Senator Bill Nelson

On Tuesday, BP announced that they would be taking a $10 billion deduction on their US taxes because of losses stemming from the blown out oil well and expenses associated with the subsequent clean-up and compensation payments to Gulf businesses. Florida Senator Bill Nelson responded on Wednesday, writing a letter to the Senate Finance Committee, demanding an investigation into BP’s planned write-off.

Marketwatch quoted Tony Hayward on the decision to take the write-off: “We have followed the IRS regulations as they’re currently written.” Their story continues:

White House Press Secretary Robert Gibbs said the following in a briefing with reporters: “I don’t think anybody would prefer that [BP] do that.” Gibbs, however, did not say whether Obama would discuss the issue with BP.

But the Marketwatch story veers to offer an entirely unexpected counterexample:

One notable example of a company that decided to forgo a deduction is Goldman Sachs Group Inc., which agreed last month not to write off $535 million in penalties as part of its settlement with the Securities and Exchange Commission. The SEC had sued Goldman Sachs, alleging that it hid critical information from investors in its mortgage securities.

Of course, this penalty assessed to Goldman Sachs amounted to only the amount of profit they accrue in about two weeks, but when Goldman Sachs is held up as the company displaying “responsible behavior” against which BP is to be compared, it’s hard to imagine how BP’s image can sink any lower in the business press. (cont’d.)
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The Hill provides us with details about Senator Bill Nelson’s letter to the Senate Finance Committee in response to BP’s planned tax deduction:

“I was appalled upon learning that BP intends to shift nearly $10 billion of the costs related to the Gulf oil spill to the backs of American taxpayers, including the very taxpayers whose lives have been devastated by the spill. Simply put, that would be unacceptable,” Nelson said in a letter Wednesday to Committee Chairman Max Baucus (D-Mont.) and Sen. Chuck Grassley (R-Iowa), the panel’s top Republican.

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The letter says the probe should explore several questions, such as “How would BP be able to generate $10 billion in tax savings, when $12.2 billion of BP’s $32.2 billion charge on its financial results appears to be for nondeductible statutory penalties and fines?”

Nelson also said the committee should review whether BP will be able to claim deductions for compensatory damages paid to the federal government and state governments, among other areas.

It’s reassuring to see Senator Nelson not accepting at face value BP’s claim that they can deduct these fines and expenses. I hope that his efforts result in an IRS ruling that the deduction will not be allowed, or, better still, that BP will decide that foregoing the deduction would be a responsible act. But then again, if BP were in the habit of acting responsibly, the blow-out would never have occurred.

Apart from the Goldman Sachs and BP cases, however, it is time for Congress and the IRS to come together to make sure that tax deductions are never an option for a company’s losses or fines stemming from illegal acts. Such deductions are merely more of the moral hazard that results when companies are allowed to reap payoffs from irresponsible gambles but socialize the losses when these gambles end in disaster.

Jim White

Jim White

Follow me on Twitter @JimWhiteGNV