morning know how our court is pleased to be sitting here in pittsburgh good today i'm pleased to be joined here in this in this area by judge  versus united states of america make to keep points today first that the purpose of section thirteen forty one of the internal revenue code which is the statute issue in this case is remedial and that the relief alcoa's seeks is entirely consistent with that remedial purpose and one the fundamental purpose underline the statute is one of equity and fairness it is founded on the simple principle that taxpayers should not pay taxes on income they didn't actually earn this principle is sometimes distorted by the so called in the aluminum business and the prices for aluminum are set by the world mahdi's market and second is that alcoa never had the chance to increase its prices and the question is whether it had the opportunity to go back and mitigate its losses by for example increasing prices or reducing expenses in other areas and the fact is alcoa never had that opportunity and the same could be said of the standard so called standard section thirteen forty one case such as the case of an employee who receives for example in a bonus that he is then required to return in a later year in that case the employee had he known at the time that he received the phone as that he was going to have to return it could have mitigated or did not have the opportunity rate that was what was charged at that time and if you're going to add to the cost of goods sold for various years don't you have to understand and do a little bit every year you are probably going to be say a catastrophic repair bill the end of the saving with environmental remediation if you do a little bit every year you ma catastrophic expense at the end and how do we know that that is not the situation i would have faced we have no understanding what was the stuff that i can see from the record of the pollutants involved and what should have been done of understanding what should have been done so that how can we imagine what the increased cost the good so for those particular years would have been we don't understand what the situation was  in your honor i think when the item included in gross income is the increase when the item included a gross income is the overstatement of gross income caused by the understanding of cost of goods sold then the question is how do you measure that item and i think that's what you're asking right and i think the best way to measure that item is five reference to the environmental remediation expenses that were incurred in the later years and the fact but those if you are going to relate them back to the expenses for a particular year don't they have to be expenses that would have been incurred in that year realistically if it had been understood that they had to be incurred that year and there been no such allocation major goal but again i think if you're looking at the when the item is the overstatement of gross income caused by the understatement of cost of goods sold then that item cannot necessarily be known until the later year when the taxpayer actually incurs the expense and it is that expense that is incurred that then is directly related to the prior years manufacturing activities and is directly aleko to those prior years and i think again that the best nature of the item included in gross income when you're talking about an understatement of cost of goods sold is the actual expensing occurred in the later years don't you run into a problem with with your logic in trying to attribute this legitimate ordinary business expense but if your reinterpretation of how those costs should be allocated is accepted as a addition to the cost of goods sold from nine if the expense had been incurred in the prior period it would have been included in cost of goods sold and that is why we have an overstatement of gross income for the prior period now these expenses were not incurred in the prior period and that's why we're here they were in fact included in to the money being restored we believe the the money is being restored to the environmental contractors who are now doing the work now this gets to the restoration argument they didn't even forth right i think the district courts the opus one to whom the payment was made is incorrect there's nothing in the statute that requires that the payment be made to a particular third party or to customers all that the statute requires is that the payment in the current year result in a restoration of prior years overstated gross income and all that that requires is that if the payment is being made on account of or is attributable to an overstatement or frozen income in the prior period the net result in a restoration of gross income there's absolutely nothing in the statute the regulations the case law that require that the restoration be made to a particular party but restoration  it's on includes the meaning of giving back in school and i think they did that they restored overstated profits that they earned in the prior periods their income was overstated in prior think you can look at the title but the title cannot change the meaning of the statute and again we're not arguing that there is no restoration requirement all that we're saying is that there is no requirement that that restoration be made to a particular third party in this case if the expense incurred in the later year is on account of births attributable to overstated gross income in the prior period then you are making a restoration of that overstated gross income again there's nothing in the statute regulation legislative history that would suggest that this restoration payment needs to be made to a specific third party  leave i think the another here again is the there's two ways you could look at it one is that the another are the environmental