Jurisdictional Statement — Inland Empire Builders, Inc. v. Washington

Supreme Court brief1964

Ask Donna

What actually matters in this document.

Text

aT eee yr pe FILED

FEB 17 1964

vo 849 JOHN F. DAVIS, CLERK

In the

Supreme Court of the United States

OcTorRER Term, 1963-4

INLAND Emprae Boripers, Inc., J. C. Borsprica

Construction Co., and McLavaauin, INc.,

Appellants,

vs.

Tre State or WasHiInaton and WriiaoraM S. Scnar-

MACHER, CLARK Sovire and A. E. HanxKrns, as the

Tax Commission of the STATE OF WASHINGTON,

Appellees.

On APPRAI FROM THE SUPREME Covert oF THR STaTE OF

W ASHINGTON

JURISDICTIONAL STATEMENT

Seta W. Morrison

ALLEN, DeGarmo & LEEpy

Attorneys for Appellants.

1308 Northern Life Tower,

Seattle, Washington 98101.

Tee AeGus Press, _ SEATTLE, WASHINGTON

No.

In the

Supreme Court of the United States

OctTorER Treo, 1963-4

Incanp Extprre Beropers, Ixc., J. ©. Borsperica

CONSTRUCTION Co., and McLacGuHutn, INc.,

Appe llants, -

; v3.

THe Strate or WasHInoton and Wriax S. Scae-

MACHER, CLARK SQUIRE and A. BF. HANKINS, as the

Tax Comission of the STATE OF WASHINGTON,

Appellees.

Qn APPEAL FROM THE SUPREME ¢ OURT OF THE STATE OF

W ASHINGTON

JURISDICTIONAL STATEMENT

Seta W. Morrison

ALLEN, DeGarwo & LEEDY

Attorne NS f vr A ppellants.

1308 Northern Life Tower.

Seattle. Washington 98101.

INDEX

Introductory Paragraph

..8

Opinion Below

Jurisdiction

Statutes Involved

Questions Presented

Statement 6f the Case

Factual Background

How the Federal Question Was Presented

The Questions Are Substantial

Appendix .\ —- Opinion of the Washington State

Supreme Court App. .A, pp. 3 to 24

Appé@ndix B—Statutes Involved — App. B, pp. 1 te 13

SOD te oe oe LO to itl

TABLE OF CASES

Alabama vo King & Boozer (1941) 314 U.S. 1, 86

L.ed. 3, 62 S.Ct. 43 mn 13

Clallam County (Wash) v. United States (1923)

263 U.S. 341, 68 L.ed. 828, 44 S.Ct. 121 9

DuPont v. State of Washington (1954), 44 Wh.

(2d) 339, 267 P.(2d 91 14,15

Easy Standard Oil v. Brans, 345 U.S. 495, 97 Led.

1174 Saou as 3

(renerol Motors Corporation v. Washington, Case

No. 115. 1963 term, United States Supreme Court 5

Green v. Eglin AFB Housing, Inc., Fla. (1958),

104 Se.(2d) 465 8. 1i

(swin, White & Prince ». Henneford, 305 U.S, 434,

83 Led. 272 3

[niand Empire Builders, Ine., et al. v. State of

Washington, et al., 162 Wash. Dee. 609, — Wn.

(2d) — 384 P.(2d) 337 ~ 2,8

James vo Dravo Construction Company, 302 U.S.

134, 42 Lied. 155 13

Kern-Limerich, Ines v. Scurlock, 347% U.S. 110.-98

L.ed. 346, 74 S.Ct. 405 3,9

* so LO APIA RE SAM ME NT RTS

” TaBie ov Cases .

; Page

Knapp Stiles v. Michigan Department of Revenue

(1963) 370 Michigan 629, 122 N.W.(2d) of2 8, 12

MeCulloch 2 ica msgs 4 Wheat. 316, 4 Led. 579,

17 U.S. 15

Railway Express Agency, tne. v. Virginia, 347 U8.

359, 98 Lied. 757 _.... 3

Silrerblatt, Inc. vo. New Vork, 5 N.Y.(2d) 635, 159

N.E.(2d) 195, cert. den. 361 U.S. 912 i4.

United States v. Livingston (E.D.. S.Ct.) 179 F.

Supp. 9; aff'd 364 U.S. 281, 4 Laed.(2d) 1719;

pet. reh. denied 364 U.S. 855, 5 Lied. (24479, 81

S.Ct. 35 ae 8,8, 14, 15

STATUTES

RCW Title 82

RCW 82.04

RaW 82.08

*REW 82.08.050 %

69 Stat. 646, 42 UuS.C. 9 1594 et seq.

28 U.S.C. * 1257 (2)

42 U.S.C. 3 1504

We Dw Ww bo

In the

Supreme Court of the United States

OcroBER TERM, 1963-4

No.

[INLAND Expree Britipers, Inc., J. C. Borspriuc

Constreetion Co., and McLavaurtr, INc.,

Appellants,

vs.

THE Strate or WasHinoton and Wiitiam S. Scnuv-

MACHER, (LARK Square and A. E. HANKINS, as the

Tax Conmnesston Of the State or WASHINGTON.

Appellees. t

(o~ APPEAL FROM THE SUPREME € OURT OF THE STATE OF

WASHINGTON

JURISDICTIONAL STATEMENT

INTRODUCTORY PARAGRAPH

Appellants appeal from the judgment of the Su-

preme Court of the State of Washington, whieh be-

came final on September 26, 1965, affirming the judg-

ment of the Superior Court of the State of Washing-

ton for Thurston County whieh held appellant con-

tractors responsible and liable for the colleetion of

sales tax on the priee of military housing constructed

under a contraet between the appellant contractors

and the United States purguant te 42 ULS.C. See. 1504.

This statement is submitted to show that the Supreme

Court of the United States has jurisdiction of this

appeal and that a substantial question is presented.

OPINION BELOW

The opinion of the majority tive Judges and the opin-

ion of the dissenting four judges of the Supreme Court

of Washimgtou is reperted in 162 Wash. Dee. 609, —

Wau. ( ld) —, 384 P.( 2d) 357. The Supreme Court opin-

ion is attached hereto as Appendix A.

JURISDICTION

a. The appellant contractors commenced an action

in the Superior Court of the State of Washington for

Thurston County to enjoin the defendant State, acting

through its Tax Conuiission, from collecting from ap-

pellants a money amount representing a consumer sales

tax which appellants were allegedly obligated to col-

lect ou the coutract price of their military housing

coustruction coutract, entered into by the Department

of. the Army and performed by appellants. The appel-

lant coutractors contended that the imposition of a

liability for failure to collect the tax coustituted an

unconstitutional applitition of the state taxing stat-

utes, Revised Code of Washington Title 82. under the

Cnited States Constitution.

b. The Superior Court decision denying appellant

coutractors relief and applying the taxing statute was

entered Judy 3. 1961, The epigon of the Supreme Court

of Washington affirming the trial court's decision, from

which this appeais taken, Was entered August 1, 1963.

Appellant's petition for re-hearing was denied on Sep-

tember 27, 1963, at which time the Supreme Court of

Washingtdn's decision beeame tinal, and Notice of Ap-

peal te this Court was served on December 18 aad tiled

on December 20, 1963.

«. The jurisdiction of the Supreme Court of the

Cuited States to hear this appeal rests upen 28 U.S.C,

Sec, 1257 (2).

4. The following cases, in which the above-entitled

Court has accepted jurisdiction in a direet appeal under

similar tax situations, are authority for accepting ju-

risdiction under a direct appeal in the present instanee :

Esso Standard Oil vo Evans, 345 US. 495, 97 Lied.

1174: Gown, White & Prince vr. Hennefyrd, 305 U.S.

454.85 Leed. 272; Aern-Limerick, Ine. +. Seurlock, 347

US. 110, 98 Lied. 46; Raliway Evpress Agency, Ine.

t. Virginia, 347 U.S. 359, 98 Lied. 757. and General

Motors Corporation v. Washington, Case No. 115. 1963

term of the United States Supreme Court.

STATUTES INVOLVED

a. The full text of the pertinent portions of Revised

Code of Washington See. 82.04 and 82.08 are set forth

in Appendix’ B. It ix the application of the tax impos-

ing portions of these statutes to the present transaction

which is contended to be unconstitutional. ,

bh, 69 Stat. 646; 42 U.S.CLA. See. 1594 ¢f seg. This

statute, Known as the Capehart Aet. constituted the

statutory autherity under which the United States

through the Department of the Army entered into the

construction contract invelved inthis case,

OLESTIONS PRESENTED

Is the application of the tax imposing provisions of

the Washington Retail Sales Tax statute, which by its

terms places the incidence of the tax on the purchaser,

to the construction of Military Housing pursnant to

a contract entered into between the appellant contrac-

tors and the United States. aeting through the De-

partmeng of the Army pursuant to authority of the

Capehart Act (69 Stat. 646 ¢f seq., 42 U.S.C. See, 1504

rf seq.), Wneonstitutional un cer the doctrine of sev-

ereign immunity as imposing a tax on

a. the United States, or

han instrumentality of the United States entitled

to eqnivalent immunity from state taxation ?

STATEMENT OF THE CASE

Factual Background

The Capehart Act (69 Stat. 646 ¢f seq., 42 T.S.C.

