City of Detroit v. Murray Corporation of America – Oral Argument – November 13, 1957

Media for City of Detroit v. Murray Corporation of America

Audio Transcription for Oral Argument – November 14, 1957 in City of Detroit v. Murray Corporation of America

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Earl Warren:

Number 18, City of Detroit, a Michigan Municipal Corporation, et al., appellants, versus The Murray Corporation of America, and number 36, City of Detroit, petitioners, versus The Murray Corporation of America.

Mr. Taylor.

Hobart Taylor, Jr.:

Mr. Chief Justice and associate justices of the Supreme Court.

The assessment on which the tax question here was levied covered personal properties of appellee Murray valued all together at $12,183,000.

Of this amount, appellee claimed that certain items described as belonging to the United States had been included, the value of which was determined to be $20,43,670.

Such items consisted of basic materials purchased from suppliers by the appellee, an independent sub contractor, which it was processing for parts and components of aircraft and aircraft engines to be delivered to Kaiser Manufacturing Company and Curtis Wright Incorporation respectively, the latter being prime contractors with the United States Air Force and engaged in manufacturing airplanes for the government.

These assessments appear in the 1952 assessment roll, as charged to Murray Corporation of America.

On the specific line, the assessing officer, has in each case, stamped this location, assessed subject to prior rights of the federal government.

These assessments were made under authority of the charter of the City of Detroit and of the general property tax law of Michigan.

The total amount involved in this specific case is roughly $80,000.

The amount involved in other cases is much greater.

The subcontract of Murray with Kaiser consisted of a letter of intent executed on March 23rd 1951 and under this letter of intent, there was included, a partial payment cause which will be discussed later.

Kaiser had a contract running back to the December 20th 1950 with the federal government and Wright had a contract running back to December 12, 1950.

Did Wright’s property involve (Inaudible)

Hobart Taylor, Jr.:

It is Murray. Murray was the subcontractor who was the plaintiff originally in this action.

Kaiser and Wright were prime contractors with the federal government, Murray was a subcontractor.

The partial payment clause provides in substance that upon the making of any partial payment under the contract, title to all parts, materials, inventory, work-in-process, and non durable tools theretofore acquired or produced by the contractor or subcontractor as the case maybe, and properly chargeable to the contract under sound accounting practice will vest in the government title to all like property thereafter acquired or produced or in connection with the performance of the contract shall also vest in the government.

The subcontracts contained a number of reservations and other sub paragraphs immediately following the partial payment title vesting clause, notably the right to acquire and dispose a property is reserved in the subcontractor subject to approval of the terms by the contracting officer, which is of course an employee of the federal government.

This right maybe exercised both before and after termination at the option of the government and by termination at the option of the government, it does not mean that that right maybe exercised before or after at the option of the government.

It means that termination is at the option of the government.

There was some confusion in the brief of the appellee in that respect.

In any event the proceeds from any disposition of the property were to be paid or credited to the government as a contracting officer might direct so long as such proceeds did not exceeds the balance of any partial payments.

Upon liquidation of all partial payments received by the subcontractor, title would then to whatever goods remains would revest in the subcontractor hopping or skipping back from the government.

Further more property to which —

Harold Burton:

(Inaudible) equipment used to make this product —

Hobart Taylor, Jr.:

It would be of any property that had not been delivered and which was and which exceeded in value, the amount of the partial payments.

Harold Burton:

Like the some of the product itself (Inaudible)

Hobart Taylor, Jr.:

It could be and in fact it most likely would be I would think because in the machine tools which had been made would already be in existence and probably would have been paid for prior to this time though it is possible that machine tools in the process of construction could still have been included in this property that would revest.

Harold Burton:

So that (Inaudible)

Hobart Taylor, Jr.:

Well, it covers in a property in existence.

Hobart Taylor, Jr.:

Let us say if the government decided to terminate the contract at any time and it might not be overproduction if there were change in plans.

I can readily see how quite a bit of raw materials and working process that had been accumulated would revest in the contractor who would of course have the right to sell it and apply anything over what he would get on redo — negotiation of its contract at the termination of it to his own profit.

The title to the property revest in the contractor.

The partial payments that are important to this particular case were received in October of 1951 and in December of 1951.

In fact in each contract partial payments were received on December 31st 1951 and tax day in Michigan is January 1st of the year.

This Court has reserved the question of jurisdiction on appeal although granting certiorari in this manner.

We would like to say in reference to this matter that we feel that the Court likewise has jurisdiction on appeal.

The statutory ground is that the Court of Appeals has found a repugnancy of the state statute with the —

You don’t think it makes any difference (Inaudible)

Hobart Taylor, Jr.:

None really to us but —

(Inaudible)

Hobart Taylor, Jr.:

We are delighted to sir.

(Inaudible)

Hobart Taylor, Jr.:

It saves us time.

Coming then to the next point the three major issues involved, and which appear to be agreed upon by all parties, are further the provisions for transfer of title to the United States of material in possession of an independent subcontractor is authorized under federal law.

Secondly that if the inclusion of title transfer provisions was authorized, did the related contract terms and undisputed course of conduct nevertheless establish ownership in Murray and paper title in the government.

And lastly whether or not state and local tax laws and non discriminatory taxes levied there under, valid in much as no direct burden is imposed on the federal government may be levied despite constitutional immunity.

I shall discuss the first two questions and Mr. Ingalls, my associate, shall discuss the last one.

In this connection also it should be noted that Murray has raised the question of so called collateral attack of government contract in this proceeding.

It should be noted, however, that we are the defendants of this proceeding and that it was the plaintiffs who is opposing government contract as a means of avoiding this tax and therefore I do not believe that we are collaterally attacking it.

As a matter of fact, I see no way for this Court to ever get jurisdiction of a contract, and if the work and activities of government contracting officers were sacrosanct and could not be questioned in any proceeding in which a tax was levied.

As to the power of the federal government to provide for a partial payment title vesting provisions, we have raised the question that Section 3648 of the revised statutes of the United States prevents the advance of public money to be made in any case unless authorized by the appropriation concerned or by other law.

And it goes on to say that “in all cases of contracts for the performance of any service or the delivery of articles of any description for the use of the United States, payment shall not exceed the value of the service rendered, or of the articles delivered previously to such payment.”

Now it is to be noted that this section of law refers to advance of public money and not to the fine distinction which we now draw between advance payment and partial payments, advance payments being a loan by the government for which a lien is received and of course partial payments being advances made periodically during the term of the contract secured either by picking titles to the materials or by some other method.

It is also to be noted in this respect that the interpretations of Section 3648 throughout the history of its existence has required that an equivalent in value be given to the government in return for the advance of public monies.

In this connection, two statutes are involved under which the appellee and under which the government claims authority to avoid Section 3648 of the revised statutes.

They are the First War Powers Act and the Armed Services Procurement Act of 1947.

They also claim some sort of general authority without benefit of any statute, a general authority to enter in to contracts for governmental purposes.

With reference to the Armed Services Procurement Act, I think it should be stated that the language “use again” which authorizes the making of contracts of any type which in the opinion of the agents it had would best promote the interest of the government refers to generic types of contract rather than to specific and (Inaudible) phrases in contracts.

On our brief on page 40, there is shown a colloquy between members of Congress and a witness testifying for the Defense Department in which Mr. Cole asked what does that mean that a contract maybe of any type?

Hobart Taylor, Jr.:

And Mr. Hill replied that prior to the war, the type of contract which was generally used was a lump sum or fixed price type of contract.

And then he goes on to explain that they are referring to cost plus fix free contacts, costs with the predetermined overhead contracts, time and material contracts, incentive contracts and other types of contracts.

This we believe to be the true meaning of that section of the Act, and that it does not give the government a general power to make any type of contract in violation of specific statutory prohibitions.

Now in the First War Powers Act there is clearly granted authority to enter into all types of partial payment contracts.

And had this contract been made under the First War Powers Act, I do not believe we would be here in Court today.

But in the first place this contract specifically cities the Armed Services Procurement Act of 1947 and secondly the authority which was given by Congress to the Executive Branch in the First War Powers Act, although delegated by the President to the Secretary of Defense and by him to the Undersecretary of Defense and through the secretaries of the army, was not so far as we can ascertain ever finally delegated to contracting officers so that its provisions could be used for that purpose.

This means of course that these contracting officers quite differently from the claim of the government in their brief, I think it’s page 16 of their brief, quite different, it is in their claim, did not have authority under the First War Powers Act to enter into these contracts.

