BP to claim $10 billion U.S. tax credit for Gulf oil spill costs

Market WatchJuly 27, 2010 

LOS ANGELES — Oil giant BP PLC will reduce its contribution to U.S. coffers by roughly $10 billion due to a tax credit the company is claiming it incurred from the Gulf of Mexico oil spill.

BP said Tuesday that it is incurring a charge of $32.2 billion from the Gulf response, and as such, it is claiming a $9.9 billion taxation credit.

Asked in a conference call Tuesday about whether the company has discussed the tax credit with President Barack Obama's administration, outgoing BP Chief Executive Tony Hayward said, "We have followed the IRS regulations as they're currently written."

White House officials weren't immediately available for comment. The Internal Revenue Service said it's not allowed under federal law to discuss individual taxpayer issues.

But the issue may raise red flags among federal officials, particularly in light of recent efforts by various other entities that have settled with the U.S.

One notable example is Goldman Sachs Group Inc., which agreed last month not to seek deductions for $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 mortgage securities.

SEC officials had come under fire from Congress for previously allowing tax deductions from penalties in other cases.

Another wrinkle, though, is that it appears no other entity in hot water with the U.S. has incurred costs on the scale that BP has. The company has agreed to put $20 billion in an escrow account to pay claims for oil-spill damages.

But half of that may now come out of government coffers, and it could prove to be embarrassing for the Obama administration, presuming the president and Hayward did not discuss the issue at their recent meeting, said David Desser, managing director of Juris Capital, which invests in corporate litigation. It was after that meeting that Hayward announced the $20 billion escrow fund.

"You would have thought in advance of that meeting, they would have thought of all of those issues," Desser said. "How do you un-ring that bell?"

"It looks to me like maybe the administration goofed here," he added.

Robert Yetman, associate professor at the University of California-Davis, graduate school of management, said the critical question is whether the discussion between Obama and Hayward constitutes a "settlement." In the Goldman Sachs case, the company was sued by the SEC, but no formal legal action has yet been taken by the federal government against BP.

Another key difference is that Goldman Sachs didn't really need the tax break, whereas BP's bottom line is under severe pressure. BP plans to shed a number of assets and reported a $17 billion second-quarter loss on Tuesday. It pegged the total cost of the disaster at $32.2 billion.

"BP is a little bit under the gun here," Yetman said, later adding: "I don't know how they're going to play it, and I don't know how the public is going to respond. But there are certainly differences."

BP's rogue well sent oil rushing into Gulf waters from a mile below the ocean's surface for three months before the company was able to cap it. BP is in the process of drilling a relief well to seal the leak permanently.

While the spill has taken a toll on local economies throughout the Gulf region, it also has cost the company. Hayward will be nominated as a nonexecutive director at BP's Russian joint venture, and Robert Dudley will take over the beleaguered company.

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