B-27245, AUGUST 4, 1942, 22 COMP. GEN. 109

B-27245: Aug 4, 1942

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ATTORNEY'S FEES OR THE EXPENSE OF DEFENSE OR PROSECUTION OF SUITS INCURRED BY COST-PLUS-A-FIXED-FEE CONTRACTORS UNDER THE APPROVED STANDARD FORMS OF COST-PLUS-A-FIXED-FEE CONTRACTS ARE TO BE REGARDED AS A PART OF THE CONTRACTOR'S GENERAL OVERHEAD EXPENSE. COMPENSATION FOR WHICH IS TO BE PRESUMED AS HAVING BEEN INCLUDED IN THE FIXED FEES PAID. WHERE LITIGATION TO TEST THE VALIDITY OF STATE SALES AND USE TAXES AS APPLIED TO SUCH A CONTRACTOR AND HIS VENDOR WAS INSTITUTED BY THEM AT THE REQUEST OF THE GOVERNMENT AND WAS UNDER ITS CONTROL AND SUPERVISION. 1942: I HAVE YOUR LETTER OF JULY 2. AS FOLLOWS: THERE IS TRANSMITTED HEREWITH THE FILE RELATIVE TO THE CLAIM OF DUNN CONSTRUCTION COMPANY.

B-27245, AUGUST 4, 1942, 22 COMP. GEN. 109

CONTRACTS - COST-PLUS - REIMBURSEMENTS FOR LITIGATION EXPENSES ORDINARILY, ATTORNEY'S FEES OR THE EXPENSE OF DEFENSE OR PROSECUTION OF SUITS INCURRED BY COST-PLUS-A-FIXED-FEE CONTRACTORS UNDER THE APPROVED STANDARD FORMS OF COST-PLUS-A-FIXED-FEE CONTRACTS ARE TO BE REGARDED AS A PART OF THE CONTRACTOR'S GENERAL OVERHEAD EXPENSE, COMPENSATION FOR WHICH IS TO BE PRESUMED AS HAVING BEEN INCLUDED IN THE FIXED FEES PAID, BUT WHERE LITIGATION TO TEST THE VALIDITY OF STATE SALES AND USE TAXES AS APPLIED TO SUCH A CONTRACTOR AND HIS VENDOR WAS INSTITUTED BY THEM AT THE REQUEST OF THE GOVERNMENT AND WAS UNDER ITS CONTROL AND SUPERVISION, THE FEES AND EXPENSES THEREOF MAY BE CONSIDERED REIMBURSABLE UNDER THE CONTRACT.

COMPTROLLER GENERAL WARREN TO THE SECRETARY OF WAR, AUGUST 4, 1942:

I HAVE YOUR LETTER OF JULY 2, 1942, AS FOLLOWS:

THERE IS TRANSMITTED HEREWITH THE FILE RELATIVE TO THE CLAIM OF DUNN CONSTRUCTION COMPANY, NC., AND JOHN S. HODGSON AND COMPANY FOR REIMBURSEMENT FOR COURT COSTS, ATTORNEY'S FEE AND OTHER EXPENSES INCURRED IN CONNECTION WITH LITIGATION INSTITUTED FOR THE PURPOSE OF TESTING THE APPLICABILITY OF STATE SALES AND USE TAXES TO COST-PLUS-A FIXED-FEE CONTRACTOR AND THEIR VENDORS. YOUR ATTENTION IS PARTICULARLY INVITED TO THE COMMENTS CONTAINED IN THE INCLOSED MEMORANDUM FROM THE JUDGE ADVOCATE GENERAL (INCL. 13).

AS REQUESTED BY THE JUDGE ADVOCATE GENERAL, YOUR DECISION IS DESIRED ON THE FOLLOWING UESTIONS:

(1) WHETHER COURT COSTS AND EXPENSES INCURRED BY A FIXED-FEECONTRACTOR IN CONNECTION WITH LITIGATION, THE OBJECT OF WHICH WAS THE FINAL DETERMINATION OF THE APPLICABILITY OF THE ALABAMA USE TAX TO A COST PLUS-A -FIXED-FEE CONTRACTOR, ARE REIMBURSABLE UNDER THE TERMS OF THE CONTRACT, WHERE SUCH LITIGATION WAS INITIATED BY THE CONTRACTOR UNDER THE DIRECTIONS OF THE WAR DEPARTMENT AND THE DEPARTMENT OF JUSTICE AS A MEANS OF FINALLY DETERMINING THE APPLICABILITY OF STATE USE TAXES GENERALLY TO COST-PLUS-A- FIXED-FEE CONTRACTORS.

