Citations
- 50 Cal. App. 4th 1703
Full opinion text
Opinion
VOGEL (C. S.), P. J.
Introduction
TRW Space and Defense Sector, a unit of TRW, Inc., and TRW Components International, Inc. (collectively, TRW), brought an action to recover ad valorem personal property taxes assessed and collected by the County of Los Angeles (County) for the tax years 1986 through 1989. The parties filed cross-motions for summary judgment. The trial court granted TRW’s motion and denied County’s motion. County appeals from the judgment awarding TRW a refund in excess of $2.1 million.
The primary issues presented by this appeal are County’s power to tax a federal contractor such as TRW and whether the personal property which was the subject of County’s assessment was the property of TRW or the property of the United States of America. If it is the latter, the property is immune from taxation. A minor issue raised by County is whether TRW should have exhausted its administrative remedies before the Los Angeles County Assessment Appeals Board before filing its tax refund suit in the superior court.
We reverse. We find that the property is properly subject to local taxation because it belongs to TRW, not the federal government. We also find that TRW was not required to first file its claim with the Los Angeles County Assessment Appeals Board.
Factual and Procedural Background
TRW owns and operates defense and research facilities in Los Angeles County. The principal business conducted at these facilities is the performance of contracts with agencies and departments of the United States of America. The contracts involve the design and delivery of space and defense equipment and related services.
The property which TRW claims is immune from taxation includes consumable supplies and material (paper, pencils, office supplies, toilet paper, janitorial supplies, and TRW stationery) and low value office and plant equipment purchased for less than $1,000 (such as cabinets, desks, and chairs). For sake of simplicity, we will refer to these as the overhead property. TRW purchases these items on a recurring basis and usually in bulk. The overhead property at issue here is carried on TRW’s books in segregated overhead accounts and allocated proportionately over all of TRW’s government contracts.
TRW’s government contracts fall into two categories. The first is a cost-reimbursement contract and the second is a fixed-price contract.
Under a cost-reimbursement contract, the government reimburses TRW for all costs necessarily incurred in the performance of the contract, plus an amount in excess of incurred costs (the fee). The costs are billed to the government when they are incurred.
Under the fixed-price contracts, TRW is paid a fixed amount for the service or the product which is the subject of the contract. Progress billings are issued during the performance of the fixed-price contracts based on a percentage of the costs incurred. About 75 percent of TRW’s government contracts are cost-reimbursement contracts and the remainder are fixed-price contracts.
TRW’s government contract work is subject to various federal regulations, including provisions of the Federal Acquisition Regulation (FAR), 48 Code of Federal Regulations, chapters 1-2 (1995), and the United States Government Cost Accounting Standards.
FAR has specific provisions for the passage of title of the product and its components to the federal government. These provisions are the predicate for TRW’s fundamental contention that it has no taxable interest in the personal property assessed by County because that property belongs to the federal government, thereby rendering it immune from local taxation.
In the trial court proceedings, the parties did not produce copies of any of the contracts. Instead, the parties proceeded on the assumption that pursuant to various sections of FAR, particular title provisions were inserted into the contracts.
In TRW’s complaint for refund of property taxes, it alleged that its cost-reimbursement contracts contained the title provision found in FAR section 52.245-5(c) and that its fixed-price contracts contained the title provision found in FAR section 52.232-16(d), and that the legal effect of the inclusions of these provisions was to immediately vest title to the overhead property in the federal government. We now set forth the text of those provisions.
FAR section 52.245-5(c), the title clause used in the cost-reimbursement contracts, provides as follows: “Title. (1) The Government shall retain title to all Government-furnished property. HQ (2) Title to all property purchased by the Contractor for which the Contractor is entitled to be reimbursed as a direct item of cost under this contract shall pass to and vest in the Government upon the vendor’s delivery of such property. [^0(3) Title to all other property, the cost of which is reimbursable to the Contractor, shall pass to and vest in the Government upon— [H (i) Issuance of the property for use in contract performance; ['JO (ii) Commencement of processing of the property [f]or use in contract performance; or [