Texaco v. United States ( 2008 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
TEXACO INC.,  No. 06-16098
Plaintiff-Appellee,
v.  D.C. No.
CV-04-00316-SBA
UNITED STATES OF AMERICA,
OPINION
Defendant-Appellant.

Appeal from the United States District Court
for the Northern District of California
Saundra B. Armstrong, District Judge, Presiding
Argued and Submitted
April 17, 2008—San Francisco, California
Filed June 13, 2008
Before: Procter Hug, Jr., Mary M. Schroeder, and
Consuelo M. Callahan, Circuit Judges.
Opinion by Judge Callahan
6843
TEXACO INC. v. UNITED STATES 6845
COUNSEL
Eileen J. O’Connor, Assistant Attorney General, Richard T.
Morrison, Deputy Assistant Attorney General, Nathan J.
Hochman (argued), Gilbert S. Rotherberg, Richard Farber,
and Judith A. Hagley, of Washington, D.C., for the defendant-
appellant.
William L. Goldman (argued), Robin L. Greenhouse, and
Michael F. Kelleher of McDermott Will & Emery LLP of
Washington, D.C., and Joseph H. Selby of McDermott Will
& Emery LLP of Boston, Massachusetts, for the plaintiff-
appellee.
6846 TEXACO INC. v. UNITED STATES
OPINION
CALLAHAN, Circuit Judge:
This appeal requires that we undertake the task of interpret-
ing a provision of the Internal Revenue Code, 26 U.S.C.
§ 1341. In essence, this statute allows a taxpayer, who is
required to pay to a third party income on which it has already
paid income tax, credit for the tax it paid on that income. Sub-
section (b)(2), however, provides that this credit is not avail-
able “with respect to an item which is included in gross
income by reason of the sale [of inventory].” 26 U.S.C.
§ 1341(b)(2).
Texaco Inc.1 sought a tax refund of $101,043,085 under 26
U.S.C. § 1341(a) because it was required to pay out pursuant
to a settlement agreement with the Department of Energy
sums that it had previously included in its gross income. The
government denied the refund claims on the ground that the
inventory exception in § 1341(b)(2) barred Texaco from using
§ 1341(a). Texaco brought suit challenging the denial. The
district court agreed with Texaco and ordered the government
to pay the refund. The government appeals and we reverse.
We hold that the language in § 1341(b)(2) plainly precludes
Texaco from using the computation of tax set forth in
§ 1341(a).
I. Background
Texaco was engaged in an integrated petroleum business.
Between 1973 and 1981, Texaco made certain sales of crude
petroleum and refined petroleum products at prices that
exceeded the price ceilings set by federal petroleum price reg-
ulations. Texaco included these overcharges as gross income
on its corporate tax returns for the years 1973 through 1981.
1
On October 9, 2001, Texaco Inc. became a wholly-owned, indirect
subsidiary of ChevronTexaco Corporation.
TEXACO INC. v. UNITED STATES 6847
The Department of Energy (DOE) took various administrative
actions against Texaco which eventually resulted in a consent
degree requiring Texaco to pay $1,250,000,000 plus interest.
Texaco made the payments and deducted the settlement
amount on its federal income tax returns for those years as
ordinary and necessary business expenses.
In February 2001, Texaco filed Refund Claims for the years
1988, 1990, 1991, and 1992, claiming that the tax benefit of
the ordinary and necessary business expense deductions
should have been calculated in accordance with 26 U.S.C.
§ 1341(a). The government denied the Refund Claims on the
ground that § 1341(b)(2) rendered § 1341(a) inapplicable.
In January 2004, Texaco filed a complaint against the
United States in the District Court for the Northern District of
California. On cross-motions for summary judgment, the dis-
trict court determined that subsection (b)(2) did not preclude
Texaco from seeking tax treatment under § 1341(a), reasoning
that the statute was ambiguous and sources outside the text of
the statute supported Texaco’s argument that § 1341(b)(2)
only prohibited the use of § 1341(a) computation for “sales
returns, allowances and similar items.”
