Alcoa, Inc. v. United States

Alcoa, Inc. (plaintiff) was an aluminum and aluminum-products producer. From 1940 to 1987, Alcoa disposed of waste byproducts produced in its ordinary course of business. Alcoa alleged that during these years, for tax purposes, it included the disposal costs in its costs-of-goods-sold (COGS) calculations, thus excluding those costs from its gross income. In 1993, Alcoa’s disposal costs increased significantly due to new environmental laws. On its 1993 tax return, Alcoa therefore deducted the disposal costs from its taxable income as business expenses. The Internal Revenue Service (IRS) (defendant) did not contest Alcoa’s deductions. However, when Alcoa requested a refund for disposal costs incurred from 1940 to 1987 pursuant to Internal Revenue Code § 1341, the IRS declined. Under § 1341, a taxpayer can take a deduction for returning funds he rightfully received in a previous tax year. Alcoa filed a refund claim in district court. The IRS asserted that Alcoa could not claim a refund for money not spent on disposal costs because the costs had been incurred in Alcoa’s normal course of business and that Alcoa had not restored the unspent funds to the funds’ rightful owner because one did not exist, thereby disqualifying the funds for consideration under § 1341. Alcoa countered that its COGS were understated and its gross income was overstated, entitling it to a refund. The district court sided with the IRS, and Alcoa appealed.