(2) WHETHER COURT COSTS, ATTORNEY'S FEE (NOMINAL), AND ATTORNEY'S EXPENSES INCURRED BY AN ALABAMA VENDOR OF A COST-PLUS-A-FIXED-FEE CONTRACTOR IN CONNECTION WITH LITIGATION, THE OBJECT OF WHICH WAS THE FINAL DETERMINATION OF THE APPLICABILITY OF THE ALABAMA SALES TAX TOSALES TO A COST-PLUS-A-FIXED-FEE CONTRACTOR, ARE REIMBURSABLE ITEMS OF COST UNDER THE TERMS OF THE CONTRACT, WHERE (A) THE COST-PLUS-A FIXED-FEE CONTRACTOR WOULD HAVE BEEN REQUIRED TO PAY TO THE VENDOR THE AMOUNT OF THE TAX IN QUESTION IF IT HAD BEEN CONCEDED TO BE APPLICABLE TO THE VENDOR, (B) SUCH LITIGATION WAS NECESSARY FOR THE DETERMINATION OF THE GENERAL APPLICATION OF STATE SALES TAXES TO SALES TO COST-PLUS A-FIXED-FEE CONTRACTORS, (C) THE LITIGATION WAS DIRECTED TO BE INITIATED BY THE WAR DEPARTMENT AND THE DEPARTMENT OF JUSTICE, (D) THE LITIGATION COULD NOT HAVE BEEN INITIATED EXCEPT UPON REQUEST MADE BY THE COST-PLUS-A-FIXED-FEE CONTRACTOR OF THE VENDOR, AND (E) UNDER THE STATE PROCEDURAL STATUTES THE QUESTION INVOLVED COULD NOT HAVE BEEN DECIDED EXCEPT IN LITIGATION INITIATED BY THE VENDOR.

IT IS REQUESTED THAT YOU RETURN THE INCLOSED PAPERS WITH YOUR DECISION.

THE REFERRED-TO MEMORANDUM OF THE JUDGE ADVOCATE GENERAL IS DATED JUNE 30, 1942, AND, RELATIVE TO THE FACTS AND CIRCUMSTANCES REPORTED TO HAVE PRECEDED THE INCURRENCE OF THE EXPENDITURES INVOLVED AND THE BASIS UPON WHICH IT IS CONSIDERED THAT REIMBURSEMENT THEREFOR IS AUTHORIZED, IS AS FOLLOWS:

1. THE CHIEF OF ENGINEERS UNDER DATE OF MAY 16, 1942, TRANSMITTED TO THIS OFFICE A STATEMENT EMBODYING THE CLAIM OF THE DUNN CONSTRUCTION COMPANY, INC., AND JOHN S. HODGSON AND COMPANY (THESE TWO COMPANIES TOGETHER HEREINAFTER REFERRED TO AS THE "CONTRACTOR") IN THE AMOUNT OF $1,606.15 FOR LEGAL EXPENSES INCURRED IN CONNECTION WITH LITIGATION INVOLVING THE ALABAMA SALES AND USE TAX ACTS. SINCE THAT DATE, THIS MATTER HAS BEEN THE SUBJECT OF MANY INFORMAL CONFERENCES. OF THE ABOVE AMOUNT $1,356.65 WAS INCURRED BY KING AND BOOZER AS FOLLOWS: $500 FOR LEGAL FEES AND TRAVEL EXPENSES, $86.65 FOR COURT COSTS IN THE CIRCUIT COURT OF MONTGOMERY COUNTY, ALABAMA, $178 FOR COSTS OF APPEAL, CIRCUIT COURT OF MONTGOMERY COUNTY, ALABAMA, $29.85 FOR COSTS IN THE SUPREME COURT OF ALABAMA, $497.25 FOR COURT COSTS IN THE SUPREME COURT OF THE UNITED STATES, AND $64.90 FOR SUPERSEDE AS AND APPEAL BOND PREMIUMS.

THE BALANCE OF $249.50 WAS INCURRED BY THE CONTRACTOR AS FOLLOWS: $67.05 FOR COURT COSTS IN THE CIRCUIT COURT OF MONTGOMERY COUNTY, ALABAMA, $157 FOR COST OF APPEAL IN THE CIRCUIT COURT OF MONTGOMERY COUNTY, ALABAMA, AND $25.45 FOR COSTS IN THE SUPREME COURT OF ALABAMA.

THE FOLLOWING INCLOSURES HAVE BEEN SUBMITTED IN SUPPORT OF THIS CLAIM:

A. COPY OF INVOICE NO. 1943, DATED JANUARY 12, 1942, FROM KING AND BOOZER TO THE WAR DEPARTMENT IN THE AMOUNT OF $500 FOR LEGAL FEES AND TRAVEL EXPENSES (INCL. 1).

B. COPY OF INVOICE DATED JANUARY 12, 1942, FROM KNOW, LILES, JONES, AND BLACKMON, ATTORNEYS, TO KING AND BOOZER IN THE AMOUNT OF $500 FOR LEGAL SERVICES AND TRAVELING EXPENSES (INCL. 2).

C. A PHOTOSTAT OF AN ITEMIZED BILL IN THE AMOUNT OF $86.65 FOR COSTS IN NO. 12047, CIRCUIT COURT OF MONTGOMERY COUNTY, ALABAMA, ENTITLED KING AND BOOZER, A PARTNERSHIP, ETC., V. THE STATE OF ALABAMA (INCL. 3).