Following the entry of a final judgment, the Government
filed a timely appeal.
II. The Statutory Scheme
The Supreme Court observed in 1931, that “[a]ll the reve-
nue acts which have been enacted since the adoption of the
Sixteenth Amendment have uniformly assessed the tax on the
basis of annual returns showing the net result of all the tax-
payer’s transactions during a fixed accounting period, either
the calendar year, or, at the option of the taxpayer, the particu-
lar fiscal year which he may adopt.” Burnet v. Sanford &
Brooks Co., 282 U.S. 359, 363 (1931). Under the “claim of
right doctrine,” which follows from the annual accounting
6848 TEXACO INC. v. UNITED STATES
principle, a taxpayer who has received an item of income over
which he has full control must include that item in his income
in the year of receipt, even if his right to retain that item is
imperfect and he is later required to return part or all of that
item. See generally 2 Mertens, Law of Federal Income Taxa-
tion §§ 12A:119-132 (1996 & Supp. July 2006).
Absent some statutory exception, such as § 1341(a), a tax-
payer who was required in a later year to restore to a third
party income previously received is entitled to a deduction if
the repayment is deductible under some provision of the Inter-
nal Revenue Code. See United States v. Lewis, 340 U.S. 590,
591 (1951). In other words, a taxpayer may be able to reduce
his taxes for the year of repayment by deducting the repay-
ment amount from his taxable income, but he has no recourse
against the increased taxes that he had paid in the year that he
received the money. The taxpayer might benefit if the tax sav-
ings from the deduction in the year of repayment is greater
than the increase in tax due to the inclusion of the amount in
the year that the amount was received. However, if the deduc-
tion in the year of repayment results in a savings of less than
the amount of increased tax paid as a result of the inclusion
of the amount repaid in income for the year in which the
amount was received, the taxpayer, absent some statutory pro-
vision, cannot recover the taxes he paid in the initial year on
income that he subsequently restored to a third party.2
Section 1341(a) provides some taxpayers with an option.3
2
It should be noted that the taxpayer’s “loss” is somewhat ameliorated
by the fact that the taxpayer has full use of the income between the time
it is received and the time it is repaid to a third party.
3
Section 1341(a) reads, in relevant part:
(a) General rule.—If—
(1) an item was included in gross income for a prior taxable year
(or years) because it appeared that the taxpayer had an unre-
stricted right to such item;
TEXACO INC. v. UNITED STATES 6849
If the taxpayer satisfies the criteria set forth in subsections
(a)(1)-(3), as Texaco does, a taxpayer has a choice. It can still
take a deduction for the repayment in the year of repayment.
26 U.S.C. § 1341(a)(5)(A). However, it can alternatively cal-
culate what its tax would have been in the initial year without
the income that was restored to a third party. If the difference
between the tax it actually paid and the tax it would have paid
if the restored amount had not been included in its gross
income is greater than the deduction it would receive by
claiming the deduction in the repayment year, it may use the
difference instead of the deduction. 26 U.S.C.
§ 1341(a)(5)(B), see Alcoa, Inc. v. United States, 509 F.3d
173, 177 (3rd Cir. 2007) (“By allowing the taxpayer the
choice between a simple deduction and a recalculation of the
prior year’s tax liability, section 1341 ensures that any change
in tax rates or in the taxpayer’s tax bracket is a tax neutral
event with respect to the disputed item of income.”). Here, the
parties agree that if § 1341(a) is applicable, then for the four
years in issue, Texaco, using the alternative provided by
§ 1341(a)(5)(B), is entitled to a refund of $101,043,085.