Sec, 1504 ef seq.) created an authority whereby the

various Military Departments of the United States

could obtain the construction of military housing for

service men by borrowing the funds from private Jend-

ing institutions and repaying the loans over a 25-year

period with funds obtained from annual appropria-

tions. This program permitted the construction of a

great deal more weilitary housing through payment by

the familiar installment plan than would have heen

possible if the construction could only be financed

from funds currentiy available in each service's an-

nual appropriations.

The housing as constructed became the property of

and was fully under the control of the Military De-

partment involved, the construction was controlled

and inspected in the same manner es other military

ecoustruction jobs, the construction contract contained

ali of the standard. provisions normally contained or

required by law to be contained in a Federal procure-

nent contract of such a nature, and the funds used to

repay the loan came from military appropriations.

The savings and loan associations were deemed the

principal source of the construction loans required.

[In order to comply with the loan security requirements

imposed by the laws of \drious states on suéh associa-

tious, requiring principally an FHA secured mortgage.

and in order te create the fiction of being a guarantor

rather than a primary debter as a device to avoid in-

cluding the borrowed amounts in the national debt

limitations and annual expenditure authorizations, the

United States required that dummy corporations oe

created (Opinion of the Attorney General of the

United States dated October 22, 1959; Tr. 0068, p. A-1).

These dummy corporations performed the function

of signing a uote to the lending institution ‘secured by

a mortgage on a nominal leasehold without right of

possession, the repayment of which was unconditiou-

ally promised by the United States, and further of

beihg a nominal signator te a construction contract also

e¥ecuted by the United States and the building con-

tractor. The stock of the corporations was at all times

during and after construction in the actnalor construe-

tive ownership of the United States, and particularly

when the construetion loan advances allegedly subject

to tax were made to the appellant contractors.

The United States had at*a time previous to the erea-

tion of the dummy corporations already entered inte

a contract with the building contractor by written ac-

ceptance of the builders’ bended bid for perform-

ance of construction of the military housing invoived.

In 1959 the appellant contractors entered into and

performed such a contract with the United States De-

partment of Army for the construction of approxi-

mately 850 units of military #otsing on the Fort Lewis

Military Reservation at Tacoma, Washington (Tr.

W05, 0006). Appellants did not collect the sales tax

on the price of the construction (Tr. 0010 F).

The Washington Retail Sales Tax Act imposes the

liability and incidence of the Retail Sales Tax on the

purchaser or buyer (ROW 82.08.050, App. B. p. 7), but

makes the seller responsible for collection of the tax

and separately liable if he fails to collect it (ROW Sec.

82.08.050, App. B. p. 7).

The Tax Commission of the State of Washington,

appellees herein, applied the Washington Sales Tax

statute to the appellants’ construetion of the Fort

Lewis Military fhousing and assessed a tax of %560,-

495.44 against thege contractors,

How the Federal Question Wa- Presented

The appellant contractors brought suit against the

Tax Commission to resist the application of the Wash-

ington Retail Sales Tax statute to them. In a pre-trial

order in the Superior Court of Thurston County,

Washington. which replaced the pleadings (Tr. 0002-

"=~

‘

M16) the plaintiff contractors contended in p agraph

3 that the sale was immune from the state €&les tax

because it was a sale to the United States, in para-

graph 4 that the Retail Sales Tax Act could not be ap-

plied to a sale to an instrumentality of the United

States, and in paragraph 6 that the application of the

tax act to the transaction involved was in violation

of the United States Constitution (Tr. 0015).

The coustitutionality under the United States Con-

stitution of impesing the tax was one of the issues of

law specified in the pre-trial order (Tr. 0016),

The trial court ruled adversely to plaintiff's con-

tentions on the constitutional issue by coneluding as a

matter of law that the sale was te the corporations, not

to the Umted States (Tr. 0037). and that the corpora-

tions were not exempt instrumentalities (Tr. 0036),

The trial court further pé jected the plaintiff’s pro-

posed conclusions of law to the contrary contained in

paragraphs Til, TV and V (Tr. 0055, 0056).

On appeal, virtually the entire argument related to

(1) whether the United States was the buyer and

therefore constitutionally exempt from the tax and

(2) whether dummy corporations were instrumentali-

ties of the United States and therefore constitution-

ally exempt. As stated in the five-Judge majority

opinion (App. Ap.4) :

“The facts upon which these appeals are predi-

eated are not in dispute. The legal issue involved

ix Whether the transactions, pursnant to which the

nilitary housing was constructed, are shielded

from state taxation by the sovereign immunity

granted to the United States government by the

federal and state conustituions,”’

The issue is further considered by the four-sudge

dissént at App. A, p. 17:

“Tt is my disagreement with the majority in the

disposition of the issue relating to whether the

mortgagor-hiulder corporation is an imstrumen-

tality of the United States that brings me to a re-

sult contrary te that of the majority in this case.”

THE QUESTIONS ARE SUBSTANTIAL

This case involves an asserted tax lability of 8560,

495.44 ageinst appellant contractors. and when eom-

bined with the companion cases on appeal of Jan Mur-

ray, et al. ve Washington and Hebb & Narodick +.

Washington (Supreme Court of Washington doeket

numbers 36226, 56228 and 36229, respectively) a total

potential lability of over one million dollars is at

issue.

The majority opinion of the Washington Supreme

Court is, in the important constitutional aspects here

involved, net only in confliet with the opmions of the

Florida Supreme Court in Green ve. Eglin AFB Hous-

ing, Inc., Fla. (1958), 104 So.(2d) 463, and of the

Michigan Supreme Court in Anapp-Stiles v. Michigan

Department of Revenue (1963) 370 Michigan 629, 122

N.W.(2d) 642, but is in direct conflict with and does

not even attempt to distinguish the most recent related

decision of the United States Supreme Court on federal

instrumeiitality as contained in its affirmance of United

States v. Livingston (B.D. S.Ct.) 179 F.Supp. 9; aff'd

$64 U.S. 281, 4 L.ed.(2d) 1719; pet. reh. denied 364

U.S. 855, 5 L.ed.(2d) 79, 81 S.Ct: 35. The genuineness

of this conflict is established by the existence of a four-

Judge dissent to the Washington decision heing ap-

pealed, which dissent is based on a view eonsistent

With, miter alia, the foregoing cited cases (App. <A,

}. 17).

The decision of the Supreme Court of Washington

tends to complicate and render uncertain the utiliza-

tio of the Capehart method of finaneing and te sub-

ject projects utilizing such method to state taxation

from whieh they are or ought to be otherwise consti-

tutionally immune.

However, notwithstanding the substantial impor-

tance of each of the foregoing considerations. hy far

the most significant and far-reaching issue, and one in-

volving a fundamental and heretofore univgfeally ae-

cepted constitutional doctrine, is whether thaoncept of

sovereign Unmunity of instrumentalities of the United

States, as set forth in BeCulloch ». Maryland, 4 Wheat.

316, 4 Led. 979, 17 U8. 159; Clallam County (Wash. )

ms, Cnited States (1923) 263 U.S. 341. 68 Led. o2s, 44

S.Ct. 121, reiterated in Aeru-Limerick, Ince. v. Scur-

lock (194+) S47 US. 110, 98 Lied. 546, 74 S.Ct. 403.

and recently coutirmed mi Conited States vr. Livingston

(E.D, S.Ct.) 179 F.Supp. 9; aff'd 364 U.S. 281, 4 Led.

(2d) 1719; pet. reh. denied 564 U.S. 855, 5 L.ed. (2d )

79, SI S.Ct. 30, will continue vo exist.

Stated differentiy, and in the factual context of the

present case, if a corporation formed for the United

States Which exerutes a note, mortgage and contract

at therdirection of and to serve the exclusive purpose

of the United States, which immediately after such

function serves no other purpose, has no assets nor

any possibility of acquiring assets or earning a profit

and whieh is &etually or construetive:y owned at all

material times by the United States—if such a corpe-

ration is not an imstrumentality of the Umited States,

itis difficult to conceive any entity whieh could be such

au instrumentality. [f no entity can qualify asa federal!

instrumentality, the sovereign immunity concept of

such an instrumentality as set forth in the foregoing

eases will atrophy and disappear, whether specifically

rejected or not.

The five-Judge majority of the Washington Supreme

(Court has as a practical matter rejected the doctrine

of sovereign iamunity of instrumentalitie+ of the

United States, and if that decisiorms permitted to stand

hy this Court, it will be hereafter universally cited to

support such rejection. The substantial question of

universal interest throughout the jurisdiction of the

Luited States then becomes whether such a preeedent

should be accepted or reversed.

An immediate reaction may be that the foregoing

contention of signileance is exaggerated but we believe

it can be demonstrated that such is not the case.

Practical limitations on the Jurisdictional State-

ment do not permut a detailed analysis of the virtually

undisputed evicence contained in the admissions of faet

in the pre-trial order, the twenty-tive exhibits and the

oral testimony at trial, to establish the uniquely singn

lar purpose and funetion of the Capehart Corporation

as an agent or instrumentahty of the United States.

However, the substantiality of such evidence js estah-

lished not only by the representations contained in the

Statement of the Case herein, but by the characteriza-

tions and conelusions relating to these corporations

contained in the following opinions:

(a) Grreen +. Eglin AFB Housing, Ine. (1958) 104

So. (2d) 463: .

