Northrop Grumman Corp. v. County of L.A.

• Decision Date: 28 November 2005
• Docket Number: No. B172863.,B172863.
• Citation: 134 Cal.App.4th 424,36 Cal.Rptr.3d 71
• Court: California Court of Appeals Court of Appeals
• Parties: NORTHROP GRUMMAN CORPORATION, Plaintiff and Appellant, v. COUNTY OF LOS ANGELES, Defendant and Appellant.

36 Cal.Rptr.3d 71

134 Cal.App.4th 424

NORTHROP GRUMMAN CORPORATION, Plaintiff and Appellant, v. COUNTY OF LOS ANGELES, Defendant and Appellant.

No. B172863.

Court of Appeal, Second District, Division 2.

November 28, 2005.

Raymond G. Fortner, Jr., County Counsel, Albert Ramseyer, Principal Deputy County Counsel, for Defendant and Appellant.

Bewley, Lassleben & Miller, Jeffrey S. Baird, Joseph A. Vinatieri, Kevin P. Duthoy, Jason C. DeMille, Whittier, for Plaintiff and Appellant.

BOREN, P.J.

The County of Los Angeles assessed ad valorem property taxes on personal property allocated by a military defense contractor to the performance of its fixed-price contracts with the United States government. The progress payment clause of the federal contracts states that title to property allocable or chargeable to the contracts vests in the federal government. The County interprets this to mean that the United States takes a lien or security interest in the contractor's property. We disagree with the County's interpretation. Title means title. Title does not mean lien. Because the County cannot tax property owned by the United States, it must refund the taxes paid by the contractor on property allocated to the performance of its military contracts.

FACTS¹

Northrop Grumman Corporation (Northrop) is a Los Angeles County (County) contractor primarily engaged in the business of designing and building military aircraft and weapons systems for the United States government. It also manufactures commercial aircraft. Northrop uses four categories of personal property in its business: perishable tools, minor equipment, supplies, and technical books.²

During the tax years in question, 1987 through 1995, Northrop's personal property (i.e., its tools, minor equipment, supplies and technical books) was accounted for as an indirect (overhead) cost, which was allocated among all of Northrop's contracts in accordance with generally accepted accounting principles. Northrop exercised sole discretion regarding the type of tools, equipment, supplies and books it procured, and maintained sole possession of them. At times, tools and supplies used by Northrop in the performance of both government and commercial contracts may have been commingled. For example, personnel on assembly lines in Hawthorne may have interchanged tools among the 747 commercial aircraft and F-18 fighter aircraft projects, because the tools, equipment and supplies used in both assembly lines were physically indistinguishable.

Northrop believes, and the County disputes, that part of Northrop's personal property is owned by the United States government and is therefore exempt from property taxes. Northrop did not request a "proof of exemption" from the federal government, nor was one provided. Nevertheless, it is undisputed that Northrop designed, fabricated and delivered military aircraft to the federal government under hundreds of fixed-price contracts during the relevant tax years. The fixed-price contracts contain a clause providing for progress payments.

Northrop filed numerous claims with the County seeking a refund of taxes it paid on its personal property. In itemized refund claim calculations, Northrop identified the percentage of its personal property allocable to the performance of its military contracts with the federal government. Northrop's total refund request for the tax years 1987 to 1995 is $2,268,451. The County denied Northrop's refund claims.

In 2002, Northrop filed suit against the County, demanding payment of its tax refund. The dispute was tried by the court, which gave judgment to Northrop. The County has appealed from the judgment and Northrop has cross-appealed to challenge the court's computation of prejudgment interest. The appeals are timely.

DISCUSSION

The County's Appeal

1. Appeal and Review

Appeal lies from the judgment. (Code Civ. Proc., § 904.1, subd. (a)(1).) The classification of items as taxable or nontaxable presents a question of law that is reviewed independently on appeal. (Crocker National Bank v. City and County of San Francisco (1989) 49 Cal.3d 881, 888, 264 Cal.Rptr. 139, 782 P.2d 278.) "Taxation must, of course, be uniform and the tax law uniformly applied. [Citation.] Uniformity depends on proper classification. And proper classification is furthered through the application of independent review." (Id. at pp. 888-889, 264 Cal.Rptr. 139, 782 P.2d 278.) The construction of contracts to which the United States is a party, the effect of the contracts on the rights and obligations of the signatories, and the titles or liens created by the contracts present questions of federal law. (U.S. v. Allegheny County (1944) 322 U.S. 174, 183, 64 S.Ct. 908, 88 L.Ed.1209.)

