Alcoa Inc v. United States

Opinions of the United

2007 Decisions States Court of Appeals

for the Third Circuit

11-28-2007

Alcoa Inc v. USA

Precedential or Non-Precedential: Precedential

Docket No. 06-1635

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 06-1635

ALCOA, INC.

and affiliated corporations

f/k/a ALUMINUM COMPANY OF AMERICA

v.

UNITED STATES OF AMERICA

Alcoa Inc.,

Appellant

On Appeal from the United States District Court

for the Western District of Pennsylvania

(D. C. No. 03-cv-00626)

District Judge: Hon. Terrence F. McVerry

Argued on May 15, 2007

Before: FISHER, NYGAARD and ROTH, Circuit Judges

(Opinion filed: November 28, 2007)

Natalie H. Keller, Esquire (ARGUED)

Kirkland & Ellis

200 East Randolph Drive

Suite 6500

Chicago, IL 60601

Counsel for Appellant Alcoa, Inc. and affiliated

corporations, formerly known as, Aluminum

Company of America

Deborah K. Snyder, Esquire (ARGUED)

Richard Farber, Esquire

United States Department of Justice

Mary Beth Buchanan, Esquire

United States Attorney

Eileen J. O’Connor, Esquire

Assistant Attorney General

Tax Division

P. O. Box 502

Washington, DC 20044

Counsel for Appellee United States of America

2

B. John Williams, Jr., Esquire

Skadden, Arps, Slate, Meagher & Flom

1440 New York Avenue, NW

Washington, DC 20005

Counsel for Amicus-Appellant Curiae Entergy

Corporation

OPINION

ROTH, Circuit Judge:

The issue before us is whether a taxpayer’s expenses for

environmental clean-up of its industrial sites, mandated by

changes in environmental law, qualify for the beneficial tax

treatment afforded by section 1341 of the Internal Revenue

Code, 26 U.S.C. § 1341. Section 1341 applies when a taxpayer

must restore a substantial amount of money, which the taxpayer

had received in a prior tax year under a claim of right. Section

1341 allows the taxpayer to take a deduction in the current tax

year for the amount of taxes the taxpayer would have saved if

the amount restored had not been included in its reported gross

income in the prior tax year.

We hold that Alcoa’s environmental clean-up expenses,

incurred in the 1993 tax year for pollution created in past years,

do not qualify as restored moneys under Section 1341.

3

I. Factual and Procedural Background

The facts of this case are simple and mostly undisputed.

Alcoa is a well-known producer of aluminum and aluminum

products. From 1940 to 1987, Alcoa’s operations produced

waste byproducts, which Alcoa disposed of during the ordinary

course of business. Alcoa claims that it included disposal costs

for these waste byproducts in its Cost of Goods Sold (COGS)

calculations for the relevant years, thereby excluding them from

its reported income during those years.1

After the enactment of new environmental laws,

including the Comprehensive Environmental Response,

Compensation, and Liability Act of 1980 (CERCLA), state and

federal agencies found that a number of Alcoa’s industrial sites

were polluted and ordered Alcoa to conduct environmental

clean-up at these sites. As a result, in 1993 Alcoa expended

substantial funds on environmental remediation.

In its 1993 tax return, Alcoa claimed these costs as a tax

1

Expenses included in COGS are excluded from gross

income because “in a manufacturing, merchandising, or mining

business, ‘gross income’ means the total sales, less the costs of

goods sold.” 26 C.F.R. § 1.61-3(a).

The government disputes that Alcoa included its waste

disposal costs in the COGS calculation; since we are reviewing

a grant of summary judgment for the government, however, we

must credit Alcoa’s version.

4

deduction; the Internal Revenue Service (IRS) did not challenge

that treatment. Subsequently, however, Alcoa filed with the IRS

a claim for a refund of over twelve million dollars. Alcoa

maintained that under section 1341, Alcoa was entitled to enjoy

not the tax benefit yielded by the 1993 deduction, but rather the

much larger benefit (due to the then generally higher corporate

tax rates) of a reduction of its 1940-1987 tax liability. The IRS

disallowed the refund and Alcoa filed this action in the District

Court.

