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BP's $20.8-billion oil spill settlement may give it a huge tax deduction

It's to be hoped that the American taxpaying public is thrilled with the $20.8-billion settlement announced Monday between BP and the Justice Department over the 2010 Deepwater Horizon oil spill. That's because the taxpayers are likely to cover a large portion of BP's bill.

Earlier estimates of the tax deduction available to BP from the deal placed the sum at more than $5 billion. That math was done this summer, when BP first agreed to a settlement then estimated at about $18.7 billion for damage to Gulf of Mexico communities and the ecosystem from the disaster. Atty. Gen. Loretta Lynch on Monday attributed the discrepancy to a refinement of the original estimates of BP's restoration obligations, and credit for money the company already has paid. 

The estimate that more than $15 billion of the final settlement will be tax deductible sounds correct to University of Michigan law professor David Uhlmann,  former chief of the Justice Department's environmental crimes section. Restitution on damage claims and restoration of the damaged environment have long been designated by the IRS as deductible charges. "That makes sense," he told me. "They're business expenses."

BP and Justice Department spokespersons hadn't responded to our queries about the issue as of the time of writing. We'll update this post once we hear back. According to an early transcript of the joint press conference held Monday by Lynch, Commerce Secretary Penny Pritzker, Agriculture Secretary Tom Vilsack, and Environmental Protection Agency Administrator Gina McCarthy, reporters didn't ask any of the speakers about tax treatment of the deal.  

According to Lynch's statement, $5.5 billion of the total is categorized as a civil penalty, which isn't deductible. She identified that as the largest such penalty "in the history of environmental law."

The rest includes $7.1 billion in payments of natural resources damages claims under the Oil Pollution Act, and $5.9 billion on economic damages claims payable to the five Gulf of Mexico states and to local governments. US PIRG estimated the total of tax-deductible elements at $15.3 billion, producing a "tax windfall" of $5.35 billion, according to PIRG's Michelle Surka.

"This not only sends the wrong message," she said, "but it also hurts taxpayers by forcing us to shoulder the burden of BP’s tax windfall in the form of higher taxes, cuts to public programs, and more national debt." 

In the past, the Justice Department has written into corporate settlements a proviso that penalties are non-deductible. But Uhlmann says those provisions typically apply to civil or criminal penalties that the IRS has ruled are non-deductible anyway--the language is more a reminder to the public. He couldn't think of a case where a payment that normally would be deductible was treated otherwise.

If the Justice Department were determined to make BP shoulder the equivalent of a non-deductible penalty, Uhlmann observed, it could achieve the same end simply by extracting a higher settlement to net out the tax break. But Monday's settlement may already be stretching the limits of what BP is willing to pay.

"This is a good settlement in a terrible situation that never should have happened," he said.

Keep up to date with the Economy Hub. Follow @hiltzikm on Twitter, see our Facebook page, or email michael.hiltzik@latimes.com.

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