Taxpayers on the Hook for BP's Gulf Spill

The oil hearings last week revealed that BP (NYSE:BP) is moving to cut its tax bill by about $11.8 billion by writing off the costs of its devastating oil spill in the Gulf of Mexico as an ordinary business expense, a spill which wreaked havoc on the Gulf, killed wild life and damaged the local economy.

BP booked $11.8 billion in tax savings in its fourth quarter as it partly wrote off the costs for the clean-up, the $20 billion victim compensation fund, and legal expenses.

Without the move, BP’s bottom line would have been deep in the red. BP says it has already taken a $40.9 billion total pre-tax charge to its income in 2010.

The oil company did not return calls or e-mail requests for comment.

Taxpayers are on the hook for about 29% of BP's overall costs, says Senate Democrat Bill Nelson of Florida, who has introduced a bill that would shut down deductions for legal, clean-up and other costs associated with oil spills in U.S. territorial waters as "ordinary and necessary" business expenses.

The legislation would apply to most of BP's expenses, Nelson has said.

Nelson says this bill was necessary, especially after BP itself vowed to not deduct such costs as "ordinary and necessary" business expenses. And especially after Boeing (NYSE:BA) and Goldman Sachs (NYSE:GS) didn't deduct similar costs after they got in trouble with the government.

All this unfolded at a testy hearing last Thursday of the Senate Finance Committee, where oil executives defended their lucrative profits and attempted to explain away rising gas prices.

Sen. Nelson began a line of questioning with BP America chairman and president Lamar McKay on whether the CEO thought it was justifiable that BP was attempting to take a tax write-off for costs associated with the spill.

In BP’s fourth quarter 2010 SEC filing. the company indicated it planned to generate $11.8 billion in tax savings as a result of the oil spill.

“Surely, the Gulf oil spill was the result of wrongdoing, and yet you want to claim that as a tax credit," Sen. Nelson said at the hearing. BP “may be entitled to this under the law, but that doesn't make it right."

But McKay said the company was not treating the expense deductions as a tax credit, and said the write-offs were justified as "standard business expenses."

However, Nelson said: "BP agreed to pick up the entire tab for cleaning the mess up the Gulf. Shifting these costs back to the taxpayer shouldn't be allowed."

Sen. Nelson also noted that in unrelated cases involving company wrongdoing Boeing and Goldman Sachs had voluntarily agreed not to deduct such things as legal expenses. Sen. Nelson said at the hearing that “ should consider changing the law to follow the example set by Boeing and Goldman Sachs.”

Boeing agreed to pay a $615 million fine to the U.S. government in 2006 to end a three-year federal investigation into its Pentagon contracting scandals.

The fine was the largest financial penalty ever slapped on a military contractor.

The Department of Justice had alleged that Boeing illegally obtained thousands of pages of confidential and proprietary documents from corporate rival Lockheed Martin Corp. to help it win Defense Department contracts to make rockets and other things. Justice had also alleged that Boeing illegally recruited a top Air Force procurement officer while she was simultaneously sanctioning contracts worth billions of dollars to Boeing.

And last year, Goldman Sachs agreed to pay $550 million to settle a civil suit filed against it by the Securities and Exchange Commission which alleged that the Wall Street investment bank had misled investors in touting  subprime mortgage investments, while not disclosing it let  John Paulson, a hedge fund manager, pick the assets for the same security which Paulson planned to bet against, or "short."

The fine was the largest in the history of the SEC, and came within a day of Congressional passage of the Dodd-Frank financial regulatory overhaul bill.