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FAILLA v. UNITED STATES

November 18, 1960

Marian FAILLA, individually, and the National Newark and Essex Banking Company of Newark and Marian Failla, as Co-Executors under the Last Will and Testament of Anthony Failla, deceased, Plaintiffs,
v.
UNITED STATES of America, and the Reconstruction Finance Corporation, an agency of the United States of America, Defendants



The opinion of the court was delivered by: SMITH

This is an action to recover internal revenue taxes, to wit, the income and victory taxes for the fiscal year 1943, alleged to have been erroneously assessed and collected. The jurisdiction of the Court is invoked under Section 1346(a)(1) of Title 28 U.S.C.A., as amended. The only issue presented for determination is one of law.

Facts.

 The plaintiff Marian Failla and her deceased husband Anthony Failla, hereinafter identified as the taxpayers, had been partners trading as the New Jersey Gear and Manufacturing Company. The deceased husband is here represented by the executors of his estate. The taxpayers were parties to certain war contracts which were subject to renegotiation under the applicable provisions of the Renegotiation Act, as amended, 50 U.S.C.A. Appendix § 1191.

 The business of the partnership was operated on a fiscal year basis during the years in question, to wit, 1942 and 1943; the former ended on September 30, 1943 and the latter ended on September 30, 1944. The partnership return of income for each of the said fiscal years was prepared accordingly. The tax liability of each of the taxpayers for each of the years in question was computed on a fiscal year basis; the fiscal year 1942 ended on February 28, 1943 and the fiscal year 1943 ended on February 29, 1944.

 It appears from the individual return of the taxpayer Anthony Failla that his income tax liability for the fiscal year 1642 (determined without regard to the pertinent provision of the Current Tax Payment Act of 1943, 26 U.S.C.A. § 1621 et seq., infra) was $ 113,022.27 and that his income tax liability for the fiscal year 1943 (similarly determined) was $ 133,962.53. It further appears that the aggregate tax liability for the years in question was computed under the formula established by the Current Tax Payment Act of 1943; the taxpayer eliminated, under the 'forgiveness feature' of Section 6 of the Act, 26 U.S.C.A. § 1622 note, all but twenty five per cent of his tax liability for the fiscal year 1942. The aggregate tax as thus computed and paid was $ 162,218.10.

 It appears from the individual return of the taxpayer Marian Failla that her income tax liability for the fiscal year 1942 (determined without regard to the pertinent provision of the Current Tax Payment Act of 1943) was $ 111,957.85 and that her income tax liability for the fiscal year 1943 (similarly determined) was $ 140,011.92. It further appears that the aggregate tax liability for the years in question was computed under the formula established by the Current Tax Payment Act of 1943; the taxpayer eliminated, under the 'forgiveness feature' of Section 6 of the Act, all but twenty five per cent of her tax liability for the fiscal year 1942. The aggregate tax as thus computed and paid was $ 168,001.38.

 The war contracts were renegotiated by the War Contracts Price Adjustment Board pursuant to the applicable provisions of the Renegotiation Act, supra, and it was determined and agreed that 'excessive profits' in the amount of $ 225,000 were realized by the partnership during its fiscal year ending September 30, 1943. This determination was made the subject of a formal Renegotiation negotiation Agreement dated April 26, 1948, by the terms of which the taxpayers agreed to the elimination of the 'excessive profits' and the repayment thereof less the tax credits allowable under the provisions of Section 3806 of the Internal Revenue Code, 1939, 26 U.S.C.A. § 3806. It was further agreed by each of the taxpayers that the 'proportionate share of the (excess) profits' was included in his and her 'income' for the taxable year 1943.

 The apposite clause of the formal agreement reads as follows:

 '3. Tax Credit under Section 3806 of the Internal Revenue Code.

 'Each of the partners comprising the Contractor represents that his proportionate share of the profits, the amount of which is agreed in Article 1 hereof to be eliminated, was included in his income for his taxable year in which said fiscal year ended in computing his total tax in his Federal income tax return for said taxable year. Each Of Such Partners Has Applied Or Will Promptly Apply For A Computation By The Bureau Of Internal Revenue, based upon the assessments made to the date of such computation, Of The Amount By Which His Taxes For Such Taxable Year Under Chapter 1 Of The Internal Revenue Code Are Decreased By Reason Of The Application Of Section 3806 Of The Internal Revenue Code. The aggregate of the amounts, if any, so computed will be allowed as a credit against the amount of profits agreed in Article 1 to be eliminated.' (Emphasis by the Court.)

 The terms of this clause conform to the pertinent provisions of the Renegotiation Act, supra, § 1191(c)(2) and Section 3806 of the Internal Revenue Code, supra.

 The computation of the tax credit allowable to each of the taxpayers under Section 3806 of the Internal Revenue Code, supra, was made by the Bureau of Internal Revenue upon formal requests. The computed tax credit allowable to each of the taxpayers, Anthony Failla and Marian Failla, was in the amount of $ 63,877.64 and $ 24,706.24, respectively, a total of $ 88,583.89. The taxpayers were thereupon notified that the balance of excessive profits in the amount of $ 136,416.11 was due and payable on July 1, 1948. The computation was disputed by the taxpayers who claimed an allowable credit in the total amount of $ 198,890.99. They accordingly paid $ 26,194.85, representing principal in the amount of $ 26,109.01 and interest in the amount of $ 85.84, and resisted payment of the balance.

 Thereafter the United States of America brought an action on the Renegotiation Agreement to recover the balance of excessive profits allegedly due thereunder. The present plaintiffs denied liability and as an affirmative defense to the action asserted a right to a setoff in the amount of the tax credit claimed by them as allowable under the express terms of the agreement. The action came before this Court on a motion for summary judgment filed by the United States of America. The motion for granted and judgment was entered. United States v. Failla, D.C., 120 F.Supp. 797, affirmed 3 Cir., 219 F.2d 212. The judgment together with interest was paid and thereafter the ...


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