United Aircraft Corp. v. O'Connor

• Decision Date: 03 August 1954
• Citation: 141 Conn. 530,107 A.2d 398
• Parties: UNITED AIRCRAFT CORP. v. O'CONNOR, Tax Com'r. Supreme Court of Errors of Connecticut
• Court: Connecticut Supreme Court

Page 398

107 A.2d 398

141 Conn. 530

UNITED AIRCRAFT CORP. v. O'CONNOR, Tax Com'r.

Supreme Court of Errors of Connecticut.

Aug. 3, 1954.

Arthur L. Shipman, Jr., Hartford, with whom, on the brief, was Benjamin Hinman, Hartford, for appellant (plaintiff).

Walter T. Faulkner, Asst. Atty. Gen., with whom, on the brief, was William L. Beers, Atty. Gen., for appellee (defendant).

Before INGLIS, C. J., and BALDWIN, O'SULLIVAN, WYNNE and DALY, JJ.

O'SULLIVAN, Associate Justice.

In 1950, the defendant made a deficiency assessment against the plaintiff for sales and use taxes incurred from July 1, 1947, to March 31, 1948, inclusive. The deficiency was assessed upon the storage, use and consumption within the state of tangible personal property purchased by the plaintiff to carry out five contracts between itself and the United States of America. General Statutes, Sup.1947, § 337i. Claiming to be aggrieved by the defendant's action, the plaintiff appealed to the Superior Court, which affirmed the tax deficiency and dismissed the appeal. Sup.1947, § 344i. From that judgment the plaintiff has appealed to this court.

The finding, which is not subject to material correction, recites the following facts: The plaintiff is engaged at East Hartford in the production and sale of standard aircraft engines and parts. It also maintains a research engineering department. This department performed services for the United States navy and the United States army air corps under five contracts, referred to herein as A, C, G, H and I. To fulfil its contractual obligations, the plaintiff purchased, from July 1, 1947, to March 31, 1948, inclusive, tangible personal property at a cost of $1,328,913.53. The defendant had issued to the plaintiff a retail sales and use tax permit pursuant to § 331i(4) of the 1947 Supplement, and when the purchases were made, the plaintiff gave resale certificates therefor to the vendors. Sup.1947, § 332i (1), (2), (4). ¹ Since no sales or use tax was paid on the purchases just mentioned, the defendant levied against the plaintiff a deficiency assessment amounting to $39,867.41.

Contract A required the plaintiff to furnish and deliver to the government eight experimental engines; contract C, to furnish and deliver one full-scale mock-up, complete with mounts and other equipment, and three experimental engines; and contract I, to furnish and deliver four engines of a model to developed by the plaintiff. Contracts G and H differed from the other three in that the government furnished engines for the plaintiff's use in experimentation. The services under contract G included the conversion of the engines into a type described as R-4360-41, which was then nonexistent, by the installation of new parts to the extent of about 15 per cent. Contract H required the plaintiff to convert three engines furnished by the government into new types by a change of approximately 25 per cent of the parts. Under contracts G and H, title to the furnished engines remained in the government. The work required by the five contracts was completely performed by the plaintiff, and in each instance the engines which were the subject matter of the contract were delivered to the government and the payments called for by the contracts were made by the government.

Contracts A, C and H also provided for partial payments and that when such payments were made, 'title to all parts, materials, inventories, work in process and nondurable tools theretofore acquired or produced' should vest in the government, but that '[u]pon liquidation of all partial payments * * * or upon completion of deliveries called for by this contract, title to all property (or the proceeds thereof) which has not been delivered to and accepted by the Government under this contract or which has not been incorporated in supplies delivered to and accepted by the Government under this contract and to which title has vested in the Government * * * shall vest in the Contractor.'

The price for a regular production engine ranges from $30,000 to $70,000. The charge per engine under contract A was $187,000. The charge under contract C for three engines and the mock-up was $5,000,000. Under contract H, the plaintiff received $5,500,000 for reconverting three government-owned engines. Under contract I, the unit price per engine was $300,000. The expense of experimental work far exceeds that for production of standard engines and parts because materials and parts have to be purchased in greater volume in order to allow for failures and design changes on experimentation, and to avoid delays where time is of vital importance to the government.

The plaintiff's practice was not to purchase materials in anticipation of possible future contracts but to make such purchases only for specific existing contracts. The materials purchased for a particular contract were segregated for use in performing that contract. Some were used in fabricating experimental engines or parts which the particular contract required, some were not used because of design changes and technological developments, some were found defective, and some became surplus over actual needs. Defective and obsolete material was discarded and sold as scrap. Surplus material, if found usable for some other experimental purpose, was so used by the plaintiff. The scrap resulting from the performance of a particular contract was sold, the money received was credited to the plaintiff's overhead expenses, and those expenses were applied to both experimental and regular production business.

All of the property purchased by the plaintiff for the five federal contracts was acquired upon the assumption that it was suitable for the particular work, and it was acquired in sufficient quantity to permit performance of the contract without interruption by reason of running short of material or the discovery of hidden defects, changes in engineering principles or design, alternative design and other conceivable eventualities. The plaintiff knew at the time of purchase that only a part of the materials would be incorporated in the final product. Materials which meet preliminary tests may be spoiled in the fabrication process or found to have hidden defects requiring that they be discarded. Where novel or difficult problems in design arise, the plaintiff must anticipate possible failure of one design upon testing and, in order to avoid delay, must make provision for one or more alternative designs by purchasing extra materials. Rapid advances in aircraft engineering technology frequently cause the plaintiff to make design changes, and it is necessary to purchase materials in anticipation of incorporating such possible technological improvements, even though this means discarding other materials.

The plaintiff purchased and paid for all the materials used in performing the contracts. The materials and parts were received, owned, placed in stockrooms and used by the plaintiff in its plant at East Hartford, or they were...