After discovery the parties filed cross-motions for

summary judgment. The District Court noted that a practically

identical case had recently been decided in the United States

District Court for the Eastern District of Virginia against the

Reynolds Metal Company. See Reynolds v. United States, 389

F. Supp. 2d 692 (E.D. Va. 2005). Finding itself in full

agreement with the opinion of the Virginia court, the District

Court adopted that opinion as its own and granted summary

judgment in favor of the government.

This timely appeal followed.

II. Jurisdiction and Standard of Review

The District Court had jurisdiction under 28 U.S.C. §

1346(a)(1), which provides that district courts have original

jurisdiction of civil actions against the United States for the

recovery of any tax alleged to have been erroneously or illegally

assessed or collected. We have jurisdiction of this appeal under

28 U.S.C. § 1291.

5

We review the District Court’s grant of summary

judgment de novo, applying the same standard the District Court

applied. Doe v. County of Centre, Pa., 242 F.3d 437, 447 (3d

Cir. 2001). Summary judgment is appropriate where there is no

genuine issue of material fact to be resolved and the moving

party is entitled to judgment as a matter of law. Celotex Corp.

v. Catrett, 477 U.S. 317, 322 (1986).

III. Discussion

The issue in this case is whether Alcoa’s 1993

expenditure for environmental remediation qualifies for the

beneficial tax treatment allowed by section 1341. If it does not

qualify, as the government argues, Alcoa can reduce its tax

liability for the year 1993 only to the extent it deducts its

remedial expenses from its 1993 income which will be taxed at

the 1993 corporate tax rate of 35%. If Alcoa’s 1993

environmental expenses do qualify under section 1341,

however, Alcoa is entitled to a deduction in 1993 equal to what

it would have saved in taxes in the years 1940-1987 by

excluding the remediation expenses from its reported income for

those prior tax years.2 This treatment would be beneficial to

2

Alcoa calculates the additional tax savings arising from

section 1341 treatment at over twelve million dollars. It appears

that it does so by apportioning its 1993 expenses among the

years 1940 to 1987. There is a significant question, however,

about whether the clean-up expenses in 1993 are in any

meaningful sense the “same” costs Alcoa would have incurred

in 1940-1987 if the remediation had been done over those years.

It would be very difficult to establish what portion of the

6

Alcoa because corporate tax rates were generally far higher in

1940-1987 than in 1993. For the reasons we set out below, we

conclude that the environmental remediation expenses that

Alcoa incurred in 1993 do not qualify for beneficial tax

treatment under section 1341. Alcoa’s proposed interpretation

of the statute, while artful, is not convincing.

A. The Claim of Right Doctrine and Section 1341

The United States Tax Code operates on an annual

accounting system, under which “each year’s tax must be

definitively calculable at the end of the tax year.” United States

v. Skelly Oil Co., 394 U.S. 678, 684 (1969). Under the so-called

“claim of right” doctrine, “[i]f a taxpayer receives earnings

under a claim of right and without restriction as to its

disposition, he has received income which he is required to

return, even though it may still be claimed that he is not entitled

to retain the money, and even though he may still be adjudged

liable to restore its equivalent.” Id. at 680 (internal quotation

omitted). Thus, a taxpayer must include in his tax return even

those items of income which are subject to competing claims, so

pollution that was eventually removed should be apportioned to

each of the 47 years in question; and even if that were possible,

it would then be necessary to calculate what it would have cost

to remove the relevant pollutants under the economic and

technological circumstances of each of those years. This is a

highly speculative enterprise. For purposes of this discussion,

however, we assume that Alcoa would be able to identify the

exact amount it would have been able to exclude from income

in each of the 47 years under review.

7

long as he has full control of those moneys at the end of the tax

year.