2) ‘Even if we regard the AFB corpora tg ae

private enterprises, their interest in the praierty’

Is so neghgible — lessees without right of use or

possession — as to make_if entirely unrealistic to

hoid that it destroys the status of these buildings

asa part of the public works of the United States.

[tis very doubtful if these corporations should

be regarded as anything other than agencies or in

strumentalities of the Federal Government. In

Clallam County, Wash. +. Tl nited States [263 |

CLS. [541]. [44 S.Ct. 121]. 68 L.Ed. 328. the Su

preme Court held that a corporation created for

the puppose of operating a sawmill and railroad

in the promotion of Ahe war effort during the first

World War and which oa Whoilt owned by; the

United States was an ageney of tht United Shates

and that its property was, theretére, immune from

state taxation. Ln desenbing the corporation there

involved the [sre | used language peculiarly appli

cable to each AFB corporation: ‘The ineorpora

tion and formal erection of a new personality was

only for the convenience of the United States. te

carry out its ends.” The creation of the AFB cor-

porations Was only for the convenience of. the

United States to enable it to finance military con-

struction in a manner determined by the Congress

to be most conducive to the national interest.”’

(h) Knapp Stiles, Ine. e. Michigan Department of

Revenue (1963) 370 Mich. 629, 122 N.W.(2d) Ghee:

“In the instant case, as distinguished from Off-

eutt and Dayton, the lessee corporation got noth-

ing. its leasehold interest was worth nothing to it

or its stockholders, and the only ones receiving

auy benetits from the contractual arrangements

were the department for whom the housing was

built, plaintiff who presumably made some profit

from building the same, and the mortgagees who

apparently received interest on therr loans. Noth-

ing in that entire situation relieves the stark fact

that the corperation was but a sham.” :

(ce) Minority opinion im the present case at Ap-

pendix A, page 24:

‘In the instant case we should hold that, al-

though the mortgager-builder is the “‘buyer™ to

whom the retail sale of the housing project con-

struction was made, it was nothing more than an —

instrumentality of the United States govesnment ;

that it had no commercial purpese other Than for

the convenience of the United States, serving as a

meats te the end of obtaming this military hous-

ing; and that the severeign immunity of the fed-

eral government applies.”

The majority opinion below seeks to distinguish the

above caseson the ground (App. A, p. 13):

Tnthe Green and Anapp-Stiles cases, the result

Was determined by interpreting a state exemption

statute much broader than our own, for which rea-

son the cases are distinguishable. ”’

This distinction is not valid. It is true that the Michi-

, gan and Florida Sales Tax Statufes have exemption

provisions differing from the provision in the Wash-

Fad

‘ vs

ington statute, but it is alse true that the Michigan and

Florida tax statutes place the incidence of the tax on

the se//er. In boty of these states the tax could be applied

on the seller in a direct sale to the United States, but

for the exemption Provision of the statute. It is not

now fri has never been argued in this case that eeo-

nomic impact on the Crited States earned entitlement

to constitutional immunity ( Alabama v. Aing & Boozer

(1941) 314 U.S. 1, 86 Lied. 3, 62 S.Ct. 43, and James v.

Dravo Construction Company, 302 U.S. 134, 82, Led.

- 155), and it is understood that under the present law,

any seller may be taxed on sales to the United States.

by inpesing the sales tax on the seller, the states of

Florida and Michigan would have subjected the United

States to the economuc burden of the tax from which

the United States was constitutionally immune in

states such as Washington which places the incidence

of the tax on the purchaser.

Without the express” exemption extended to the

United Stafes by statutes in states such as Florida and

Michigan, such states weuld probabiy see precious

little Federal coustruction spending because of the un-

favorable tax situation. Therefore, the exemption was

enacted to furnish in such states protection to the

United States equivalent to the constitutional ummu-

nity it enjoys elsewhere. 1t may be that the exemptions

are uot identical in seope with the constitutional um-

munity, but it will be seen that any deviations do net

materially aiter the basic identity of the central issue

decided ; that the sales are to the United States througi

an ageney, or to a United States instrumentality.

The only similar tax case relating to Capehart con-

struction and. the issues here involved is Si/rerblatt,

Ine. «. New York, 5 N.Y.(2d) 635, 159 N.E.(2d) 195,

eert. den. 361 U.S. 912. The soundness of this opinion

has been seriously questioned as follows in the minor-

ity opinion below (App. A, p. 22):

An analysis of In re S. S. Stiberblatt, Ine. v.

Tas Comm, of the State of New York, 5 N.Y.(2d)

635, 159 N.E.(2d) 195, 186 N.Y.S.( 2d) 646 (1959),

cited by the majority, discloses that the opinion is

based on the erroneous premise that the Delaware

corporations were *...created for a commercial

purpose for private profit, as distinguished from

a governmental purpose.’ As heretofore stated,

consideration of the housing contract in its en-

tirety cannot support such a conelusion. The analy-

sis of the housing contract and the reasoning of the

dissent in the Suberblatt case is correct.”

Finally, one of the most significant conflicts in the

Washington Supreme Court opinion and the one with

possibly the broadest impact is the court's disregard

of United States v. Linvingston (E.D., S.Ct.) 179 F.

Supp. 9; aff'd do4 U.s. 281, 4 Leed.(2d) 1719; pet. reh.

denied 364 U.S. $55, 5 Lied. 79, 81 S.Ct. 35, and its re-

liance updn its own earlier decision in DuPont v. State

of Washington (1954), 44 Wn. (2d) 339, 267 P.(2d) 91.

The ie the two cases are virtually identical,

each InVOLVINg the management by DuPont for one

dollar per yeav of an atomic production facility for

the United Stafas. If anything. the Livingston case is

more similar to the present case because it involved

application of a sales tax statute whereas DuPont

involved application of a business and ovcupation tax

on DuPont's total expenditures at the Hanford, Wash-

ington Atomic Project.

Both eases were primarily decided on whether Du-

Pont was such an agent or instrumentality of the

United States that its activities were entitled to sev-

ereign immunity. The Washington Supreme Court held

that it was not, and cited its decision in support of the

majority opinion in the present ease. The three-judge

Federal Court in the Livingston case beld that DuPont

was such.an agent in operating the Savana River

Atomic Project, and that its purchases were immune

from taxation by the State of South Carolina. This de-

cision Was affirmed upon motion by this Court.

We submit that the decision of DuPont v. Washing-

ton is irreconcilable with and superseded by the deei-

sion in (nited States v. Livingston, and that the fail-

ure of the Washington Supreme Court to cousider this

conflict, although it was vigorously urged in both ap-

pellants’ opening (Tr. 0068) and reply briefs (Tr.

0073), creates a conflict and uncertainty in the area of

sovereign immunity that only the opinion of this Court,

after fuli, plenary presentation, can resolve.

[t is therefore urged that the present appeal involves

several aspects of an important constitutional question

of general concern, and should be granted a full! hear-

ing on briefs and oral argument.

Respectfully submitted,

SetH W. Morrison

ALLEN, DeGiarmo & LEEDY

Attorneys for Appellants.

1308 Northern Life Tower,

Seattle, Washington 98101,

APPENDICES

AanoB

Appendia A, Page 3

APPENDIX A

OPINION OF THE SUPREME COURT OF THE

STATE OF W ASHINGTON

[ Nos, 36226, 36227, 36228, 36229. En Bane. August 1,

1963)

Tan Murray ef al., Appellants, vo THE STATE OF

WASHINGTON ef a/., Responds nts,

INLAND EMpire Boripers, INc.. cf al., Appellants, v.

THE STATE OF WASHINGTON cf a/., Respondents.

Hepp & Naropick CONsTRUCTION Co. INc., ef al.,

Appellants, v. THE STATE OF WASHINGTON et al.,

Respondents.

Hepp & NaroprcK CONSTRUCTION Co. INC... Appellant, v.

THE STATE OF WASHINGTON ef al., Respondents.*

Consolidated appeais from jhdgments of the Supe-

rior Court for Thurston County, Nos. 32176, 32186,

$2195, 52196, Charles T. Wright, J.. entered July 3,

1961. Affirmed.

( Onsolidated actions to recover taxes paid under pro-

test. Plaintiffs appeal from judgments in favor of the

defendant.

Bogie, Bogle & Gates, Edward G. Dobrin, and Rich-

ard S. Sprague, for appellants Murray et ai.

Allen, DeGarmo & Lordy and Scth W. Morrison, for

appellants Inland Empire Builders, Ine.. ef a7.

Casey d& Pruzan, by Ca:! Pruzan, for appellants

Hebb & Narodick Construction Co. Ine., ef al.

The Attorne Yu (rene ral, John WwW’. Riles Y, Char f Assist-

ant, and “Timothy R. Malone, Assistant, for respond-

ents.

A; pendix A, Page 4

’

Orr, ©. J— This appeal is a consolidation of four ac-

tions brought by several contractors to recover a retail

sales tax paid under protest, and to enjoin the State

Tax Commission from assessing the sales tax in con-

nection with the construction of Capehart Act housing

at military installations in Washington. .

From adverse judgments, the contractors appeal.

The facts upon which these appeals are predicated

are not in dispute, The legal issue involved ié whether

the transactions, pursuant to which the military bhous-

ing was constructed, are shielded from state taxation by

the sovereign immunity granted to the United States

cht goss by the federal and state constitutions.

