## Facts

- From 1940 to 1987, Alcoa’s operations generated waste byproducts that were disposed of in the ordinary course of business, with disposal costs reflected in cost of goods sold for those years.
- After enactment of federal environmental laws, including CERCLA, regulators identified pollution at several Alcoa industrial sites and required clean-up.
- In 1993, Alcoa incurred substantial environmental remediation expenses and deducted them on its 1993 return as ordinary and necessary business expenses; the IRS did not dispute that deduction.
- Alcoa filed an administrative refund claim exceeding $12 million, asserting the 1993 remediation payments qualified for relief under 26 U.S.C. § 1341 (claim-of-right), on the theory that the payments effectively “restored” amounts it had previously retained in earlier years.
- The IRS denied the § 1341 claim, reasoning that the remediation expenditures were not restoration of a discrete item previously included in income under a claim of right and were not repayments to a rightful owner.

## Issues

1. Whether environmental remediation expenses incurred in a later year due to changed environmental law and regulatory orders qualify as amounts “restored” under 26 U.S.C. § 1341.
2. Whether § 1341 requires a specific, identifiable prior “item” included in gross income under an apparent unrestricted right, and a later obligation to return that same item because the right was not unrestricted.

## Decision

- The Third Circuit affirmed summary judgment for the United States.
- The court held Alcoa’s 1993 environmental clean-up expenses did not qualify as “restored moneys” under § 1341.
- The court concluded the expenditures were current compliance costs, not repayment of a discrete prior income item to a rightful owner.
- Alcoa therefore was not entitled to § 1341’s recomputation/credit mechanism, notwithstanding its permissible current-year deduction of the remediation expenses.

## Legal Principles

- Section 1341 applies only when: (a) an identifiable item was included in gross income in a prior year because it appeared the taxpayer had an unrestricted right to it, and (b) it is later established the taxpayer lacked that unrestricted right and must restore the item.
- A “restoration” for § 1341 purposes contemplates repayment/return of a specific prior income item, typically to the party with the superior entitlement, rather than payment of new expenses.
- Later-incurred business expenditures—even if tied economically to past operations—do not trigger § 1341 absent a prior over-inclusion of a discrete income item and a subsequent obligation to return that same item.

## Conclusion

The Third Circuit held that Alcoa’s later-incurred environmental remediation payments, mandated by environmental law and regulatory orders, were deductible as ordinary expenses but did not qualify for § 1341 relief because they were not restorations of a specific prior income item to a rightful owner.


Alcoa, Inc. v. United States, 509 F.3d 173 (3d Cir. 2007)