For many years, if a taxpayer filed a tax return but later

was forced to relinquish some of the reported income, the

taxpayer “would be entitled to a deduction in the year of

repayment; the taxes due for the year of receipt would not be

affected.” Skelly Oil, 394 U.S. at 680-81. This system had the

potential to create inequities because a taxpayer might be forced

to pay taxes on the item of income at a certain tax rate and take

a deduction at a lower rate (because of an intervening change

either in the taxpayer’s tax bracket or in the tax rates

themselves). Id. at 681. The case which focused attention on

these inequities is United States v. Lewis, 340 U.S. 590 (1951).

In 1944, the taxpayer in Lewis had received a bonus from his

employer, on which he had properly paid income taxes in the

year of receipt. Two years later, in 1946, a state court ordered

Lewis to repay his employer part of that bonus because it had

been improperly computed. “Until payment of the judgment in

1946, [Lewis] had at all times claimed and used the full [bonus

amount] unconditionally as his own, in the good faith though

‘mistaken’ belief that he was entitled to the whole bonus.” Id.

at 591. The government argued that Lewis should deduct the

amount he returned to his employer as a loss from his 1946 tax

return; Lewis wished to recompute his tax for 1944. The Court

sided with the government and held that under the well-

established claim of right doctrine, the tax year in which the

contested amount was received could not be reopened, whether

this would “result[] in an advantage or disadvantage to a

taxpayer.” Id. at 592.

8

In order to correct the inequities made apparent by the

Lewis decision, Congress enacted section 1341, which, “as an

alternative to the deduction in the year of repayment which prior

law allowed, . . . permits certain taxpayers to recompute their

taxes for the year of receipt.” Skelly Oil, 394 U.S. at 682.

Section 1341 is designed to put the taxpayer in essentially the

same position he would have been in had he never received the

returned income in the first place. Dominion Res., Inc. v.

United States, 219 F.3d 359, 363 (4th Cir. 2000). Under the title

“Computation of tax where taxpayer restores substantial amount

held under claim of right,” section 1341 provides in relevant

part:

(a) General rule. If –

(1) an item was included in gross income for a

prior taxable year (or years) because it appeared

that the taxpayer had an unrestricted right to such

item;

(2) a deduction is allowable for the taxable year

because it was established after the close of such

prior taxable year (or years) that the taxpayer did

not have an unrestricted right to such item or to a

portion of such item; and

(3) the amount of such deduction exceeds $3,000,

then the tax imposed by this chapter for

the taxable years shall be the lesser of

the following:

9

(4) the tax for the taxable year computed with such

deduction; or

(5) an amount equal to

(A) the tax for the taxable year computed

without such deduction, minus

(B) the decrease in tax under this chapter

(or the corresponding provisions of prior

revenue laws) for the prior taxable year (or

years) which would result solely from the

exclusion of such item (or portion thereof)

from gross income for such prior taxable

year (or years).

26 U.S.C. § 1341(a). The “net effect” of the provision is “that

the taxpayer can recompute his taxes for the year in which he

originally received the money, excluding from his income that

amount which he later repaid.” Reynolds, 389 F. Supp.2d at

698. By allowing the taxpayer the choice between a simple

deduction and a recalculation of the prior year’s tax liability,

section 1341 ensures that any change in tax rates or in the

taxpayer’s tax bracket is a tax neutral event with respect to the

disputed item of income.

For a taxpayer to qualify for the beneficial tax treatment

of section 1341, (1) the taxpayer must have appeared to have an

unrestricted right to an item included in gross income for a prior

taxable year (i.e., must have included the item in income under

a claim of right); (2) it must be established after the close of that

10

prior year that the taxpayer did not have an unrestricted right to

the item; (3) the taxpayer must be entitled to deduct the amount

of the item in the year in which the taxpayer restored the item;

and (4) the amount of the deduction must exceed $3,000.

Dominion Res., 219 F.3d at 363.3 The taxpayer bears the burden

of proving his eligibility for section 1341 treatment. Kappel v.

United States, 437 F.2d 1222, 1227 (3d Cir. 1971).

