## Facts

- Inductotherm Industries, Inc., through a subsidiary, contracted in 1989 to manufacture three vacuum furnaces for Iraq, supported by a $6.4 million letter of credit and a $1.1 million deposit.
- After Iraq invaded Kuwait, an Executive Order and OFAC regulations blocked Iraqi-related property interests, limiting transfer of the furnaces and blocking related funds absent an OFAC license.
- In 1991, Inductotherm sold one furnace (Furnace A) to Mitsubishi for $1.8 million and initially commingled the proceeds with its general funds rather than holding them in a blocked account.
- After the government learned of the sale, it required the proceeds to be treated as blocked property; related administrative proceedings allowed release conditions tied to maintaining the Iraqi deposit in a blocked account.
- On its 1991 federal return, Inductotherm did not report the $1.8 million as income and sought earlier-year deductions for manufacturing costs of the other two furnaces (Furnaces B and C), claiming sanctions effectively confiscated them or destroyed their value.
- Inductotherm paid the assessed tax on the Furnace A proceeds and filed a refund suit.

## Issues

1. Whether the $1.8 million proceeds from the 1991 sale of Furnace A were taxable in 1991 under the claim of right doctrine despite OFAC blocking restrictions.
2. Whether Inductotherm could deduct, in years prior to any disposition, the manufacturing costs of Furnaces B and C on the theory that sanctions amounted to confiscation or otherwise produced a realized loss.
3. Whether a “loss of market value” theory for Furnaces B and C could be asserted on appeal when it was disclaimed below and unsupported by the trial record.

## Decision

- The Third Circuit affirmed summary judgment for the United States.
- The court held that Inductotherm had to recognize the $1.8 million Furnace A proceeds as taxable income in 1991.
- The court held that Inductotherm could not take earlier-year deductions for the costs of Furnaces B and C based on sanctions-related restrictions.
- The court declined to accept a “loss of market value” appellate theory that was not preserved and was inadequately supported by evidence.

## Legal Principles

- Under the claim of right doctrine, amounts received are includable in gross income when received under a claim of right and without restrictions on disposition sufficient to negate dominion and control.
- A governmental blocking order that regulates transfer or requires funds to be held in a blocked manner does not, by itself, negate income recognition when the taxpayer in fact exercises dominion over the proceeds (including commingling and practical ability to use the funds).
- A deductible loss generally requires a fixed, realized loss evidenced by a “closed and completed transaction”; temporary regulatory limits on use or transfer, without seizure or permanent divestiture, do not satisfy this requirement.
- Retention of title and possession, plus the availability of regulatory relief (e.g., seeking an OFAC license), weighs against treating sanctions restrictions as a completed confiscation for loss-deduction purposes.
- An appellant cannot raise a new theory on appeal that was disclaimed or not developed in the district court, particularly where the evidentiary record does not support it.

## Conclusion

The court required income recognition for blocked sale proceeds where the taxpayer exercised dominion over the funds and denied earlier loss deductions for property subject to sanctions because the restrictions were temporary and did not create a closed and completed, realized loss, while also enforcing ordinary preservation rules against new appellate theories.


Inductotherm Industries, Inc. v. United States, 351 F.3d 120 (3d Cir. 2003)