BP Trial Decision May Hinge on Tax Deductibility

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Behind-the-Scenes Factor in BP Trial Decision:
Choice to Settle May Hinge on Justice Department Stance on Tax Deductibility

The following is a statement of Phineas Baxandall, senior tax and budget analyst for U.S. PIRG, on the negotiations between British Petroleum (BP) and the Department of Justice (DOJ) to resolve Clean Water Act violations and other remaining penalties related to the Gulf oil spill.

In an attempt to avert a trial that would begin on Monday, the DOJ and BP are discussing a potential settlement. The DOJ has not declared whether it would insist that BP be prevented from taking the cost of a settlement as a tax deduction. If BP goes to trial, the penalties determined by the judge will not be tax deductible. BP previously received $10 billion in tax breaks by writing off earlier settlement costs related to the spill, but the DOJ forbid the company from taking its most recent $4 billion settlement as a tax write-off in November, at the urging of Attorney General Holder. The Department of Justice similarly forbid tax-deductibility of its portion of a $1.5 billion UBS settlement in December.

“The high-stakes negotiations between BP and the Justice Department may depend on how determined the Department is to protect taxpayers from subsidizing a settlement. In the past, agencies have allowed companies to write off legal settlements over wrongdoing as a tax deduction. Doing so forces taxpayers to ultimately foot the bill for these deductions. Every dollar these companies avoid paying gets made up through cuts to public programs, higher national debt, or increases to other taxes.

“Hidden taxpayer subsidies have been a sweetener that brings companies to the negotiating table, but they are not justified. A 2005 Government Accountability Office study found that agencies have typically been complicit in ignoring the tax consequences of settlements and that the IRS throws up their hands when agencies fail to take the lead.

“In addition to keeping legal disclosures about their wrongdoing out of the public record, companies often prefer to pay legal settlements rather than go to trial in order to collect little-noticed tax benefits. The law forbids companies from writing off the cost of fines and penalties, but companies that negotiate settlements in lieu of penalties typically write off those costs unless agencies specifically forbid it.

“In the past year the Justice Department and the SEC have stepped up in defense of taxpayers and at times have outright forbidden these write offs. They’ve received little public recognition for it, but have saved taxpayers billions of dollars as a result.

“Taking hidden taxpayer subsidies for corporate wrongdoing off the table would shift how BP weighs its decision about whether to risk a trial. BP will need to choose between the number the Justice Department will agree to and the number they believe the judge will ultimately decide. Tax-deductibility would tilt the decision toward a settlement. But if taxpayers won’t be subsidizing the settlement dollars, then BP may be more likely to take their chances with the judge.

“Congress decided that fines and jury awards should not be tax-deductible, like other ordinary costs of doing business. Settlements provide a loophole that corporate wrongdoers have used to shift the cost they’ve created onto the U.S. Treasury. In the end, taxpayers pick up the tab.

“BP has already claimed over $10 billion in tax benefits from restitution funds and other costs related to the spill. That’s not right. Taxpayers should not be subsidizing corporate wrongdoing. The Justice Department should stand firm in preventing BP payments from becoming a tax write off, whether that means going to trial or not.”

You can read U.S. PIRG’s report on the tax implications of legal settlements, “Subsidizing Bad Behavior: How Corporate Legal Settlements for Harming the Public Become Lucrative Tax Write Offs.”

U.S. PIRG’s research and analysis of legal settlements has been featured recently in the New York Times, the Washington Post, and the Associated Press.

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U.S. PIRG, the federation of state Public Interest Research Groups, is a consumer group that stands up to powerful interests whenever they threaten our health and safety, our financial security, or our right to fully participate in our democratic society.