U.S. v. State of N. M., 78-1755

• Decision Date: 02 June 1980
• Docket Number: No. 78-1755,78-1755
• Citation: 624 F.2d 111
• Parties: 28 Cont.Cas.Fed. (CCH) 81,365 UNITED STATES of America, Plaintiff-Appellee, v. STATE OF NEW MEXICO; Bureau of Revenue of the State of New Mexico; and Fred L. O'Cheskey, as Commissioner of Revenue of the State of New Mexico and his successors in office, Defendants-Appellants.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 111

624 F.2d 111

28 Cont.Cas.Fed. (CCH) 81,365

UNITED STATES of America, Plaintiff-Appellee, v. STATE OF NEW MEXICO; Bureau of Revenue of the State of New

Mexico; and Fred L. O'Cheskey, as Commissioner of

Revenue of the State of New Mexico and

his successors in office,

Defendants-Appellants.

No. 78-1755.

United States Court of Appeals, Tenth Circuit.

June 2, 1980.

Daniel H. Friedman, Sp. Asst. Atty. Gen., Santa Fe, N.M. (Jan E. Unna, Sp. Asst. Atty. Gen., and Jeff Bingaman, Atty. Gen. of N.M., Santa Fe, N.M., with him on the brief), for defendants-appellants.

John J. McCarthy, Atty., Tax Division, Dept. of Justice, Washington, D.C. (M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews and Jonathan S. Cohen, Attys., Tax Division, Dept. of Justice, Washington, D.C., R. E. Thompson, U.S. Atty., and Ruth C. Streeter, Asst. U.S. Atty., Albuquerque, N.M., of counsel, with him on the brief), for plaintiff-appellee.

Before McWILLIAMS, BARRETT and McKAY, Circuit Judges.

McKAY, Circuit Judge.

The United States seeks a declaratory judgment defining the status for purposes of the New Mexico Gross Receipts and Compensating Tax ¹ of three private corporations under management contracts with the Energy Research and Development Administration (ERDA), the successor to the Atomic Energy Commission (AEC). ² The government also seeks a declaration that, as a matter of constitutional law, it must be permitted to intervene in any New Mexico administrative proceeding involving the tax status of the three corporations.

The government's substantive arguments focus on whether the contractors are agents of the United States for certain functions. ³ As agents for the disbursement of federal funds, they would be constitutionally immune from application of the gross receipts tax to those funds. ⁴ See N.M.Stat.Ann. § 72-16A-12.1 (Supp.1975) (exemption for the government); N.M.Stat.Ann. § 72-16A-3F (Supp.1975) (requirement of receipt). In addition, if the contractors are procurement agents for the government, their suppliers of tangible personal property would be entitled to a tax deduction. See N.M.Stat.Ann. § 72-16A-14.9 (Supp.1975).

The parties filed cross-motions for summary judgment. Most facts, including the applicable contract language, were stipulated. The district court granted the motion of the United States, finding that the contractors were disbursement and procurement agents for the government and that the United States must be permitted to intervene in the state proceedings. The district court found that in paying their own operational costs such expenses as overhead and salaries the contractors were merely disbursing, not receiving, federal funds. The court also found that purchases of tangible personal property, even though used in the contractors' own work, were made as agents of the government.

We agree with the district court that the United States may intervene in state proceedings. However, we believe that the law which has developed to resolve agency questions in the government contract context requires that the district court grant summary judgment to New Mexico on the agency issues.

The three contracts involved here are in most respects standard AEC management contracts a genre of contracts developed to facilitate the AEC's heavy reliance on private industry in the construction and management of large research and development facilities. Although AEC management contracts closely resemble typical cost-plus government contracts, they also contain unusual features. For instance, they contemplate long-term relationships and vest substantial autonomy in the contractors. See Hiestand & Florsheim, The AEC Management Contract Concept, 29 Fed.B.J. 67, 68 (1969).

Under its contract, Sandia Corporation, a subsidiary of Western Electric Company, Inc., operates the Sandia Laboratories owned by ERDA. Sandia was created in 1949 to perform research and development for the AEC, and it is not involved in private work. It receives no fee or profit under its contract and owns no property except the $1,000 in United States bonds constituting its nominal paid-in capital.

The Zia Company, a subsidiary of Santa Fe Industries, Inc., has been performing a variety of functions in support of ERDA's Los Alamos Scientific Laboratory since 1946. Zia performs separate private work with a distinct set of records, employees and locations. Virtually none of Zia's private property is involved in performance of its contract with ERDA.

Los Alamos Constructors, Inc. (LACI) is a subsidiary of the Zia Company. It performs construction work in support of the Los Alamos Scientific Laboratory. LACI owns no tangible personal property and procures the property needed in performance of its Los Alamos contract through Zia.

I.