Now the history of the partial payments causes in this country does not justify the assertion that this type of clause has been permitted to insulate or (Inaudible) Section 3648 for in all cases up to the present type of contract and in the many decisions of the Attorney General, and of the Comptroller General which are mentioned in the briefs of the appellee and of the government, we find that something material was being given in return.

But in this case, we find that it is cost, the expenses, traveling expenses, (Inaudible) preparations, all of these are part of the costs up on which partial payments are made.

And these are intangible items which if the government sought to take possession of them, they would find that there was nothing there to take without forcing that this represents a substantial departure from the original type of situation which we face.

A very good discussion of these is contained in a recent article by Mr. Phelean, Professor Phelean in the summer issue of the Fordham Law Journal and I understand that he was for many years a teacher in The Judge Advocates General School and is one of the authors of the standard text on Army Procurement Law which is utilized by the Army in training its officers.

So our position then on this point is simply this that as there is a specific and positive prohibition of law in Section 3648, there can be no general authority claimed in violation of a specific prohibition of Law and that under the remaining statutes there has been delegated to these contracting officers no authority to make this type of a clause and to place it in procurement contract.

Now we come to what I feel to be the major consideration in the study of the partial payments clause, and that is the question of whether or not the government took title to the property in question and that is we feel of course always a matter of intent.

Here the government in Murray seems to be base their entire position on one clause leaving out in a reference to the rest of the contract.

They ask that we look at a language in the partial payments title vesting clause to show that title does pass.

Our position, however, is based on the entire contract.

We ask examination of all of the clauses as a related whole for this is the only way at which the true intent of the parties can be ascertained.

From an examination of it, it is clear that the government never intended to buy raw material, plant layout, liaison work or other items of costs useful and necessary for the final production of the desired in item.

The contract authorized Murray, as stated before, to acquire and dispose of property.

It gave Murray an unrestricted control over scrap and determined what was scrap and what was not scrap, placed the risk of laws upon Murray and provided for reversion of title to Murray upon liquidation of partial payments.

The government’s only real interest in Murray’s activities were to examine and control accounting procedures.

And in this connection, it should again be noted the use of this phrase ‘properly chargeable under sound accounting practices’.

In other words. this was a method of cost accounting not a method of determining what property was passed to the government under the title vesting provision.

Payments were made upon these costs which included intangible items not upon the value of the materials appropriated for the execution of the contract.

This is not the buying of goods.

This is simply cost reimbursement.

Compare, if you will, this situation, which prevailed in Ansonia — in the Ansonia case, which is the leading case cited by the appellee in support of the progress — payments clause.

In the Ansonia contract, we find the language parts paid for under the system of partial payment shall become thereby the sole property of the United States and in the Ansonia contract the United States government bought a ship in parts as it was delivered.

They inspected it, paid for these parts and attached it to the ship.

This then in each of these cases there was an equivalent for the money which was expended.

Hobart Taylor, Jr.:

The main — and not only was this an equivalent I should say, but it was — the equivalent was a main subject of a contract, the thing which the government actually wanted to buy.

The conclusion here reached by us in reference to this point is we think heightened by the conduct of the parties.

These practices are set forth beginning on page 69 of our brief and perhaps (Inaudible) were mentioned at this time, but it is important to note that insurance was that the beneficiary of the insurance policy was Murray only, not Murray and the government as their interest might appear or anything of that sort.

That in the conduct of this contract Murray treated this as its own property.

Finally and this is perhaps the more substantial of their argument, the government in Murray urged that ownership passes here because the government wanted to maintain control over materials in the process of defense production, but it is a clear control that comes into being only upon the option of the party whom you desire to control.

In this connection it should be noted that Kaiser at one time took the partial payments clause out of its contract, out of its prime contract, and that it was reinstated in Kaiser’s prime contract only because Murray insisted upon a partial payments clause as a condition of accepting a subcontract with Kaiser.

This means then that as certainly as to the Kaiser contract, the government had no particular interest in the control or production under that contract and that the only reason that in a such control was ever given again would be because of the fact that Murray who wanted financing insisted upon it as a condition of entering into the contract with Kaiser.

This means I think that we are dealing with a fiction and the proof of that fiction lies in the fact that the power, the option to pass ownership to the government rests with the contractor because it is only he who can then initiate a demand for partial payments and in this case with a subcontractor who was not even a party to the contract with the United States government.

Now many cases are cited in appellee’s briefs, but the other two cases other than this one which have the precise clause involved here are United States against Lenox and American Motors against the City of Kenosha.

In both of these cases, only a paper of security title is found.

In Lenox this interest is designated as an equitable lien and in the Kenosha case, in American Motors against Kenosha, it is designated as a paper i.e. security title.

We believe that the reasoning of the Court in those cases fully explain and justify the position which we have taken in this matter.

And this Court has indicated that they are willing to look through such paper titles because in Allegheny, it was said that where the private interest is so propounding that all the government holds is a naked title and of nominal interest, the whole value is taxable to the equitable owner.

Now I would like to say that although we believe that this disposes of the case, we also think that this Court did not take jurisdiction of this clause simply to determine a problem in the law of sales.

Rather we think that this action expresses a concern for the problem which local government faces from a further expansion of federal power and a further diminution of the resources necessary to provide essential services at the local level.

It has been estimated that the percentage of total taxes collected by local government has fallen from 56% to 12% between 1932 and 1952 while debt collected by the federal government has arisen from 22% to 75%.

Yet local government must continue to provide the necessary utilities and services for an increasing population and an expanding federal program and these efforts about which are insignificant to the federal government become vital to local government.

This tax is one within the traditional ambit of state authority.

It is not levied upon and represents no discrimination against the federal government.

It falls upon and it falls equally upon all prime contractors, all private contractors including those who do not have progress payment clauses in their contract.

There are pot-full claims of ownership here made, founded upon the will of a contracting officer and the decision of a private contractor should not determine whether the doctrine of immunity recognized by the courts as requisite or for our dual form of government should or should not be applied.

Earl Warren:

Mr. Ingalls.

Vance G. Ingalls:

(Inaudible) if it please the Court, to supplement my learned colleague’s argument I wish to refer the Court to the concern which this Court has had over this problem since 1819 when the great Mr. Chief Justice Marshall and his Court considered a case of McCulloch versus Maryland, which case established the so called doctrine or principle of implied constitutional immunity of the government from taxation, local taxation or regulation.

The case of McCulloch versus Maryland was unique in the history of this principle.

In the fact that the case as this Court undoubtedly knows was involved rather a tax which was a discriminatory or political tax levied by the state of Maryland on a branch bank of the United States for the deliberate purpose of destroying that branch bank.

In order to protect the new federal government from actions of this kind by not only Maryland, but by other states, Chief Justice Marshall handed down the opinion in that case which established the rule that no tax could be levied upon the means of government operations and any tax or regulation which would hinder or impede or burden or control the operations of the federal government would be invalid under the supremacy clause of the constitution, which provides simply that the laws of Congress are the supreme laws of the land.

Now the concern of the Court today is the same as the concern of the Court was in 1819 with one exception and that’s a very important one we feel.

The history of that case in McCulloch versus Maryland was built up over a long period of years as this Court knows out of a — out of controversies between the states and the new federal government some of the states resenting the powers of the federal government and seeking to either nullify them or destroy them.

No case since that time that I know of that I have read has involved a tax even remotely like the tax in that case.

I don’t know of any case that’s come before this Court since that time, I maybe wrong and I stand to be corrected if there has been one, which involved a discriminatory tax deliberately intended to destroy or impair or interfere with the operations of the federal government.

Vance G. Ingalls:

And the tax now before this Court is non-discriminatory tax, as my brother counsel has pointed out, levied in the ordinary course of the City of Detroit and the County of Wayne’s taxation procedure under the charter of the City of Detroit and the state laws.

A tax which is levied in common not only on Murray, but upon all comparable persons in possession or owning personal property in the City of Detroit and the County of Wayne.

Now, what is the real concern of this Court in a case of this kind?

It is merely the question of whether or not if this tax is to be a regulation could in any way threaten a preservation and protection of the supremacy of the federal government.

If the tax or the regulation has none of the qualities of destruction or interference with that supremacy, it should be good.