D. A PHOTOSTAT OF AN ITEMIZED BILL IN THE AMOUNT OF $178 FOR COSTS OF APPEAL IN NO. 12047, CIRCUIT COURT OF MONTGOMERY COUNTY, ALABAMA, ENTITLED KING AND BOOZER, A PARTNERSHIP, ETC. V. THE STATE OF ALABAMA (INCL. 4).

E. THE ORIGINAL ITEMIZED BILL IN THE AMOUNT OF $497.25 IN NO. 602, SUPREME COURT OF THE UNITED STATES, ENTITLED STATE OF ALABAMA V. KING AND BOOZER, ETC. (INCL. 5).

F. COPY OF AN INVOICE DATED JUNE 4, 1941, FROM THE NATIONAL SURETY CORPORATION, ATLANTA, GEORGIA, TO KING AND BOOZER, IN THE AMOUNT OF $37.45 FOR PREMIUMS ON BONDS NOS. 461031 AND 461032 (INCL. 6).

G. COPY OF AN INVOICE DATED JULY 7, 1941, FROM THE NATIONAL SURETY CORPORATION, ATLANTA, GEORGIA, TO KING AND BOOZER, IN THE AMOUNT OF $27.45 FOR A PREMIUM ON BOND NO. 461386 (INCL. 7).

H. A PHOTOSTAT OF AN ITEMIZED BILL IN THE AMOUNT OF $29.85 FOR COSTS IN NO. 351, THE SUPREME COURT OF ALABAMA, ENTITLED KING AND BOOZER, A PARTNERSHIP, ETC. V. THE STATE OF ALABAMA (INCL. 8).

I. A PHOTOSTAT OF AN ITEMIZED BILL IN THE AMOUNT OF $67.05 FOR COSTS IN NO. 12046, CIRCUIT COURT OF MONTGOMERY COUNTY, ALABAMA, ENTITLED UNITED STATES OF AMERICA ET AL. V. JOHN C. CURRY ET AL. (INCL. 9).

J. A PHOTOSTAT OF AN ITEMIZED BILL IN THE AMOUNT OF $157 FOR COSTS OF APPEAL IN NO. 12046, CIRCUIT COURT OF MONTGOMERY COUNTY, ALABAMA, ENTITLED UNITED STATES OF AMERICA ET AL. V. JOHN C. CURRY ET AL. (INCL. 10).

K. A PHOTOSTAT OF AN ITEMIZED BILL IN THE AMOUNT OF $25.45 FOR COSTS IN NO. 350, THE SUPREME COURT OF ALABAMA, ENTITLED UNITED STATES OF AMERICA ET AL. V. JOHN C. CURRY, INDIVIDUALLY, AND AS COMMISSIONER OF REVENUE ETC. (INCL. 11).

2. THE CONTRACTOR IN A LETTER (INCL. 12) DATED JANUARY 22, 1942, TO THE AREA ENGINEER, FORT MCCLELLAN, ALABAMA, STATED THAT THE SALES AND USE TAX SUITS WERE INSTITUTED AT THE REQUEST OF THE WAR DEPARTMENT FOR THE PURPOSE OF TESTING THE LEGALITY OF THE APPLICATION OF ALABAMA SALES AND USE TAX STATUTES TO SALES OF MATERIALS TO IT FOR THE CONSTRUCTION OF A CANTONMENT AT FORT MCCLELLAN, ALABAMA. ATTACHED TO THIS LETTER WERE SIX COST BILLS IN THE AMOUNT OF $544 (INCLOSURES LISTED HEREIN AS 3, 4, 8, 9, 10, AND 11) FOR COSTS INCURRED IN THIS LITIGATION WITH THE REQUEST THAT THEY BE FORWARDED TO THIS OFFICE FOR FORMAL APPROVAL AND PAYMENT.

THE AREA ENGINEER, FORT MCCLELLAN, ALABAMA, IN A LETTER (SEE INCL. 12) DATED JANUARY 24, 1942, TO THE OFFICE OF THE DISTRICT ENGINEER, ATLANTA, GEORGIA, PERTAINING TO THE CLAIM FOR REIMBURSEMENT OF COURT COSTS IN THE CASE OF KING AND BOOZER, STATED THAT THIS CASE WAS A TEST CASE INSTITUTED AT THE REQUEST OF THE WAR DEPARTMENT AND THAT IT WAS BELIEVED THAT THE COSTS WERE A REIMBURSABLE ITEM. ATTACHED TO THIS LETTER WAS AN INVOICE IN THE AMOUNT OF $527.10, DATED JANUARY 13, 1942, TO THE CONTRACTOR SUPPORTED BY A PHOTOSTAT OF A BILL FOR COSTS OF $29.85 IN THE SUPREME COURT OF ALABAMA (THE SAME AS ITEM LISTED AS INCL. 8), AND THE ORIGINAL BILL FOR COSTS OF $497.25 IN THE SUPREME COURT OF THE UNITED STATES (LISTED AS INCL. 5).

