Moses Lake Homes, Inc. v. Grant County

PETITIONER:Moses Lake Homes, Inc.
RESPONDENT:Grant County
LOCATION:Convertible Top Replacement Co.

DOCKET NO.: 212
DECIDED BY: Warren Court (1958-1962)
LOWER COURT: United States Court of Appeals for the Ninth Circuit

CITATION: 365 US 744 (1961)
ARGUED: Mar 23, 1961
DECIDED: Apr 17, 1961

Facts of the case

Question

Audio Transcription for Oral Argument – March 23, 1961 in Moses Lake Homes, Inc. v. Grant County

Earl Warren:

Number — Number 212, Moses Lake Homes, Incorporated, et al., Petitioners, versus Grant County.

Lyle L. Iverson:

May it please the Court.

Earl Warren:

Mr. Iverson.

Lyle L. Iverson:

This is an action involving an application by Grant County, Washington to impress upon the deposit of estimated compensation in a condemnation case alleged tax liabilities or taxes against a leasehold.

Now, all that we have in the condemnation case is a condemnation of a leasehold, not a condemnation of buildings.

This case involves what is known as a Wherry housing project.

Felix Frankfurter:

What it — I’m sorry.

Lyle L. Iverson:

A Wherry housing project.

It arises under Title VIII of the Federal Housing Act and a Wherry Housing Act — Wherry housing project operates this way.

On a military reservation, a lease is given for a period of 75 years and the — the sponsor that is — that’s the terminology, the sponsor corporation erects the buildings and then leases them to tenants assigned by the military commander for that period of 75 years.

He is financed by an FHA guaranteed loan.

Now, in this case, Grant County levied taxes against this property.

In their listing of the property, they designated it as buildings on the military reservation.

Actually, the Circuit Court of Appeals has had some discussion of this question, and the Court has held that notwithstanding that they designated buildings, that they were really trying to tax the leasehold.

But the Court, the Circuit Court held that this — some of this —

Felix Frankfurter:

Would you mind telling in greater detail the effect, namely, what it is before you get to the holding, what it is and who is — what it is that was taxed against whom it was taxed?

Lyle L. Iverson:

Yes.

We have —

Felix Frankfurter:

Financial relations and so forth.

Have you —

Lyle L. Iverson:

If the Court please.

We have three corporations here, each which has a separate Wherry housing project, and they have these 75-year leases.

Grant County, Washington in — in which Moses Lake — Larson Air Force Base is located, undertook to assess personal property taxes against these buildings.

Now, by the terms of the lease, which rendered for 75 years, buildings immediately upon construction became the property of the Federal Government, and Grant County undertook to assess the leasehold upon the basis.

Felix Frankfurter:

It’s 75-year old —

Lyle L. Iverson:

That’s correct, Your Honor —

Felix Frankfurter:

— leasehold.

Lyle L. Iverson:

Upon the basis of the valuation of the buildings.

Now, we have approximately $6 million in mortgages outstanding against the property.

They assessed the property at a figure which if we disregard equalization figures and so forth would — would put these — put the market value at approximately $2 million.

Lyle L. Iverson:

Now, the Government, in condemning this property, paid in as estimated compensation, $253,000.

Grant County sought to obtain actually more money than the total amount paid in by the Federal Government.

The lower court, in this case — the application was made by Grant County to impress their tax lien against this estimated compensation on the ground that the — that a lien rested against the leasehold, therefore, the estimated compensation being substituted for the lien and became substituted for the estimated compensation.

The lower court found and the Circuit Court of Appeals has concurred in the finding that the proceeding followed by Grant County in this matter was discriminatory against a contractor with the Federal Government.

Now, this is the reason for that holding in Washington.

We have a statute that provides, this is R.C.W. 84.40.030, it’s cited in my brief and it’s in the appendix, “Taxable leasehold estate shall be valued at such price as they would bring at a fair voluntary sale for cash.”

Now, you know of taxable leaseholds.

They’re especially — they’re especially covered by statute.

In a long line of cases in Washington known as the Metropolitan Building Company cases, the Washington Supreme Court has construed that statute with respect to all leaseholds held from the State.

And in those cases, which involved state-owned land in the heart of Seattle under 50-year leases, it was sought by the public authorities to tax them upon the basis of the value of the improvements on the property rather than the value of the leasehold as someone would buy it and let someone would pay for it, and that — those contentions were rejected four times by the Washington Supreme Court.

And I set out the cases in my brief.

And the Court held in that case that in Washington, in taxing a leasehold, the leasehold must be taxed on its — on a reasonable market value what a willing seller — what a willing — what a willing seller could obtain from a willing buyer considering the burdens and benefits.

And the Court said that a purchaser would take it (Inaudible).

And that if there was a large mortgage against the property that that mortgage would be taken into consideration, and the method of taxing all leaseholds in Washington, all other leaseholds in Washington, is well-established and that is what would a willing buyer to take — pay to a willing seller, considering the encumbrances, the burdens and benefits.