If it has the qualities or the possibilities of interference with the activities of the government and in this instance with the production of aircraft for the Defense Department, then it should be stricken down and I want to say at this point that if counsel for the government or for Murray Corporation can point out any way in which this tax, this assessment can harm the government, can interfere with the production of aircraft, can destroy any instrumentality of the government, then we say the tax is bad, but I don’t think they could point out on it.

(Inaudible)

Vance G. Ingalls:

Murray has already paid it of course, beg your pardon?

(Inaudible)

Vance G. Ingalls:

If the provisions of the contract — by the provisions of the contract, it maybe that in the negotiations, they have already occurred, I don’t know what has happened, in the negotiations for settling the cost of the contract, these were letters of intent contracts and so on, of which I am not too familiar, but in those negotiations for settling the final costs, the profits between the government and — not between the government and Murray, but between the government and the prime contractors, and then through them to Murray, the tax that Murray would have to pay, maybe an element of cost whether it be reimbursable fully or only partly I do not know.

Well it says we have an impact on the government?

Vance G. Ingalls:

Only in that respect that the government may, through the contract, have to reimburse Murray for the taxes.

What I’m talking about in the way of interference or in the way of destruction and so on, is outside of the economic effect.

This Court has for the past several years held that the economic impact of the tax on the government, if the government does not have to directly bear the tax, is not a consideration for invalidating a tax since James versus Dravo, Graves versus New York and a number of other cases has settled that policy I believe.

William J. Brennan, Jr.:

Does your argument then that permit a Michigan ad valorem tax on the federal post office in Detroit?

Vance G. Ingalls:

Directly on the federal post office, no.

If the post office was in the hands of a private contractor, a private contractor was taxed for the value of that post office and his own business and only indirectly the economic affect being on the government then I would say yes.

William J. Brennan, Jr.:

Well what’s the effect of such economic if — as I understand it this is a non discriminatory ad valorem tax, that’s your position isn’t it?

Vance G. Ingalls:

That’s correct.

William J. Brennan, Jr.:

Well what effect except economic arises from a property tax levied against the post office?

Vance G. Ingalls:

This could result, and it can’t result as far as the government is concerned since United States versus Alabama was decided by this Court, but this could be the effect and the only effect and the only interference with the government would be upon foreclosure of the lien provided in the statute and the taking over of the post office by the city or the county, for non payment of tax.

That could not occur sir if the government has title or ownership of that property.

It could not occur, because in United States versus Alabama, this Court held that no suit of course could be brought against the government and no proceeding for the collection of any taxes could be brought against the government or its property.

That case was a case where the tax itself originally was assessed against a private individual and the lien went into effect when the private individual owned the property.

But the government bought the property after that and then they refused to pay the tax and then a proceeding was brought for enforcement of that lien against the government’s property which was (Inaudible).

The Court said, Chief Justice Hughes delivering the opinion that the tax was good, the lien was good, but it could not be collected by foreclosure against the government property.

So at all times, the government and its property is protected from any adverse action in the way of seizure of its property.

William J. Brennan, Jr.:

Well then I don’t quite understand why you tell me the facts against the post office would be — run afoul of federal immunity but this tax does not?

Vance G. Ingalls:

I didn’t say it would, under those circumstances if it pleases you.

William J. Brennan, Jr.:

Well then you are telling me that your position would lead to a valid tax, ad valorem property tax at least against the federal post office in Detroit?

Vance G. Ingalls:

Maybe I didn’t make myself clear.

Felix Frankfurter:

You said if the post office were formed out.

Vance G. Ingalls:

It was formed out, that’s right, it was leased out to a private corporation for profit and the tax was against that private corporation, as it is here —

William J. Brennan, Jr.:

(Inaudible) but I don’t — I still don’t understand how you make the distinction between one formed out, one not formed out?

Vance G. Ingalls:

The distinction is this, and this Court has made the distinction.

William J. Brennan, Jr.:

I have gathered that your argument was leading to the proposition that the tax would equally be valid against the post office directly?

Vance G. Ingalls:

No, no, you misunderstood or I didn’t make myself clear, absolutely not, we do not contend that a direct tax against a post office or against this building or any government building without an intervening third party who was the tax payer and whom we can assess the tax against and also collect from, I say no, those taxes would be bad.

Felix Frankfurter:

You say the third person insulates it even though an economic burden is passed on the government.

Vance G. Ingalls:

That’s correct.

Felix Frankfurter:

But aren’t you, in saying that aren’t you really asking this Court — aren’t you rearguing Allegheny?

William O. Douglas:

I thought you were rearguing the (Inaudible)

Vance G. Ingalls:

If it pleases the Court. I think its time that both Allegheny and (Inaudible) be reappraised by this Court —

Felix Frankfurter:

Alright I understand that.

Vance G. Ingalls:

— in the light of correct principles of this doctrine.

Felix Frankfurter:

Very well, but that I want to be sure that you agree to that.

Vance G. Ingalls:

I do say this, that this case is distinguished from both Allegheny and (Inaudible) in the facts but the distinction —

Felix Frankfurter:

If you take care of justice Douglas’s (Inaudible) tell how it’s differentiated from Allegheny?

Vance G. Ingalls:

How is it different from Allegheny?

Felix Frankfurter:

Yes.

Vance G. Ingalls:

Well number one, the machinery which was involved in the Allegheny case was owned, purchased, owned, delivered to the government.

It was machinery either brought into the plant of Mesta in that case by the government from some other place, or manufactured by Mesta or ordered by Mesta, but the government owned the property and owned the machinery, paid for it and then leased it back to Mesta for use in the production under a government contract.

That is one of the distinctions.

The second distinction —

Felix Frankfurter:

Why is that a significant distinction?

It was leased in fact.

Vance G. Ingalls:

It was leased back to Mesta, that’s correct.

Felix Frankfurter:

Do you think it makes a difference whether the title, all the niceties of —

Vance G. Ingalls:

I don’t —

Felix Frankfurter:

(Inaudible)

Vance G. Ingalls:

I don’t think it should and I think Your Honor was correct in your dissenting opinion in that case.

Felix Frankfurter:

That comforts me, but it doesn’t wipe out the fact the decision went against my views?

Vance G. Ingalls:

Maybe it comfort Your Honor to have a re-appraisal of that case and that’s what —

William O. Douglas:

How about (Inaudible)

Vance G. Ingalls:

(Inaudible) there was property which was — now there was a contract as Your Honor recalls which had a provision making the contractor the purchasing agent of the government, so that the contractor in purchasing these particular materials, I remember I think they were tractors for use in the government construction contract, in purchasing those, he was subject to the or the purchaser rather was subject to the state sales tax, because the state sales tax provided that the purchaser was a taxpayer responsible for payment of the tax.

So that when the government via the contractor made itself or made the contractor its agent, rather than independent contractor, then it was the same result, the tax was directly upon the government.

Now that of course is —

William O. Douglas:

That’s what the lower court ordered in case hearing.

Vance G. Ingalls:

I beg your pardon.

William O. Douglas:

That’s what the lower court (Inaudible)

Vance G. Ingalls:

That’s correct, that’s correct, but it’s not the situation here, because the contractor is not the purchasing agent of the government, not the tenant either, that the contractor is the purchasing agent of the government.

He is an independent contractor, in fact a subcontractor and the contract even provides that the government is not a party to the contract and there is no obligation upon the part of the government under that contract, strictly a contract between the five contractors and Murray which is the subcontractor.

Now —

William O. Douglas:

(Inaudible)

Vance G. Ingalls:

Not at all, not at all Your Honor.

William O. Douglas:

(Inaudible)

Vance G. Ingalls:

The partial payment clause —

William O. Douglas:

(Inaudible)

Vance G. Ingalls:

By force (Inaudible) partial payment clause the government acquires title to recent material and work-in-process, upon the making, a meeting upon the making of the partial payment.

Now the partial payment maybe in any amount of course, but not only does the government take pay roll to the partial payments for which costs have already been incurred by the contractor, but also for all future acquired materials in that claim.

Now this tax is not directed, we say against the materials.

It is directed against a private corporation.

It is a personal tax in nature.

The contractor here distinguishing from (Inaudible) is not in any respect the agent of the government.

He is completely an independent contractor.

William O. Douglas:

What was the legal incidence of the tax?

Vance G. Ingalls:

The legal incidence is entirely upon the Murray Corporation.

The legal instance entirely upon him, not only in the assessment, in the collection which can only be made against Murray Corporation, the City of Detroit and the County of Wayne can sue Murray Corporation for collection if it does pay it as a debt, as a personal obligation and can seize any of his personal property.