THE DISTRICT ENGINEER, ATLANTA DIVISION, ATLANTA, GEORGIA (3RD IND. TO THE LETTER OF JANUARY 24, 1942--- SEE INCL. 12) STATED THAT PURCHASE ORDERS WERE ISSUED BY THE CONTRACTOR TO KING AND BOOZER FOR THE PURCHASE OF LUMBER FOR USE IN THE PERFORMANCE OF THE CONTRACT. THE PURCHASE ORDERS WERE APPROVED BY THE CONSTRUCTING QUARTERMASTER SUPPORTED BY BIDS OR QUOTATIONS FROM KING AND BOOZER AND APPROVED BY THE QUARTERMASTER GENERAL. THE DISTRICT ENGINEER CONCLUDED THAT, INASMUCH AS THIS SUIT WAS A TEST CASE INSTITUTED AT THE REQUEST OF THE WAR DEPARTMENT, THE CLAIM FOR COURT COSTS BY KING AND BOOZER SHOULD BE ALLOWED AS A REIMBURSABLE ITEM.

THE DIVISION ENGINEER, SOUTH ATLANTIC DIVISION, RICHMOND, VIRGINIA (4TH IND. TO THE LETTER OF JANUARY 24, 1942--- SEE INCL. 12), CONCURRED IN THE RECOMMENDATION OF THE DISTRICT ENGINEER.

3. THE UNITED STATES, THROUGH THE WAR DEPARTMENT, WAS AUTHORIZED BY ACTS OF CONGRESS PROVIDING FOR NATIONAL SECURITY AND THE ACQUISITION OF FACILITIES AND WEAPONS OF DEFENSE TO ENTER INTO CONTRACTS FOR THE PURPOSE OF CARRYING OUT THESE DECLARED OBJECTIVES (ACT OF JUNE 13, 1940, CHAP. 343 (54 STAT. 350), AND ACT OF JULY 2, 1940, CHAP. 508 (54 STAT. 712).

PURSUANT TO THE AUTHORITY GRANTED UNDER APPLICABLE STATUTES, THE UNITED STATES, THROUGH THE WAR DEPARTMENT, AWARDED A COST-PLUS-A- FIXED-FEE CONTRACT (NO. W-6119-QM-161) DATED SEPTEMBER 9, 1940, TO THE DUNN CONSTRUCTION COMPANY, INC., A DELAWARE CORPORATION, AND JOHN S. HODGSON AND COMPANY, A PARTNERSHIP, WHO WERE ACTING JOINTLY AS MEMBERS OF A CO- ADVENTURE FOR THE CONSTRUCTION OF A COMPLETE TENT AND ARMY CAMP AND OTHER MILITARY FACILITIES FOR THE UNITED STATES AT FORT MCCLELLAN, ALABAMA.

ARTICLE II, SECTION 1, OF THE CONTRACT PROVIDED FOR THE REIMBURSEMENT OF EXPENDITURES BY THE CONTRACTOR, AMONG WHICH ARE THE FOLLOWING:

"/M) PAYMENTS FROM HIS OWN FUNDS MADE BY THE CONTRACTOR UNDER THE SOCIAL SECURITY ACT, AND ANY APPLICABLE STATE OR LOCAL TAXES, FEES, OR CHARGES WHICH THE CONTRACTOR MAY BE REQUIRED ON ACCOUNT OF THIS CONTRACT TO PAY ON OR FOR ANY PLANT, EQUIPMENT, PROCESS, ORGANIZATION, MATERIALS, SUPPLIES, OR PERSONNEL; AND, IF APPROVED IN WRITING BY THE CONTRACTING OFFICER IN ADVANCE, PERMIT AND LICENSE FEES, AND ROYALTIES ON PATENTS USED INCLUDING THOSE OWNED BY THE CONTRACTOR.

"/P) SUCH ITEMS AS SHOULD, IN THE OPINION OF THE CONTRACTING OFFICER, BE INCLUDED IN THE COST OF THE WORK. WHEN SUCH AN ITEM IS ALLOWED BY THE CONTRACTING OFFICER, IT SHALL BE SPECIFICALLY CERTIFIED AS BEING ALLOWED UNDER THIS PARAGRAPH.'

4. FOLLOWING STATUTORY AUTHORIZATION FOR THE USE OF COST-PLUS-A FIXED-FEE CONTRACTS, THE WAR AND NAVY DEPARTMENTS AND OTHER DEPARTMENTS OF THE GOVERNMENT ENGAGED IN NATIONAL DEFENSE ACTIVITIES ENTERED INTO MANY COST- PLUS-A-FIXED-FEE CONTRACTS FOR THE ACQUISITION OF WAR MATERIEL, WAR FACILITIES, ARMAMENT, AND THE LIKE. THESE ACTIVITIES REQUIRED THE CONSTRUCTION OF PLANTS, CANTONMENTS, AND CAMPS IN MANY OF THE STATES OF THE UNION AND NECESSITATED THE PURCHASE OF MATERIALS AND THE CONSTRUCTION AND OPERATION OF MANY MANUFACTURING PLANTS IN MANY STATES. THE WAR PROGRAM UNDERTAKEN BY THE INTERESTED DEPARTMENTS OF THE GOVERNMENT, EVEN IN ITS INITIAL STAGES, REQUIRED THE EXPENDITURE OF BILLIONS OF DOLLARS, AND WITH THE DEVELOPMENT OF THE WAR CRISIS HAS SO DEVELOPED AS TO REQUIRE AN ESTIMATED EXPENDITURE OF OVER TWO HUNDRED BILLION DOLLARS.