Now, when we got to this matter of the Wherry housing projects, it had considerable litigation over this and the first of these — these three corporations to be organized were Moses Lake Homes, Inc. and Moses Lake Homes, Inc. obtained, in 1954, an injunction against the efforts of the County to levy upon the buildings as they were — that’s what they were listings, the buildings which were, by the terms of the lease, Government property.

And that injunction remained in effect until 1957.

And so or — the taxes levied in 1955, 1956, 1957 were all held up the administrative proceedings while that injunction was in effect.

Then about that time, this Court decided a case served as the warehousing case, Offutt Housing Company versus Sarpy County, which is cited — citations in the brief, in which this Court held that in Nebraska, a Wherry housing project could be taxed at the value of the — of improvements on the property and the Washington court, having this before it, rather blindly followed that decision of this Court and said that they were bound by the — for the sake of uniformity and so forth they would follow the decision of this Court and, therefore, a Wherry Act housing project in Washington in this case would be taxed at the basis, that was the leasehold, will be taxed on the basis of the value of the improvements.

Now, that might have been alright in Nebraska, but in Washington, that is precisely what the Washington Supreme Court, in the Metropolitan Building Company cases, had repeatedly held could not be done in one of the cases which we cite, which we quote in it.

The Washington court held in so many words that it was not permissible for the public authorities to take the value of the improvements and use those as the sole basis for determining the tax liability.

Now, in effect, what has happened has been that for Wherry housing projects only, the leasehold is taxed not as the statute says on its market value but it’s taxed on the value of the improvements.

Now, you see what kind of difference that makes.

That is the difference between whether we take about $7 million worth of houses here and tax or whether we take our interest in them, which the Government estimated at $253,000.

Now, in counsel’s brief, they say they actually did not ignore the burdens on this leasehold.

Now, this is the first time they’ve said that.

And in the court below, in answer to admissions, which we pointed out in our reply brief, they specifically admitted that they did not take into consideration the $6 million worth of mortgages.

It is the difference between taxing the equity of the lessee and the property and taxing the property itself.

If you count up what they have actually assessed, if we — I think any court in Washington would take judicial notice of the fact that equalized values are far or less than the 50% they — that they seek to get at but if we disregard that and get simply to the — to the value that they have put on it, they have put a value of some $2 million on this property.

Now, we’re being condemned.

We’d be awfully happy to get the Government pass $2 million worth.

Lyle L. Iverson:

It just isn’t that much but nobody’s going to pass that because that just isn’t what our — what our equity is worth but that’s what we’ve taxed for.

Felix Frankfurter:

Mr. Iverson, your complaining here that this Wherry’s interest attached at — the base of the rate, the base rate of Wherry property is higher than the base rate of other taxable properties in Washington, isn’t it?

Lyle L. Iverson:

Different and higher.

Yes, sir.

Felix Frankfurter:

Now, since your Supreme Court interpreted the Offutt decisions the way it did, has there been any decision by your court that they wouldn’t be equally applied at measuring throughout the non-Wherry interests?

Lyle L. Iverson:

No, there has not, Your Honor.

Felix Frankfurter:

Well, how can we tell that they haven’t changed their mind and therefore, you’ve been treated, and tomorrow they (Inaudible)

Lyle L. Iverson:

We have —

Felix Frankfurter:

What you’re saying is that judged by the prior rulings of your statement reenforce the application for the — the basis of taxation in this assessment of this case operates discriminatorily.

Is that what you say?

Lyle L. Iverson:

The Court did not —

Felix Frankfurter:

But non (Inaudible) that today, they wouldn’t measure it by the same equal hand as non-Wherry property?

Lyle L. Iverson:

The Court did not undertake to reverse any of those cases.

Felix Frankfurter:

But it doesn’t have to.

Lyle L. Iverson:

The Court has, in fairly recent times, reaffirmed that long line of decisions.

Felix Frankfurter:

What did they do with that in the case in which they applied Offutt?

They say as to we now have the green light from the Supreme Court but as to Wherry taxation, we can — we can dodge them all or we can in local taxation.

Did they say that?

Lyle L. Iverson:

Well, I think those aren’t exactly the words, Your Honor, but I think that’s the effect of it.

Felix Frankfurter:

Well, I don’t mean the effect.

Lyle L. Iverson:

I think what —

Felix Frankfurter:

But that maybe —

Lyle L. Iverson:

About what they said was that we are going to make this uniform throughout the country, and we feel that we are guided by the United States Supreme Court on this.

Now, what they’ve failed to do was to compare it with what they were doing to everything else and in addition to that case, to — to all that long line of cases, we also have a statute in Washington which has not been repealed or modified, and that statute says that the leasehold shall be at its reasonable — at its market value on a fair sale for cash.

Felix Frankfurter:

But you — you candidly said a minute ago that it’s applied to the same standard for non-Wherry property you couldn’t make a claim of discrimination.

Lyle L. Iverson:

I think that’s right but I don’t think there’s any question in the world that they never have and that nobody has contended that they’re going to.

