Lockheed Aircraft Corporation v. United States

• Decision Date: 14 April 1967
• Docket Number: No. 143-64.,143-64.
• Citation: 375 F.2d 786
• Parties: LOCKHEED AIRCRAFT CORPORATION v. The UNITED STATES.
• Court: U.S. Claims Court

375 F.2d 786 (1967)

LOCKHEED AIRCRAFT CORPORATION v. The UNITED STATES.

No. 143-64.

United States Court of Claims.

April 14, 1967.

Numa L. Smith, Jr., Washington, D. C., attorney of record, for plaintiff. Charles D. Woodruff, Corp. Counsel, Burbank, Cal., and Miller & Chevalier, Numa L. Smith, Jr. and Clarence T. Kipps, Jr., Washington, D. C., of counsel.

Manfred J. Schmidt, Washington, D. C., with whom was Asst. Atty. Gen. Barefoot Sanders, for defendant.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS, SKELTON, and NICHOLS, Judges.

LARAMORE, Judge.^*

The primary issue presented by these cross-motions for summary judgment may be easily stated: Can the Lockheed Aircraft Corporation allocate to government contracts a portion of personal property taxes which have been assessed with respect to commercial productive material and work-in-process inventories? This is an extremely difficult cost accounting problem, not because it involves a complicated fact situation, but because the standards are inconclusive. There is also a subsidiary issue of the scope of review of the administrative determination which was adverse to Lockheed.

Lockheed and the Department of the Air Force entered into three contracts for the manufacture of F-104 aircraft.¹ These were so-called fixed-price incentive type contracts, which provided for the following procedure for the determination of price. After award, Lockheed and the government were to negotiate a target contract price comprised of target costs plus a target profit. They also had to negotiate a profit rate, a sharing ratio in cost increases or decreases, and ceilings on final price and profit. At the time of completion, it was contemplated that the parties would negotiate a final price, of course less than the ceiling, which would be the total of finally negotiated costs and profit on target costs, plus or minus an incentive sharing adjustment based upon the increase or decrease of final costs versus target costs.

An example may be helpful. Lockheed and the contracting officer might initially negotiate a basic profit rate of 8 percent of target costs, a profit ceiling of 15 percent of target costs, a total contract price ceiling of 120 percent of target costs, and a sharing ratio in the ultimate variance between target and final costs of 75 percent for the government and 25 percent for Lockheed. If the parties agree to a target cost of $100 and it turns out that Lockheed can hold costs to $80, the contract contemplates that Lockheed will get its initial 8 percent profit ($8) plus 25 percent of the cost saving ($5) — a total profit of $13 or 17.2 percent of final cost. The final price will be $93, computed by adding $80 of final costs to $8 of target profit and $5 of cost saving. The disincentive effect of a higher-than-forecast target cost is illustrated by assuming a final cost of $104. Lockheed's target profit will be reduced by 25 percent of the cost "dis-saving." The final contract price will be $111, computed by adding $104 of final costs to $8 of target profit less $1 of "dis-saving." This works out to a total profit of $7 which is only 6.7 percent of final cost. The ceiling is a further disincentive. If final costs exceed 120 percent of target, for example if final costs are $130, the final contract price will be $120 and Lockheed will have a $10 loss. See Nash, Incentive Contracting 8-26 (Gov't.Con.Mon. No. 7, Geo.Wash.U.1963); Thompson, The Pricing Significance of Contract Types Used in Negotiated Military Procurement, 18 Fed.B.J. 132, 133-134 (1958).