(2) a deduction is allowable for the taxable year because it was
established after the close of such prior taxable year (or years)
that the taxpayer did not have an unrestricted right to such item
or to a portion of such item; and
(3) the amount of such deduction exceeds $3,000,
then the tax imposed by this chapter for the taxable year shall be
the lesser of the following:
(4) the tax for the taxable year computed with such deduction; or
(5) an amount equal to—
(A) the tax for the taxable year computed without such deduc-
tion, minus
(B) the decrease in tax under this chapter (or the corresponding
provisions of prior revenue laws) for the prior taxable year (or
years) which would result solely from the exclusion of such item
(or portion thereof) from gross income for such prior taxable year
(or years).
6850 TEXACO INC. v. UNITED STATES
The government, however, contends that Texaco is barred
from using § 1341(a) by § 1341(b)(2).4 The government’s
position is that § 1341(a) is not applicable to Texaco because
the first sentence of § 1341(b)(2) provides that “Subsection
(a) does not apply to any deduction allowable with respect to
an item which was included in gross income by reason of the
sale or other disposition of stock in trade of the taxpayer.”
Texaco concedes that “[d]uring the years 1973 through 1981,
all of Texaco’s sales of crude oil and petroleum products were
sales of inventory or property held by Texaco primarily for
sale to customers in the ordinary course of Texaco’s trade or
business.” Because the income in issue arose out of the sale
of inventory, the government asserts that Texaco is barred
from using § 1341(a) to compute its taxes. Texaco disagrees,
contending that §1341(b)(2) does not bar it from using
§ 1341(a). Thus, this litigation turns on the meaning and
scope of § 1341(b)(2).5
4
This subsection reads:
Subsection (a) does not apply to any deduction allowable with
respect to an item which was included in gross income by reason
of the sale or other disposition of stock in trade of the taxpayer
(or other property of a kind which would properly have been
included in the inventory of the taxpayer if on hand at the close
of the prior taxable year) or property held by the taxpayer primar-
ily for sale to customers in the ordinary course of his trade or
business. This paragraph shall not apply if the deduction arises
out of refunds or repayments with respect to rates made by a reg-
ulated public utility (as defined in section 7701(a)(33) without
regard to the limitation contained in the last two sentences
thereof) if such refunds or repayments are required to be made by
the Government, political subdivision, agency, or instrumentality
referred to in such section, or by an order of a court, or are made
in settlement of litigation or under threat or imminence of litiga-
tion.
5
The interpretation of a statute such as 26 U.S.C. § 1341 is a question
of law, and accordingly, we review de novo the district court’s determina-
tion. See Estate of Heim v. Comm’r of Internal Revenue, 914 F.2d 1322,
1325 (9th Cir. 1990).
TEXACO INC. v. UNITED STATES 6851
III. Interpreting Section 1341(b)(2)
The Supreme Court has directed that the first step in inter-
preting a statute “is to determine whether the language at
issue has a plain and unambiguous meaning with regard to the
particular dispute in the case.” Robinson v. Shell Oil Co., 519
U.S. 337, 340 (1997). “The inquiry ceases if the statutory lan-
guage is unambiguous and the statutory scheme is coherent
and consistent.” Barnhart v. Sigmon Coal Co., Inc., 534 U.S.
438, 450 (2002) (internal citation omitted). The Supreme
Court has further noted that “[i]f a court, employing tradi-
tional tools of statutory construction, ascertains that Congress
had an intention on the precise question at issue, that intention
is the law and must be given effect.” Chevron U.S.A., Inc. v.
Natural Res. Def. Council, Inc., 467 U.S. 837, 843 n.9 (1984).
[1] The language of 26 U.S.C. § 1341(b)(2) is clear. The
statute provides that a “deduction” otherwise “allowable”
under subsection (a) is prohibited if the deduction was based
on “an item” included in gross income “by reason of” the sale
of inventory. Thus, the statute directs us to the basis of the
deduction allowable under subsection (a). The deduction
arises if a taxpayer included in its tax return income that it
subsequently had to pay to a third party. Subsection (b)(2)
asks what was the basis for the item included in gross income
that year. If the item was included in gross income because of
the sale of stock in trade (inventory), then the taxpayer is pro-
hibited by subsection (b)(2) from using the deduction other-
wise allowed by subsection (a).