2. Extent of the County's Right to Levy on a Federal Contractor's Property

The County is generally entitled to assess levies on taxable property. (Rev. & Tax Code, § 405; General Dynamics Corp. v. County of L.A. (1958) 51 Cal.2d 59, 63-66, 330 P.2d 794.) The County is not, however, entitled to collect taxes on property owned by the federal government: the United States is immune from direct state and local taxation. (United States v. California (1993) 507 U.S. 746, 753, 113 S.Ct. 1784, 123 L.Ed.2d 528; M'Culloch v. State of Maryland (1819) 4 Wheat. 316, 17 U.S. 316, 436, 4 L.Ed. 579.) "[T]he Government's property interests are not taxable either to it or to its bailee. The `Government' is an abstraction, and its possession of property largely constructive. Actual possession and custody of Government property nearly always are in someone who is not himself the Government but acts in its behalf and for its purposes. He may be an officer, an agent, or a contractor. His personal advantages from the relationship by way of salary, profit, or beneficial personal use of the property may be taxed as we have held. But neither he nor the Government can be taxed for the Government's property interest." (U.S. v. Allegheny County, supra, 322 U.S. at pp. 187-188, 64 S.Ct. 908.)

Thus, the federal immunity from state taxes may extend to a federal contractor. "[W]here the federal government receives title to property pursuant to the provision of its contract with a civilian contractor, any use of the property made by the contractor in performing the contract after title has passed to the government under the terms of the contract is deemed to have been made on behalf of the government and such use therefore is not taxable." (Aerospace Corp. v. State Bd. of Equalization (1990) 218 Cal.App.3d 1300, 1309-1310, 267 Cal.Rptr. 685; Lockheed Aircraft Corp. v. State Bd. of Equalization (1978) 81 Cal.App.3d 257, 266-267, 146 Cal.Rptr. 283.)

In sum, ad valorem property taxes cannot be imposed if the property belongs to the federal government, not the contractor. However, an ad valorem property tax can be imposed on property belonging to the federal contractor and not to the federal government. (TRW Space & Defense Sector v. County of Los Angeles (1996) 50 Cal.App.4th 1703, 1713-1714, 58 Cal.Rptr.2d 602 (TRW); Hughes Aircraft Co. v. County of Orange (2002) 96 Cal.App.4th 540, 545, 117 Cal.Rptr.2d 601 (Hughes).) With respect to federal contractors, government property is "`"all property owned by or leased to the Government or acquired by the Government under the terms of the contract. It includes both Government-furnished property and contractor-acquired property as defined in this section." [Citation.] Contractor-acquired property "means property acquired or otherwise provided by the contractor for performing a contract and to which the Government has title...." [Citation.]'" (Hughes, supra, 96 Cal.App.4th at p. 552, fn. 5, 117 Cal.Rptr.2d 601, quoting the Federal Acquisition Regulation (FAR), 48 C.F.R. § 45.101(a).)

3. Federal Title: Ownership or Security Interest in Northrop's Property?

Northrop's contracts with the federal government are fixed-price contracts. In these contracts, the agreed consideration is fixed and the work is financed by the government with progress payments based on the contractor's periodic invoices. (48 C.F.R. § 52.232-16.) The question raised by the County is whether, under a fixed-price contract with progress payments, the federal government takes title to the contractor's personal property, or merely takes a lien or security interest in the contractor's personal property.

The contracts between the United States and Northrop state, on their face, that the federal government takes title to specified portions of Northrop's personal property. The progress payment clause reads, "(d) Title. (1) Title to the property described in this paragraph (d) shall vest in the Government. Vestiture shall be immediately upon the date of this contract, for property acquired or produced before that date. Otherwise, vestiture shall occur when the property is or should have been allocable or properly chargeable to this contract."³ Identical language appears in the FAR, 48 Code of Federal Regulations part 52.232-16(d). "The FAR sets forth the Government's policies with respect to progress payments. Progress payments are made on the basis of costs incurred by the contractor as work progresses under the contract. Upon contract formation, or as property becomes allocable to a contract, title vests in the Government. The Government takes title to parts, materials, inventories, work in progress, special tooling nondurable tools, and drawings and technical data developed as part of the contract." (Sainsbury, Seeking One Rule to Bind Them: Unifying the Interpretation and Treatment of the "Title-Vesting" Language of the Progress Payments Clause (2003) 32 Pub Cont. L.J. 327, 335, fns. omitted.)

For nearly 100 years, the courts have confirmed that the federal government takes title to its contractors' property in exchange for progress payments. In 1910, the Supreme Court held that progress payments to a shipbuilder vested title to the contractor's property in the federal...