We cannot seize and we cannot touch any property of the federal government, if this is property of the federal government, truly we cannot touch it.

Now we say, in our brief we’ve discussed this quite at length, that the federal government and its property if this is truly the property of the federal government is completely protected from any action by the city or the county, in this case there can be no harm outside of economics to the government in this case.

William J. Brennan, Jr.:

Well before you seize the taxpayer’s property under Michigan law must you obtain at least for the purposes of this tax a personal judgment against him?

Vance G. Ingalls:

In this particular instance — no we have a choice, we have a choice —

William J. Brennan, Jr.:

What is that choice?

Vance G. Ingalls:

— to proceed against him, in this instance under the charter and the state tax law, we can make the taxpayer or make the person in possession of personal property the taxpayer and that’s what we’ve done here and then if its not paid we can sue him as a debt in assumption.

We collect that tax or we can proceed against the property or any of his property no matter what it is, where we can find it.

That’s a remedy.

Now we can also — it’s true there is question about it, seize the property which is used for evaluation of this tax, the materials, if a private corporation owned these materials under our tax law we could these materials in payment of the debt.

But if the government has title to them, no matter what the title, then we can’t touch them.

Now the effect on the government, so far as these materials are concerned would be much worse if they were completely owned by the Murray Corporation, and this Court would not be concerned with that at all.

In other words, the property of the Murray Corporation, the real property, there is no question about the tax on the real property of the Murray Corporation, but if we seize that plant out from under Murray and he can’t use it for producing government goods, then there is more harm certainly to the government then there possible could be in this instance.

I haven’t been watching my time.

The sum in substance of our position, if the Court please, is that federal government is in no way harmed, nor could it possibly be harmed, there is no threat to the preservation or the protection of the federal government or its supremacy in the levying of this tax or in the collection of the tax or in anyway possible.

We feel that the cases of James versus Dravo, of Graves versus New York, Oklahoma Tax Commission versus Texas and so on, all of which have laid down the principle following the principle in McCulloch, that an indirect tax which does not interfere with the activities or the functions of the federal government should be a valid tax under the immunity doctrine.

Hugo L. Black:

Why did you call this an indirect tax?

Vance G. Ingalls:

Because it’s levied against a private corporation and collectable against the private corporation.

Hugo L. Black:

For what?

Vance G. Ingalls:

Beg your pardon?

Hugo L. Black:

For what?

Levied against him for what, on what?

Vance G. Ingalls:

Presumably for their payment of their share of the local cost of government.

Hugo L. Black:

What do you say your tax is levied against?

Vance G. Ingalls:

We say it’s levied against the Murray Corporation under our charter –-

Felix Frankfurter:

For what?

Vance G. Ingalls:

— actual levy —

Felix Frankfurter:

For what levied against for what?

Vance G. Ingalls:

For the payment of Murray’s share of the cost of local government.

Felix Frankfurter:

No, I don’t mean generally, but what is the object of the tax?

What is the subject matter?

Vance G. Ingalls:

The subject matter of the tax so far as its valuation is concerned or so far as it’s measurement is concerned is the material, that’s correct.

William O. Douglas:

Possession alone —

Vance G. Ingalls:

Possession alone, we can tax under the charter in laws and that’s been upheld by the Michigan Supreme Court, possession alone, we can tax the person in possession.

William J. Brennan, Jr.:

Well you argument actually postulates titles to these materials in the federal government, doesn’t it –-

Vance G. Ingalls:

Not necessarily –-

William J. Brennan, Jr.:

— the argument that you are making?

Vance G. Ingalls:

If they are not in the federal government then —

William J. Brennan, Jr.:

Then we don’t make a problem —

Vance G. Ingalls:

Then Murray is the owner.

William J. Brennan, Jr.:

But the argument that you are now making postulates title of these materials in the federal government, nevertheless you say that taxes assessed against the Murray Corporation measured by the value of those materials.

Vance G. Ingalls:

That’s correct, and it could be either way, I mean if he could be the owner and still be the same tax, the same material.

Felix Frankfurter:

(Inaudible)

Hugo L. Black:

You are levying it against the company for the property it used or for the action by Murray in doing business is your state, now what is the tax for, I think that’s what we were trying to find out?

What’s your contention about that?

Vance G. Ingalls:

Very — because Murray is in possession of these materials is permitted under the charter, that we tax him.

That’s only true in cases of personal property.

It’s not through in case of real property in Michigan.

William J. Brennan, Jr.:

But isn’t this an ad valorem property tax, is there anything else?

Vance G. Ingalls:

We don’t feel that it is.

William O. Douglas:

What cause an ad valorem personal tax (Inaudible)

Vance G. Ingalls:

I recognize that.

William J. Brennan, Jr.:

Well have you any Michigan decisions to say that it is not tax?

Vance G. Ingalls:

That’s right in our brief we have the decision and an opinion of the Attorney General that says —

William J. Brennan, Jr.:

No, any Court decision?

Vance G. Ingalls:

Yes Court decision (Inaudible)

William J. Brennan, Jr.:

Is that a Michigan Supreme Court —

Vance G. Ingalls:

That’s a Michigan Supreme Court case which says —

William J. Brennan, Jr.:

Where is that cited?

(Inaudible)

William O. Douglas:

Mr. Ingalls, this Court has said —

Vance G. Ingalls:

That’s in personam.

Felix Frankfurter:

This Court has said that we don’t care what label the Supreme Court of the state puts on a tax, and it may even deny that a tax is a certain tax, is that this Court find that it is or it isn’t and to state its constitutionality or find unconstitutionality, so forget all about labels; all, everything that your Supreme Court has said and that you said, it would help me greatly if you would take exactly this same situation, the Murray Corporation, the same things, the same transactions except the private person in relation, in the position of where the United States is, just give me a concrete case and then state what it is that would be taxed in that court for what amount and what the remedies would be?

Have I put my question?

Felix Frankfurter:

Just forget about the United States, assume a big corporation named Uncle Sam, a private corporation engaged not in war business, but in automobile business, has this same relation, the same kind of an agreement, same kind of a transaction with the Murray Corporation.

Now what would happen in Michigan or Wayne County?

Vance G. Ingalls:

I understand, we would then — the assessors rather would then try to determine the owner and —

Felix Frankfurter:

By the owner you mean the —

Vance G. Ingalls:

Owner of the property of the materials or of the (Inaudible) the materials, determine the owner or the person in possession and name that person whoever he maybe as the tax payer on the tax roll.

Felix Frankfurter:

For what, for what?

Vance G. Ingalls:

For —

Felix Frankfurter:

A concrete —

Vance G. Ingalls:

For a tax which would be measured by the value of that property which he either owned or had in his possession.

Felix Frankfurter:

That is the Murray Corporation, suppose a subcontractor of a Ford or the General Motors has things like this in its possession by the same kind of leasing arrangement or contract arrangement, he would be taxed, it would be taxed for the value for a certain percentage of the value of the total value of what he has in his position, is that it?

Vance G. Ingalls:

That’s right, the ratable portion.

Felix Frankfurter:

Yes, and you wouldn’t care whether you owned it, so long as he has the use of (Inaudible) for a year.

Vance G. Ingalls:

That’s right.

He doesn’t have to have it for year, as long as he has in his possession on tax days.

Felix Frankfurter:

Well, whatever it is, all right.

Hugo L. Black:

You left me a little in doubt there.

You said tax it to the owner or the one in possession.

Suppose that owner is not in any possession or that another person is in possession.

Vance G. Ingalls:

The he is the tax payer.

Hugo L. Black:

He is the tax payer, not the owner?

Vance G. Ingalls:

Well, it could be the owner.

Hugo L. Black:

It could be both.

Vance G. Ingalls:

It probably could be both.

Hugo L. Black:

(Inaudible) taxing possession.

Vance G. Ingalls:

We don’t say we’re taxing possession, but we’re taxing him because he has it in his possession.

Hugo L. Black:

And you would tax the other man because he owns it, would you have two taxes or just one?

Vance G. Ingalls:

Only one tax.

Hugo L. Black:

Well which one under the law you have some (Inaudible) which one under the law would you tax to the exclusion of the other?

Vance G. Ingalls:

The owner if he can be found or determined, sometimes it is difficult to determine the owner of personal property.

Felix Frankfurter:

By the owner you mean that fellow who got the full title, is that it?

Vance G. Ingalls:

As far as we’re concerned, yes.