[2] The Federal Circuit agrees that this is the plain meaning
of subsection (b)(2). In analyzing the statute, the Federal Cir-
cuit parsed § 1341 into three phrases: “[A] any deduction
allowable [B] with respect to an item which was included in
gross income [C] because of the sale or other disposition of
. . . property such as inventory. Pennzoil-Quaker State Co. v.
United States, 511 F.3d 1365, 1372 (Fed. Cir. 2008). It then
wrote:
6852 TEXACO INC. v. UNITED STATES
The wording of the inventory exception is clear as a
grammatical matter. A modifying phrase attaches to
its closest referent; so phrase [C] (“because of the
sale . . . of . . . inventory”) would ordinarily modify
phrase [B] (“which was included in gross income”).
Accordingly, if the “item was included in gross
income for a prior taxable year” because of the sale
of inventory, then the inventory exception precludes
section 1341 relief. 26 U.S.C. § 1341(a)(1).
Id. at 1373 (Fed. Cir. 2008) (alteration in original).
Texaco, however, urges that there is a “syntactical”
ambiguity in subsection (b)(2), and that the phrase “by reason
of the sale or other disposition of [inventory]” modifies the
phrase “deduction allowable with respect to an item which
was included in gross income” in such a way that “the ques-
tion that must be answered is whether the deduction in the
current year is allowable ‘by reason of the sale or other dispo-
sition of [inventory].’ ” It then defines “by reason of the sale
or other disposition of [inventory]” to be limited to “sales
returns, allowances, and similar items.”
Even if such a construction were grammatically possible, it
would not be reasonable. First, subsection (a) clearly states
that its general rule applies when “an item was included in
gross income for a prior taxable year (or years) because it
appeared that the taxpayer had an unrestricted right to such
item.” 26 U.S.C. § 1341(a)(1) (emphasis added). Accordingly,
there is no reason to interpret “included in gross income” in
subsection (b)(2) as referring to anything other than the prior
taxable year or years. Moreover, the proposed interpretation
would eviscerate subsection (b)(2) because a subsection (a)
deduction is always based on calculations arising from a prior
tax year and not on whether an item was included in gross
income in the current year.
TEXACO INC. v. UNITED STATES 6853
Second, there is nothing in the statute that limits the defini-
tion of “sale or other disposition of stock in trade” to “sales
returns, allowances, and similar items.” Texaco urges that
such a limitation arises from Treasury Regulation § 1.1341-
1(f).6 We, however, agree with the Federal Circuit that this
regulation does not limit subsection (b). The Federal Circuit
explained:
The Treasury Regulation, which recites the inven-
tory exception and infers “therefore” that § 1341
provides no relief for transactions in inventory, is not
to the contrary. The word “therefore” means “as a
consequence [or] it must follow.” Bryan A. Garner,
The Elements of Legal Style 141 (1991). The Trea-
sury Regulation can be made to say no more than
that “sales returns and allowances and similar items”
are examples of situations where the inventory
exception applies; they do not delimit the exception.
Mertens, a leading tax treatise, explains that the
inventory exception “is not limited to sales returns,
but [rather] the Regulations use this merely to pro-
vide an example of the inventory exception. For
example, amounts for which the taxpayer is liable
due to a patent infringement fall within this excep-
6
Treasury Regulation § 1.1341-1(f) is entitled “Inventory items, stock in
trade, and property held primarily for sale in the ordinary course of trade
or business.” Subsection (1) reads:
Except for amounts specified in subparagraphs (2) and (3) of this
paragraph, the provisions of section 1341 and this section do not
apply to deductions attributable to items which were included in
gross income by reason of the sale or other disposition of stock
in trade of the taxpayer (or other property of a kind which would
properly have been included in the inventory of the taxpayer if
on hand at the close of the prior taxable year) or property held by
the taxpayer primarily for sale to customers in the ordinary
course of the taxpayer’s trade or business. This section is, there-
fore, not applicable to sales returns, allowances, and similar
items.