Each of the appellants was awarded contracts under

the provisions of the Capehart Act (69 Stat. 651-694 as

amended ). Since the contract provisions are identical,

we will refer only to the material portions of the docu-

ments in cause No, 36226. The procedure for the execu-

tion of a contract under the act, in so far as here ma-

terial, may be stated as follows:

The Secretary of Defense, after determining a need

for military housing, issues an invitation for bids. The

contractor submitting the lowest acceptable bid re-

ceives a Letter of Acceptability’ from the Secretary.

The letter requires the successful bidder to establish a

private ‘‘mortgagor-builder"” corporation under the

laws of the state of Delaware, and to qualify it te do

business in the state involved. The contractor furnishes

the corporation with £1,000 for capital stock, purchases

all of it, and elects its officers and directors. The United

States government executes to the corporation a 5)-

“

Appendix A, Page 5

vear lease of the real estate upon which the housing is

to be coustructed. The corporation is to obtain private

financing by giving a mortgage on its leasehold, and

obtain a commitment from the Federal Housing Ad-

miinistration to insure its mortgage loan. The mortgage

loan in is the amount of the contractor's bid.

The ** Letter of Acceptability” prescribes the ‘initial

closing” procedure, which entails the execution of the

following documents:

(1) The 55-year lease between the United States and

the corporation for a consideration of ¥1,000, paid hy

the corporation to the United States government. The

corporation agrees, during the period of construction,

to maintain insurance and to save the United States

government harmless from many laws, ordinances, and

regulations applicable to the leased premises, with re-

gard to construction, sanitation, licenses or permits to

do business.

(2) The corporation executes a note, secured by a

real and chattel mortgage on its real-estate leasehold,

to the private lender.

(3) The corporation, coutractor, and the United

States exegute a housing contract which provides that

all construction is to be i@spected and supervised by the

United States; that progress payments are to be made

hy the corporation from the mortgage loan, upon re-

quest of the contractor angyapproval of the United

States. and that, upon full payment, title to the housing

units vests in the United States, subject to contractor

liability for latent defects. The contract further pro-

vides that the contractor shall act as agent for the cor-

Appendix A, Page 6

poration, guarantee its performance, and furnish a

performance bond to the corporation and the mort-

gagee,

(4) An irrevocable eserow agreement. is executed

which provides that the resignations of the officers and

directors of the corporation, and the stock certificates

of the corporation, endorsed in blank, are to be placed

in escrow, with instructions to the eserow holder to

deliver these documents to the Chited States upon com-

pletion and acceptance of the project.

(5) The United States executes a written guarantee

to pay the mortgage installment payments to the pri-

vate mortgagee and or the Federal Housing Adminis-

tration, the insurer.

The provisions of the Capehart Act were fully com-

plied with by the contractors involved in these appeals.

Appellants’ assiguments of error ra wo principal

issues: First, the appellant contractors contend that,

under Washington law, the consumer of the housing

project is the party liable for payment of the sales tax,

and that. as a result of the statutory method for the

construction of Capehart housing, the -tnited States

is the consumer and, therefore, its constitutional immu-

nity from state taxation applies. Secondly, appellants

contend that the mortgagor-builder corporation is an

agency of the — States and, as such, is immune

from state tax.

f1] The function of interpreting state statutes to de-

termine who is liable for payment of a sales tax is re-

served to the state courts involved. Alabama v. King &

Boozer, 314 U.S. 1, 86 L.Ed. 3, 62 S.Ct. 43, 140 A.L.R.

Appendix A, Page 7

615 (1941): Kern-Liricvick, Ine., v. Scurlock, 347 U.S.

110. 98 L. Fd. 546, 74. S.Ct. 403 (1954).

REW &2.08.020 provides that ** ... there shall he col-

leeted a tax on each retail sale in this state... °’ A retail

sale is defined in RCW 82.04.050 as including

‘+. the sale of or charge made for tangible personal

property consumed and or for labor and services ren-

dered in respect to the following: ... (b) the construct-

ing... of new or existing buildings or other structures

under, upon, or above real property of or for consum-

ers,...°' (Italies ours. )

A consumer is defined in ROW 82.04.190(4) as ** Any

person who isan owner, lessee or has the right of posses-

sion to or an easement in real or personal property

.... (Italies ours.)

RCW 82.68.050 provides in part:

‘The tax hereby imposed shall be paid by the buyer

to the seller, and each se/ler shall collect from the buyer

the full amount of the tax payable in respect to each

taxable sale...

**In case any seller fails to collect the tax herein im-

posed ... he shall... be personally liable to the state

for the amount of the tax."* (Italies ours. )

Appellants concede that a retail sale, as defined in

RCW 82.04.050, did occur, but contend that the con-

sumer defined in ROW 82.04.190, and the buyer denomi-

nated in RCW 82.08.050 are svnonymous, and that the

United States government is the consumer and taxable

party because it becomes the owner of the housing

units upon their completion and acceptance.

Append A, Page 8

[2] With this contention, we do not agree. One of

the purposes of ROW 82.04.050 is to detine the event

that gives rise to a taxable transaction, which is the

rendition of labor and services in the construction of

new buildings upon real property of or for consumers.

RCW 82.04.1990 establishes the means by which the con-

party liable for payment of the tax in any given trans-

action. ROW 82.08.050 provides that the retail sales tax

shall be borne by the buyer, whe is primarily liable for

payment of the tax. Kaeser v. Everett, 47 Wn. (2d) 666,

PRO PL 2d) SAS (1959).

We must therefore determine who is the buyer under

the facts of the instant case. In this regard, appellants

contend that the United States is the buyer because it

bears the economic burden of paying for the military

housing, by vitue of its guarantee of the mortgage

obligation.

In Alabama v. King & Boozer, supra.-the state of Ala

bama, pursuant to a statute which imposed the sales tax

upon the purchaser, levied a sales tax upon the sale of

lumber to a contractor who was constructing installa-

tions for the Army. It was there contended that the

sales tax could not be collected from the contractor for

the reason that the United States was the purchaser,

within the meaning of the Alabama statute. In ansyer-

ing this contention, the Supreme Court of the United

States held:

+. The taxing statute, as the Alabama courts have

held. makes the ‘purchaser’ liable for the tax to the

seller, who is required ‘to add to the sales price’ the

Appendir 1, Paar 9

amount of the tax and collect it whet the sales price is

collected. whether the sale is for cash or on credit. Who,

inany particular transaction like the present, isa *pur-

chaser’ within the meaning of the statute, is a question

of state law on which only the Supreme Court of Ala-

bama can speak with final authority. But it seems plam,

asthe Government concedes and as we assume for pres-

cnt purposes, that under the provisions of the statute

the purchaser of tangible qoods who ws subjected to the

ac measured by the sales price, is the person who or

ps rs and pays for them when tHe sale as for cash or whe

jis legally obligated to. pay for them if the sale ww on

here dity _.*’ (I talies ours. )

\ The court concluded :

\ We cannot say that the contractors were not, or

thatthe Gievernment was, bound to pay the purenase

price, or that the contractors were not the purchasers

oh whom the statute layg the tax. The added eirewm-

stance that they were bound by their contract to furnish

the purchased material to the Government and entitled

te be reimbursed by it for the eosi, inchiding the tax, ne

more results in an infringement of the Government im-

munity than did the tax laid upon the contractors gross

receipts from the Giovernment in James ¢. Dravo Coa

tracting Co., supra [302 U.S. 154).°°

(3.4) Applying this ruie. the bmver is the person who

ix Iegally obligated to pay the seller ti any transaction.

The housing contract executed by the parties APivided

that “The mortga®or-builder [corporation | shall pay

the eligible-bnilder [eontrattor | for the performance

of this Housing Contract, and all other obligations of

Appendix A. Page 10

the eligible builder herein, ».. '* By the express terms

of the contract, the corporation, and not the United

States, was obligated to pay the appellant contractors;

henee, the corporation was the buver under the statute.

Under the provisions of the Capehart Act and the facts

in the instant case, the United States government was

not obligated to pay the selfer. The fact that the ulti-

inate economic burden of the tax may fall upon the

United States does not vitiate a state tax on the trans-

actions. Alabama v. King & Boozer, supra; Kern-Lim-

erick, dne.,v. Scuricoks supra; United States v. Detroit,

$00 UUS. 466, 2 L.Ed. (2d) 424, 78 S.Ct. 474 (1958): BLT.

Din Pont de Nemours & Co. v. State, 44 Wn.(2d) 339,

267 P.( 2d) 667 (1954).

$ | :

Our conelusion im this regard is also supported by

the following cases:

Limited States v. Harrison & Grimshaw Constr. Co.,

305 F.( 2d) 363 (1962), involved the question of whether

the provisions of the Miller Act applied to the perform-

ance bond given by the eligible builder under a Cape-

hari Act contract. The court held (p. 368) :

. The projects are of a private nature tint com-

pletition and assumption of control by the government.

