California Just Learned That Gas Companies Can Deduct Settlement Damages From Their Taxes

Oh, you didn't know that penalties are tax deductible?

on July 22, 2015 at 4:25 PM

San Bruno pipeline explosion

In today’s episode of “How The World Works,” we see slack-jawed, Californian lawmakers react with bemusement and horror when they find out that large companies routinely deduct the fines they pay in settlement deals from their state taxes.

In 2010, PG&E damn near blew up San Bruno. A pipeline exploded: people died, homes were destroyed, the California Public Utilities Commission was outraged and structured a $1.6 billion dollar settlement with PG&E. They called the settlement “fines,” but it was structured in such a way that part of it would go to PG&E customers as a one time “credit” and part of it would go to making pipeline improvements that PG&E should have been making all of this time.

Things is, “credits” and “improvements” are generally tax deductible. The law prohibits companies from deducting “punitive damages” paid to the government from taxes. But punitives are a very specific legal thing. Calling something “a fine” doesn’t magically make it a fine. I’m not sure if the California Public Utilities Commission knew this, but I’ll bet all the money in my pocket that lawyers for PG&E did.

The California PUC has filed some briefs with the IRS essentially saying “No… IT’S A FINE, Don’t let these motherf**kers off the hook!” But even punitives can be deducted if the company argues that the fine was “remedial” in nature.

It’s always fun when lawmakers suddenly become aware about the operation of their own laws. Now, the California legislature has sprung into action. The San Jose Mercury News reports that SB 681 would “specifically prevent PG&E from realizing a windfall from a tax deduction from the penalty.” Here’s a passionate editorial in favor of the legislation.

Oh, is that BP’s music I hear? From Forbes:

Compensatory damages are clearly deductible. So are punitive damages paid in the course of a trade or business. Thus, deductions are likely despite the fact that tax deductions for wrongdoers rub many the wrong way. A good example was BP’s large payments relating to the Gulf oil spill. Sen. Bill Nelson, D-Fla., called for a congressional inquiry into BP’s tax treatment. Senator Nelson didn’t focus solely on the extent to which BP would deduct fines, penalties or related counsel fees.

He also asked whether BP should be allowed to deduct the $20 billion placed in escrow for injured parties.

When a corporation has lobbyists working on the tax code, what do you think they’re working on? Making hookers deductible? California legislators are like a child who wanders into the middle of a movie.