But —

Hugo L. Black:

Did they here?

Lyle L. Iverson:

Here, they certainly did.

Here, they applied a wholly different standard in — in a Wherry Act case which has come since this one.

Lyle L. Iverson:

Since — the Moses Lake case was there, second case involving Spokane County Air Base housing, the Air Base Housing case which is cited in the briefs here.

They again applied this discriminatory method insofar as Wherry Housing Act cases.

Felix Frankfurter:

But this isn’t — this isn’t (Inaudible)

Lyle L. Iverson:

The ruling of our —

Felix Frankfurter:

What we have here is the Ninth Circuit case, haven’t we?

Lyle L. Iverson:

That’s what we’ve taken in this effort.

Now, both the Ninth Circuit, Your Honor, and the — the lower court found, as a matter of fact, that Washington did in fact discriminate against the Wherry Act projects.

Now, you got two courts below have decided that and under ordinary rules, where two courts below have conferred in that.

Felix Frankfurter:

Where is that?

Where is that, Mr. Iverson?

Where do they say that?

And do they justify it on the ground you can do this to Wherry but not to other people?

Lyle L. Iverson:

That’s right.

Those are the findings.

Those are the specific findings —

Felix Frankfurter:

Where are they?

Lyle L. Iverson:

— Your Honor.

The — the — let’s see if I can get the — the reference here immediately.

Felix Frankfurter:

What you’re saying is that this decision said in the light of Offutt, each State — that the interest of national uniformity that the Wherry Act permits this discrimination.

And that’s what you’re saying.

That’s what you say the Court held, is that it?

Lyle L. Iverson:

Well, I don’t think the Court ever said that.

The Court didn’t quite come to that point.

The Court just said that in this case because of the — of the Offutt case, we’re going to hold it that way.

And it violated — it’s contrary to the Washington statute which has been uniformally applied and all other cases and it’s contrary to all of the decisions of our Court —

Felix Frankfurter:

I’m going to give you — I’ve —

Lyle L. Iverson:

— in all of the cases.

Felix Frankfurter:

— I’ve said what I said to give you a time to point us to that finding.

(Voice Overlap) —

John M. Harlan II:

I would like to ask you a question.

John M. Harlan II:

Do you think any of those questions are here under the limitations of the Wherry Act?

Lyle L. Iverson:

Well, I think it is a matter —

John M. Harlan II:

It’s limited to one question.

Lyle L. Iverson:

— I think it is — as the matter comes up on the — on the writ, it is assumed that the Circuit Court of Appeals was correct in making its finding that the — that the discrimination did exist.

Felix Frankfurter:

Well, but if we — it turns out that the —

John M. Harlan II:

Page 370 of the record.

Felix Frankfurter:

— if we made — if we brought in a question that turns out to be abstract, you don’t have to decide that aspect, don’t you?

Lyle L. Iverson:

No.

I think we don’t have an abstract question here.

The —

Felix Frankfurter:

well, I didn’t say we have, I say if we have brought in abstract questions which we don’t have to decide in this (Inaudible).

Lyle L. Iverson:

The — the — on page 354 of the record, the Court said, this is the Circuit Court, the trial court’s further finding that a different method was used in (Inaudible) the Wherry Act leaseholds here and question is also correct likewise to be sustained as the Court’s finding that the method used in assessing the Moses Lake leasehold resulted in a higher tax and would have been true in the case of a non-Wherry Act leasehold.

And then they go on in the footnote to say the Moses Lake leasehold was heavily encumbered by a mortgage.

Amortization of this indebtedness was not taken into account in assessing the leasehold.

It was only the value of the physical improvement was considered but has the valuation of the leasehold been measured by its market value considered in the lights of its burdens and benefits, the necessity of amortizing the mortgage would have been taken into account, citing some cases, had been taken into account the assessed value for 1958 and therefore, the levied tax would have been substantially lower, but we do not know how much lower.

So both the District Court and the Circuit Court has specifically found the question of — of discrimination.

Now, that leads us to — to where we are.

Here, for the first time —

John M. Harlan II:

May I interrupt you again?

What do you consider under this question, it appears on 370 — page 370 of the record which the only thing we brought out what do you consider was involved in the issue that we have to decide?

Lyle L. Iverson:

The fact that now, an application has made to a federal court — to — and its processes to collect a discriminatory tax which discriminates against the Federal Government.

Now, this is a matter which is just inherit in courts, but they do not assist the violation of the laws of their own sovereignty.

This Court in that case, Philips Chemical Company versus Dumas School District, which is cited here, has not too long ago, very explicitly reaffirm the long-standing rule that a State, in taxing those who deal with the Federal Government, may not discriminate against them and pick them out for special adverse treatment.

And that is what has occurred here.

So that the — this Court is now being — the — the federal courts are now being called upon in this condemnation procedure to assist the County in collecting from the — from this estimated compensation, this discriminatory tax.