The mortgagor-builder has a cvontract with a construe-

tion company to build the project. The constructor looks

to the mortgagor-builder for payment for his work and

owes to the mortgagor-buider the obligation to per-

form.... ” (Ltalies ours. )

Iu dw re S.S. Silberblatt, Inc., v. Tar Comm. of the

State of New York, 5 N.Y. (2d) 635, 159 N.E.(2d) 195,

186 N.Y.S. (2d) 646 (1959), it was said:

Appendir 1, Page 11

‘Likewise, we must reject appellant's contention

that the subject mortgages, as direct obligations to the

United States, are immune from State or loeal taxa-

tion, as provided in section 3701 of the Revised Statutes

of the United States (U.S. Code. tit. 31. § 742) whith

exempts ‘Exeent as otherwise provided by law. all

stocks, bonds, Treasury notes, and other obligations of

the United States’ since they hre not ‘of the same type

as those specifically enumerated’ in the statute (Smith

vr. Daves, 325 USS. 111, 117). Under the wwrangement

authorized by the Enabling A ., it is clear that the de-

vice employed was designed to relieve the Government

of its financially burdensome obligation to provide

housing for its military personnel and at the same time

avoid increasing the national debt. It did not pledge its

eredit im the usual sense, but merely guaranteed each ©

‘periodic payment” based on a monthly average of 90

per family unit.”’ :

Congress, in its discretion, by enacting the Capehart

law, chose to leave the hazards of construetion, the pur-

chasing of proper materials, and the furnishing of

proper labor performance to private contractors and

private lenders. It chose fo guarantee only the payment

to the private lender, after units acceptable to the gov-

ernmnent were erected upon the leased premises. We

conclude, therefore, that the mortgagor-builder corpo-

ration was the party legally obligated to pay the con-

tractor, and that it was the buyer denomingted in RCW

82.08.0530.

Is the mortgagor-builder corporation an ageney of

the United States?

Appendix A, Page 12

Appxllants contend that title to the units. when built

in accordance with the contracts. vested in the United

Statex; that the United States controlled and dietated

the terms of the construction contracts, and that it

guarantedd/ the mortgage obligation and ultimately

\_ gained bwnership of all of the corporation's capital

stock ; hence, the corporation is a government agency.

In support of this contention. appellants rely on

Clallam County v. United States, 263 U.S. 341, 68 L.Ed.

328, 448.Ct. 121 (1923); Green v. Eqiin AFB Housing,

Ine., 104 So.(2d) 463 (Fla. Wios); and Knapp-Stiles

Ine., v. Michigan Department of Revenue, CCH 2 Mich

Tax Cases 6 200-202 (1962). a

—

The Clallam County ease held that a corporation, or-

Zanized pursuant to a World War I emergency act

which authorized the Director of Aircraft Production

to establish one or more state corporations to produce

war materials, was an agency of the United States and,

as such, its activities were exempt from state taxation.

The case is not apropos. The Director of Aircraft Pro-

duction was, by law, an agent of the government. In the

“instant case, the successful bidders were not author-

ized ageuts of the government. Furthermore, the facts

in the cif@d case did not disclose any evidence of an

intent to distinguish the corporate activities {rom those

‘of the United States. In this regard, the couptystated

(p. do): °°... This is not like the case of a corpora-

tion having its own purposes as well as those of t}..

United States...”

In the Green case, the court stated (p. 467):

* ... The question here is the extent of an erem p-

‘

Appendix A, Page 13

tion granted by state statute. Had the legislature in-

tended to limit the exemption to that required by the

Federal Constitution there would have been no oceasion

whatever to go further than to say ** There shall also be

exempted all sales made to the United States."",But the,

legislature intended to grant a greater exemption and

made that intent clear...’ ”’

In Anapp-Stiles, Inc., v. Michigan Department of

Revenue, supra, the court stated :

**At the outset, it may be noted that the question is

not whether the State has the power to impose such tax

upon eontraetors who are performing contracts with

the United States.

ss , 4

**Michigan has the power to impose such a tax. Has

it done so? Or has it, by the language of the statute, ex-

empted the sales here involved from the tax?...”"

In the Green and Knapp-Stiles cases, the result was

determined by interpreting a state exemption statute

much broader than our own, for which reason the cases

are distinguishable.

[5] The mortgagor-builder corporate entity created

for the purpose of constructing gpd tinancing Capehart

housing serves a separate and distinct function from

that of the United States. That such a corporation is

not an agency of the United States igysustained by the

following decisions: |

In dn ve SS. Siuberblatt, Inc... Tar Commission of

the State of New York, supra, the New York Court of

Appeals held that the mortgager-builder corporation

a Appendix A, Page 14

was subject to that state’s mortgage recording tax,

stating (p. 641):

‘The appellant's contention that this petitioner and

the tive corporate mortgagors are instrumentalities of

the Federal Government or its agencies and, as such,

are exempt from Sfate and local taxation, is without

subgtance, ...cethe time of the execution, delivery and

recordiug’of these mortgages, each of the mortgagors

was a private corporation, all of the capital stock of

which was privately owned. They were created for a

commercial purpose for private protit, as distinguished

from a governmental purpose. In the absence of statute

to the contrary, it may not be assumed that a govern-

mental function was involved. They possess all of the

requisites and responsibilities of corporate existence

and, as such, are an entity separate and apart from the

United States (LU mted States v. Strang, 254 U.S. 491)

and this is so, notwithstanding the fact that all of the

capital stock of each corporation will ultimately be

owned by the Federal Government (Sloan Shipyards

v. United States Bleet Corp., 258 U.S. 549, 42 S.Ct.

386, 66 L.Ed. 762)..." (Italies ours)

lu United States .. Ft. George G. Meade Defense

Housing Corp. No. 1, D.C., 186 F.Supp. 639 (1960), it

was held that the leasehold interest acquired by the

mortgagor-builder corporation from the United States

Was subject to the Maryland mechanics’ lien law be-

cause

* 2. the so-called Capehart Act contemplates leav-

ing the entire arrangement for the tinaneing and con-

struction of Capehart housing projects. in the hands of

Appendix A, Page 15

private enterprise until the point at which the govern-

ment has seeured the gas stock of the Housing Cor-

poration...”

The reasoning in the followgg eases, although not

arising from Capehart transactions, supports the view

that the mortgagor-builde

cies of the government.

In E. [. Du Pont de Ne

(2d) 339, 267 B.(2d) 667

‘corporations are not agen-

mours & Co. v. State, 44 Wn.

(1954), it was contended that

the Du Pont Conmpany was an agent or instrumentality

of the United States in its operation of the Hanford

Engineer Works. We he

(pp. 349, 350) :

+. the fact that the government reserved and exer-

eised the right to restrict ér control the action of the

contractor as to its general activities does not establish

the existence of an agency relationship. . . . ~,

. . .

“It is also without significance that all of the real

and personal property utilized in performing the con-

tract was owned by the goverument. [ Citing cases. ] The

same is true with regard

to the fact that the govern-

ment exerted unusual supervisory controls over every

phase of the contractor's

activity. [Citing case.]~

In United States v. Brown, D.C. 41 F.Supp. 35

(1941), the contention Was rejected that certain Re-

gional AgriculparaitTedit Corporations, created pur-

suant to fedéral enactme

ut. were immune from state

taxation because the United States owned all of the

- capital stock of the corporations. The court said (p.

R40) :

Whether or not these

Regional Corporations sha!l

enjoy severelgu immunity from taxation is wholly a

ites

Appendir A, Page 16

question of Congressional intent. They are purely com-

mercial corporations exercising no sovereign function.

[In the absence of statutory provision, there is no~rea-

son why they shoyfd be exempted from taxation, espe

cially in view of Congressional poliey concerning this

type of corporation, evidenced by many statutory pro-

visions expressly subjecting the real property of

similar eorporations to taxation.

‘The mere faet that the United States owns all the

capital stock of these corporations is not alone suffi-

cient to endow them with sovereign immunity, nor do

they acquire such immunity merely because they are the

medium through which the Government carries out

certain proprietary activities. Note, 83 L.Ed. 799 ot Seq.

*.*

. os

‘When a corporation is created for commercial as

distinguished from Governmental purposes, it is ordi-

narily implied in the absence of ‘statutory provisions

to the contrary, that such cofporation shadjl have ali the

requisites and responsibi ities of corporate existence,

even though the United States owns all the stock. Such

a corporstion is an entity separate from the United

States. United States v. Strang, 254 U.S. 491, 41 S.Ct.

165, 65 L.Ed. 368.’

We conclude that the mortgagor-builder corporation,

having served an independent and distinct purpose in

the taxable event, is not u federal agency.

Further, Cougress has not expressed a legislative in-

tent to immunize a Capehart corporation from state

taxation. The invitations to bid expressly provided :

‘*Nothineg in thic Invitation for PRid<« chall he deemed

Appendix A, Paae 17

to relieve the eligible builder of any liability for the

payment of sales or use taxes properly levied.”

For the reasons stated, the sales tax was ** properly

levied’ npon these transactions. Appellants, under the

statute, were obligated to collect the tax from the mort-

gagor-muider corporations, Having failed to collect it,

appellantsare liable for the tax. ROW 82.08.050, supra.

The judgments are affirmed. ,

Mes

Fixiey. Roseruist, Hamirron, and Hare, JJ., con-

eur.

Huwrer. J. (dissenting )—The majority say that the

scales tax must fall upon the person legally obligated to

pay for construction of the military housing. With this

| agree.

The majority then state that, by the express terms of

the contract with the mortgagor-builder, the Delaware

corporation, and not the United States was legally ob-

ligated to pay the appellant contractors ; henee, the cor-

poration was the buyer under the statute. The fact that

the ultimate economic burden of the tax may fall upon

the United States does not constitute it as the person

Jegally obligated to pay the tax. Neither do I disagree

with this rationale.