In the District Court, the government conceded (as it does

here) that Alcoa has met the third and fourth requirements of

section 1341 because it was entitled to a deduction in 1993 that

exceeded $3,000.4 The government contended, however, that

Alcoa could not satisfy the first or second requirement for

eligibility under the provision, i.e., (1) inclusion of an item in

gross income under claim of right, and (2) later determination

that the taxpayer did not have an unrestricted right to that item

(restoration of that item). The government argued that Alcoa

could not characterize as an “item . . . included in gross income”

3

In addition to this “general rule,” section 1341 includes

certain exceptions, one of which – the “inventory exception” –

is the object of a secondary dispute in this case. See 26 U.S.C.

§ 1341(b)(2). Because we do not reach the parties’

disagreement as to the interpretation of this exception we do not

discuss it here.

4

Section 1341 does not itself create the right to a deduction

in the year of the repayment. Rather, it is a prerequisite for

section 1341 treatment that the taxpayer be entitled to a

deduction for all or part of the repaid amount under some other

Code section. Skelly Oil, 394 U.S. at 683.

11

the funds it did not spend in 1940-1987 on additional waste

disposal activities. The government’s position was that “gross

income” means “gross receipts”; “gross income” does not

include money the taxpayer failed to spend. Alcoa disagreed,

reasoning its “gross income” for the years in question was

overstated because Alcoa’s cost of goods sold was understated.

The government’s response to this argument was that,

even if the amounts not spent by Alcoa could qualify as an “item

included in gross income,” the claim of right doctrine applied

only when the taxpayer was subject to an adverse claim at the

time it included the item in gross income – whether or not the

taxpayer was aware of the adverse claim at the time of the initial

return. In the government’s view, section 1341 does not apply

where the taxpayer had an actual and not simply an apparent

right to the item, but later lost its right to the item through an

intervening change in factual circumstances. Under this theory,

even if Alcoa’s insufficient waste disposal expenses could

qualify as an “item included in gross income,” Alcoa had an

actual – not an apparent – claim to the funds it saved by failing

to conduct proper waste disposal. This is so because there was

no rival claim to those funds. Alcoa replied that something can

be apparent and also be true; in Alcoa’s view, all a taxpayer

must show to qualify under section 1341 is that the taxpayer lost

the right to the item at some point before claiming the

12

deduction.5

The District Court, pursuant to the Reynolds decision,

grudgingly accepted Alcoa’s argument that its insufficient

environmental expenditures during the 1940-1987 period

amounted to the inclusion of an item in gross income under an

apparent claim of right. See Reynolds, 389 F. Supp. 2d at 702

(noting that the taxpayer had “skillfully co-opted the definition

of gross income for its own means”). As for the requirement of

a determination in a later year that the taxpayer did not have a

claim of right to that item, however, the District Court held that

Alcoa could not satisfy it and therefore could not avail itself of

the beneficial treatment of section 1341.6

5

The question of whether an actual claim of right can qualify

as an apparent one under the statute has caused some

disagreement in the federal courts. Compare Dominion Res.,

219 F.3d 359 (holding that a taxpayer may qualify for section

1341 treatment even if, during the year of receipt, he did in fact

have an actual right to the item of income) with Cinergy Corp.

v. United States, 55 Fed. Cl. 489 (Fed. Cl. 2003) (holding that

section 1341 treatment presupposes that the taxpayer’s right to

was “apparent,” not “actual,” in the year of receipt).