5. ALMOST IMMEDIATELY UPON THE ENTRY UPON THE PERFORMANCE OF COST PLUS-A- FIXED-FEE CONTRACTS BY SUCH CONTRACTORS MANY STATE TAX AUTHORITIES IN STATES WHICH IMPOSE SALES, USE, OCCUPATIONAL, PRIVILEGE, AND GASOLINE TAXES APPLIED THOSE TAXES TO COST-PLUS-A-FIXED-FEE CONTRACTORS AND DEMANDED PAYMENT THEREOF.

6. TWENTY-TWO STATES IMPOSE SALES, USE, PRIVILEGE, OCCUPATIONAL, OR SIMILAR TAXES, AND ALL OF THE STATES IMPOSE GASOLINE TAXES IN ONE FORM OR ANOTHER. IN THE CASE OF SALES, USE, AND SIMILAR TAXES THE RATES VARY FROM ONE PERCENT TO THREE PERCENT.

7. THUS IT APPEARED THAT IF COST-PLUS-A-FIXED-FEE CONTRACTORS SHOULD BE REQUIRED TO PAY THESE TAXES TO THE STATES THE COST TO THE FEDERAL GOVERNMENT WOULD BE INCREASED IN LIKE AMOUNT. WAR AND NAVY DEPARTMENT ESTIMATES OF THIS TAX COST MADE IN JANUARY AND FEBRUARY 1941, AND BASED UPON EXPENDITURES AUTHORIZED AS OF THAT TIME, EXCEEDED $100,000,000.

8. IN THE BELIEF THAT STATE SALES, USE, PRIVILEGE, OCCUPATIONAL OR SIMILAR TAXES AND GASOLINE TAXES WERE INAPPLICABLE TO COST-PLUS-A FIXED- FEE CONTRACTORS WITH THE UNITED STATES AND TO THE PURCHASES MADE FOR THE UNITED STATES UNDER THAT TYPE OF CONTRACT, THE WAR AND NAVY DEPARTMENTS REQUESTED THE ATTORNEY GENERAL OF THE UNITED STATES TO UNDERTAKE RESISTANCE TO THESE TAXES FOR AND ON BEHALF OF THE WAR AND NAVY DEPARTMENTS. THIS REQUEST MET WITH OPPOSITION FROM CERTAIN OTHER DEPARTMENT (NONEXPENDING) OF THE GOVERNMENT, AND ONLY AFTER LENGTHY CONSIDERATION DID THE ATTORNEY GENERAL FORMULATE A POLICY WITH RESPECT TO THE TYPES OF STATE TAXES WHICH THE DEPARTMENT OF JUSTICE WOULD RESIST.

9. PENDING CONSIDERATION OF THE QUESTION BY THE ATTORNEY GENERAL, DEMANDS BY THE STATES FOR PAYMENT OF THE TAXES CONTINUED. COST-PLUS-A FIXED-FEE CONTRACTORS WERE HARASSED WITH DEMANDS FOR PAYMENT, AND THEIR VENDORS IN MANY INSTANCES EITHER REFUSED TO DELIVER MATERIALS WITHOUT PAYMENT OF THE TAX QUA TAX, OR INCREASED THEIR PRICES TO INCLUDE THE TAX. IN ONE STATE, AT LEAST, CONSTRUCTION WAS SUBSTANTIALLY DELAYED BY INABILITY TO PROCURE SUPPLIES AND MATERIALS AND THE PROCUREMENT PROGRAM WAS GENERALLY THREATENED WITH STAGNATION. 10. IN THESE CIRCUMSTANCES IT BECAME APPARENT THAT IT WAS ESSENTIAL TO THE WAR PROGRAM THAT THIS MATTER OF STATE TAXATION BE SETTLED BY A COURT DECISION OF GENERAL APPLICATION. ACCORDINGLY THE DEPARTMENT OF JUSTICE MADE A STUDY OF THE TAXING STATUTES OF EACH AFFECTED STATE AND THE PROCEDURE PRESCRIBED BY STATE STATUTES. THIS STUDY HAD FOR ITS OBJECT THE ASCERTAINMENT OF THE MOST ADVANTAGEOUS PLACE IN WHICH TO LITIGATE THE MATTER, WITH A VIEW BOTH TO THE NATURE OF THE TAX AND TO OBTAINING A FINAL DETERMINATION EXPEDITIOUSLY. BASED UPON THIS STUDY, THE DEPARTMENT OF JUSTICE CONCLUDED THAT THE ALABAMA SALES AND USE TAX STATUTES PRESENTED THE LEGAL QUESTION SQUARELY AND THAT ALABAMA PROCEDURE INSURED PROMPT CONSIDERATION BY THE COURTS.