The target cost negotiations for the contracts designated AF-33700 and AF-33701 took place in January 1959. The Air Force Negotiators took the position that for 1957 and subsequent years, Lockheed could not allocate to the contracts any of the personal property taxes that were measured by the value of commercial productive material inventories and commercial work-in-process inventories. The contracting officer finalized this by issuing determinations which disallowed the taxes as a cost of performance. An identical position was taken in the total (final) contract cost negotiations for the AF-27378 contract in April 1959. The contracting officer for that contract refused to allow allocation of the taxes for 1958, although he allowed the allocation for 1954 through 1957. The Air Force policy change was precipitated by a decision of the Supreme Court of California, in which it was held that Los Angeles area defense contractors could recover county and city ad valorem personal property taxes which had been levied on productive material and work-in-process inventories to which the contractors had possession and the United States government held title.² General Dynamics Corp. v. County of Los Angeles, 51 Cal.2d 59, 330 P.2d 794 (Sup. Ct.Cal.1958). The theory of the case was that the California legislature did not provide for the taxation of possessory interests in tax-exempt United States government property, although it was not prohibited from doing so by either its own or the United States Constitution. The Air Force negotiators and the contracting officer construed this as a kind of immunity, and accordingly decided that the accounting provisions of the contracts should not be interpreted in a manner that would indirectly defeat the government's immunity. The Armed Services Board of Contract Appeals (AS BCA) agreed, and sustained the contracting officer's determinations on appeal.

The taxes in question were tangible personal property taxes measured by the value of the property. They were authorized generally by the California constitution and specifically by the California Revenue and Taxation Code (section 201), and levied by counties, cities, school districts, and other local political subdivisions. Here the taxing authorities were the City of Burbank, the Burbank School District and the County of Los Angeles. Lockheed's principal office and the facilities used for the performance of the contracts in issue were located in those jurisdictions. The mechanics of the tax were the following: All personal property was assessed every year at noon on the first Monday in March. The resulting appraised values were then grossed-up for the entire jurisdiction and divided into the projected revenue requirement figure to produce a quotient which was the percentage rate to be applied to appraised value. The tax was then assessed and paid for the one-year period commencing on the following July 1. The parties have stipulated that the taxes in issue were used by these jurisdictions "as a principal source of support for community services, such as flood control, civil defense, fire department, health services, police protection, public works, refuse collection and disposal, street lighting and maintenance, traffic control, sewer maintenance, air pollution control, coroner, county library, county counsel, district attorney, forester and fire warden, administration of justice, health department, parks and recreation, and schools." There is no dispute that these services benefited the business as a whole, and that the essential services, such as fire and police protection and sewage disposal, were obtained more economically as community services than if they had been obtained from private contractors.

Lockheed allocated these taxes to both commercial and government work in the same manner as other indirect costs. It placed the taxes in a so-called factory overhead pool. It then divided the dollar value of the pool by the total number of direct factory labor hours expended on all work to establish a rate of overhead per hour. The amount of overhead per contract was calculated simply by multiplying the number of direct labor hours put into the contract by the hourly rate. This was an accepted method of allocating costs and had been consistently used by Lockheed to allocate such overhead items as the franchise tax and plant security costs. From 1941 to 1959, the government allowed Lockheed to include in the pool the presently disputed taxes, which in the early years (as in the years after the Supreme Court of California's decision) were based solely on commercial inventories, and in the interim years were based on both commercial and government inventories.

I

Plaintiff filed a petition in this court on May 25, 1964, alleging that the February 3, 1964 decision of the ASBCA was not final and conclusive because the issues in the case were questions of law which it had decided erroneously, or alternatively, because the decision on questions of fact was arbitrary, capricious, and not supported by substantial evidence. In its motion for summary judgment and accompanying brief, plaintiff identified the questions of law as the interpretation of the contract terms "target costs" and "total contract costs" in the light of the accounting standards in the contracts, or in the alternative, the interpretation of these terms in the light of the intention of the parties at the time of contract formation. Plaintiff stated that either issue could be resolved on the facts that had been stipulated before the Board, although for the alternative approach, the Board's view of the facts would have to be reversed as unsupported by substantial evidence. Defendant responded with a cross-motion for summary judgment. In its accompanying brief it agreed the facts were "for the most part uncontested," but urged strongly that the primary issue was an accounting problem presenting "predominantly a question of fact" so that the Board's decision should be final and conclusive.

At this stage in the proceedings, the court referred the case to Trial Commissioner Evans under Rule 54(b). He submitted an opinion and recommended conclusion of law which held for plaintiff. He dwelled extensively on the factlaw problem, ultimately concluding that the primary issue was a question of contract interpretation and an issue of law. We adopt this conclusion in a...