Now, it had the theory upon which — the County proceedings, apparently is that because of the fact that the leaseholds are for a period of 75 years, they will outlast the — the leaseholds will outlast the buildings.

In other words, there was no such findings that, in this case, as a matter of fact, the Court in its — in its oral opinion indicated that since the — the contract called for this maintenance reserves and replacements that this would be maintained on to the end of the term.

So that there has — there has been no decision that there is any conversion of this property from a leasehold to ownership.

And in Washington, we have a case which we’ve cited in here which holds that even a lease for 999 years doesn’t constitute ownership.

And if it be considered that the County is claiming this tax against the physical buildings, then I don’t think they have any claim against the — the positive estimated compensation because it is not the physical buildings that the Government is condemning.

Lyle L. Iverson:

What the Government is condemning here is the leasehold, and this is compensation for the leasehold.

So —

Hugo L. Black:

May I ask you if you could state very briefly what would happen to your client if this case is dismissed?

Lyle L. Iverson:

Well —

Hugo L. Black:

The question whether it’s raised.

What I want to know, what happens to your client in this case?

Lyle L. Iverson:

What happens to my client?

Well, I suppose that if it were dismissed, the County would start over in trying to collect these taxes but they would have to do it on a basis that would be the same as they would collect other tax — taxes on other leaseholds in the State.

They would — other words — in other words, they would have to follow the statute and assess and — and determine this on the basis of what the lease could be sold for.

Hugo L. Black:

You mean that this case was decided against it?

Lyle L. Iverson:

Oh, no.

This case was decided against us, then we pay the taxes.

Hugo L. Black:

What tax now do you pay?

Lyle L. Iverson:

We — we would pay the taxes for 1955, 1956 and 1957.

Hugo L. Black:

How much is this?

Lyle L. Iverson:

That runs to about $90,000 roughly, yes.

Hugo L. Black:

What — what would it be if they had assessed you on the basis that they assess other people who do not apply leaseholds (Voice Overlap) —

Lyle L. Iverson:

Had they assessed us on that basis it, probably, would — would not run over about $10,000 because our — our property, our actual value, our actual equity is — is pretty small in here.

Hugo L. Black:

If I understand your claim, is it this, that in — in the State of Washington, they assess only the equitable value to some —

Lyle L. Iverson:

Of a leasehold.

Hugo L. Black:

Yes, of a leasehold.

Lyle L. Iverson:

That’s — that’s correct.

Of a leasehold.

Hugo L. Black:

I understood.

Lyle L. Iverson:

Everyone else besides Wherry households — Wherry leaseholders in assessing a lease.

They assess the lease with its burdens and benefits, that is what a reasonable buyer would pay to a reasonable seller considering the mortgage.

Hugo L. Black:

That is the value less the mortgage.

Lyle L. Iverson:

That’s right.

Hugo L. Black:

What is the mortgage?

Lyle L. Iverson:

The value?

Hugo L. Black:

Yes.

Lyle L. Iverson:

About $6 million.

Hugo L. Black:

How much?

Lyle L. Iverson:

About $6 million.

Hugo L. Black:

And what’s the —

Lyle L. Iverson:

It’s about —

Hugo L. Black:

— what’s the assess valuation that Washington (Voice Overlap) —

Lyle L. Iverson:

The assessed valuation that they’ve actually put on here is about, you see, they assessed a 50% evaluation, so that would make about $2 million of what they have actually put on here.

I want to save about five minutes of my time.

Earl Warren:

Mr. Klasen.

Paul A. Klasen, Jr.:

Mr. Chief Justice and members of the —

Felix Frankfurter:

If you please, would you mind stating at the outset whether you challenge or agree with Mr. Iverson that this one non-Wherry property, exactly the same situation, there would be a different standard, a different basis on ratings against (Inaudible)

Paul A. Klasen, Jr.:

I disagree with Mr. Iverson.

And the — a — a different standard is not applied in the State of Washington and the general rule was announced by the Moses Lake Homes versus Grant County at 51 Wash.2d.

The —

Hugo L. Black:

Was that the position you took in the Court of Appeals?

Paul A. Klasen, Jr.:

Yes, Your Honor.

Hugo L. Black:

In other words, you deny that they decided this on the right bench.

You denied that there’s a discrimination which they said there was.

Paul A. Klasen, Jr.:

That’s right, Your Honor.

We denied there was any discrimination —

Hugo L. Black:

I’m not talking about that the — I hardly said there was.

You deny that the — there was a discrimination which the Court of Appeals approved.

Do you not or do you now?

Did they not say that there was this discrimination?

Paul A. Klasen, Jr.:

The court below merely stated that a different method of valuation was used for Wherry housing, and that they did not say that in such in dollars and cents, there was any discrimination.

Hugo L. Black:

I’m not talking about dollars and cents but didn’t they say that the one you took account of the equitable ownership and the other you didn’t?

Paul A. Klasen, Jr.:

That’s right.

I did.

Hugo L. Black:

Is that true?

