## Facts

- Reynolds Metals Company generated and disposed of industrial waste as part of manufacturing operations from approximately 1940 to 1987.
- After later environmental enforcement under CERCLA, Reynolds undertook remediation at sites associated with historic disposal activities.
- Reynolds paid more than $110 million for remediation and related compliance from 1992 to 1995.
- Reynolds deducted those expenditures in the tax years 1992–1995 as ordinary and necessary business expenses.
- Because corporate tax rates were higher in many of the 1940–1987 years than in 1992–1995, Reynolds sought to treat the 1992–1995 remediation payments as additional cost of goods sold (COGS) for 1940–1987.
- Reynolds claimed it had overstated gross income in 1940–1987 by omitting those environmental costs from COGS and sought a refund of about $22.27 million (tax and interest).
- Reynolds filed a federal tax refund suit; both sides moved for partial summary judgment on whether the later remediation costs could be allocated to earlier years through COGS.

## Issues

1. May a taxpayer retroactively adjust COGS for earlier tax years to include environmental remediation costs incurred decades later, after the related goods were sold and income reported?
2. Must CERCLA remediation expenditures be taken into account in the years the liability becomes fixed and the costs are paid or incurred, rather than reallocated to earlier years on a COGS or matching theory?

## Decision

- The court granted the United States’ motion for partial summary judgment and denied Reynolds’s motion.
- The court held Reynolds could not recompute COGS for 1940–1987 to include remediation costs paid in 1992–1995.
- The court concluded the remediation expenditures were not part of COGS for the earlier years and had to be accounted for in the years they became properly chargeable under timing rules.

## Legal Principles

- COGS generally reflects costs properly capitalized to inventory connected to goods sold in the year at issue; it does not include costs arising from later legal and factual developments unrelated to inventory capitalization at the time of production.
- For accrual-basis taxpayers, liabilities are taken into account when all events establishing the fact of the liability have occurred and the amount is reasonably determinable; liabilities that were not fixed or reasonably estimable in earlier years are not attributable to those years.
- Taxpayers generally may not reopen closed tax years to restate income through retroactive recharacterization or timing changes absent specific statutory authority or an authorized accounting method change.
- Environmental remediation expenditures may be deductible business expenses, but the dispute turns on timing and characterization; later-incurred cleanup costs are not converted into earlier-year COGS solely because they relate to past operations.
- IRS revenue rulings issued during ongoing litigation are not binding on courts and may receive limited persuasive weight where they appear to address the case’s outcome rather than apply settled law.

## Conclusion

The court rejected Reynolds’s attempt to obtain refunds by back-allocating decades-later CERCLA remediation payments to earlier high-rate years through COGS, holding the costs were not includible in prior-year COGS and were properly taken into account only when the remediation liability became fixed and the expenditures were paid or incurred.


Reynolds Metals Co. v. United States, 389 F. Supp. 2d 692 (E.D. Va. 2005)