Alcoa, Inc. v. U.S.

• Decision Date: 28 November 2007
• Docket Number: No. 06-1635.,06-1635.
• Citation: 509 F.3d 173
• Parties: ALCOA, INC. and affiliated corporations f/k/a Aluminum Company of America v. UNITED STATES of America, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

509 F.3d 173

ALCOA, INC. and affiliated corporations f/k/a Aluminum Company of America v. UNITED STATES of America, Appellant.

No. 06-1635.

United States Court of Appeals, Third Circuit.

Argued on May 15, 2007.

Opinion Filed: November 28, 2007.

Natalie H. Keller, Esquire (ARGUED), Kirkland & Ellis, Chicago, IL, 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, Washington, DC, Counsel for Appellee United States of America.

B. John Williams, Jr., Esquire, Skadden, Arps, Slate, Meagher & Flom, NW Washington, DC, Counsel for Amicus-Appellant Curiae Entergy Corporation.

Before: FISHER, NYGAARD and ROTH, Circuit Judges.

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.

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 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.

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, 106 S.Ct. 2548, 91 L.Ed.2d 265 (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 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, 89 S.Ct. 1379, 22 L.Ed.2d 642 (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, 89 S.Ct. 1379 (internal quotation omitted). Thus, a taxpayer must include in his tax return even those items of income which are subject to competing claims, so 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, 89 S.Ct. 1379. 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, 89 S.Ct. 1379. The case which focused attention on these inequities is United States v. Lewis, 340 U.S. 590, 71 S.Ct. 522, 95 L.Ed. 560 (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, 71 S.Ct. 522. 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, 71 S.Ct. 522.

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, 89 S.Ct. 1379. 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:

(4) the tax for the taxable year computed with such deduction; or

(5) an amount equal to

Reported below, (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).

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