Cuba Railroad Company v. United States

• Decision Date: 18 November 1955
• Citation: 135 F. Supp. 847
• Parties: CUBA RAILROAD COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of New York

135 F. Supp. 847

CUBA RAILROAD COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.

United States District Court S. D. New York.

November 18, 1955.

Kramer, Marx, Greenlee, Backus & MacMahon, New York City, for plaintiff. Richard S. Greenlee, John J. Hayes, New York City, of counsel.

Paul Williams, U. S. Atty. for Southern District of New York, New York City, for defendant. Maurice N. Nessen, Asst. U. S. Atty., New York City, of counsel.

DAWSON, District Judge.

The plaintiff has moved for summary judgment pursuant to Rule 56 of the Rules of Civil Procedure, 28 U.S.C.A., seeking a dismissal of the defendant's affirmative defense.

This is an action for refund of corporate income and excess profits taxes in connection with the tax return filed by the plaintiff covering the fiscal year ended June 30, 1943. The complaint alleges that in 1950, the plaintiff paid certain income and excess profits taxes to the Cuban Government, and seeks credit for said payments in connection with the United States tax return filed by the plaintiff for the fiscal year ended June 30, 1943 and a refund as a result thereof.

In 1954, a motion and cross-motion for summary judgment came on before Judge Noonan, and on July 14, 1954, he handed down his opinion, 124 F.Supp. 182, directing summary judgment for the plaintiff, subject to the pleading by defendant of the set-off of any claim which it might have against the plaintiff. An order to that effect was entered by Judge Noonan on August 11, 1954. Thereafter, an answer was filed by the defendant pleading a set-off of $51,062.17.

The decision of Judge Noonan constitutes the law of the case insofar as the original claim of the plaintiff is concerned. My consideration must, therefore, be limited to the legal validity and effect of the set-off asserted in defendant's answer.

It appears from the affirmative defense asserted in the answer (and the facts are not in dispute) that in the examination of plaintiff's tax return for the year ending June 30, 1943, the Revenue Agent proposed two changes. These changes were (1) the disallowance of contingent bond interest expense deduction in the amount of $181,904.34 and (2) the inclusion in taxpayer's income of $300,227.42 profit from the purchase of its own bonds.

Thereafter, a settlement was arrived at between the government and the taxpayer in which the taxpayer conceded that the alleged profit from the purchase of its own bonds was to be included as income in its return, and in which the government conceded that $150,041.64 of the contingent interest deduction was to be included as an expense item. The amount of $150,041.64 represented so much of the contingent interest, which had been taken as a deduction in 1943, as had actually been paid by the plaintiff to its bondholders from the period 1943 up to and including the fiscal year ended June 30, 1948. Based upon this settlement agreement, the plaintiff executed Treasury Department Form 870-TS and paid to the defendant the sum of $102,173.39 as additional taxes, together with interest.

Subsequently, and in 1950, the plaintiff paid to the Cuban Government the sum of $53,937.83 representing income taxes and excess profits taxes assessed against it by the Cuban Government for the year 1943. It was the contention of the plaintiff that these taxes should be permitted as a deduction with respect to its federal tax return covering the fiscal year ended June 30, 1943 and that it was, therefore, entitled to a refund; and on this issue, Judge Noonan decided in favor of the plaintiff.

In its affirmative defense and proposed set-off, the government now contends that the item of $150,041.64 representing the contingent interest, and which had been allowed to the taxpayer on the settlement, never should have been allowed and seeks to exclude this amount from proper expense deductions for the year 1943. The government contends that if the settlement agreement, Form 870-TS, is not binding upon the plaintiff, as was indicated by Judge Noonan, it is not binding upon the government either, and that, therefore, the government may reopen this question of this expense deduction. The plaintiff disputes the right of the government to re-open this particular issue on the ground that this particular issue was determined by the settlement.

I had first concluded that, as a matter of law, the set-off asserted by the government in its answer was without legal foundation on the ground that the plaintiff was entitled to claim as an accrued interest deduction in 1943 the full amount of interest payable under the terms...