6854 TEXACO INC. v. UNITED STATES
tion if the infringement is related to the inventory
goods.” Mertens Law of Federal Income Taxation
§ 12A:130 (2007).
Pennzoil-Quaker, 511 F.3d at 1373.
Third, Texaco’s proposed interpretation of subsection (b)
would reduce the final sentence of the section to surplusage.
The Supreme Court counsels against adopting such a statutory
interpretation, stating:
It is “a cardinal principle of statutory construction”
that “a statute ought, upon the whole, to be so con-
strued that, if it can be prevented, no clause, sen-
tence, or word shall be superfluous, void, or
insignificant.” Duncan v. Walker, 533 U.S. 167, 174,
. . . (2001) (internal quotation marks omitted); see
United States v. Menasche, 348 U.S. 528, 538-539,
. . . (1955) (“It is our duty ‘to give effect, if possible,
to every clause and word of a statute.’ ” (quoting
Montclair v. Ramsdell, 107 U.S. 147, 152, . . .
(1883))). “[W]ere we to adopt [Andrews’] construc-
tion of the statute,” the express exception would be
rendered “insignificant, if not wholly superfluous.”
Duncan, 533 U.S. at 174, . . . We are “reluctant to
treat statutory terms as surplusage in any setting,”
ibid. (internal alteration and quotation marks omit-
ted), and we decline to do so here.
TRW Inc. v. Andrews, 534 U.S. 19, 31 (2001).
The final sentence of subsection (b)(2) provides that the bar
to using a subsection (a) computation in the first sentence
does not apply “if the deduction arises out of refunds or
repayments made by a regulated public utility,” if required by
a government agency, a court, or “made in settlement of liti-
gation or under threat or imminence of litigation.” Although
it may not be impossible for a public utility’s refund or repay-
TEXACO INC. v. UNITED STATES 6855
ment to be based on “sales returns, allowances, and similar
items,” it defies logic to believe that Congress in enacting the
final sentence of subsection (b)(2) was concerned with only
such a refund or repayment. Again, we agree with the Federal
Circuit when it reasons:
A “sales return” is defined as “merchandise given
back to the seller because of defects,” while a “sales
allowance” is defined as a “reduction in the selling
price of goods because of a particular problem (e.g.,
breakage, quality deficiency, incorrect quantity).”
Dictionary of Accounting Terms 387, 386 (3d ed.
2000). A public utility’s government- or court-
ordered rate refund is neither of those things. Quak-
er’s narrow interpretation of the inventory exception
would therefore render the public utility exception to
the inventory exception superfluous-an impermissi-
ble reading.
Pennzoil-Quaker, 511 F.3d at 1374.
[3] For the forgoing reasons we conclude that subsection
(b)(2) clearly provides that the deduction allowed by subsec-
tion (a) is not available with respect to an item which was
included in the gross income in a prior taxable year by reason
of the sale or other disposition of stock in trade or inventory.
In light of our conclusion that subsection (b)(2) is plain and
unambiguous, several of Texaco’s other arguments need not
detain us. Texaco argues that Congress’s intent in enacting
§ 1341 may be extracted from the legislative histories of
§ 1341 and former Internal Revenue Code § 462. Internal
Revenue Code of 1954, § 462(a), 68A Stat. 158-159 (repealed
by Act of June 15, 1955, ch. 143, §§ 1, 3, 69 Stat. 134, 135).