Hugo L. Black:

Did you say it was truth before — in the Court of Appeals?

Paul A. Klasen, Jr.:

No, we did not.

Hugo L. Black:

You did not.

Paul A. Klasen, Jr.:

Well —

Hugo L. Black:

But why did they decide it this way if you deny that and the others asserted it?

Paul A. Klasen, Jr.:

I cannot explain the reasoning of the Circuit Court —

Felix Frankfurter:

That is you —

Paul A. Klasen, Jr.:

— under the —

Felix Frankfurter:

— you want to — of course, you got a judgment in your favor.

And I am answering to your answer to Justice Black’s question to mean that you’re going to defend this judgment on grounds other than those on which the Court gave you the judgment.

Paul A. Klasen, Jr.:

Yes, Your Honor.

Felix Frankfurter:

Alright.

Hugo L. Black:

Well, are you going to defend it on the ground as different to those you stated to that Court?

Paul A. Klasen, Jr.:

No.

Hugo L. Black:

You have your briefs here that you had in that court?

Paul A. Klasen, Jr.:

They’re very similar, the same articles — I — I don’t (Voice Overlap) —

Hugo L. Black:

Can you — can you get the briefs that were in the Court of Appeals?

Paul A. Klasen, Jr.:

Yes, we can.

Hugo L. Black:

I cannot understand how they possibly could decide this case if they did, if you had presented the argument you’re now presenting.

Paul A. Klasen, Jr.:

Well, it appears to Grant County that the Court merely on its — had so to speak on — on the res judicata issue and since that would apply, they went on to the other matter.

They did not discuss the arguments that we raised that the same arguments that were used in the Offutt Housing cases that you can carry, at least, a part to look at the practical effect of the lease rather than follow the mere designation of lessee or lessor.

Hugo L. Black:

Was there any —

Felix Frankfurter:

Were —

Hugo L. Black:

Excuse me.

Felix Frankfurter:

I beg your pardon.

Hugo L. Black:

Was there any evidence for them in any court to show what was the basis on which you imposed this in connection with Wherry housing? What was the basis on which you imposed if you claim this tax?

Are you assessing the entire, so far as they’re concerned, are you assessing as though there were — as they own that, which they have conveyed by mortgage interest to somebody else?

Paul A. Klasen, Jr.:

Generally speaking, that is right, Your Honor.

The — under the —

Hugo L. Black:

You do that for homeowners?

Paul A. Klasen, Jr.:

Yes.

Hugo L. Black:

You do it for everybody.

Paul A. Klasen, Jr.:

Yes.

Hugo L. Black:

Of course, if that’s — that’s true I’m wondering why the Court decided this.

Paul A. Klasen, Jr.:

That’s what I don’t understand.

Charles E. Whittaker:

Do you mean — do you mean to say, if I own a house in a lot in your State, then it’s subject to mortgage now in fee that your assessor will deduct an amount of the outstanding mortgage in the assessment?

Paul A. Klasen, Jr.:

No, he will not.

Charles E. Whittaker:

Well, in that, what Mr. Justice Black was asking you.

I don’t think you understood his question.

Paul A. Klasen, Jr.:

I — I did not.

That was the question that — though the assessments are never made on real property in my home on the basis of the mortgage so on the valuation of the home as if the mortgage did not exist.

Felix Frankfurter:

You mean for non-Wherry people?

Paul A. Klasen, Jr.:

Yes, from my house, that’s — that’s the way —

Felix Frankfurter:

Well now, let me ask you this question.

Justice Black, that he wasn’t interested in dollars and cents.

I like to be interested.

He had some other purpose.

Let me ask you this question.

Suppose you had the identical situation you have here, the exact interest created, the same 75-year term, the same mortgage, everything the same, except the financing was not done through the — through the Government, it was done through private lease.

Would the assessment be the same for my — the case that I put you, the hypothetical case as it was in this case.

Paul A. Klasen, Jr.:

It would be.

Hugo L. Black:

As an insurance company or bank would be precisely the same.

Paul A. Klasen, Jr.:

Yes.

Charles E. Whittaker:

Now, are you — I don’t know what you mean.

Isn’t it true that one thing is that (Inaudible) mortgages are not ordinarily deducted in determining the asset value yet because of the Offutt case, it’s — no, no, but if this were only done with respect to leasings but because of the Offutt case, we will not do it in a Wherry Act situation, isn’t that what you said?

Paul A. Klasen, Jr.:

Not exactly, Your Honor.

In the Washington case where they decided the — the leasehold or the valuation, the Court said that because the improvements did not last the link of the term of the lease and other factors that — for that — on that basis, the rule in the State of Washington is that you do not have to take into consideration the mortgage value, the mortgage against the property.

Charles E. Whittaker:

Let’s just take A, B, C.

You did have a lease, a normal lease in your State, do you ordinarily permit deduction of the mortgage against it in determining assessed valuation of it?

Paul A. Klasen, Jr.:

A normal lease, yes, where the improvements would last —

Charles E. Whittaker:

Yes.

