The opinion of the court was delivered by: TERRENCE McVERRY, District Judge
MEMORANDUM OPINION AND ORDER OF COURT
Presently before the Court are the parties' cross motions for
summary judgment. On October 20, 2005, the Court heard oral
argument from counsel on these motions. At the hearing, all
parties were represented by counsel who presented and argued the
issues skillfully and effectively. For the reasons that follow,
the motion for summary judgment filed by Alcoa, Inc. (f/k/a
Aluminum Company of America), and affiliated corporations, will
be denied and the motion for summary judgment filed by the United
States of America will be granted.
Alcoa, Inc. (f/k/a Aluminum Company of America), and affiliated
corporations, ("Alcoa") is seeking a total tax refund from the
government of $12,575,164, plus applicable interest, which it
claims resulted from the overstatement of its gross income in
federal tax returns from 1940-1987. The manufacturing operations
conducted by Alcoa generate waste byproducts, which are disposed
of in the ordinary course of business. The costs of disposing of
these waste byproducts ("waste disposal costs") include the cost
of direct labor for plant employees who participate in the waste
disposal process and the cost of third-party contractors hired to dispose of waste byproducts. During the tax years
1940-1987, Alcoa included its waste disposal costs in the
computation of its costs of goods sold for both financial
accounting and federal income tax purposes.
During its 1993 tax year, Alcoa was required by state and
federal authorities, including the federal Environmental
Protection Agency ("EPA"), to conduct environmental remediation
activities with respect to waste byproducts generated in the
1940-1987 tax years. For federal income tax purposes, Alcoa was
entitled to deduct a significant portion of these costs.
Alcoa argues that had it incurred these environmental
remediation costs in the 1940-1987 tax years (during the actual
tax years when the waste byproducts were generated), its waste
disposal costs, and consequently its cost of goods sold, would
have been higher for such years. As a result, its gross income,
which is computed as gross receipts less costs of goods sold,
would have been lower for such years. "In other words, the gross
income Alcoa reported during the 1940-1987 years was overstated
because its waste disposal costs, and thus its cost of goods
sold, were understated." Alcoa Memo. at 6. Alcoa sought a refund
of the allegedly excess taxes it paid during those years, but the
Internal Revenue Service ("IRS") refused its claims.*fn1
According to Alcoa, if it treats the environmental remediation
costs as deductible in the tax year 1993 rather than allocable to
the years 1940-1987, Alcoa will not receive the full tax benefit of its costs as a result of the differences in tax
rates during the relevant years. According to Alcoa, the
corporate "tax rates in effect during the 1940-1987 tax years
were generally substantially higher than the tax rate in effect
during tax year 1993."
Alcoa argues that the Internal Revenue Code, and specifically
26 U.S.C. § 1341, provides a remedy for the "inequity" caused by
the timing differences in the tax rates. Alcoa insists that the
application of § 1341 in this case would allow Alcoa to claim a
deduction in the tax year 1993 at the same tax rate as that which
Alcoa paid on the underlying gross income it reported in the
years 1940-1987. Alcoa argues that the holding in
Pennzoil-Quaker State Co. v. United States, 62 Fed. Cl. 689
(2004), is exactly on point and should control the outcome of
Not surprisingly, the United States of America does not agree.
In support of its position, it relies upon IRS Revenue Ruling
2004-17, issued on February 6, 2004, which states that amounts
paid or incurred in the current taxable year to remediate
environmental contamination that occurred in prior taxable years
do not qualify for treatment under § 1341. Further, the United
States argues that Alcoa's reliance on the decision in
Pennzoil-Quaker State Co. is misplaced and, therefore, should
not control the outcome of this case. Rather, the United States
argues that the holding in Reynolds Metal Co. v. United States,
389 F. Supp.2d 692 (E.D. Va. 2005), is directly on point and
should be adopted by this Court.
Summary judgment should be granted when "the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine issue as to any material fact and . . . the moving party
is entitled to a judgment as a matter of law." Fed.R.Civ.P.
56(c). A fact is "material" if proof of its existence or
non-existence might affect the outcome of the suit under
applicable law. See Anderson v. Liberty Lobby Inc.,
477 U.S. 242, 248 (1986). "Facts that could alter the outcome are material
facts." Charlton v. Paramus Bd. of Educ., 25 F.3d 194, 197 (3d
Cir. 1994). "[S]ummary judgment will not lie if the dispute about
a material fact is `genuine,' that is, if the evidence is such
that a reasonable jury could return a verdict for the nonmoving
party." Anderson, 477 U.S. at 248.
Initially, the moving party must show the absence of a genuine
issue concerning any material fact. See Celotex Corp. v.
Catrett, 477 U.S. 317, 323 (1986). All doubts as to the
existence of a genuine issue of material fact must be resolved
against the moving party, and the entire record must be examined
in the light most favorable to the nonmoving party. See
Continental Ins. Co. v. Bodie, 682 F.2d 436, 438 (3d Cir. 1982).
Once the moving party has satisfied its burden, the nonmoving
party, "must present affirmative evidence in order to defeat a
properly supported motion for summary judgment." Anderson,
477 U.S. at 257. Mere conclusory allegations or denials taken from
the pleadings are insufficient to withstand a motion for summary
judgment once the moving party has presented evidentiary
materials. See Schoch v. First Fidelity Bancorporation,
912 F.2d 654, 657 (3d Cir. 1990).
In a tax refund suit, the taxpayer has the burden of proof as
to the taxpayer's claim. Psaty v. United States, 442 F.2d 1154,
1160-61 (3d Cir. 1971). When the IRS assesses a tax, a rebuttable
presumption arises that the assessment is correct. Anastasato v.
IRS, 794 F.2d 884, 886 (3d Cir. 1986). "This presumption is a procedural device ...