contractors who are being paid the other way to look at it is  pointed out is that circular requires a restoration for the public good there were in the damage thief the environmental harm was caused to the public and circular requires the when the that's not an argument just another way to look at what the restoration requirement is it's like citing another case i think here again the key point that we would say hired me i do not consider ones i think again the key point is behalf of the united states the issue in this case is whether alcoa can use section thirteen forty one of the code to in effect re compute its tax liability for forty seven prior years based on the clean up costs that it incurred in one nine hundred ninety three when alcoa incurred those costs in one thousand nine hundred three they deducted them as a business expense under section one sixty two in that year and that's not it issue here  at issue is the application of section thirteen forty one to those expenses on section thirteen forty one provides a limited exception to the claim of right doctrine which of course is the doctrine that provides that a taxpayer who receives an item of income has to include it in his income in that year even though he may be required to repay it later that of course derives from the annual accounting principle which says that tax determined based on events occurring within the taxable year and without regard to events occurring in prior subsequent what section thirteen forty one does is it provides a limited exception rules in some cases and those cases are where the taxpayer is required to restore in a later year and item that was received in a prior year under a claim of right to respond to alcoa's argument that the purpose of section thirteen forty one is remedial and therefore should be construed broadly in favor of the taxpayer that's actually not the case section thirteen forty one provides for a deduction and its black letter law that statutes  providing for deductions are construed narrowly and are a matter of legislative grace in the taxpayer has the burden of proving their entitlement to them fundamentally alcoa is not entitled to section thirteen forty one benefits for its clean up costs because observe the regulations made of course of medication no the regulation section one point thirteen forty one dash one those regulations have actually been in effect since i believe one thousand and fifty seven but the environmental there's a revenue ruling that was issued later it was issued i believe in two thousand but the regulations themselves that ruling was in titling was interpreted and that explicitly require restoration to another have been in effect for quite some time the restoration requirement is also implicit in the statutory text of thirteen forty one because it's implicit in the sort of deduction that the tax payers and title to the statute requires that the tax payer included an item in gross income in a prior year and that it was a stablished that the taxpayer did not have an unrestricted right to such item the taxpayer gets a deduction for not having under strict a right to an item of income the only way you can get a deduction for not having under strict a right to an item of income is if you pay it back and so without a restoration there is no deduction that meets the terms of section thirteen forty one  argues that the district court erred because it required that the restoration be me to a customer or to a related third party that's actually not with the district court held looking at the reynolds opinion on page seven o two which course was adopted by the court below in this case the court held reynolds has not repaid any funds to anyone and reynolds cannot seriously argue that it is restoring its overstated income to any person or entity in the sense contemplated by section thirteen forty one so the district court held that alcoa had not restored an item of income to any party and that holding was in fact correct in america but now we're going to tell you that our rules really were insufficient regardless of what you did in the past where ever you dispose of that waste you're going to have to clean up the property which is dispose weirds dispose and by the way you're going to do it at your expense can you name me another congress has taken that kind of a step dealing with such a broad cross section of  the american business community oh well i mean there are other environmental statutes like the other the new environmental area off the top of my head no but i that right and i think that that would have the similar result as this case here it's an obligation that arises as a result of the subsequent event something happens there's a lawsuit brought and the company incurs an additional sense of the fact that the expense related in some way to conduct that occurred in prior years doesn't mean that section thirteen forty one allows the taxpayer to recoup their tax but doesn't it can't  late eighty's early ninety's that the they've got to go back and remediate how they dispose of their by products actually they didn't find out that they did not have an unrestricted right to an item of income alco received its income from sales of its products t speculative the problem with that is the district court observed a set of wires the court to assume what alcoa's gross income would have been in a prior year and that's simply unknowable as the court observed the expenses were and even the same cleanup costs are not the same as remediation costs so i mean i think another issue is that the cost of goods sold argument is really a red herring because as the court observed the expenses were cost of goods sold from the prior years then they wouldn't be deductible in one nine hundred ninety three alcoa argues that the i r s allowed the deduction and that ends the