The cornerstone case on whether a government contractor may share in the intergovernmental tax immunity enjoyed by the United States is Alabama v. King & Boozer, 314 U.S. 1, 62 S.Ct. 43, 86 L.Ed. 3 (1941). There the Supreme Court upheld a sales tax levied on the purchases of cost-plus-fixed-fee contractors notwithstanding the fact that the government would ultimately pay the tax in reimbursing the contractors' costs. The Court rejected an economic impact test and decided the case on the basis of the bare legal incidence of the tax. "The asserted right of the one (sovereign) to be free of taxation by the other does not spell immunity from paying the added costs, attributable to the taxation of (its contractors)." Id. at 9, 62 S.Ct. at 45. The incidence of the tax was found to fall on the contractor, not the government, even though, inter alia, the government maintained extensive control over the contractor, the title to the goods purchased subject to the tax passed directly to the government, and the government was to assume good faith obligations of the contractor upon termination of the contract.

In 1952 the Supreme Court interpreted § 9(b) of the Atomic Energy Act of 1946 to be a legislative extension of governmental immunity to AEC contractors. Carson v. Roane-Anderson Co., 342 U.S. 232, 72 S.Ct. 257, 96 L.Ed. 257 (1952). Congress promptly repealed § 9(b), Act of August 13, 1953, Pub.L. No. 83-262, 67 Stat. 575 (1953), for the express purpose of putting AEC contractors on the same footing as other government contractors, who, since the decision in King & Boozer, are rarely found to be immune from taxation. The Senate Report accompanying the repealer discloses a congressional sensitivity to the decreased tax bases of those states with large-scale AEC activities. S.Rep. No. 694, 83d Cong., 1st Sess., reprinted in (1953) U.S.Code Cong. & Admin.News, pp. 2379, 2380.

Since the decision in King & Boozer, the Supreme Court has only twice been satisfied that a sufficient relationship existed between the contractor and the government to qualify the contractor for implied constitutional immunity. In Kern-Limerick, Inc. v. Scurlock, 347 U.S. 110, 74 S.Ct. 403, 98 L.Ed. 546 (1954), the Court found a contractor to be an agent for the government for procurement and, therefore, immune from a sales tax. Language in the request for bids, the contract, and the purchase order clearly and uniformly disclosed an intention for the government to be directly obligated to the vendor for the contractor's purchases. Id. at 119-20, 74 S.Ct. at 409. In the course of the opinion, the Court also noted the careful attention Congress has given to the proper adjustment of intergovernmental tax burdens. Id. at 116, 74 S.Ct. at 407.

Justice Douglas, in his Kern-Limerick dissent, criticized the majority opinion insofar as it could be read to allow "any government functionary to draw the constitutional line by changing a few words in a contract." 347 U.S. at 126, 74 S.Ct. at 413 (Douglas, J., dissenting). This concern that immunity questions not turn on technicalities of contract drafting reappeared in the majority opinions of the Michigan property cases decided four years later:

Constitutional immunity from state taxation does not rest on such insubstantial formalities as whether the party using government property is formally designated a "lessee." Otherwise immunity could be conferred by a simple stroke of the draftman's pen.

United States v. Township of Muskegon, 355 U.S. 484, 486, 78 S.Ct. 483, 485, 2 L.Ed.2d 436 (1958) (emphasis added). The Michigan opinions recognize Congress as "the proper agency . . . to make the difficult policy decisions necessarily involved in determining whether and to what extent private parties who do business with the Government should be given immunity from state taxes." City of Detroit v. Murray Corp., 355 U.S. 489, 495, 78 S.Ct. 458, 462, 2 L.Ed.2d 441 (1958). See also United States v. City of Detroit, 355 U.S. 466, 474, 78 S.Ct. 474, 478, 2 L.Ed.2d 424 (1958). Cf. United States v. Boyd, 378 U.S. 39, 51, 84 S.Ct. 1518, 1525, 12 L.Ed.2d 713 (1964).

In 1960 the Supreme Court affirmed, without opinion or citation, a three-judge district court determination that an AEC contractor in South Carolina was a tax-exempt government agent. Livingston v. United States, 364 U.S. 281, 80 S.Ct. 1611, 4 L.Ed.2d 1719 (1960) (per curiam), aff'g 179 F.Supp. 9 (E.D.S.C.1959). The district court relied heavily on the fact that this AEC contractor undertook government work as a contribution to the defense effort rather than as a source of profit. Although the contract involved in Livingston was typical of AEC management contracts in most respects, it provided for only a nominal one-dollar fee, and purchase orders were made on behalf of the government. 179 F.Supp. at 18. Later, in United States v. Boyd, 378 U.S. 39, 84 S.Ct. 1518, 12 L.Ed.2d 713 (1964), the Supreme Court, considering another AEC management contract, sharply limited Livingston to the " 'extraordinary' contractual relationship" involved and the "factual determination that (the contractor) received no benefits from the contract." Id. at 45 n. 6, 84 S.Ct. at 1522 n. 6...