Felix Frankfurter:

Well now as a matter of fact, I suppose as a matter of constitutional law you would tax the owner because he owns it.

You could tax the lessee because he enjoys its use.

But that isn’t what you are doing in Michigan, are you?

Vance G. Ingalls:

This is —

Felix Frankfurter:

Well are you doing that?

Vance G. Ingalls:

This is a little different from that, we don’t claim this is a privilege tax.

Felix Frankfurter:

Well what is it?

Vance G. Ingalls:

We’re not claiming it’s a privilege tax.

It’s a personal property tax which can be and is levied against a private person collectable against that private person.

That’s our argument in this case.

Felix Frankfurter:

Well let’s see if I understand that.

You are taxing the thing —

Vance G. Ingalls:

We are not.

Felix Frankfurter:

That’s a figurative way of talking because things aren’t owned, somebody owns it, and while we talk that way, it means you are taxing somebody who has a proprietary relation to something called property and you say that you could tax the owner if you can get hold of him although he may have leased his machine, is that right?

Vance G. Ingalls:

That’s right.

Felix Frankfurter:

But if you can get to the owner, if is it merely (Inaudible) of getting the owner or at your choice, if you go after the fellow who actually at the time has the thing is his use.

Vance G. Ingalls:

It maybe at our choice, yes.

Felix Frankfurter:

Well —

Vance G. Ingalls:

It is not mandatory.

Earl Warren:

Under your law is there any distinction between this particular tax and the tax that you normally levy against an automobile or a tractor or a bicycle or something else?

Vance G. Ingalls:

Not at all, and these —

Earl Warren:

It is the same tax.

Vance G. Ingalls:

Exactly, in these charter provisions are the same charter provisions in effect for 200 years, or 150.

William J. Brennan, Jr.:

Well Mr. Ingalls suppose General Motors owns I gather, let’s assume, I’m not sure where it is, the headquarters are in Detroit, but it has some of these machines on lease on the assessment base in some other municipality, in some other county of Michigan, which county assesses?

Vance G. Ingalls:

I didn’t quite get that query.

William J. Brennan, Jr.:

What I’m trying to get is if you have an owner of personal property who lives in one county, but on the assessment date the property is in fact located in another county, in the possession of someone else, who taxes it?

Vance G. Ingalls:

Well, under certain circumstances we can levy the tax — the tax can be levied by the jurisdiction having jurisdiction over the owner.

In other words —

William J. Brennan, Jr.:

Well let’s take an actual situation of an owner in your county on the assessment date, you have a single assessment date?

Vance G. Ingalls:

That’s right.

William J. Brennan, Jr.:

What is that date?

Vance G. Ingalls:

January 1st.

William J. Brennan, Jr.:

All right, on January the 1st there’s an owner of machine tools, he has no residence except in your county, but his machine tools are in some other county on January 1, in the possession of somebody under lease or otherwise.

Now which county assesses it?

Vance G. Ingalls:

Undoubtedly the other county.

William J. Brennan, Jr.:

And you can’t reach —

Vance G. Ingalls:

The person in possession.

William J. Brennan, Jr.:

And you can’t reach him in your county even though he lives there, can you?

Vance G. Ingalls:

I wouldn’t say so, no under those circumstances.

William J. Brennan, Jr.:

Now isn’t this then just an ordinary ad valorem property tax, how can it be anything else?

Vance G. Ingalls:

It has the characteristic certainly of an ad valorem property tax, but are our only contention in this case is that it also is in the nature of a personal tax, because it can be levied against the person and collectable against the person without touching the property.

William J. Brennan, Jr.:

Well now here this opinion you referred us to (Inaudible) in which what the Court says is, there the tax is against the person because he owns personal property, or it’s the only reason —

Vance G. Ingalls:

Read into that or because he is in possession of personal property which is this instance, and that instance he happened to —

William J. Brennan, Jr.:

You say read into it, reading what —

Vance G. Ingalls:

Well if you read the charter into that, which permits us to levy the tax against a person in possession.

William O. Douglas:

The city charter?

Vance G. Ingalls:

The city charter, that’s correct.

Felix Frankfurter:

Mr. Ingalls, I don’t know what the situation is now of course, but not so long ago fellows who make shoes in Michigan, there must have been shoe factories for big shoe makers, had to — if they had machines they leased them from the shoe machines of the United Shoe Machinery Company.

Now in that case, this tax would be levied against all the fellows around Detroit who had leased two machines from the United Shoe of Massachusetts, is that right?

Vance G. Ingalls:

Could be.

Felix Frankfurter:

Now, suppose the United States government during war had taken over United Shoe machinery, had taken over all the outstanding leases, your argument is, that Detroit could still have accessed, levied this tax, whatever it is, against those shoe fellows, is it?

Vance G. Ingalls:

Not under those circumstances Your Honor —

Felix Frankfurter:

Why not?

Vance G. Ingalls:

— where the government has taken over.

Felix Frankfurter:

No, the government has taking over the business of the shoe machinery, but it hasn’t taken over the manufacturing of shoes, it took over the leases whereby the shoe machinery was leased throughout the United States by the United Shoe Machinery Company.

Vance G. Ingalls:

Private corporations —

Felix Frankfurter:

Which the government had taken over.

Vance G. Ingalls:

If the government had taken over the private corporation —

Felix Frankfurter:

The lease, yes, if it taken over these outstanding leases, and thereafter royalties would to be paid to it.

Vance G. Ingalls:

No, only if the private corporation was still operating as a private corporation, not taken over by the government as its agents, then we could tax the private corporation.

That would be a direct tax against a private corporation and not against the government.

Government might have to pay the tax in the record.

Felix Frankfurter:

I know, yes.

But this, the government here, what I want to know is this, does this great problem, for a great problem it is, at least to me a very great problem, the allocation, the tapping of resource within states and municipalities in which the government has some kind of interest, I purposely use that loose phrase, this great problem of determining what resources may still be trappable by the local communities, although the government has some kind of interest in it.

Now some things are clear.

The government’s own ownership can’t be taxed.

You can’t tax the post office as you indicated in Detroit.

Another thing is clear that no matter how it forms out its business you can’t levy to take over the billing in fact it does government business, because there you are interfering with government operation.

Then we’ve got in between things to which Dravo is one thing, to which the mere fact that there is an incidence of financial burden to the government isn’t enough to immunize, that’s Dravo, if it means anything, it means that.

Then you’ve got Alleghany which I’m not quite sure I know what it means, but it can’t turn on these niceties of title or the niceties of looking where or who has — who is owner, that’s of all the treacherous phrases, that’s one of the worst.

What is your position on this thing?

I can understand you’re asking us to overrule these two cases you’ve been talking about on the theory that they are negative or that they contradict the implications of Dravo, is that your position?

Vance G. Ingalls:

They are not in accordance with the general principles or the correct principles of the doctrine at all.

Felix Frankfurter:

Well you’re — I’m respectful when this Court says it has decided and it is in accord with principle, it is that until I get overruled on that.

Vance G. Ingalls:

When Your Honor said that yourself, I’m not —

Felix Frankfurter:

Yes I know, but it isn’t any good to you, unless you can get five others to agree with you.

[Laughter]

Vance G. Ingalls:

It is presumptuous on my part to ask that Your Honor.

Hugo L. Black:

Are you saying this that (Inaudible)?

You’re saying that in Michigan there is no personal property tax is levied on the owner, it is there, has it in his possession if you find any.

Vance G. Ingalls:

That’s right.

Hugo L. Black:

If he’s not there and you can’t find him and you find his property, you levied against anyone whose in possession.

Vance G. Ingalls:

That’s correct.

Hugo L. Black:

And you’re saying here that the United States Government because it is immune is to be treated precisely as an owner of property (Inaudible) who has left the state and you can’t service him. You can therefore put your tax on the person who has —

Vance G. Ingalls:

The effect is same Your Honor.

Felix Frankfurter:

Is that what you’re saying?

Vance G. Ingalls:

The effect is same.

Felix Frankfurter:

Well that’s a gross fiction to day you can’t find them because you can’t tax them.

Vance G. Ingalls:

No that’s —

Felix Frankfurter:

That’s a terrible fiction to me.

Vance G. Ingalls:

We do not care to rely upon fictions or upon labels or titles, if the Court please?

We would like the Court to look to substance in this case.

