Inductotherm Industries, Inc. v. United States

Inductotherm Industries, Inc. (Inductotherm) (plaintiff) contracted with the Iraqi federal government in 1989 to make and provide three vacuum furnaces, the first (Furnace A) being an Induction Skull Melting Furnace and the others (Furnaces B and C) being Electron Beam Furnaces. Iraq provided a $6.4 million letter of credit and a $1.1 million deposit to Inductotherm, representing that the furnaces were to make prosthetics for veterans of the Iraq-Iran War. After the furnaces were finished and about to be shipped, Iraq invaded Kuwait, setting into motion the events that would eventually become Operation Desert Storm. President Bush issued an Execution Order blocking all property in which Iraq had an interest. The Office of Foreign Assets found that Iraq had an interest in the furnaces and the deposit that Inductotherm held. Accordingly, Inductotherm sold Furnace A to Mitsubishi for $1.8 million in 1991. Inductotherm did not hold those proceeds in a blocked account but comingled the payment with other funds. Once the US federal government learned of the sale, the US government directed Inductotherm to block the sales proceeds, and Inductotherm then filed suit. The trial court found that the furnaces and proceeds were blocked property but would allow Inductotherm to release the property if Inductotherm held the $1.1 million deposit in a blocked account. Inductotherm filed its tax returns and did not record the $1.8 million sale as taxable income in 1991. Inductotherm argued that those funds did not have to be recognized as income under the claim-of-right doctrine, in which a tax payment does not have unfettered discretion over funds. The elements of the doctrine were that, to be income, the funds must be held (1) under a claim of right and (2) without restriction as to disposition. The US government (defendant) disagreed with this argument, arguing that if Inductotherm held dominion over the funds—as it did in 1991—then the funds were properly considered as income. At trial, the court found in favor of the government, and Inducotherm then appealed.