It's pretty outrageous that BP would use a billion-dollar accounting trick to avoid accountability for paying the cleanup costs of the Gulf oil spill.
It's not illegal—under the U.S. code they can claim the damages as a tax-exempt loss. But it does reveal a possible gap in the code for all corporations. (The exemption is not something specific to the oil and gas industry, which certainly enjoys benefits here and there.)
It is worth keeping in mind, though, that BP cannot claim any penalties they end up owing as a deduction. I don't know the answer to this question, but one wonders if BP could claim all of these deductions if their escrow funds were mandated by the government as a penalty, and whether BP's initiative was really a way to help balance the books.
This move also raises the question of whether the tax code or the IRS needs to find some mechanism for determining when these are true business losses, or whether taxpayers are expected to foot the bill for a company's misconduct. This is a problem across the government. One of our investigators, Michael Smallberg, found a Government Accountability Office (GAO) report that mentioned that determining if settlements are penalties under the tax code presents challenges, and that some agencies put explicit clauses about penalties not being deductible, even though this is just a restatement of existing law.
The Chair and Ranking Member of the Senate Finance Committee, Senators Max Baucus (D-MT) and Chuck Grassley (R-IA), raised concerns about companies claiming similar settlement payments as tax-deductible in 2003. It may be time to follow up.
-- Mandy Smithberger
Image: Flickr user Profound Whatever, used under Creative Commons License