June 17, 2010 / 5:54 PM / 9 years ago

BP spill fund tax break could bite back

WASHINGTON (Reuters) - The good news for BP: it will probably be able to write off some or all of a new $20 billion oil spill escrow fund from its taxes.

The bad news: it could create yet another public relations headache for the beleaguered oil giant.

Under pressure from the Obama administration, BP acquiesced on Wednesday to fork over $20 billion for a fund to pay damages to individuals and businesses harmed by the massive leak still gushing at the bottom of the Gulf of Mexico.

Tax experts say it would be natural for BP to deduct the costs paid out under the fund. Indeed, they have a duty to shareholders to maximize the firm’s value.

“Corporations have liabilities all the time for damages and they are deductible either as a loss or a business expense; it happens all the time,” said Walker Johnson, partner at Steptoe & Johnson in Washington, D.C.

Exxon did the same thing after its oil disaster over two decades ago but was criticized for it. The final costs to Exxon shareholders from the 1989 Exxon Valdez tanker disaster were less than the headline cleanup figures, as many costs were deductible.

But Boeing Co decided to forego seeking a tax deduction for any of a $615 million settlement with the government in 2006 over ethics charges, under pressure from lawmakers.

“The company’s goal is going to be write off as much as possible,” Edward McNally, a lawyer at Kasowitz, Benson, and a former U.S. prosecutor who headed the criminal division in Alaska during the Exxon Valdez litigation.

“On the other hand, we live in a representative democracy and people are very adverse to the idea that a large corporation gets ‘special tax breaks’ as a result of paying us what they owe us for their own missteps,” McNally added.

BP was not available for comment on whether it would take a tax deduction for the fund.

Under the plan, a new independent claims process will be set up to pay for damages to people and businesses.

BP has agreed to contribute $20 billion over a four-year period at a rate of $5 billion per year, including $5 billion this year. BP will provide assurance for these commitments by setting aside $20 billion in U.S. assets.

Asked whether the tax issue came up during the negotiations for the escrow fund, U.S. Attorney General Eric Holder told reporters it did not, and he was unsure whether it would be part of the discussion as they work out the final terms of the fund.

Frank O’Donnell, president of the advocacy group Clean Air Watch, said there would likely be a swift negative reaction from the public and lawmakers if the escrow fund proves to be a tax writeoff.

“I think that the American public would be justifiably outraged to realize it is subsidizing this horror show,” O’Donnell said.

He also said lawmakers are under pressure to craft a legislative response to the oil spill, and the tax deductibility issue would be a leading issue on the agenda.

WHICH SIDE OF THE FENCE?

To be sure, BP will likely not be able to deduct everything, including penalties and any fines for crimes.

“Expenses that are penalties, that are designed to punish, to deter future wrongdoing, those most likely ... would not be tax deductible,” said Anthony Sabino, a law professor at St. John’s University. “It’s a matter of taking an item and saying which side of the fence does it fall upon.”

Companies can, however, deduct punitive damages awarded in lawsuits from their taxes, an ability some U.S. lawmakers have been trying to change. Earlier this week, Senate Majority leader Harry Reid introduced a proposal to disallow such deductions in a pending tax bill.

The timing of any tax deductions will depend on how the fund is structured, tax experts say.

If BP keeps the funds on its books, but earmarked for the fund, no deduction can be taken until money is paid out, according to Johnson. If the fund is independent and there is no way of BP getting a refund for funds paid into it, they would be deductible.

For David Heikkinen, an analyst with Tudor, Pickering, Holt, the question is whether or not the deductions will hold.

“Those expenses can be categorized as tax-deductible,” he said. “The question is, will the government allow them to be deducted?

“Under today’s tax law, those are deductible costs. Can that change? Everything seems like it can change,” Heikkinen said.

Additional reporting by Ernest Scheyder in New York and Tom Bergin in London and Karey Wutkowski in Washington; Editing by Tim Dobbyn

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