6

Because of the conclusion we come to in this appeal, we do

not need to reach the question of whether the funds Alcoa did

not spend in 1940-1987 on waste disposal qualify as “items

included in gross income.” We note, however, that the

argument presents significant difficulties. As a practical matter,

the relationship between Alcoa’s expenditure in 1993, on the

one hand, and whatever unspent moneys may have been

13

B. The “Same Circumstances, Terms and

Conditions” Test

We agree with the District Court that Alcoa’s clean-up

expenditures in 1993 do not qualify as the restoration of income

to which Alcoa found it did not have a claim of right. How then

can a taxpayer satisfy section 1341's requirement that it “was

established after the close of [a] prior taxable year (or years) that

the taxpayer did not have an unrestricted right” to an item of

income or a portion of such item? 26 U.S.C. § 1341(a)(2). The

District Court, adopting Reynolds, held that a taxpayer’s later

arising obligation to remedy environmental ills is not a

determination that the taxpayer did not have an unrestricted right

to an item of income or to a portion of such item, as required by

the statute, because the taxpayer had not demonstrated

restoration of an item of income to an entity from whom the

income was received or to whom the item of income should

have been paid. Reynolds, 389 F. Supp. 2d at 702; see also

included in the COGS for the years under review, on the other,

is tenuous and speculative at best. The exact amount Alcoa

expended on clean-up in 1993 cannot be simply apportioned

among the 47 years at issue without regard to the difference in

the kind of activity (immediate waste disposal vs. delayed clean-

up), cost of labor, cost and availability of technology, etc.

Moreover, it seems unlikely that the statute was intended to

cover unspent money. What Congress had in mind was the

situation where a taxpayer received income that it later had to

relinquish. Alcoa’s artful argument that waste disposal expenses

would have been part of COGS, and thus an item of income,

exploits technicalities at the expense of common sense.

14

Kappel, 437 F.2d at 1226 (“[t]he requirement that a legal

obligation exist to restore funds before a deduction is allowable

under the claim of right doctrine is derived from the language of

§ 1341(a)(2) of the Code”).

On appeal, Alcoa argues that, in order to take advantage

of section 1341, it needs to show only that it discovered it could

not keep the money it had not spent on more effective clean-up

in 1940-1987 because after the enactment of CERCLA and other

environmental laws it was forced to spend the money on

remediation efforts. The government responds that this

interpretation would extend the benefits of section 1341 far

beyond its intended scope and that a taxpayer must show it has

“restored” the amount at issue to another claimant with actual

right to it. The government urges that a taxpayer is entitled to

section 1341 treatment if the repayment arose from the “same

circumstances, terms and conditions” as the original payment of

the item to the taxpayer. See, e.g., Kraft v. United States, 991

F.2d 292, 295 (6th Cir. 1993); Dominion Res., 219 F.3d at 367;

Cinergy Corp. v. United States, 55 Fed. Cl. 489, 507 (Fed. Cl.

2003); Blanton v. Comm’r, 46 T.C. 527, 550 (T.C. 1966). In

other words, there must be a “substantive nexus between the

right to the income at the time of receipt and the subsequent

circumstances necessitating a refund.” Dominion Res., Inc. v.

United States, 48 F. Supp. 2d 527, 540 (E.D. Va. 1999), aff’d,

Dominion Res., 219 F.3d 359.

Alcoa’s claim fails under this “same circumstances,

terms, and conditions” test. Even if we were to credit Alcoa’s

theory about its new obligation to engage in clean-up in 1993 –

15

namely, that it is equivalent to the discovery that it did not have

a claim of right on the money it saved by not engaging in more

extensive environmental efforts in 1940-1987 – it is clear that

the new obligations did not arise from the same circumstances,

terms, and conditions as the initial failure to spend additional

funds on environmental clean-up. Rather, the obligations were

created by new circumstances, terms, and conditions, namely, by

an intervening change in environmental legislation. There is no

substantive nexus that can be recognized for our purposes

between the waste disposal expenses Alcoa did not incur in

1940 to 1987 and its clean-up expenses in 1993.

Taxpayers’ claims have been rejected in analogous

situations. For instance, in Cinergy, the Court of Federal Claims

held that a utility company’s “refund” to current customers of

payments for deferred taxes made by former customers arose

from “subsequent and unrelated events.” 55 Fed. Cl. at 508.

The “refund” did not arise from a recognition that the “amounts

originally collected were excessive or otherwise unneeded”;

rather, customers began protesting the utility’s rates and, faced

with an investigation into the rates’ reasonableness, the utility

proposed a reduction but paired it with a plan for “accelerated

reversal of certain tax reserves” so as to reduce the effect of the

impending rate reduction on its equity. Id. The court found

that the obligation to reverse the tax reserves did not arise from

the same circumstances, terms, and conditions as the original

accumulation of the reserves, but from the later dispute with

customers and wrote that “nothing in the case law suggests that

the requisite nexus is satisfied simply because the receipt of

income and its later return both derived from the same

regulatory process.” Id. Here, the obligation to clean up certain

16

sites – though undoubtedly connected in some way to the earlier

polluting activities – did not arise from some inherent fault in

Alcoa’s waste management choices. The moneys not spent did

not fall under the pall of a latent competing claim. Instead, the

need to expend money for remediation arose from the more

stringent regulations that were later enacted.