It is my disagreement with the majority in the dis-

positionof the issue relating to whether the mortgagor-

builder corporation is an instrumentality of the United

States that bring me to a result contrary to that of the

majority in this case.

Under the established rule for the construction of

contracts. 2 contract must be picked up by its four

Appendix A, Page 18

corners and considered in its entirety. In so doing, it is

inesfapable to conclude other than that the prime pur-

pose of the housing contract was the construction of

military housing for the exclusive use of the United

Si tes. It was necessarily the obligation of the govern-

ment to pay for this housing and, although it did not

wish te be directly obligated, the United States, in

causing the Delaware corporation to be organized, did

so to provide a means to carry out its obligation te com-

pensate the contractors for the construction of this

housing.

In Clallam County v. United States, 263 U.S. 341, 68

L.Ed. 328, 44. S.Ct. 121 (1923), it was held that a corpo-

ration created for the purpose of operating a sawmill

and railroad for the promotion of the war-effort and

wholly owned by the United States was an instrumen-

tality of the United States. The court there said:

‘In short the Spruce Production Corporation was

organized by the United States an an instrumentality _

for carrying on the war, all its property was conveyed

to it by or bought with money coming from the United

States and was used by it solely as means to that end,

and When the war was over it stopped its work except

so far as it found it necessary to go on in order to wind

up its affairs....

“The State claims the right to tax on the ground

that taxation of the agency may be taxation of the

means employed by,the government and invalid upon

admitted grounds, but that taxation of the property of

the agent is not taxation of the means. We agree that it

ad,

Appendir 1, Page 19

‘is not always, or generally, taxation of the means,” as

said by Chief Justice Chase in Thomson v, Pacific Rail-

road. 9 Wall 579, 501. But it may be, and in our opinion

clearly is when as here not only the agent was created

but all the agent's propefty was acquired and used, for

the sole purpose of producing a weapon for the war.

This is not like the case of a corporation having its own

purposes as well as those of the United States and im-

terested in profit on its own account, Phe imecorpora-

tion and formal erection of a new personality was only

for the convenience of the Unite d States to carry out its

ends. ...°’ (Italics mine. )

Contemporaneous with the signing of the housing

contract. the stock of the corporation in the instant

case was irrevocably placed in escrow, together with

the resignation of the officers and directors, to be deliv-

-ered to the United States at the conclusion 0! the con-

struction of the housing. There was no possible con-

tingency for the return of the stock to the stockholders

or the documents of resignation to the officers and diree-

tors. The corporation owned nothing of any value in

the housing being constructed. It served solely as

gage il any purpose other than to ser

obtaining military housing for the } ed States on

this exclusive project. Becatisy fad no purposes in-

dependent of those of the United States, the corpora-

tion was nothing more than an instrumentality thereof,

The appellants cite Green vr. Eglin AFB Housing,

Inc., 104 So.(2d) 463 (Fla. 1998), which is persuasive

Appendix A, Page 20

of their contention. There, under the authority of the

Capehart Act, the government entered into a contract

virtually identical with that of the instant ease for the

construction of military housing at the Eglin Air Force

Base in Florida. The Florida court ineff¥ct found that

the Delaware corporations were government instru-

mentalities, stating:

‘The AFB corporations were created at the direc-

tion of the United States for the sole purpose of bor-

rowing money to be expended in constructing facilities

needed by the United States, to be repaid by the United

States and further securing the payment of this money

by a mortgage upon property of the United States.

These corporations will continue in existence until the

mortgage debts are paid, so as to provide a party

against whom the mortgages may be foreclosed in the

remote contingency that the United States defaults in

its obligation to pay the mortgage debt.

‘Even if we regard the AFB corporation as private

enterprises, pa nae in the property is so neglible

—lessees without right of use or possession—as to make

it cutirely unrealistic to hold that it destroys the status

ef these buildings as a part of the public works of the

United States.

y IAs very doubtful if these corporations should be

regarded as anything other than agencies or instru-

mentalities of the Federal Government. In Claliam

County, Wash. v. United States, 263 U.S. 341, 44 S.Ct.

121, 68 L.Ed. 328, the Supreme Court held that a cor-

poration created for the purpose of operating a saw-

mill and raijiroad in the promotion of the war ef-

Appendix A, Page 21

fort during the first World War and which was wholly

owned by the United States was an agency of the

United States and that its property was, therefore, im-

mune from state taxation. In describing the corpora-

tion there involved the [sic] used language peculiarly

applicable to each AFB corporation: **The incorpora-

tion and formal erection of a new personality was only

for the convenience of the United States, to carry out

its ends.** The creation of the AFB corporations was

only for the convenience of the United States to enable

it to finance military construction in a manner deter-

mined by the Congress to be most conducive to the

national interest....’”’ ;

The limited function of the Delaware corporation,

its power and purpose are aptly stated by the Michigan

court in Anapp-Stiles, Inc., v. Michigan Department

of Revenue, CCH 2 Mich. Tax Cases ‘* 200-202 (1962).

There, as here, the contracts were for nilitary housing

under the Capehart Act. The court said relative to the

corporations :

* ... In the Invitation for Bids, which is prepared

and issued by the United States, acting through the

Department of the Air Force, there is found in Para-

graph 1, above quoted, the following:

+The statute further contemplates that the Govern-

meut-owned housing site be leased to a mortgagor or

borrower corporation which will act as a channel for

the proceeds of the mortgage loan from the lender to

the successful bidder... °

“Anda review of the documents—the lease, the con-

tract. and the mortgage is convincing that this is sub-

ae ate «J rae

7 2

Appendix A, Page 22

tantially the only funetion that the Delaware corpora-

tion do perform.

‘They have no real powers except to do the bidding

of the United States. ...

The corporations do not determine the terms of the

contract. That is all done before the corporations come

into existence. They do not determine whether the con-

tract has been performed. They cannot modify its

terms. They cannot terminate it.

‘True, the corporations had a lease upon the prem-

ises. While this is nominally for a fifty-five year term,

in fact, the actual possession, maintenance and opera-

tion of the housing is in the hands of the United States

and its Air Force as soon as the housing is ready for

occupancy.

The United States alone determines the terms of

the contract. It alone can modify or terminate it. It

alone determines when it has been performed.”’

An analysis of In re S. S. Silberblatt,Jnc., ». Tar

Comm. of the State of New York, 5 N.Y.(2d) 635, 159

N.E.(2d) 195, 6 N.Y.S.(2d) 646 (1959), cited by the

majority, discloses that the opinion is based on the

erroneous premise that the Delaware corporations were

“s . created for a commercial purpose for private

profit, as distinguished from a governmental purpose. ”’

As heretofore stated, consideration of the housing con-

tract in its entirety cannot support such a conelusion.

The analysis of the housing contract and the reasoning

of the dissent in the Si/berblatt case is correct.

eee

Appendix A, Page 23

- .. Althongh under our State law the tax is im-

posed upon the recording of the mortgage (Franklin

Soc. v. Bennett, 282 N.Y. 79), this case is controlled by

Federal law under which the tax is on the mortgage

itself. which is a Federal instrumentality exempt from

State taxation (Federal Land Bank v. Crosland, 261

US. 374: ... ). Unlike the Wherry Act, the Cape-

hart Act. under which this military housing project

was authorized, renders petitioner-appellant merely a

builder and not a private sponsor of the military hous-

ing. The United States, through its Department of De-

{fse, ix the sponsor, financier and owner of the entire

project. The mortgagor corporations are mere fictions,

and they and the mortgagee banks had no other funce-,

tion in this business than to act as agents for the Fed-

eral Government (Clallam County vr. United States, 263

U.S. 341. 45, 44 S.C. 121, 68 L.Ed. 328; Railroad Co.

v. Peniston, 18 Wall 5, 42. 85 U.S. 5, 42, 21 L.Ed. 787)

" 4

The majority attempt to distinguish the Clallam

County case on the basis that the corporation there had

no purpose other than to produce war materials for

the United States government, and it quotes from the

Clallam County case as follows:

++ This is not like the case o* a corporation hav-

ing its own purposes as well as those of the United

States....°”’

The inference from this quotation which is desired by

the majority is that the Delaware corporation had pur-

poses other than those of the United States govern-

ment. This is erroneous and unsupported by the record.

SRO RS a fae ane ARS

Appendix A, Page 24

The holding of the cases cited by the majority, E. J.

Du Pont de Nemours & Co. v. State, 44 Wn.(2d) ‘4209,

267 P.(2d) 667 (1954), and United States rv. Brown, AY

F.Supp. 838 (1941), is not inconsistent with the Clallam

County case since the corporations, in those cases, were

not instrumentalities of the United States because they

had separate commercial purposes for private profit.

In the instant case we should hold that, although the

mortgagor-builder is the **buyer’’ to whom the retail

sale of the housing project canstruction was made, it

was nothing more than an instrumentality of the United

States government; that it had no commercial purpose

other than for the convenience of the United States,

serving as a means to the end of obtaining this military

housing ; and that the sovereign immunity of the federal

government applies.

