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BP Business Economic Loss Claim Appeal 2017-400: Claimant’s Officer Compensation Treated Correctly

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The following is an Appeal Panel Decision issued pursuant to Section 6 of the BP Deepwater Horizon Economic & Property Damages Settlement Agreement and the Rules Governing the BP Appeals Process. Links may have been added to assist the reader. The original decision may be found here, as well as a glossary of BP Settlement terms


The three-member Panel, having duly convened and deliberated, renders the following unanimous decision. The Settlement Program awarded Claimant, a general contractor located in Palmetto, Florida (Zone D), $5,406,161.98 pre-RTP ($6,757,702.48 post RTP).
BP’s Final Proposal of $0 is based on the contention that the award contains several errors and should be remanded for consideration of them. BP’s contentions are: first, the Settlement Program did not follow through with regard to Policy 70 because the IRS did not have a record of Claimant having filed its 2008 tax return; second, the Settlement Program did not address a discrepancy between Claimant’s treatment of bad debt on its tax returns versus its treatment of bad debt on its P&Ls; and third, a discrepancy exists between Claimant’s treatment of owner/officer compensation on its tax returns as compared to its P&Ls.
Claimant’s response to BP’s contentions is as follows: Regarding BP’s first contention, when Claimant submitted its claim, it included the 2008 tax return it had filed with the IRS. It subsequently also submitted properly executed IRS Forms 4506 and 4506-T whereby the Settlement Program could request Claimant’s Tax Returns and Tax Transcripts for the period 2007-2011.. The IRS was apparently unable to retrieve Claimant’s 2008 Tax Return. After receiving BP’s Final Proposal, Claimant uploaded the affidavit of XXX, the outside Certified Public Accountant who prepared and filed Claimant’s 2008 Tax Return, confirming that the tax return filed with the
Deepwater Horizon Settlement Program is the tax return he prepared and filed with the IRS. [This Panel notes that it is doubtful that Claimant would have filed returns in 2007 and 2009, but not 2008.]
As to BP’s second issue, the $250,000 difference between the $750,000 bad debt expense on Claimant’s 2007 tax return and the $500,000 recorded on its P&L, is explainable. The 2006 P&L reflected bad debts of $250,000, but the 2006 Tax Return reflected $0 in bad debts.  This is because in 2006 Claimant made a $250,000
entry into “Allowance for Bad Debt” which is a contra asset account that reflected how much of its receivables Claimant believed to be uncollectible. Uploaded is a copy of Claimant’s 2006 Audit Report, which reflects that the Accounts Receivable is net of an allowance for bad debts of $250,000. Since the project that was responsible for the $250,000 entry was not completed in 2006, it was not recorded on the tax return that year and the balance was rolled over into 2007. Then in 2007, Claimant increased the account by $500,000, resulting in  a balance to the Allowance for Bad Debt account of $750,000. The full loss of $750,000 was taken in 2007 because that is when the entire $750,000 was determined to be uncollectible. Uploaded is a copy of Claimant’s 2007 Audit Report, which reflects that there was no Allowance for Bad Debts (i.e., it was not netted against Accounts Receivable as in 2006), and that the Bad Debts Expense was $500,000. The combination of the two entries (the reversal of the 2006 Allowance of Bad Debts plus the additional $500,000 Bad Debt Expense in 2007 resulted in the $750,000 Bad Debts Expense on the 2007 Tax Return. [This Panel notes that the $250,000 amount is de minimis when compared to 2007 Revenue of $57,154,295.]
Finally, with respect to BP’s third argument, the discrepancy between Claimant’s treatment of Owner/Officer compensation on its tax returns as compared to its P&Ls is explained as follows. On the P&Ls, the bulk of Owner/Officer compensation is charged to specific jobs. However, for tax return purposes, the full amount of compensation must be reported for the Owners/Officers. Uploaded is the chart reflecting the amounts of Owner/Officer compensation on the P&Ls and tax returns and W-2s for the Owner/Officers for the period 2007- 2010.  Also uploaded are the W-2s for Claimant’s Owners/Officers for the period 2007-2010. [This Panel notes
that if the full amount of Claimant’s Owners/Officers compensation were extracted from those job costs, this would probably have resulted in an increased
Compensation Award under the Settlement Program because these would be fixed
costs and therefore not included as an expense in calculating the Award.]
This Panel is satisfied with Claimant’s explanations and therefore adopts Claimant’s Final Proposal. [In the alternative, even if this Panel were to agree with BP on one or more of its issues, BP’s Final Proposal of -0- would still leave this Panel no choice but to adopt Claimant’s Final Proposal.]

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