We conclude then, as the government proposes, that

because Alcoa’s expenditure of funds in 1993 was not the

restoration of particular moneys to the rightful owner and did

not arise from the same circumstances, terms, and conditions as

Alcoa’s original acquisition of the income, Alcoa’s 1993 clean-

up expenditures do not qualify for the beneficial tax treatment

provided under section 1341. See id.

This conclusion appears to be consistent with the

language of the statute – although the language of section 1341

is ambiguous in that it does not explain “how a taxpayer or the

IRS is supposed to establish that the taxpayer does not have an

unrestricted right to income.” Chernin v. United States, 149

F.3d 805, 815 (8th Cir. 1998). To resolve this ambiguity in the

language of the statute, we will turn to the congressional intent

revealed in the history and purpose of the statutory scheme. See

Adams Fruit Co. v. Barrett, 494 U.S. 638, 642 (1990). The

historical background of the statute, recounted in some detail

above, strongly suggests that Congress intended to allow

taxpayers to reverse their tax liability for funds received and

included in the relevant tax return although they were the object

of a competing claim. As the Court of Federal Claims found, at

the time the statute was enacted, claim of right cases “tend[ed]

to coalesce around some dispute over the ownership of income

17

or a mistake of fact, deriving, for example, from a quarrel over

the ownership of income producing property, the misapplication

of a contract provision, or the payment of funds under a

contingency based upon business expectations that were thought

to, but actually did not, materialize.” Cinergy, 55 Fed. Cl. at

500 (citations omitted). The purpose of section 1341 was, quite

simply, to ensure that, when the taxpayer found itself to be the

losing party in the dispute and had to turn over specific funds to

the rightful owner, the taxpayer should be able to recompute its

income for the year of receipt so as to entirely reverse the tax

liability due to the disputed item.

Legislative history confirms this interpretation. It

documents the section’s enactment in reaction to the perceived

inequity of Lewis, supra, and makes repeated references to

repayment, restoration, and restitution. See, e.g., H.R.Rep. No.

83-1337, at 86-87, reprinted in 1954 U.S.C.C.A.N. 4017, 4113

(“The committee's bill provides that if the amount restored

exceeds $3,000, the taxpayer may recompute the tax for the

prior year, excluding from income the amount repaid” ;

“excluding the amount repaid from the earlier year's income is

likely to have little, if any, tax advantage over taking a

deduction in the year of restitution”) (emphasis added); S.Rep.

No. 83-1622, at 188, reprinted in 1954 U.S.C.C.A.N. 4621,

4751 (same).

Similarly, the accompanying regulations explain that

[i]f, during the taxable year, the taxpayer is entitled under

other provisions of chapter 1 of the Internal Revenue

Code of 1954 to a deduction of more than $3,000

because of the restoration to another of an item which

18

was included in the taxpayer's gross income for a prior

taxable year (or years) under a claim of right, the tax

imposed by chapter 1 of the Internal Revenue Code of

1954 for the taxable year shall be the tax provided in

paragraph (b) of this section.

26 C.F.R. § 1.1341-1(a)(1) (emphasis added).7 Clearly in order

to qualify under the section, the taxpayer must show not simply

that it is no longer entitled to keep money it has included in an

earlier return, but also that it has “restored” it.

Alcoa argues, however, that, even if section 1341

includes a restoration requirement, it does not mean that

restoration must be to the taxpayer’s customers or to a

connected third party. Rather, all the regulations require is

restoration “to another,” and therefore any “other” to whom

moneys are paid will do.