11. THEREUPON THE DEPARTMENT OF JUSTICE ADVISED THIS OFFICE OF ITS CONCLUSION IN THESE RESPECTS AND THAT IT WOULD IN THE NAME OF THE UNITED STATES RESIST THE APPLICATION OF THE ALABAMA USE TAX TO A COST PLUS-A- FIXED-FEE CONTRACTOR WITH THE WAR DEPARTMENT. THE DEPARTMENT OF JUSTICE WAS OF THE OPINION THAT IT WAS EQUALLY NECESSARY TO LITIGATE THE QUESTION OF THE APPLICABILITY OF THE ALABAMA SALES TAX TO PURCHASES BY A COST-PLUS- A-FIXED-FEE CONTRACTOR AND, COGNIZANT OF THE FACT THAT THE VALIDITY OF THAT TAX COULD BE DETERMINED ONLY IN AN ACTION BROUGHT BY THE VENDOR OF A COST-PLUS-A-FIXED-FEE CONTRACTOR, REQUESTED THE WAR DEPARTMENT TO ARRANGE WITH A COOPERATIVE VENDOR FOR THE USE OF THAT VENDOR'S LITIGATING POSITION WITH REFERENCE TO THE SALES TAX.

12. UPON RECEIPT OF THIS ADVICE AND REQUEST A REPRESENTATIVE OF THIS OFFICE, TOGETHER WITH A REPRESENTATIVE OF THE DEPARTMENT OF JUSTICE, PROCEEDED TO MONTGOMERY, ALABAMA, AND ANNISTON, ALABAMA, WHERE CONFERENCES WERE HAD WITH THE STATE TAX AUTHORITIES, WITH DUNN CONSTRUCTION COMPANY, INC., AND JOHN S. HODGSON AND COMPANY, WHICH COMPANIES TOGETHER WERE OPERATING AS A COST-PLUS-A-FIXED-FEE CONTRACTOR, AND WITH TOM COBB KING OF THE FIRM OF KING AND BOOZER, FROM WHICH FIRM THE CONTRACTOR HAD MADE CERTAIN PURCHASES PURSUANT TO A PROPOSAL SUBMITTED BY KING AND BOOZER TO THE CONSTRUCTING QUARTERMASTER AT CAMP MCCLELLAN, ALABAMA, WHICH HAD BEEN APPROVED BY THE QUARTERMASTER GENERAL. AS A RESULT OF THESE CONFERENCES THE STATE TAXING AUTHORITIES, REPRESENTED BY THE ATTORNEY GENERAL OF ALABAMA, NOT ONLY AGREED TO THE INSTITUTION OF TEST SUITS, BUT ALSO AGREED TO EXPEDITE THE PROPOSED LITIGATION THROUGHOUT THE STATE COURTS OF ALABAMA. THE CONTRACTOR ( DUNN CONSTRUCTION COMPANY, INC., AND JOHN S. HODGSON AND COMPANY) AGREED TO THE PROPOSED LITIGATION INVOLVING THE USE TAX. THE FIRM OF KING AND BOOZER AT THE TIME OF THESE CONFERENCES HAD BEEN ASSESSED WITH ALABAMA SALES TAXES IN AN AMOUNT IN EXCESS OF $18,000, WHICH AMOUNT WAS ATTRIBUTABLE SOLELY TO SALES BY KING AND BOOZER TO THE CONTRACTOR. THE STATE DEPARTMENT OF REVENUE AT THAT TIME WAS THREATENING TO LEVY UPON THE GOODS AND CHATTELS OF KING AND BOOZER IN ORDER TO COLLECT THE TAX SO ASSESSED, AND KING AND BOOZER, IN TURN, WAS DEMANDING IMMEDIATE PAYMENT OF THE TAXES FROM THE CONTRACTOR, TAKING THE WELL-FOUNDED POSITION THAT UNDER THE ALABAMA SALES TAX STATUTE IT WAS REQUIRED TO COLLECT THE TAX FROM THE CONTRACTOR AND THAT UNDER THE STATUTE THE AMOUNT OF THE TAX BECAME A DEBT FROM THE CONTRACTOR TO KING AND BOOZER. WITH RESPECT TO BOTH THE SALES AND USE TAXES, PENALTIES HAD BEEN INCURRED AND INTEREST WAS ACCRUING.

