United States District Court, W.D. Pennsylvania
December 23, 2005.
ALCOA, INC. (f/k/a Aluminum Company of America), and affiliated corporations, Plaintiff,
UNITED STATES OF AMERICA, Defendant.
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.
STANDARD OF REVIEW
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 that
places the burden of producing evidence to rebut the presumption
on the taxpayer." Id.
Section 1341 provides that 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
(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)(1995). Section 1341 also contains an
"inventory exception" to the general rule. According to the
inventory exception, section 1341(a)
does not apply to any deduction allowable with
respect to an item which was included in gross income
by reason of the sale or other disposition of stock
in trade of the taxpayer (or other property of a kind
which would properly have been included in the
inventory of the taxpayer if on hand at the close of
the prior taxable year) or property held by the
taxpayer primarily for sale to customers in the
ordinary course of his trade or business. . . .
26 U.S.C. § 1341(b)(2). Alcoa argues that it meets all of the requirements of
subsection (a). First, the United States has stipulated that
Alcoa's deduction for environmental remediation expenses exceeded
$3,000 in tax year 1993. Next, Alcoa claims that it overstated
its gross income from the sale of aluminum products in tax years
1940-1987 because its waste disposal costs were understated for
such years. Third, Alcoa claims that in tax year 1993 it is
established that Alcoa did not have an unrestricted right to the
income it claims during the 1940-1987 tax years because of the
significant additional sums it was required to expend for
environmental remediation activities with respect to waste
byproducts generated in the 1940-1987 time period. See Alcoa
Memo. at 9. Finally, Alcoa insists that the inventory exception
does not apply in this case "because that exception is limited to
items such as sales returns and allowances, which do not include
the environmental remediation costs at issue here." Id. at
The government contends that § 1341 does not apply to the
deductions for the environmental remediation costs claimed by
Alcoa for a number of reasons. First, Alcoa cannot identify any
item that was included in gross income in a prior year and/or
Alcoa cannot show that such item was included in gross income
under an apparent claim of right, rather than an absolute right.
Therefore, Alcoa cannot meet the requirements of § 1341(a)(1).
Next, to satisfy § 1341(a)(2), the deduction must be allowable
because an item received and included in gross income in a prior
year has been restored in a subsequent year to its rightful
owner. Chernin v. United States, 149 F.3d 805, 816 (8th Cir.
1998). The government argues that the environmental remediation
expenditures incurred by Alcoa is not a restoration and, thus, §
1341(a)(2) does not apply. Last, the government argues that assuming, arguendo, that
Alcoa meets the statutory requirements of § 1341(a), it still
cannot prevail because the inventory exception rule of §
1341(b)(2) precludes recovery. Section 1341 does not apply to any
deduction attributable to an item which was included in gross
income by reason of the sale or disposition of stock in trade,
inventory, or property held primarily for sale to customers. §
1341(b)(2); Trea. Reg. § 1.1341-1(f)(1). Therefore, should this
Court find that Alcoa's gross income was overstated in prior
years because the cost of goods sold was understated by the
amount of the environmental remediation expenditures, then
Alcoa's claimed deductions under § 1341(a)(2) are attributable to
the prior sale of products to customers in the ordinary course of
business and § 1341 does not apply.
Although this is an issue of first impression in this circuit,
the Court is persuaded by the logic and reasoning of Judge James
R. Spencer of the United States District Court for the Eastern
District of Virginia, Richmond Division, in the Reynolds Metals
Company v. United States of America case, 389 F. Supp.2d 692
(E.D. Va. 2005). In that case, Judge Spencer, in a thoughtful and
well-reasoned opinion, examined the history, rationale, and
purpose of § 1341 and concluded that later-incurred environmental
remediation costs were not an allowable deduction with regard to
past sales, the identical issue presented in the instant
The facts, issues, and arguments in Reynolds are virtually
identical to those in this case, as stipulated by counsel at
argument. In 1999, Reynolds filed refund claims for 1992-1995
totaling $22.3 million, citing § 1341 in an attempt to recoup
taxes paid during the years 1940-1987. Reynolds argued that from
1940 through 1987 it used waste disposal practices in connection
with its aluminum manufacturing operations that met prevailing
standards. In the years 1992 through 1995, Reynolds incurred substantial
environmental remediation costs in an effort to remediate
contaminated areas, which resulted from its prior waste disposal
The court in Reynolds determined, however, that Reynolds'
claim was "fundamentally at odds with what a taxpayer should
expect to gain from section 1341 because Reynolds did not restore
or repay an item previously included in gross income when it
incurred environmental remediation costs from 1992 to 1995."
Reynolds, 389 F. Supp.2d at 704.
As an alternative basis for its decision, the Reynolds court
found that it did not "need to reach the issue of whether the
inventory exception bars Reynolds' claim because Reynolds has not
demonstrated that it is entitled to relief under subsection (a)
of section 1341. However, the Court notes that Reynolds would
have this Court classify its prior disposal costs as inventorable
and included in the costs of goods sold but refrain from applying
the inventory exception under § 1341(b)(2)." Id. at 703.
This Court agrees with the decision and reasoning employed by
Judge Spencer in Reynolds and, therefore, adopts and
incorporates said opinion and holding as the opinion of this
Court. The Court finds and rules that Alcoa cannot establish that
the environmental remediation costs it incurred in 1993 is an
allowable deduction for an item of income over which it appeared
to have an unrestricted right as required by § 1341(a).
Accordingly, the Court will deny Alcoa's Motion for Summary
Judgment and grant the United States' motion because it is
entitled to judgment as a matter of law.
An appropriate Order follows. ORDER OF COURT
AND NOW, this 23rd day of December, 2005, in accordance with
the foregoing Memorandum Opinion, it is hereby ORDERED, ADJUDGED
AND DECREED as follows:
1. The Motion for Summary Judgment filed by Alcoa, Inc. (f/k/a
Aluminum Company of America), and affiliated corporations
(Document No. 22) is DENIED; and
2. The Cross Motion for Summary Judgment filed by the United
States of America (Document No. 27) is GRANTED.
The Clerk of Court is directed to mark this case closed.
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