We reject this argument. The requirement that there be

a nexus is inherent in the concept of “restoration” itself. It is

true, as Alcoa points out, that “restoration to another” is not

7

We also note, of course, that the title of section 1341,

“Computation of tax where taxpayer restores substantial amount

held under claim of right,” uses the verb “restore.” We do not

rely on this, however; although generally “the title of a statute

or section can aid in resolving an ambiguity in the legislative

text,” INS v. Nat'l Ctr. for Immigrants’ Rights, 502 U.S. 183,

189 (1991), the Internal Revenue Code’s rules of construction

provide that no “legal effect” should be given to descriptive

matter in the Code. 26 U.S.C. § 7806(b).

19

further defined in the statute or the regulations; the latter merely

state, somewhat tautologically, that “restoration to another

means a restoration resulting because it was established after the

close of [the] prior taxable year (or years) that the taxpayer did

not have an unrestricted right to such item (or portion thereof).”

26 C.F.R. § 1.1341-1(a)(2). For clarification then we will turn

to the dictionary. See Perrin v. United States, 444 U.S. 37, 42

(1979) (it is a fundamental canon of statutory construction that

“unless otherwise defined, words will be interpreted as taking

their ordinary, contemporary, common meaning”).

Webster’s Third International Dictionary defines

“restore” as: “1: to give back (as something lost or taken

away); make restitution of; return. . . . 2: to put or bring back;

3: to bring back to or put back into a former or original state.”

Webster’s Third International Dictionary Unabridged 1936

(1971). The American Heritage Dictionary lists “4. To make

restitution of; give back; [e.g.,] restore the stolen funds.” The

American Heritage Dictionary of the English Language 1538

(3d ed. 1992). Clearly, to restore something to another means

to give it to the person who either once had it or should have had

it all along – in this case, the person with the actual claim of

right to the item of income.

Alcoa’s argument that the legislative history shows that

Congress intended to extend section 1341 benefits to completely

unconnected third parties is unavailing. Alcoa grounds its

contention on the statement found in both the Senate and House

reports that section 1341 would apply to cases of transferee

liability such as Arrowsmith v. Comm’r, 344 U.S. 6 (1952). In

Arrowsmith, a corporation was liquidated, but subsequent to the

20

liquidation a judgment was rendered against it. As a result, the

shareholders who had received capital gain income from the

liquidation of the corporation were required to disgorge part of

that income to satisfy a claim by the corporation’s creditor.

Somewhat puzzlingly, Alcoa presents this as evidence that

Congress intended payments to anyone to count. But the

references to Arrowsmith in the legislative history intimate

precisely the opposite. In Arrowsmith, the funds received by the

shareholders at the time of their corporation’s liquidation were

partly the object of a competing claim; when that competing

claim was perfected, the shareholders were obligated to turn

over the funds. There is nothing remarkable about the

recognition that section 1341 applies to such an instance – and

nothing at all that could be construed as analogous to Alcoa’s

situation here.

Moreover, for substantially the same reasons given by the

District Court in Reynolds (and adopted by the District Court

here), we decline Alcoa’s invitation to follow the Court of

Federal Claims’ decision in Pennzoil-Quaker State Co. v. United

States, 62 Fed. Cl. 689 (Fed. Cl. 2004). See Reynolds, 389 F.

Supp. 2d at 700-702. In Pennzoil, the taxpayer, Quaker State,

had purchased crude oil from independent oil producers for a

period of time. In 1994, a number of these independent

producers brought an antitrust action against Quaker State,

alleging that Quaker State had engaged in price-fixing of its own

products, thereby reducing the price at which the producers

could sell their oil to Quaker State. Eventually Quaker State

settled the lawsuit for $4.4 million and claimed that the

corresponding deduction on the year of the settlement was

entitled to Section 1341 treatment. The Court of Federal Claims

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agreed. Pennzoil is both unpersuasive and distinguishable. It is