The judgment of the trial court should be reversed,

and the cause remanded with instructions to enter

judgment restraining the Tax Commission from im-

posing the tax and to permit recovery of the tax which

appellants paid under protest. :

Hit., DonwortH, and WEAVER, JJ., coneur with

Hunter, J.

a) EE aL Rive? ht ee 2

Appendix B, Page 1

‘APPENDIX B

STATUTES INVOLVED

Revised Code of Washington

RCW 82.08.010 Definitions. For the purposes of

this chapter:

(1) ‘Selling price’* means the consideration, whether

money, credits, rights. or other property, expressed in

the terms of money paid or delivered by a buyer to a

seller. all without any deduction on aecount of the cost

of tangible property sold, the cost of mate pals used,

labor costs, interest, discount, delivery 7Osts, taxes, or

any other expenses whatsoever paid or acerued and

without any deduction on account of losses; but shall

not inelude the amount of cash discount actually taken

by a buyer;

(2) **Seller’’ means every person making sales at re-

tail or retail sales to a buyer or consumer, whether as

agent, broker, or principal ;

(3) Buyer” and consumer” include, without lim-

iting the scope hereof, every individual, receiver, as-

signe?, trustee in bankruptey, trust, estate, firm, co-

partnership, joint venture, elub, company, joint stock

company, business trust, corporation, association, s0-

ciety, or any group of individuals acting as a unit,

whether mutual, cooperative. fraternal, nonprofit, or

otherwise, municipal corporation, quasi municipal cor-

poration, and also the state, its departments and insti-

tutions and all political subdivisions thereof, irre-

spective of the nature of the getivities engaged in or

Appendix B, Page 2

functions performed, and also the United States or any

instrumentality thereof ;

(4) The meaning attributed in chapter 82.04 to the

terms ‘*‘tax yvear,”: **taxable year,”’ ‘*person,”’’ ‘*com-

pany,”’ *‘sale,”’ **sale at retail,’ ‘retail sale,’’ *‘sale at

wholesale,’’ **wholesale sale,’’ ‘*business,’’ ‘‘engaging

in business,”’ **eash diseount,”’ ‘*suecessor,’’ *‘eon-

sumer,”’ ‘‘in this state’’ and *‘within this state’’,shall

apply equally to the provisions of this chapter. .. .

99 66

RCW 82.08.020 Retail sales tax imposed. There is

levied and there shall be collected a tax on each retail

sale in this state equa! to three and one-third per cent

of the selling price: Provided, That from April 1, 1959

the tax imposed by this section shall be equal to four

per cent of the selling price. The tax imposed under

this chapter shall apply to suecessive retail sales of the

same property and to the retail sale of intoxicating

liquor by the Washington state liquor stores. . . .

RCW 82.08.030 Exemptions. The tax hereby levied

shall not apply to the following sales:

(1) Casual and isolated sales of property or service,

unless made by a person $vho is engaged in a business

activity taxable under chapters. 82.04., 82 16 or 82.28:

Provided, That the exemption provided by this para-

graph shall not be construed as providing any exemp-

tio nfrom the tax imposgi! by chapter 82.12;

(2) Sales made by persons inthe xdurse of business

activities with respect to-Which tax liability is specifi-

cally imposed under chapter 82.16, when the gross pro-

ceeds fromSueh sales must be included in the measure

of the tax tmpeésed under said chapter ;

Appendir B, Page 3

(3) The distribution and newsstand sales of news-

papers ;

(4) Sales whieh the state is prohibited from taxing

under the é ‘onstitution of this state or the Constitution

or laws of 1 the United States;

(5) Sales of motor vehicle fuel used in aircraft by

the manufacturer thereof for research, development,

and testing purposes and sales of motor vehicle fuel

taxable under chapter 82.36: Provided, That the use

of eny such fuel upon which a refund of the motor ve-

hicle fuel tax has been obtained shall be subject to the

tax imposed by chapter 82.12;

(6) Sales Gincluding transfers of title through de-

cree of appropriation) heretofer or hereafter made of

the entire operating property of a publicly or privately

owned public utility, or of a complete operating inte-

gral section. thereof, to the state or a political subdivi-

sion therefor use in conducting any Peg eecoge cranes

in subdivisions (1), (2). (3), (4). . (6), . (8),

(9), (10) or (11) of RCW uae.

(7) Auetion sales made by or through auctioneers of

tangible personal property (including household goods )

which have been used in conducting a farm aetivity,

when the seller thereof is a farmer snd the sale is hed]

or conducted upon a farm and not otherwise ;

(8) Sales to corporations which jiave been Incorpe-

rated under any act of the congress of the United

States and whose principal purposes are te furnish vol-

unteer aid to members of armed forces of the Uuited

States and alse te carry on a system of national and

international relief and to apply the same in mitigat-

Appendix B, Page 4

ing ihe sufferings caused by pestilence, famine, fire,

floods, and other national calamities and to devise and

carry on measures for preventing the same; =

(9) Sales of purebred livestock for breedmg puf-

poses where the animals are registered in a nationally

recognized breed association ; sales of* cattl> and milk

cows nsed on the farm;

(16) Sales of tangibf? personal property (other than

the type referred to in subdivision (11) hereof) for

use by the purchaser in connection with the business

of operating as a private or common carrier by air,

rail, or water in interstate or foreign commerce: Pro-

vided, That any actual use of such property in this

state shall, at the time of such actual use, be subject to

the tax imposed by chapter 82.12;

(11) Sales of airplanes, locomotives, railroad cars,

or watercraft for use in conducting interstate or for-

eign commerce by transporting therein or therewith

property and persons for hire or for use in conducting

commercial deep sea fishing operations outside the

territorial waters of the state; also sales of tangible

personal property which becomes a component part of

such airplanes, locomotives, railroad cars, or water-

craft, and of motor Vehicles or trailers used by the

holder o. a carrier permit issued by the Interstate

Commerce Commission authorizing transportation by

motor vehicle across the boundaries of this state, in the

course of constructing, repairing. cleaning, altering,

or improving the same; also sales of or charges made

for labor and services rendered in respect to such eon-

trecting, repairing, cleaning, altering, or improving;

Appendir B, Page 5

(12) Sales of motor vehicies and trailers to bewused

for the purpose of transporting therein persons or

property for hire in interstate or foreign commerce:

Provided, That the purchaser must be the holder of a

carrier permit issued by the [uterstate Commerce Com-

mission and that the vehicles will tirst move upon the

highways of this state from the point of delivery in

this state to a point outside of this state under the au-

thority of a one-transit permit issued by the diree-

tor of licenses pursuant to the provisions of RCW

46.16.100;

(13) Sales of motor vehicles and trailers to non-

residents of this state for use outside of this state, even

though delivery be made within this state, but only

when (a) the vehicles or trailers will be taken from

the point of delivery in this state directly to a point >

outside this state under the authority of a one-transit /

permit issued by the director of licenses ptirsuant to the

provisions of RCW 46.16.100, or (b) said motor vehi-

eles and trailers will be registered and licensed imme-

diately under the laws of the state of the purchaser's

residence, will not be used in this state more than three

months, and will not be required to be registered ual

licensed nuder the laws of this state.

(14) Sales to nonresidents of this state for use eut-

side of this state of tangible persona! property whieh

becomes a component par “Of any machinery or other

article of personal property belonging to sueh ne mresl-

deut. iw the course of 4nstalling, repairing. cleaning.

altering. or improving the same and also sales of or

charges made for labor and services rendered in re-

spect to any-installing. repairing, cleaning, altering, or

Appendir B, Page 6

improving, of personal property of or for a nonresi-

dent, but this subsection (14) shall apply only when

the seller agrees to, arid does, deliver the property to

the purghaser at a point outside this state, or delivers

the prapérty to a common or bona fide private carrier

consigned to the purchaser at a point outside this state ;

(15) Sales to nonresidents of this state for use out-

side of this state of watercraft requiring coast guard |.

registration or registration by the state of principal

use according to the Federal Boating Act of 1958, even

though delivery be made within this state, but only

when (a) the watercraft will not be used within this

state for more than forty-five days and (b) an appro-

priate exemption certificate supported by identification

ascertaining residence as provided by the tax commis-

sion and signed by the purchaser or his agent estah-

lishing the fact that the purchasey is a non-resid nt

and that the watercraft is for use outside of this state,

one copy to be filed with the tax commission with the

regular report and a dupligate to be retained by the

dealer.

(16) Sales of baby chicks and turkey pouits for use

in the production for sale of poultry or- poultry

products. —~

(17) Sales to nonresidents of this state for use out-

side of this state of machinery and implements for use

in conducting a farming activity, when such machinery

and implements will be transported immediate out-

side the state. As proof of exemption, an affidavit or

certification in such form as the tax commission shall

require shall be made for each such sale, to be retained

asa business record of the seller.

, - cy yeep se

ne Ny wy ‘

Appendix B, Page 7

(18) Sales for use in noncontiguous states, terri-

tories and possessions of the United States, but only

when. as a necessary incident to the contrags of sale,

the selledelivers the subject matter of the "gale to the

purchaser or his designated agent at the usual recelv-

ing terminal of the carrier selected to transport the

goods, under such circumstances that it is “casonably

-eytain that the goods will be transported directly to a

destination in such noncontiguous states, territories

andl Possessions, .. .