Felix Frankfurter:

Now I understand —

Vance G. Ingalls:

What I’m trying to —

Felix Frankfurter:

Well then why do you shrink from saying that a fellow who has the use of property although it’s owned by the United State enjoys wealth can exercise power although Uncle Sam made it possible for him to exercise that power and we’ll tax him for that.

These labels are no good at all for my — for me not one of them is worth anything except to reach a result that you reach otherwise.

But you can’t get anywhere by talking in personal, at that (Inaudible), at personal property, is that real property, is it a licence tax, is it a privilege tax, those are all nice checkers on the checker board.

Vance G. Ingalls:

We only thought that —

Felix Frankfurter:

They are not reality.

Vance G. Ingalls:

If it pleases Your Honor we only talk that way because distinctions have to be made and are being made with Alleghany and cases of that kind.

We think the substance of this —

Felix Frankfurter:

But take the distinction isn’t any good and you very candidly ask this Court to reconsider the whole problem, isn’t that what you’re doing?

I thought you did, alright.

Vance G. Ingalls:

I maybe suggesting that.

Felix Frankfurter:

Well it’s perfectly appropriate to ask of course to reconsider a constitutional principle, but you’ve got them — if you’re going to make a distinction, (Inaudible) and you certainly can’t get any comfort from the dissenting opinion except intellectual comfort —

Vance G. Ingalls:

Most of these distinctions Your Honor are distinctions without much difference.

I intended to reserve sometime for the rebuttal, because of the questions I’ve lost track of the time.

Earl Warren:

Well Your time has been up for some time Mr. Ingalls, but that’s not your fault, I admit (Inaudible)

Vance G. Ingalls:

I’m sorry.

Earl Warren:

Mr. Klien.

Victor W. Klein:

Mr. Chief Justice and members of the Court.

In view of the line of questioning of the Court I’ll change the order of my presentation to call the Court’s attention to the short memory of the corporation counsel for the City of Detroit in characterizing this personal property ad valorem tax because shortly ago, recently, the corporation counsel of the City of Detroit in a tax case before the Supreme Court of the State of Michigan in his brief said to that Court, “Under the provisions of our charter in an ad valorem assessment tax upon personal property, the property and not the person is assessed and yet he comes before this Court advocating the direct opposite.

Felix Frankfurter:

Well would it make a difference to you if I don’t know how the charter is deployed, is that a home rule charter?

Victor W. Klein:

Yes sir.

Felix Frankfurter:

Would it make any difference to you if this Court should sustain your position, affirm this judgment and then the appropriate charter amending authorities would say we’ve heard this, the client say this is argued vigorously and persuasively but this is a property tax, we now have to change it, would that be, would you then say —

Victor W. Klein:

No sir.

Felix Frankfurter:

(Inaudible) saying that’s an error?

Victor W. Klein:

The substance counts and it’s for this Court to determine —

Felix Frankfurter:

But what difference does it make that he said that in a brief?

Victor W. Klein:

I merely want to point out to Your Honor the provisions of the charter which require jurisdiction of the property as the basis of assessment, all personal property within the subsidy shall be the subject of taxation.

Felix Frankfurter:

Would it make any difference to you if they called it very elegantly as language can be drafted in Detroit and it can be I know some of the lawyers there —

Victor W. Klein:

Yes sir.

Felix Frankfurter:

As they call it the privilege tax whereas the Murray Company is enhanced in its power in having property on lease belonging to the United States (Inaudible) mean something, will that make any difference to you?

Victor W. Klein:

No sir.

Felix Frankfurter:

Then let’s get down to the real stuff in the coconut.

Victor W. Klein:

I am sir.

The meat in the coconut sir is that the incidence of the tax is upon the property and jurisdiction over the property is the basis for the tax.

And there is a case Michigan, the Phillip’s case which we cite in our brief, which hold that where the property is situated in a different jurisdiction within the state then the owner of the property, the place where the property is situated, the sites, that city has the power to tax irrespective of the residence of the owner.

And that was the question which was discussed in Allegheny as you recall, jurisdiction over the property is the determining basis for the tax and the mere fact that the tax bill is sent to the owner or to the person in possession if the owner is not there, is not — does not determine the incidence of the tax.

The incident is upon the property owned in this case we submit by the United States government and the mere fact that Murray is in possession in manufacturing goods for the United States title to which is in the United States is unimportant.

At least that is our position and we discussed it, we say that jurisdiction of the tax is the situs of the property within the jurisdiction and the mere fact that it is collected from the owner or the person in possession is unimportant.

And even the person in possession, if you please, under both the city charter and the state law has the right to go against the owner to collect and in — under state law he has lien for that purpose.

Felix Frankfurter:

Tell me whether I am wrong in thinking that jurisdiction to tax, the jurisdiction to tax property means only that the taxing power has such relation to the property that there is no constitutional barrier to make some exaction?

Victor W. Klein:

I think I agree with that sir.

Felix Frankfurter:

That’s all the jurisdiction — I mean the privilege —

Victor W. Klein:

I think that —

Felix Frankfurter:

— all it means —

Victor W. Klein:

That is correct sir.

Felix Frankfurter:

You have to have some relation, a state or the United States or a city has to have some relation to the things in relation to which an exaction is imposed that isn’t barred by some constitutional principle either direct or in this case by the implication that belongs to the United States.

Victor W. Klein:

That is correct sir and the reading of the statute and a reading of the charter indicates that the thing taxes is property and not the person — the collection machinery is from the person, but the tax is imposed — and the incidence of the tax is upon the property.

Felix Frankfurter:

Well then you — then please tell me why you don’t agree that although Uncle Sam may own property in defense in which one uses that —

Victor W. Klein:

Yes sir.

Felix Frankfurter:

— and leases it to a private person, that a state or a city may enjoy and may tax the enjoyment of the lessee of property though owned by United States?

Victor W. Klein:

In that situation I do agree sir if the assessment is to the extent of the lessee’s value and not valued upon the value of the entire property, but of course that is not this case here at all.

And to that point I will now address myself, the partial payment clause, title vesting clause, here before the court is one that has been used for many, many years and it doesn’t affect a leasing or a use situation where the contractor gets the use of something.

As you pointed out in this Court, in the Ansonia case which goes away back to the early 1900s, this very question was before this Court and there, there was a contract which provided that a ship builder would build a ship and as percentages 10%, 20% and so forth of the work was done on the ship, partial payment would be made to that extent and title would vest in the government.

And in the Ansonia case, 218 US, the question was whether that was beneficial ownership in title or merely lien type because the State of Virginia lien laws came into apply and if it was merely lien type the Virginia liens would take precedence over the government’s title if it was only lien title.

And this Court pointed out though generally under the law of sales where a manufacturer manufactures and a person buys, title ordinarily does not pass until completion and delivery.

If the parties clearly indicate by their contract that they intend that title should pass during the course of construction if you please, during the progress of the work and that is clearly stated that title, and it isn’t only lien title it’s absolute beneficial ownership passes as the work progresses and you so held in Ansonia and I know of no case since then which holds to the contrary.

Victor W. Klein:

And we say that the title of partial payment title vesting clause in this case and this case used in 80% of the Air Force contracts if you please, the language is clear and unmistaken that this is a payment upon the purchase price, it isn’t merely for the use of materials in process in Murray’s hands.

The government wants title to the goods in process while it is being made by Murray, and it is applying that upon the purchase price.

The partial payment here is not a loan.

It is not an advance which can be repaid.

There is no provision for repayment.

Murray could not repay any partial payment.

There is no interest provided for it.

It is merely a situation where a contractor is called upon to perform a large contract which will take a lot of time and where lot of money is involved and the government says to him you may get partial payments on the purchase price as the work progresses and the government retains title until the work is completed and the finished end product in which the government wishes for its military service is actually delivered.

And the purpose of that has been demonstrated in many cases, the government wants control of these materials the minute it arrives at the contractors’ plant.

Some of these goods are of high priority.

During this period steel and aluminium were in very short supply.

They were only gotten by priority.

The contractor couldn’t use them for his own automative production.

The government wanted to be sure that if something happened to the contractor, he failed to perform, or he went bankrupt or whatever the cause maybe that it could step in immediately and take it because it owned it and remove it to another plant for completion.

In fact in this very Murray case goods were delivered to other prime contractors at the direction of the government where the other government facilities were in short supply of these goods.

Earl Warren:

How long has that been the custom of the government to do that?

Victor W. Klein:

I think this partial payment clause go back as far as 70 years.

