A Novel Theory

A Novel Theory

October 01, 2005

A novel theory for reducing pollution cleanup costs failed in a US court.

Reynolds Metals Co. had to spend $110 million to help clean up a US “Superfund” site. The company had spent money on waste disposal continuously from 1940 to 1987 — the period the government charged that its manufacturing activities contributed to contamination at the site. However, standards changed, and what the company had done in the past was no longer good enough.

The company had treated its earlier spending as a cost of the goods it manufactured each year and offset the spending against its sales revenue for the year, thereby reducing the amount of income it had to report from sales.

However, rather than deduct the $110 million in additional cleanup spending today against current sales revenue, Reynolds argued that it should be able to treat the amount as additional costs of the goods sold earlier — in effect, deduct the $110 million against the higher tax rates that the company faced during the period 1940 to 1987. Section 1341 of the US tax code allows this approach in some situations by allowing a company to credit the amount it overpaid in taxes in earlier years against the taxes it owes today.

A US district court rejected the argument. The court said this was not a case of the company overstating its earlier earnings. Rather, the company faced new environmental clean-up costs after Congress adopted more stringent standards. The case is Reynolds Metals Company v. United States. The court released its decision in late August.

Keith Martin