* * *

RCW 82.08.050 Buyer-to pay, seller to collect tax—

Penaltie-. The tax hereby immposed shall he/paid by the

buver to the seller, and each seller shall collect from

the buyer the full amount of the tax payable in respect

to each taxable sale in accordance with the schedule

of collections adopted by the tax commission pursuant

to the provisions of ROW 82.08.0600. The tax required

by this chapter, to be collected by the seller, shall be

deemed to be held in trust by the seller until paid to

the commission, and any seller who appropriates or

converts the tax collected to his own use or to any Use

other than the payment of the tax to the extent that

the money required to be coliected is not available for

payment on the due date as prescribed in this chapter

shall be guilty of a misdemeanor.

In case any seller fails to collect the tax herein in

posed ov having collected the tax. fais to pay it to the

commission it the manner prescribed by this chapter.

whether such failyay i< the result of his own acts or

the result of acts or conditions hevond his control, he

Appendix B, Paae &

shall, nevertheless, be personally liable to the state for

the amount of the tax.

The amount of tax, until paid by the bnyer to the

seller, or to the commission, shall constitute a debt

from the buyer to the seller and any seller who fails or

refuses to collect the tax as required with intent to vio-

late the provisions of this ehapter or to gain some ad-

vantage or benefit, either direct or indirect, and any

buyer who refuses to pay any tax due under this chap

ter shall he guilty of a misdemeanor.

Where a buyer has failed to pay to the seller the tax

imposed by this chapter and the seller has not paid the

amount of the tax te the commission, the commission

may, in its discretion, proceed directly against the

buyer for collection of the tax, in which case a penalty

of teu percent may be added to the amount of the tax

for failure of the buyer to pay the same to the seller, re-

gardiess of when the tax may be collected by the com-

mission; and all of the provisions of chapter 82.32, in-

cluding those reiative to interest and penalties, shall

apply in addition; and, for the sole purpose of apply-

ing the various provisions of chapter 82.32, the fif-

teenth day of the month following the bimonthly tax

period im whieh the purchase was made shall be con-

sidered as the due date of the tax... .

RCW 82.08.0060 Collection of tax — Methods and

schedules. The tax commission shall have power to

adopt rules and regulations preseribing methods and

schedules for the collection of the tax required to be

cotlected by the seller from the buver under this chap-

ter. The methods and schedules preseribed shall be

EOE Ay vga a —

A PLES PEER EN Re LIE Sve, ey, RP ses

Append: rf, Page 9

adopted so as to eliminate the collection of fraetions

of one cent and so as to provide that the aggregate col-

leetions of all taxes by the seller shall, insofar as prac-

ticable, equel the amount of tax imposed by this chap-

ter. Such schedules may provide that no-tax need by

collected from the buyer upon sales below a stated sum

and may be amended from time to time to) acéomplish

the purposes set forth herein. ...

RCW 82.08.140 Administration. The provisions of

RCW 82.04.470 and all of the provisions of chapter

82.52 shall have full force and application with respect

to taxes imposed under the provisions of this chap-

“SALE DEFINED

RCW 82.04.040 *Sale’> means any transfer of the

ownership of, title to. or possession of property for a

valuable consideration and includes any activity clas-

sified as a ‘‘sale at retail’ or “‘retail sale’ under RCW

82.04.0090. [It includes renting or leasing, conditional

sale contracts, leases with option te purchase, and any

contract under which possession, of the property Is

given to the purchaser but title is retained by the

vendor as security for the payment of the purchase

price. It also includes the furnishing of food, drink, or

meals for compensation wheter consumed upon the

premises or not.

Casual or isolated sale” means a sale made by a per-

son Whe is not engaged in the business of selling the type

of property involved.

« Appendix B, Page 10

‘Sate at? Retarn,”’ ‘Reta Sate’ DEFINED

RCW 82.04.050 “Sale at retail’’ or ‘‘retail sale”’

means every sale of tangible personal property (in-

cluding articles produced, fabricated, or imprinted )

other than a sale to one who (a) purchases for the pur-

pose of resale as tangible personal property in the

regular course of business, or (8) installs, repairs,

cleans, aWers, iraprints, improves, constructs, or deco-

rates real or personal property of or for consumers, if

such tangible personal property becomes an ingredient

or component of such real or personal property, or (c)

purchases for the purpose of consuming the property

purchased in producing for sale a new article of tan-

gible personal property or substance, of which such

property becomes an ingredient or component or as a

chemical used in processing, when the primary pur-

pose of such chemical is to create a chemical reaction

directiy through contact with an ingredient of a new

article being produced for sale. The term also means

every sale of tangible personal property to persons en-

gaged in any business which is taxable under RCW

82.04.280, subsection (2), and 82.04.290. |

The term ‘‘sale at retail’’ or ‘‘retail sale’? shall in-

clude the sale or charge made for tangible personal

property consumed and or for labor and services ren-

dered in respect to the following: (a) The installing,

repairing, cleaning, altering, imprinting, or improving

of tangible personal property of or for consumers, ex-

cluding, however, services rendered in respect to live

animals, birds and insects; (b) the constructing, re-

pairing, decorating, or improving of new or existing

buildings or other structures under, upon, or above

ai’

a* 7

re Ee a EE LN MC AL aretha fh >

Appendix B, Page 11

real property of or for consumers, including the in-

stalling orattaching of any article of tangible personal

property therein or thereto, whether or not such per-

sonal property bedemes a part of the realty by virtue

of installation, and shall also include the sale of serv-

ices or charges made for tue clearing of land and the

moving of earth, excepting the mere leveling of land

used in commercial farming or agriculture: (c) the

sale of or charge made for labor and services rendered

in respect to thé cleaning, fumigating, razing or mov-

ing of existing buildings or structures, but shall not

include the charge made for janitorial services; (d)

the sale of or charge made for labor and services ren-

dered in respect to automobile towing, armored car

service and similar automotive transportation services,

but not in respect to those required to report and pay

taxes under chapter 82.16; (¢) the sale of and charge

made for the furnishing of lodging and all other serv-

ices by a hotel, rooming house, tourist court, motel.

trailer camp, and the granting of any <imilar license to

use re ‘operty, as distinguished from the renting or

leasing of real property, and it shall be presumed that

the occupancy of real property for a continuous period

of one month or more constitutes a rental or lease of

real property and not a mere license to use or enjoy the

same. ‘

The term shall not include the sale of or charge made

for labor and services rendered in respect to the build-

ing, repairing, or improving of any publicly owned

street, place. road. highway, bridge. or trestle which

is used for to be used primarily for foot or vehicular

traffic, nor shall it include sales of feed, seed, fertilizer,

Appendix B, Page 12

and spray materials to persons for the purposes of

producing for sale any agricultural product whatso-

ever, including milk, eggs, wool, fur, meat, honey, or

other substances obtained from animals, birds, or

insects. ;

**SaLe aT WHOLESALE,’ **‘ WHOLESALE SALE’ DEFINED

RCW 82.04.060 **Sale at wholesale”’ or ** wholesale"’

sale’? means any sale of tangible personal property

which is not a sale at retail and means any charge fade

for labor and services rendered for persons who are

not consumers, in respect to geal or personal property,

if such charge is expressly defined as a retail sale by

RCW 82.04.050 when rendered to or for consumers:

Provided, That the the term ‘‘real or personal pyop-

erty”’ as used in this section shall not include any natu-

ral products named in RCW 82.04.100.

‘Gross PRocEEDS OF SALES’? DEFINED

RCW 82.04.070 “Gross proceeds of sales’? means

the value proceeding or accruing from the sale of tan-

gible personal property and or for services rendered,

without any deduction on account of the cost of prop-

erty sold, the cost of materials used, labor costs, inter-

est, discount paid, delivery costs, taxes, or any other

expense whatscever paid or accrued and without any

deduction on account of losses.

**CONSU MER"* DEFINED

RCW 82.04.1990) **Consumer’’ means the following :

(1) Any person who purchases, acquires, owns,

holds, or uses any article of tangible personal property

other than for the purpose (a) of resale as tangible

. <5 She Ve Watts, ei natt ‘ . ™ ,

Banc SA TVET SC GS bP COED BEERS ees sess ee a RS eI ss i Tc ar reat SERS ot

Appendix I, Page 13

personal property ‘n the regular course of business or

(b) of incorporating such property as an ingredient

or component of real or personal gt isd when in-

stalling, repairing, cleaning, altering, imprinting, im-

proving, constructing, or decorating such real or per-

sonal property of or for consumers or (c) of consum-

ing such-property in producing for sale a new article of

tangible personal property or a new substance, of

which such property becomes an ingredient or -compo-

vent or as a chemical used in processing, when the

primary purpose of such chemical is to create,a chemi-

cal reaction directly through tontact with an ingredient

of a new art.cle being pr€duced for sale; .

(2) Any person engaged in any business activity

taxable under RCW 82.04.290;

(3) Any person engaged In the business of contract-

ing for the building, repairing or improving of any

publicly owned street, place, road, highway, bridge or

trestle which is used or to be used primarily for foot or

vehicular traffic as defined in RCW = 82.04.280, in re-

spect, however, only to tangible personal property

used or consumed in such business ;

(4) Any person who is an owner, lessee or has the

right of possession to or an easement in real or per-

sonal property which is being constructed, repaired,

improved, cleaned, imprinted, or otherwise altered by

a person engaged in business, excluding oly the United

States. the state, and its political subdivisions in respect

to labor and services rendered to their real property

which is used or held for public road purposes.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.