Paul A. Klasen, Jr.:

— beyond the link of the term of the lease.

Felix Frankfurter:

Now, do you do that in a Wherry Act situation that the Ninth Circuit distinguished?

Paul A. Klasen, Jr.:

We do not want to do that in a Wherry housing because the improvements do not last in term of the lease.

The Court did not go into the distinctions at all in the Ninth Circuit.

Felix Frankfurter:

What you’re saying is the practical differences, the nature of the lease in a Wherry situation is different from the case in which your state court applied the doctrine that it applies, is that it?

Paul A. Klasen, Jr.:

That’s right.

Our State Supreme Court —

Felix Frankfurter:

I don’t know if that’s so but that’s what you’re saying, is it?

Paul A. Klasen, Jr.:

Yes, that’s right, Your Honor.

Felix Frankfurter:

That the practical difference, you’re dealing with different interest, if an incident of — of value, is that right?

Paul A. Klasen, Jr.:

That’s right, Your Honor.

William J. Brennan, Jr.:

Mr. Klasen, may I get your (Inaudible) and the judgment was to remand the District Court where we set (Inaudible)

Paul A. Klasen, Jr.:

Yes, in order to determine actually the value for (Voice Overlap) —

William J. Brennan, Jr.:

It was a — it was a remand to the United States District Court not show the taxes (Inaudible)

Paul A. Klasen, Jr.:

That’s right.

William J. Brennan, Jr.:

(Inaudible) nobody could save the opposition, of course they can —

Paul A. Klasen, Jr.:

Well — Grant County isn’t really too much concern with it because of a new section of — Section 511 of the Housing Act is going to, probably, for all practical purpose, wipe out the taxes.

William J. Brennan, Jr.:

(Inaudible)

Paul A. Klasen, Jr.:

In addition, Your Honor, the — the Court awarded Grant County some $90,000 in taxes, irrespective of — of the remand, for three years 1955, 1956 and 1957.

William J. Brennan, Jr.:

(Inaudible)

Paul A. Klasen, Jr.:

The — the Ninth — Court — Circuit Court of Appeals said that the — a different method was used but on — on the basis of res judicata that the matter was foreclosed to them.

That this —

William J. Brennan, Jr.:

(Inaudible)

Paul A. Klasen, Jr.:

Yes, Your Honor.

William J. Brennan, Jr.:

(Inaudible)

Paul A. Klasen, Jr.:

Well, it had to be for 1958 and for 1956 and 1957 for Larsonaire — Larsonaire Homes and I think 1957 for Larson Heights.

William J. Brennan, Jr.:

Do you want the United States District Court to make a valuation of property for tax purposes for the State of Washington?

Paul A. Klasen, Jr.:

I don’t know how they’re going to do it, but I would imagine they’re going to have to — go into some —

William J. Brennan, Jr.:

My question is (Inaudible)

Paul A. Klasen, Jr.:

None in particular.

No.

If the Court please, the reason we’re not objecting to it is because of the law.

The final result will mean nothing to Grant County probably.

Charles E. Whittaker:

I didn’t understand.

Paul A. Klasen, Jr.:

Well, the reason we are not objecting to the — the remanding back is because of Section 511 of the — amended the Wherry Housing Act.

Grant County probably will realize little or nothing when the case is, in fact, in the District Court for reevaluation.

Hugo L. Black:

Why?

Paul A. Klasen, Jr.:

Well, because the Secretary of the Air Force, under Section 511, has claimed that they have offset the taxes by granting services which be — would be covered under the taxes.

And therefore, since the services will exceed the taxes under the amendment of Congress, they can offset services against the tax and the Air Force comes up with services overweighed when above the tax.

Hugo L. Black:

Well, would you think it’s a moot case?

You say Grant County doesn’t expect to get a dollar because of the new statute which allows the Government to offset for services against your tax.

Paul A. Klasen, Jr.:

Well, whenever we’re optimistic, I’ll put it that way to mean but we’re not very hopeful.

Earl Warren:

Well, they didn’t offset this — this amount that you — that you’ve been awarded, then you would still owe them that much money, wouldn’t you, if —

Paul A. Klasen, Jr.:

That’s right.

The off —

Earl Warren:

— if you’re lost.

Paul A. Klasen, Jr.:

Well, the outset applied only to taxes that came on lien after 1956.

These taxes here are for taxes before the offset provision came applicable of that amount Grant County has received from the depository, I think, $50,000, and we have not yet collected the amount awarded to us in addition by the Ninth — Ninth Circuit.

Earl Warren:

But my point is, we don’t — if you don’t get credit for — for this on the — on the services that the — the Air Force has rendered to you, you’ll have to pay them in some other way, won’t you, for the same amount.

Paul A. Klasen, Jr.:

No, the —

Earl Warren:

(Voice Overlap) —

Paul A. Klasen, Jr.:

— no, we will not, Your Honor.

The —

Earl Warren:

Go ahead.