13. AT THE SOLICITATION OF THE REPRESENTATIVE OF THE DEPARTMENT OF JUSTICE AND AT THE REQUEST OF THE CONTRACTOR, KING AND BOOZER AGREED TO LEND ITS LITIGATING POSITION WITH RESPECT TO A PORTION OF THE SALES TAX INVOLVED, TO WIT: THE SUM OF $1,236.71 TAX, $123.67 PENALTIES THEREON, WITH INTEREST UPON THE AMOUNT OF THE TAX FROM APRIL 20, 1941, WITH THE UNDERSTANDING THAT ITS LITIGATING POSITION WITH RESPECT TO THAT PORTION OF THE SALES TAX WAS AFFORDED TO THE WAR DEPARTMENT AND TO THE DEPARTMENT OF JUSTICE SOLELY FOR THE PURPOSE OF DETERMINING THE VALIDITY OF THE TAX AND FOR NO OTHER PURPOSE. IT WAS EXPRESSLY UNDERSTOOD AND AGREED, AS TO THE REMAINDER OF THE TAX ASSESSED BY THE STATE TAX COMMISSIONER AGAINST KING AND BOOZER, THAT KING AND BOOZER RESERVED ALL RIGHTS WITH RESPECT THERETO; ALSO THAT KING AND BOOZER WOULD NOT BE REQUIRED TO PAY THE COURT COSTS INCIDENT TO THE TEST LITIGATION, AND THAT IT SHOULD HAVE THE RIGHT TO THE PRESENCE OF COUNSEL IN SUCH LITIGATION FOR THE PROTECTION OF SUCH OTHER INTERESTS AS IT MIGHT HAVE WITH RESPECT TO THE TAX WHICH MIGHT OTHERWISE HAVE BEEN INVOLVED IN THE TEST LITIGATION. TO THIS A REPRESENTATIVE OF THE DEPARTMENT OF JUSTICE AND A REPRESENTATIVE OF THE WAR DEPARTMENT GAVE THEIR APPROVAL. IT WAS APPARENT THAT IF THE TAX SHOULD BE DETERMINED TO BE A VALID TAX WHEN APPLIED TO A COST-PLUS-A-FIXED-FEE CONTRACTOR'S PURCHASES, THEN THE CONTRACTOR WITH THE WAR DEPARTMENT WOULD BE REQUIRED TO PAY THE AMOUNT OF THE TAX TO KING AND BOOZER, TOGETHER WITH INTEREST AND PENALTIES, SINCE THE CONTRACTOR WAS WITHHOLDING PAYMENT OF THE TAX TO KING AND BOOZER ONLY BECAUSE OF THE DIRECTIONS OF THE WAR DEPARTMENT AND THE DEPARTMENT OF JUSTICE. THEREAFTER AND IN CONFORMITY WITH THIS UNDERSTANDING, WITHOUT WHICH KING AND BOOZER WOULD NOT HAVE MADE ITS LITIGATING POSITION AVAILABLE TO THE DEPARTMENT OF JUSTICE AND THE WAR DEPARTMENT, THE DEPARTMENT OF REVENUE CONFIRMED THE ASSESSMENT IN THE AMOUNT OF $1,236.71 IN TAX, AND $123.67 PENALTIES, WITH INTEREST UPON THE AMOUNT OF THE TAX FROM APRIL 20, 1941. FROM THIS ASSESSMENT KING AND BOOZER, THROUGH THE DEPARTMENT OF JUSTICE, FILED AN APPEAL IN THE CIRCUIT COURT OF MONTGOMERY COUNTY, ALABAMA, WHICH COURT CONFIRMED THE ASSESSMENT OF THE STATE DEPARTMENT OF REVENUE. THEREAFTER IN LIKE FASHION THE DEPARTMENT OF JUSTICE PERFECTED AN APPEAL IN THE NAME OF KING AND BOOZER IN THE SUPREME COURT OF ALABAMA. IN THE CIRCUIT COURT OF MONTGOMERY COUNTY, ALABAMA, AND IN THE SUPREME COURT OF ALABAMA, THE DEPARTMENT OF JUSTICE, THROUGH ITS REPRESENTATIVE, APPEARED FOR THE UNITED STATES AS INTERVENOR AND CONTROLLED AND DIRECTED THE LITIGATION, THE MAKING OF THE RECORD, THE PERFECTING OF THE APPEAL, AND THE BRIEFING OF THE CASE. COUNSEL FOR KING AND BOOZER APPEARED IN BOTH OF THESE COURTS AND LATER IN THE SAME CASE IN THE SUPREME COURT OF THE UNITED STATES, AND WAS ACTUALLY PRESENT AT ALL STAGES OF THE LITIGATION.

14. IN THE CASE OF THE ALABAMA USE TAX LITIGATION, PROCEEDING UNDER THE NAME OF DUNN CONSTRUCTION COMPANY, INC., AND JOHN S. HODGSON AND COMPANY, THE CONTRACTOR, THE UNITED STATES APPEARED AS CO-PLAINTIFF AND, THROUGH THE REPRESENTATIVE OF THE DEPARTMENT OF JUSTICE, HAD FULL CHARGE OF THE LITIGATION FROM ITS INCEPTION TO ITS TERMINATION.