Despite the facts that the statutes covered different taxpayers,
that § 1341 makes no mention of § 462, and that § 462 was
retroactively repealed in 1955, Texaco argues that the “Com-
mittee Reports confirm Congress’s unmistakable intention
6856 TEXACO INC. v. UNITED STATES
that the exception in section 1341(b)(2) apply only to those
deductions that qualified for section 462 treatment.” Whatever
the merits of Texaco’s argument, it is insufficient to overcome
the plain meaning of the statute’s language. See BedRoc Ltd.,
LLC v. United States, 541 U.S. 176, 183 (2004) (stating that
the “preeminent canon of statutory interpretation requires us
to presume that [the] legislature says in a statute what it
means and means in a statute what it says there” and that “our
inquiry begins with the statutory text, and ends there as well
if the text is unambiguous”) (internal quotation marks and
citations omitted).
Similarly, we are not free to act on Texaco’s assertion that
subsection (b) creates an inequity. Once Congress has spoken,
the court cannot revise a statute to promote a more equitable
consequence. See Badaracco v. Comm’r of Internal Revenue,
464 U.S. 386, 398 (1984) (“The relevant question is not
whether, as an abstract matter, the rule advocated by petition-
ers accords with good policy. The question we must consider
is whether the policy petitioners favor is that which Congress
effectuated by its enactment of [the statute]. Courts are not
authorized to rewrite a statute because they might deem its
effects susceptible of improvement.”); In re Kelly, 841 F.2d
908, 913 (9th Cir. 1988) (stating that “policy arguments are,
of course, beside the point once Congress has spoken.”)
IV. Deference to the agency’s position
Even if there were some ambiguity in § 1341(b), we would
be hard pressed not to defer to the agency’s interpretation of
the statute. In Morales v. Sociedad Espanola de Auxilio
Mutuo y Beneficencia, 524 F.3d 54 (1st Cir. 2008), the First
Circuit recently reiterated the controlling standard as follows:
If, however, the language admits of a possible
ambiguity and Congress has not spoken directly to
the issue, the court must look for guidance to any
relevant regulations promulgated by an agency
TEXACO INC. v. UNITED STATES 6857
charged with administering the statute. Chevron,
U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467
U.S. 837, 843 . . . (1984); Muñiz v. Sabol, 517 F.3d
29, 38 (1st Cir. 2008).
In those circumstances, a court is bound to apply the
agency’s interpretation of the statute, as embodied in
a regulation, as long as it constitutes a permissible
construction of the statutory text. Chevron, 467 U.S.
at 843 . . . . Determining a regulation’s meaning
requires application of the same principles that
imbue exercises in statutory construction. See, e.g.,
Cumberland Coal Res., LP v. Fed. Mine Safety &
Health Rev. Comm’n, 515 F.3d 247, 254 (3d Cir.
2008); Sidell v. Comm’r, 225 F.3d 103, 110 (1st Cir.
2000).
When the regulatory language remains ambiguous
even after the application of those principles, an
inquiring court must look beyond the letter of the
regulation and defer to an agency’s reasonable inter-
pretation of the regulation. United States v. Lach-
man, 387 F.3d 42, 54 (1st Cir. 2004); see
Christensen v. Harris County, 529 U.S. 576, 588 . . .
(2000).
Id. at 57.
[4] Although Texaco derides Revenue Ruling 2004-17,
2004-1 C.B. 516, as an unreasoned afterthought and no more
than a belated attempt to reconcile the agency’s position with
Treasury Regulation § 1.1341-1(f),7 we note that Ruling 2004-
17 does include the statement: “Section 1341(b)(2) provides
that § 1341(a) does not apply to any deduction allowable with
respect to an item included in gross income by reason of the
7
We have already rejected Texaco’s reading of Treasury Regulation
§ 1.1341-1(f), see supra.
6858 TEXACO INC. v. UNITED STATES
sale or other disposition of the taxpayer’s stock in trade (or
other property of a kind that would have been included in the
taxpayer’s inventory if on hand at the close of the prior tax-
able year) or property held by the taxpayer primarily for sale
to customers in the ordinary course of its trade or business.”
In other words, the Ruling includes the agency’s interpreta-
tion of the statute that it was entrusted by Congress to enforce,
and its interpretation of its own regulation.