Hugo L. Black:

The statute simply provides that so far as taxes are concerned, as I gather your statute, as far as taxes are concerned, the Government can offset certain services.

Paul A. Klasen, Jr.:

That’s — United States said to Congress.

Hugo L. Black:

But they can’t collect from here except as an offset against taxes.

Paul A. Klasen, Jr.:

No, no, no, they can’t — no, they cannot go back against the County.

Hugo L. Black:

(Inaudible) with a basis fee, I think, they don’t want you to keep any taxes.

Paul A. Klasen, Jr.:

That’s right.

Hugo L. Black:

But they are not willing to make you pay for those services.

Paul A. Klasen, Jr.:

No.

Hugo L. Black:

Is that statute cited there in your brief?

Paul A. Klasen, Jr.:

The Section is 511.

It’s cited in the — in the record at Section 511 of the — it’s in the Circuit Court’s opinion, I guess, opinion to the —

Hugo L. Black:

That’s the one related to the services?

Paul A. Klasen, Jr.:

Yes, Your Honor.

It’s on the record, page 349.

Grant County’s position is based on the Offutt Housing cases.

In addition, the statute to which Circuit Court of Appeals didn’t pay too much attention to it at least as far as we can see is that personal property includes all improvements upon lands, the fee of which is vested in the United States or in the State.

And that’s the basis upon which the property was assessed as improvements upon land, the fee which is — is vested in the United States or the State of Washington.

Now, in the Offutt Housing cases, the Court has ruled that you can go be — look as to the substance, not really is the form of the lease, you can go behind the terms and look as the practical aspect and the cases of which the Wherry housing cases can be distinguished from the Metropolitan Building cases because in those cases, one, there is no — that the improvements, last way beyond the term of the lease.

The amount of compensation is entirely different.

Charles E. Whittaker:

Is it not true that the Offutt case did not involve a question of discrimination which is the attack of petitioner here?

Paul A. Klasen, Jr.:

Not — not precisely.

There was a question whether the — the taxes could be levied.

But the Nebraska tax law are similar to this Washington tax law and the very same issues are raised.

The Metropolitan Building cases were cited in briefs presented in the Offutt Housing cases.

Charles E. Whittaker:

I thought it was true that in the Offutt case, Nebraska assessed all personal property at the same basis, namely, its fair value, and it treated this Wherry Act leasehold as personal property, and there was no element of discrimination involved in that case.

Paul A. Klasen, Jr.:

It wasn’t argued as such, Your Honor.

Charles E. Whittaker:

What is res judicata in this instance?

Paul A. Klasen, Jr.:

The manner of the taxes has been determined in Moses Lake Homes versus Grant County in 51 Wash. 2d 285 in which these very taxes were upheld and the petitioner here did not see fit to seek review from this Court.

And the — as stated in Grubb versus Ohio Public Utilities that the state court, the highest court of the state land having determined the issue that they are not entitled to raise the matter.

Petitioner is not entitled to raise it again in — in another federal court.

The same question as to res judicata was in the Grubb versus Public Service of Ohio.

Charles E. Whittaker:

It will also make some questions if you raise some questions upon failure of the petitioner to exhaust his state permit with relevance to valuation, do you?

Paul A. Klasen, Jr.:

That’s right, Your Honor.

The petitioner has done nothing in relying on these taxes.

He has never listed his property as the law requires him to do.

Paul A. Klasen, Jr.:

He’s never done as in the Metropolitan cases come in and shown what the value of the property is.

In other words, he says, “You might be $10,000” but they have never said what the valuation of the property should be as —

Charles E. Whittaker:

And what does your law require to me if I owned a leasehold in your State to do with respect to taxes if an assessment was made of X dollars and I don’t like it, what do I do?

Paul A. Klasen, Jr.:

You go before the County Board of Equalization.

They have a hearing every year when the assessments were equalized.

If you don’t like the decision of the County Board, you can appeal to the State Board.

And if you don’t like the decision of the State Board, the law says, “You had to pay the tax under protest and sue to be covered.”

Charles E. Whittaker:

May I bypass those procedures?

Paul A. Klasen, Jr.:

I don’t see — those are the remedies as prescribed by law.

I know of no way in the State of Washington where it can be done.

Thank you.

Earl Warren:

Thank you.

Lyle L. Iverson:

If the Court please.

In State of Washington, there were taxes invalid, it maybe enjoined and attacked directly by statute.

Now, insofar as counsel’s argument that there was —

Charles E. Whittaker:

To be invalid simply because the valuation maybe accessible?

Lyle L. Iverson:

To be invalid, I don’t know, to be invalid only because it is discriminatory.

That’s the basis of the invalidity and the decision of the Washington Supreme Court in the Moses Lake Homes case did not involve any taxes.

That was an injunction case.

It was a preliminary matter.

And we never got down to any figures.

There were never any ascertain taxes.

This case is the first time that anybody has actually attempted to collect any taxes, so that the decision of the state court did nothing but to declare what the State voids.