Earl Warren:

But you said 80% of the air corps —

Victor W. Klein:

Military, yes sir.

Earl Warren:

— contracts are that way how long have they been that way?

Victor W. Klein:

For a considerable period of time sir, I can’t give you the exact amount of time, I think it developed from World War II and then it was continued on under the Armed Services Procurement Act?

Earl Warren:

The reason — the reason I ask you is I don’t question right except for this extent I seem to remember that in my state where they had a great deal —

Victor W. Klein:

Yes sir.

Earl Warren:

— of airplane manufactured, and the government provided them as contracts but those planes should be delivered in another state.

We taxed them in California and I seem to remember army officers and airforce officers up at our state capital trying to get the law changed so that we would not charge them not because the government is particularly interested, but because it would put our airplane industry in a bad position economically with other airplane manufacturers in the country.

Now am I wrong about that?

Victor W. Klein:

I think that was the case in California called Douglas versus (Inaudible) which involved almost not quite but almost this identical clause in which the position we here assert was sustained sir.

Earl Warren:

Now how long ago was that just if you remember, if you don’t well I don’t – don’t worry.

Victor W. Klein:

I can give you the citation where —

William J. Brennan, Jr.:

What’s that?

Victor W. Klein:

1942 sir.

Felix Frankfurter:

Did that go on to the Supreme Court of California?

Victor W. Klein:

No, it did not immediate court sir and it’s not —

Felix Frankfurter:

Is there an opinion?

Earl Warren:

Did that discontinue the, did that discontinue the practice of taxing in California?

Victor W. Klein:

No what was done in California I am advised sir was that California then attempted to impose a tax on the leasing of machinery, not just — we are not talking about this but a use tax on leasing a machinery, but not I am not aware that there was any problem on this question as being litigated, again if that’s what you are asking me sir.

This very question is again being litigated in California, I’m advised.

Earl Warren:

No but what I was, what I was thinking of it, the government had done that clearly for many years and it had been accepted, I wonder why the government would be up at our state capital trying to get the legislature to relieve these machines from taxation after they were completed not during the course but after they are completed and before they flew out of the state to some other point of delivery.

Victor W. Klein:

All I can refer Your Honor to is that the decision in 42 and to say the subject is still being contested because I am glad you mentioned that, because in the present posture, defense spending is very high, in fact with the impending threat it’s going to be billions higher undoubtedly, the airforce advises me that there is a stake in this decision to the airforce $100,000,000 a year in taxes.

So conversely if the federal government has stake in its airforce program a $100,000,000 a year on this decision, the state seeking to get that $100,000,000 will be pressing for it as they have been pressing for years and years and years and it’s a difficult question for the court, which this Court very properly said it’s a matter for Congress.

If there is immunity Congress may waive the immunity, Congress may waive this question and in fact there is before Congress now a number of bills, a very comprehensive study by Congress and another study by a presidential committee, we make reference in our brief the last page of our brief to these studies.

And that’s a difficult question.

We recognize that state government – I’m from Detroit, I want Detroit to get as much taxes as it can but —

Earl Warren:

For the other fellow?

Victor W. Klein:

What’s that sir?

Earl Warren:

But for the other fellow?

Victor W. Klein:

But as a lawyer well it’s not going to get it from Murray in any event sir.

The government is going to pay the bill, it’s not going to get it from Murray.

Felix Frankfurter:

Mr. Klein may I put to you, continue the question which you suggested a little while ago and I understood you to agree part in answer to the Chief Justice that the state or the municipality could tax the privilege of having a lease, is that right?

Didn’t I understand you to say —

Victor W. Klein:

No I didn’t quite understand.

Felix Frankfurter:

And what you differentiated it, that in this case they tax for the whole value of the property, is that right?

Victor W. Klein:

I say, as I understand that proposition that question was left open in Allegheny and I think that it opened a serious question of whether or not government property leased to a private contractor under the government’s power of ownership could be a subject of a privilege tax if measured by the extent of the privilege.

I think it’s opened a question and I think Mr. Fisher is to argue that question in the succeeding case.

Felix Frankfurter:

Well then I just leave that for him to take care of —

Victor W. Klein:

I have not gone to that part.

Felix Frankfurter:

Because if that is open, then one goes to the next step, the obvious next step, the amount of the tax is great scope of discretion to the taxing authority of the state.

Victor W. Klein:

I appreciate that sir.

That is not in this case because there is nothing leased here.

Murray is not leasing goods as it gets them.

Victor W. Klein:

Murray buys goods and makes them for a prime contractor for the government and the subcontract requires the approval of the government that government inspector is required to be at the Murray plant inspecting these goods.

Murray cannot dispose of these goods, as is suggested by counsel, without the approval of the contracting officer and the fact remains under — on this record nothing was disposed off by Murray to anyone except at the government’s direction for government use in another government contractor’s plant where they were in short supply.

Murray segregated these goods, tagged them, earmarked them by contract number, the buildings were separate where the defense work was carried out.

The goods were identified.

They were appropriated.

They were earmarked there could be no question what goods belonged to the government.

Then when the partial payment was made under the contract, title vested in the government, what kind of title?

Ansonia says beneficial ownership title.

Title because the goods were to be used by the United States when completed in the end product to what airplanes, in Ansonia ships.

The government was interested in those goods from the beginning because the reason I pointed out it wished to have control and we’ve cited cases in our brief American Boiler, Read-York and others, some involving almost identical partial payments in American Boiler title pass without any payment.

Payment is not required to vest title if two people, a buyer and seller so agree and completion is not required if they agree under their contract.

And the clause here as I say is designed to pay a contractor part of his purchase price as he goes along on a long-term contract instead of making him wait to the end of the road, but there is a distinct difference between advance payments which are loans in advance of anything being done, which the contractor must repay and partial payments, which are payments upon the purchase price which the contractor is neither obliged to pay — repay nor is he permitted to repay because the government does not wish to give up title to the goods in process.

And the only time, I think Justice Burton mentioned this vestiture clause, the only time that comes into play sir is when the contract is complete, the parts have all been delivered and there is some residual material left over of little or no value because the government ultimately wants the end products, holds the title from the beginning and goes through and gets the end product and non durable tools which have low or no value then vest in the contractor, but the goods themselves stay in the government from the beginning until final delivery and it’s only this minimal residual material which would cost the government more to move out and store and settle than to leave it there that that clause comes into operation.

William J. Brennan, Jr.:

You (Inaudible)

Victor W. Klein:

That is right sir and the history of that clause about the vesting of residual material is set forth in our brief and it appeared in the federal register and I think it clearly demonstrates that, that was the purpose.

It was more of a nuisance for the government to get these leftovers store, sell it, and whatnot than to leave it.

What happens if the contract is terminated?

Victor W. Klein:

What was that sir?

What happens if the contract is terminated?

Victor W. Klein:

If the contract is terminated before completion sir, the title of the goods is in the government all the time, but they are disposed of, the goods are disposed of, at the direction of the contracting officer not Murray.

Murray doesn’t determine the disposition of it.

The contracting officer does and the proceeds are applied upon first the partial payments theretofore made by the government to the contractor, because it’s paid 75% in one case and 90% of the other for the goods, so the proceeds are paid to the government and on termination as you well know sir, the material is virtually scraped and the government probably won’t even get enough to pay it’s partial taxes and then the contractor in turn files his termination claim with the government for the unpaid balance of his contract and in these contracts before the Court it specifies particularly, these were letter contracts pending a definitive contract, and it says if it’s terminated before the contract it would get fully paid.

Felix Frankfurter:

I think your friend on the other side were asked, I’d like to have you answer.

Victor W. Klein:

Yes sir.

Felix Frankfurter:

In case Murray should be taxable, does the tax pass on to the government?

Victor W. Klein:

I would say yes sir, it would be tax passed on to the government, but that is not determinative of the issue here.

Felix Frankfurter:

I didn’t mean it was I just want to know that.

Victor W. Klein:

I think the answer is yes, I would like to check it, but that’s my recollection.

Felix Frankfurter:

I didn’t mean to draw an inference to that.

Victor W. Klein:

No sir, that was in Allegheny and you discussed that, the mere fact if it’s a tax on the property and the property is owned by the United States and in this case its owned for its sovereign purposes to what airplanes for the military, that’s what these parts were.

Victor W. Klein:

The tax is on the property, the incidence of the tax is on the property.