issue but it doesn't because know the government does not agree with the definition of an item included in income another problem with alcoa's case is that as the district court observed below there has to be a nexus between the transaction that can rise to the income in the first place and subsequent obligation to restore it so the courts interpret in that if uniformly held that the obligation to be a has to arise out of the same circumstances as the original payment and that wasn't the case here either which is have we adopted that t that was not the basis for the holding in that case the basis for the holding in that case was that there was no legal obligation to restore an item of income which is exactly the case here alcoa was never obligated to restore any items of income that it had received in a prior year when the way section thirteen forty one works is actually relatively simple the claim of right doctrine requires a taxpayer to take into account money received the taxpayer has to pay it back later in the deduction doesn't make them whole none of that has anything to do with additional expenses that are incurred in later years and that's what happened here that al support of any further questions the cost or cost of goods sold or inventory it will cost but on the other hand we're saying that the exceptions would not apply and our arguments for why the tax payers restrictive definition of that exception is wrong or in our apply yes i believe that if this court were to hold of although of course we believe it shouldn't but there was a restoration within the terms of section thirteen forty one day that the inventory exception would bar thirteen forty one really for that restoration the dear position is we don't need to reach that's right thank you m to address just a couple of the points we hit on in the main argument starting up with the restoration argument the term restoration is frequently used as a shorthand for the statutory requirements in particular section thirteen forty one eight two which says that if it must be established after the end of the prior year that the taxpayer did not in fact have an unrestricted right to that income we think that it's clear here by virtue of incurring the environmental remediation expenses in the subsequent years it was  overstated gross income in the prior years now the regulations that judge nygaard pointed out do use the term restoration to another but they don't go on to define restoration to another is simply parroting the statute that i just mentioned it says restoration to another means a restoration resulting because it was established after the close of the year that the taxpayer did not have an unrestricted right to begin time again we don't think the restoration requirement focuses on to whom the payment was made it just is shorthand for the second requirement in the statute and we think that requirement is clearly met here in addition as as mentioned in our legislative history or as mentioned in our brief the legislative history further supports that  argument the legislative history indicates that thirteen forty one was intended to apply to treat cases of transfer reliability and specifically cites the arrowsmith case in that case the taxpayers received their income from a corporation which liquidated and then repaid the income to a creditor that was not at all connected with the original payment of the item to the tax payers and so again the focus should not be on to whom the payment is made it should simply be on whether the payment is attributable and overstatement of gross income in the prior periods second i'd like to follow up on the amount of the item the judge rauf mentioned earlier this issue of whether the environmental remediation expenses are an appropriate proxy for the understatement of cost of goods sold in the prior periods and as i mentioned i think that is the right way to look at it because alcoa did in fact incur the environmental remediation expenses in one thousand nine hundred three and those expenses are properly eligible or tribute able to manufacturing activities in the prior period however if this court feels that the analysis needs to be done as to some sort of discounting to take those expenses back to the prior period the next a factual issue for the district court it does not mean that alcoa is not entitled to relief instead alcoa should be the legal argument should be breached that section thirteen forty one applies and then there should be a factual issue for the district court as to what the extent of the understatement cost of goods sold was in the prior period third i want to mention the same circumstances test and judge fisher asked whether the circuit has adopted that test and i believe they have not and they should not do so again it's a test that is not found anywhere in the statute there or the regulations council mentioned that the compel case in the third circuit may have adopted that test and i don't think they did the issue in compel was whether a voluntary payment is sufficient  meet the establishment requirement and in compel what the court said is that if the taxpayer voluntarily returns an item of income and that does not meet the establishment requirement instead the taxpayer must be obligated or legally obligated to make that  return of income and then last i just want to hit on one other point and that's whether the statute is remedial counsel mentioned that because it provides for a deduction it is not remedial and should be construed narrowly and i disagree with that i think it's clear under the law that section thirteen forty one does not provide for a deduction instead the cases all say that the taxpayer must be entitled to a deduction independent of section thirty forty one and one should title to that deduction then section thirteen forty one comes in and sa