And the state law as it declared it was that for Wherry housing projects in Washington, the — the — they will be taxed at the base — at the value of the improvements and for all other — all other property.

Now, I’d like to get one matter straight.

Well, some of Your Honors were — were asking about the case of a person buying property and whether his equity would take into consideration the mortgage.

We are not in that situation here.

We’re talking about a leasehold.

And in Washington, the cases are uniform and the statute has been construed and the statute has not been changed that a leasehold must be valued (Inaudible) with its burdens and benefits and that is the universal way.

There are just no — there are just no exceptions to it, and that’s why this — in the both courts below found that there was a discrimination in this case.

Lyle L. Iverson:

Now —

William O. Douglas:

Are petitioners in bankruptcy?

Lyle L. Iverson:

Oh, no.

The petitions are — they’re — they’re fully solved, and there were not many — many matter of that kind.

The — the property is simply being condemned under a general —

William O. Douglas:

I understand.

Lyle L. Iverson:

— program that the — that the Government carries on for condemnation of the — of condemning this — this Wherry Act leaseholds.

So our — our story is simply that we have not been treated as anybody else in the State is treated, and we have not been treated as anybody leasing similar properties from the State would be treated, and there are just no exceptions to that situation, and they pick out these — these people but a blind following of the — of the Offutt Housing case, which didn’t take into consideration at all the fact of discrimination.

Now, counsel says that they wouldn’t get anything if this went back.

Actually, what we’re concerned with is taxes on Moses Lake for three years which has been allowed in the sum of about $90,000, and the Court has allowed those discriminatory taxes, although finding they were discriminatory, on the basis that Section 511, which is in one of the appendixes of my brief, did not become effective until June 16th, 1956.

And the — and that — that statute said that they could not — that the State could not discriminate.

It said it had to tax on the same basis as all other taxes.

Now, it is our position that the Circuit Court was wrong because that was only declaratory of constitutional law as it already existed.

And it didn’t take any statute to say that the State couldn’t discriminate against the — against the Government’s contractors.

But even without the statute ever since McCulloch versus Maryland, it has been ruled that a State must tax those who deal with the Federal Government on the same basis of the tax (Voice Overlap) —

Hugo L. Black:

How did claim get into federal court?

Lyle L. Iverson:

The County filed a claim against the estimated compensation which —

Hugo L. Black:

County filed it in the federal court?

Lyle L. Iverson:

In the federal court, that’s correct.

Hugo L. Black:

Did they ask the Court to pass on them?

Lyle L. Iverson:

Yes, and that matter was passed upon and then under the Rule 54 (b), that matter was especially appealed.

The condemnation has not actually — the — the main condemnation has not actually been determined yet.

This is a — a side issue in the condemnation case.

And —

Charles E. Whittaker:

Mr. Iverson, is it not true that the discrimination of which you complained relates not to rate of tax but to value?

Lyle L. Iverson:

It rates — it relates to method — to method of taxation.

It isn’t a matter that we can take up before the Equalization Board because the — it has nothing to do with how they would look at it and use their judgment but it has to do with the law of Washington as interpreted by its highest court which is said that in determining this kind of a — of a tax that they shall appraise it on the basis of the — of the buildings.

And they left no room for the burdens and benefits theory, and they left no room for the application of the statutory test as to what a buyer would pay to a willing seller of the leasehold, and there has never been any determination in any Washington case to the effect that a long term lease converts the property into ownership in the Government.

Hugo L. Black:

They say — they say that you have had this adjudicated against you in the state court.

Is that true?

Lyle L. Iverson:

No, Your Honor.

That was this matter where the court or in the state court, they held that under the law of Washington, the method of determining — the method of taxing is to tax the leasehold, and they used the word “leasehold” on the basis of the value of the buildings.

That’s — that’s the very decision that brought about the discrimination.

Earl Warren:

There was some — some question about what was argued below.

Do you have the briefs?

Lyle L. Iverson:

I have our brief below.

Earl Warren:

You don’t have the other one.

You don’t have this.

Lyle L. Iverson:

I don’t.

I didn’t bring it definitely with me, Your Honor.

Earl Warren:

You — you don’t have yours?

Hugo L. Black:

I understood you to say they took a different position.

I thought your brief statute —

Lyle L. Iverson:

Well, what — what they — what they did for the first time here was to advance the proposition that there was no discrimination.

Hugo L. Black:

That was I understood.

Lyle L. Iverson:

That was admitted below, and it’s even in their — in their request for admission.

They admitted that they didn’t take into consideration the burdens and benefits.

Earl Warren:

Would you both submit your briefs, please, to the Court?

Lyle L. Iverson:

I’ll have to wait until I get back home and —

Earl Warren:

That’s alright.

Lyle L. Iverson:

— mail them.

Yes, Your Honor.

Earl Warren:

Yes.

You would.

Lyle L. Iverson:

I’ll be glad to.

Earl Warren:

Yes.

Very well.

We’ll adjourn.