies to be explicit whether large out-of-court settlements are tax deductible and would require companies to disclose in their SEC filings whether they use settlements as tax deductions.

Some agencies, such as the Consumer Financial Protection Bureau, promptly post all their settlements online and are very explicit about forbidding payments to be tax deductible. Since 2013, standard practice at the Environmental Protection Agency has been to make explicit in their settlements that agreed costs of undergoing future clean up or paying into clean up funds are also non-deductible.

Said Baxandall, "Americans expect that when companies pay settlements for terrible acts like oil spills or mortgage scams, it is to atone for their misdeeds and to discourage future violations of public law. It sends the wrong message to allow payments for misdeeds to be a tax write off. Moreover, every dollar that BP receives as a tax windfall for deducting this settlement will be a dollar that ordinary taxpayers will need to shoulder in the form of more national debt, higher tax rates or cuts to public programs. Allowing this settlement to be a tax write-off subsidizes bad behavior."

You can read U.S. PIRG's research report on settlement deductions here (link).