                                                                                                                           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Precedential or Non-Precedential: Precedential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

                               21
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.

                               22
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




                                23
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.”)

                               24
