Reynolds Metals Company v. United States

Facts

P's manufacturing operations generate waste byproducts. Between 1940 and 1987, it utilized waste disposal practices in accordance with industry standards and federal regulations. P claims that it included the disposal costs in the computation of its gross income for income tax purposes. P learned that its waste disposal practices were inadequate when it incurred liability under CERLA. From 1992 to 1995, P incurred substantial environmental remediation costs to re-dispose of the waste byproducts and to remediate contaminated areas. P contends that the environmental remediation costs from 1992 to 1995 taxable years are allocable to revenue reported by P in the years 1940 to 1987. P insists that it understated the waste disposal costs for those five decades. This means P overstated its gross income for the years 1940 to 1987. This greatly angered the IRS (D) who refused P's claims. The corporate tax rates for the years 1940 through 1987 were substantially higher than the tax rates from 1992 to 1995. Thus if P wrote off the expenses prior to 1987 it would get more bang for its buck. P insists that §1341, provides a remedy for this contingency caused by the timing differences in the tax rates. Section 1341 provides that the affected taxpayer may (i) claim a deduction in the later year to offset the overstatement in the prior year or (ii) reduce its tax for the later year by the decrease in tax for the prior year that would have resulted if the taxpayer reported the correct amount of gross income in the prior year. P expended over $110 million remediating the sites of its prior operations. Between the years 1940 and 1987, the tax rate was usually 46% or higher. In 1987, Reynolds' tax rate dropped to 35%. P insists that it is entitled to a refund because it overstated its gross income for the years 1940 through 1987 due to the understated environmental costs.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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