Texaco notes that Revenue Ruling 2004-17 issued on Feb-
ruary 6, 2004, shortly after Texaco filed its complaint. Citing
Reynolds Metals Co. v. United States, 389 F. Supp. 2d 692,
703-04 (E.D. Va. 2005), Texaco argues that a Revenue Ruling
issued during the pendency of litigation has no power to per-
suade. This perspective, however, has yet to gain broad accep-
tance. See Alcoa, 509 F.3d at 183 n.9 (“Because we reach this
result without relying on Revenue Ruling 2004-17, which the
IRS issued while the Reynolds litigation was ongoing and
which addresses the precise issue presented both in Reynolds
and here, we do not decide what deference it should be
accorded.”). We recognize that the timing of a Revenue Rul-
ing may be relevant to its power to persuade, but we do not
think that the timing of Revenue Ruling 2004-17 precludes us
from considering the ruling, particularly as the ruling was not
based on the facts in Texaco’s case.
We have held that generally revenue rulings are entitled at
least to “Skidmore deference.” Omohundro v. United States,
300 F.3d 1065, 1067-1069 (9th Cir. 2002); but see Tualatin
Valley Builders Supply, Inc. v. United States, 522 F.3d 937,
948 (9th Cir. 2008) (Judge O’Scannlain specially concurring,
opining that a revenue procedure was entitled to Chevron
rather than Skidmore deference).8 The Supreme Court in Skid-
8
The government also asserts that Revenue Ruling 2004-17 is entitled
to Chevron deference, not just Skidmore deference. Texaco strongly dis-
agrees. Because resolution of this question is not necessary to our disposi-
tion of this appeal, we decline to address it.
TEXACO INC. v. UNITED STATES 6859
more v. Swift Co., 323 U.S. 134, 140 (1944), explained that
agency rulings “while not controlling upon the courts by rea-
son of their authority, do constitute a body of experience and
informed judgment to which courts and litigants may properly
resort for guidance.”
[5] Here, Revenue Ruling 2004-17, along with the agency’s
constant position in this litigation as well as in the Pennzoil-
Quaker litigation, reflect that the agency has consistently
interpreted subsection (b)(2) as prohibiting the application of
subsection (a) with respect to an item which was included in
the gross income in a prior taxable year by reason of the sale
of inventory. We have determined that this is the plain mean-
ing of subsection (b)(2). It follows that even if such a reading
were not compelled, the agency’s adoption of such a reading
would be a reasonable interpretation of the statute and thus
entitled to deference. Chevron, 467 U.S. at 844 (noting that
even when the legislative delegation to an agency on a partic-
ular question is implicit rather than explicit, “a court may not
substitute its own construction of a statutory provision for a
reasonable interpretation made by the administrator of an
agency”).
V. Conclusion
[6] Although 26 U.S.C. § 1341(a) was designed to allow
certain taxpayers relief from having paid taxes on income it
subsequently is required to pay to a third party, see Alcoa, 509
F.3d at 177, subsection (b)(2) restricts the availability of a
§ 1341(a) computation. We read § 1341(b)(2) as plainly pro-
hibiting the use of a § 1341(a) computation by an entity other
than a public utility with respect to any amount which was
included in its gross income in a prior taxable year by reason
of the sale or other disposition of stock in trade or inventory.
Our reading of the statute is compelled by its plain language,
its logic, its lack of any limitation on the definition of inven-
tory, and the presence of the final sentence of subsection
(b)(2). Accordingly, the district court’s grant of summary
6860 TEXACO INC. v. UNITED STATES
judgment in favor of Texaco is VACATED and the case is
REMANDED to the district court for the entry of judgment
in favor of the government.9
9
We note that the district court when ruling on the cross-motions for
summary judgment did not have the benefit of the Federal Circuit’s opin-
ion in Pennzoil-Quaker, 511 F.3d 1365, or the government’s explicit argu-
ment concerning the second sentence in § 1341(b).