The mere circumstance that the collection machinery of the tax, this ad valorem tax is against Murray, doesn’t mean that it’s a valid tax or if Murray pays it that it nonetheless not an ad valorem tax on the property, which is what you in Allegheny said, in fact in my opinion sir, your — if I read your dissent correctly there, the dissent wouldn’t apply in this situation because here is the tax is directly on the very property to which ownership of the government attaches.

Felix Frankfurter:

There is a difference, because on that — from the Pennsylvania cases apart from Justice Roberts’ expertness on the subject, the Pennsylvania laws, if that was a tax on the property, on the land of (Inaudible) enhanced by the presence on the land, etcetera.

Victor W. Klein:

That’s my reading of it sir.

Earl Warren:

Mr. Klein, could you gave me the name of that California case, you spoke of, is it in your brief?

Victor W. Klein:

It is in the brief Douglas Aircraft versus Byram, it’s at page 29 and 64 of our briefs.

Earl Warren:

Oh yes, thank you.

William J. Brennan, Jr.:

Mr. Klein is that tax rate a constant?

Victor W. Klein:

Well it varies according to the total assessment in the —

William J. Brennan, Jr.:

In other words it’s arrived at by dividing what has to be arrived at in the way of income, municipal or county as the case maybe.

Victor W. Klein:

That’s right.

William J. Brennan, Jr.:

They take the total assessment and that gives you rates, is that it?

Victor W. Klein:

Correct sir.

William J. Brennan, Jr.:

So that — actually the assessments then, if they include the value of this property, have their reflection in the tax rate applied.

Victor W. Klein:

That is correct sir.

William J. Brennan, Jr.:

Well I’ve always understood that was an ad valorem tax?

Victor W. Klein:

Well, Michigan courts have so stated and we’ve cited the cases in our brief, I don’t want to take your time to go into it, but it’s always been considered and the Michigan Court has so considered a tax on the property, and even in the (Inaudible) case sir, the question there is one of collection not of whether the incidence of the tax is upon the person.

They are talking about terms of collection in that (Inaudible) case and we cite several other cases in our brief where the Court clearly says it’s a tax upon the property and I think you were satisfied when you checked those cases.

May I point out that counsel for the city and county two days ago filed a very voluminous reply brief, some of the statements of which I believe are substantially in error.

If we would be permitted a ten-page brief within the week I would be very grateful, I think it would be helpful to you sir.

Just filed —

Earl Warren:

I assume you are going to be that long you better get in sooner than that.

Victor W. Klein:

We’ll get it in sooner.

Earl Warren:

You better get it in this week.

Victor W. Klein:

All right, we will do that sir.

Earl Warren:

Mr. Fisher.

Roger D. Fisher:

Mr. Chief Justice may it please the Court?

The United States intervenes in this suit both because of its financial interest in the particular case, because the property involved we believe belongs to the United States and was immune taxation.

It’s been estimated that about $4 billion worth of parts, materials, of goods and process are outstanding owned by the United States under the terms comparable to these at the air force and other —

Earl Warren:

What’s that about again please, I missed it?

Roger D. Fisher:

It has been estimated that there are about $4 billion worth of personal property consisting of defense procurement supplies which belonged to the United States under clauses similar to that here in litigation, that’s all the armed services, the figures obviously fluctuating at all times, that’s the rough figure which is given in the brief and the authority for it decided in the municipal brief amicus filed today or filed yesterday.

Felix Frankfurter:

You mean that it might infer that whatever local taxation is involved would be passed on to the government?

Roger D. Fisher:

Under the circumstances of this case on tax day it was a cost reimbursement contract if terminated.

If the tax has been paid on tax assessment day with the contracts then outstanding, the full cost would be borne by the United States.

The contract was later changed as contemplated to a fixed price contract with price redeterminations forward and backward based on cost experience.

There has been a price redetermination based on the fact Detroit and Wayne County collected this tax.

There were a number of elements of cost which Murray came to the United States and said look our costs are higher in these respects then we estimated and we think the price ought to go up so much, the United States agreed on a middle price, so certainly some of the tax burden is being borne by the United States.

Felix Frankfurter:

And that would be true at least as to some of the taxes assessable against the $4 billion outstanding?

Roger D. Fisher:

That would be true as to most presumably of the tax assessed.

There are other —

Earl Warren:

Mr. Fisher may I – may I — do you happen to know how long the air force has been doing that?

Roger D. Fisher:

As I understand since in the Second World War —

Earl Warren:

Is this new since memory, current memory?

Roger D. Fisher:

It was devised during the Second World —

Earl Warren:

Devised, but —

Roger D. Fisher:

Put into effect if I’m correct.

Was it current?

Roger D. Fisher:

During the Second World War this clause was in use.

Earl Warren:

Rather uniformly?

Roger D. Fisher:

Increasingly, so —

Earl Warren:

Or did they do like they did in the (Inaudible) just in that particular case the contracting officer as I understood it made that contract.

It wasn’t — that wasn’t the contract in general use in air force was it?

Roger D. Fisher:

I think the (Inaudible) one did reflect a policy change following King and Booth (Inaudible)

Earl Warren:

Yes, apparently.

Roger D. Fisher:

And the present clause now has provided for in the regulations.

There are — appellant here make four, in substance what are four arguments.

First they argued that this not a property tax.

I don’t want to quibble about words, the Michigan statute which authorized the tax says that property shall be subject to taxation, which is the language authorizing tax and the tax here not only measured for the property but because of the property.

I want to meet a point you raised Mr. Justice Frankfurter on the privilege of use.

Most of the machine tools used by Murray in this — all of the machines tools I believe used by Murray in this production are owned by the United States.

Roger D. Fisher:

These are being beneficially used by Murray.

They are not being taxed.

There is no question, Michigan tax does not apply to that.

Tools which Murray made, durable tools which Murray made for this job, in their plant, titles passed to the United States, they’re completed, they have been inspected and accepted, they are being used in the plant.

They are not been taxed by Michigan.

This tax is not an enjoyment of government property tax.

It could not be so construed.

It’s a tax because of property in their possession.

The same tax would be imposed on a warehouse full of government owned equipment if they thought the ownership was not really in the United States.

The question here under the — as explained in the Court below and as the Michigan statute bears on it, is are these goods United States goods or not and that Michigan would concede that if goods “Belong to the United States”, their tax does not apply.

They are so recognized with regard to balance machinery.

Their second argument is that this Court should overrule a long line of cases —

Felix Frankfurter:

That last statement looks suspicious in light that question of state — construction of a state statutes?

Roger D. Fisher:

I think that the tax is —

Felix Frankfurter:

You said that if Michigan as a matter of state construction says that which belongs to the United States is not taxed, that this construction of the statute, is that right and then they say — so the question here really is whether, whatever belonged — whether this belonged to be United States, is that —

Roger D. Fisher:

I think that —

Felix Frankfurter:

Is that what (Inaudible)

Roger D. Fisher:

I think the question is whether this property is such an interest in the United States, that the United States has such ownership interest in this property, that Michigan under the — this is like the post office, this is like other government owned property in the possession of individuals who were being paid, the post master gets paid, their tax could be assessed on the post master’s private capacity, because they are using the post office building, he is doing the same sort of thing that Murray is here making goods, doing work, doing the government’s business with government property.

Felix Frankfurter:

Well did the Michigan — oh this is not.

In Michigan did they give that conclusion, namely if it belongs a county tax, as a matter of compulsion, constitutional compulsion, was that their construction of the state law?

Roger D. Fisher:

I think it’s their constructional constitutional —

Felix Frankfurter:

All right.

Roger D. Fisher:

— compulsion I would suppose, but they do not —

William J. Brennan, Jr.:

Mr. Fisher whether there is an exemption provision in the Michigan Law which exempts property belonging to the United States, there usually is I think in most of these ad valorem tax laws.

Roger D. Fisher:

I do not know, Mr. Taylor is there a provision in your —

Hobart Taylor, Jr.:

(Inaudible)

Roger D. Fisher:

I’m advised as to real property there is, as to personal property is it not.

William J. Brennan, Jr.:

There is not.

Roger D. Fisher:

There is not.

The tax here is because of the property, it’s not because of anything else relating to it, and that’s when I say it’s not a question of what Michigan says, it’s what they do, and this tax is because of property, if there is some property there they tax it, and they are not taxing the privilege of beneficial use, they don’t see whether you’re enjoying the property or whether you’re merely having a storage, these goods in process were not being enjoyed, they were being worked on.