unpersuasive because the decision is based on a number of

problematic assumptions, including that Quaker State’s COGS

during the years of the price-fixing would have been higher

without its alleged misconduct and that there was an

ascertainable relationship between the settlement amount and

the amount by which Quaker State’s COGS would have been

higher. In addition, Pennzoil is distinguishable because even if

the Pennzoil court’s understanding of the facts was correct, there

was an identifiable entity – the wholesale oil merchants – who

would have received the money had Quaker State not saved it by

illegally keeping the wholesale prices down. In Alcoa’s case,

there simply was never any entity that had a better right to the

funds Alcoa deducted in 1993 than Alcoa itself.8

The other case Alcoa relies on, Barrett v. Comm’r, 96

T.C. 713 (1991), is no more persuasive. The taxpayers in that

case had bought and sold stock options and realized a large

short-term capital gain. The Securities & Exchange

Commission charged Barrett with using inside information to

buy the options and instituted proceedings to cancel his broker’s

license. Certain other brokers filed suit against Barrett and

8

Evidently aware that this is a significant weakness in

Alcoa’s theory, amicus Entergy Corporation argues that the

restoration requirement is satisfied because the aim of CERCLA

was “to restore to the public the income attributable to the

producers’ environmental consumption.” Like Alcoa’s own

proposed interpretation of the statute, the argument that the

amount not spent by Alcoa in 1940-1987 was somehow restored

to “the public” in 1993 is creative but not convincing.

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others, seeking $10 million. The lawsuits were eventually

settled, with Barrett paying about $54,000 to the plaintiffs. The

Tax Court allowed Barrett to benefit from section 1341

treatment for the settlement amount. In doing so it treated the

settlement as directly related to the profit, talking about “the

$54,400 of the proceeds from the sale of the options.” Id. at

718. After the Tax Court’s decision, the I.R.S. declared its non-

acquiescence with the decision. 1992-2 C.B. 1, 1992 WL

1483929 (I.R.S. A.C.Q. Dec. 31, 1992). The IRS noted that

“[t]he Tax Court in the instant case failed to consider whether

there was a nexus between the obligation to repay and the

original option profits received by Barrett. Specifically, neither

the plaintiffs’ complaint nor any other evidence was introduced

by either party to establish the grounds for the civil suit, the

allegations made in the complaint or the focus of the plaintiffs’

discovery.” I.R.S. AOD 1992-08, 1992 WL 794825 (I.R.S.

A.O.D. March 13, 1992). Barrett, like Pennzoil, appears to be

based on the rationale that the settlement gave back certain

funds to persons or entities that had a better right to them, but in

each case the analysis was too imprecise to be followed.

In sum, only the most torturous reading of section 1341

could equate Alcoa’s expenditures to clean up its sites with

restoring moneys to the rightful owner. Under Alcoa’s theory,

a taxpayer may qualify under section 1341 almost any time that

it is faced with an expense that can be related in any way to the

fact that the taxpayer did not pay that expense in a prior year.

This approach turns the annual accounting system into an

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illusion.9

IV. Conclusion

For the reasons stated above, we will affirm the District

Court’s grant of the government’s motion for summary

judgment motion and its denial of Alcoa’s.

9

Because we reach this result without relying on Revenue

Ruling 2004-17, which the IRS issued while the Reynolds

litigation was ongoing and which addresses the precise issue

presented both in Reynolds and here, we do not decide what

deference it should be accorded. Compare Long Island Care at

Home v. Coke, 127 S.Ct. 2339, 2349 (2007) (holding that an

“Advisory Memorandum” of the Department of Labor, issued

only to Department personnel and written in response to the

litigation, should be afforded deference because it reflected the

Department’s fair and considered views developed over many

years and did not appear to be a “post hoc rationalization” of

past agency action) with AMP Inv. and Consol. Subsidiaries v.

United States, 85 F.3d 1333, 1338-39 (Fed. Cir. 1999) (“[a]

revenue ruling issued at a time when the I.R.S. is preparing to

litigate is often self-serving and not generally entitled to

deference by the courts”) and Catskills Mtns. Chapter of Trout

Unltd. v. City of New York, 273 F.3d 481, 491 (2d Cir. 2001) (“a

position adopted in the course of litigation lacks the indicia of

expertise, regularity, rigorous consideration, and public scrutiny

that justify Chevron deference.”)

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