15. NOT ONLY WAS THE QUESTION OF THE APPLICATION OF STATE SALES AND USE TAXES TO COST-PLUS-A-FIXED-FEE CONTRACTORS AND TO THE VENDORS OF SUCH CONTRACTORS IMPORTANT FROM THE STANDPOINT OF INCREASED COST OF THE WHOLE PROCUREMENT PROGRAM, BUT IT WAS IMPORTANT IN THE ADMINISTRATION OF ALL COST-PLUS-A-FIXED-FEE CONTRACTS. NEITHER THE CONTRACTOR IN THE INSTANT CASE NOR KING AND BOOZER HAD ANY PARTICULAR OR FINANCIAL INTEREST IN THIS QUESTION OTHER THAN TO ASSIST THE UNITED STATES IN SECURING A DETERMINATION. THE CONTRACTOR, THE CONTRACTING OFFICER, AND REPRESENTATIVES OF THE WAR DEPARTMENT AND OF THE DEPARTMENT OF JUSTICE, DECIDED THAT, BEFORE PAYING THE ALABAMA SALES AND USE TAXES ON TRANSACTIONS UNDER THE CONTRACT, THEY SHOULD BE SURE THAT SUCH TAXES WERE LEGALLY DUE. THIS ACTION TAKEN WAS FOR THE PURPOSE OF MINIMIZING TAXES REIMBURSABLE UNDER ARTICLE II, SECTION 1, PARAGRAPH (M), OF THE CONTRACT, REFERRED TO IN PARAGRAPH 3 HEREOF. SUBSECTION (P), OF ARTICLE II, SECTION 1, OF THE CONTRACT, PROVIDES FOR THE REIMBURSEMENT OF EXPENDITURES MADE BY A FIXED-FEE CONTRACTOR COVERING SUCH ITEMS AS SHOULD, IN THE OPINION OF THE CONTRACTING OFFICER, BE INCLUDED IN THE COST OF THE WORK. THESE EXPENSES SHOULD BE INCLUDED IN THE COST OF THE WORK AS THEY WERE INCURRED IN AN ENDEAVOR TO REDUCE THE TOTAL AMOUNT OF MONEY TO BE EXPENDED UNDER THE TERMS OF THE CONTRACT, AT THE INSISTENCE OF THE WAR DEPARTMENT AND THE DEPARTMENT OF JUSTICE. THE LITIGATION ALSO DETERMINED THE GENERAL QUESTION OF THE CONSTITUTIONALITY OF STATE TAXES AS APPLIED TO ALL COST- PLUS-A-FIXED FEE CONTRACTORS.

THE VOUCHERS WHICH HAVE BEEN SUBMITTED BY THE CONTRACTOR IN SUPPORT OF ITS CLAIM ARE NOT IN PROPER FORM FOR PAYMENT. THEY HAVE NOT BEEN CERTIFIED AND APPROVED FOR PAYMENT BY THE CONTRACTING OFFICER. MANY OF THE ORIGINAL PAPERS ARE FILED IN DIFFERENT OFFICES OF THE WAR DEPARTMENT AND THE CONTRACTING OFFICERS ARE NOT IMMEDIATELY AVAILABLE. HOWEVER, THE QUESTION OF REIMBURSEMENT IS BEING SUBMITTED FOR DETERMINATION WITH THE UNDERSTANDING THAT IN THE EVENT THAT IT IS DECIDED THAT THESE ITEMS ARE REIMBURSABLE THESE VOUCHERS WILL BE SUBMITTED IN PROPER FORM.

16. IT IS THE OPINION OF THIS OFFICE THAT THESE COSTS INCURRED IN THIS LITIGATION WHICH WAS CONDUCTED ON BEHALF OF THE UNITED STATES ARE REIMBURSABLE ITEMS UNDER THE TERMS OF THE CONTRACT. THE IMPORTANCE OF THIS QUESTION MAKES IT DESIRABLE THAT THE OPINION OF THE COMPTROLLER GENERAL THEREON BE SECURED IN ADVANCE OF PAYMENT.

SUCCINCTLY STATED, IT APPEARS THAT IN THE COURSE OF THE PERFORMANCE OF THE CONTRACT HERE INVOLVED, THERE AROSE THE QUESTION OF THE LIABILITY OF THE CONTRACTOR AND OF ITS SUPPLIERS FOR THE USE AND SALES TAXES, RESPECTIVELY, IMPOSED BY THE STATE OF ALABAMA; THAT, UNDER THE REIMBURSEMENT PROVISIONS OF THE CONTRACT, THESE TAXES, IF REQUIRED TO BE PAID BY THE PARTIES, WERE ITEMS OF COST TO BE REIMBURSED BY THE GOVERNMENT; AND, THAT FOR THE PURPOSE OF OBTAINING A FINAL DETERMINATION WHETHER THESE AND SIMILAR TAXES IMPOSED BY ALABAMA AND OTHER STATES WERE APPLICABLE TO THE OPERATIONS CONDUCTED BY COST-PLUS-A FIXED-FEE CONTRACTORS, GENERALLY, ON BEHALF OF THE UNITED STATES, THE SAID CONTRACTOR AND ONE OF ITS SUPPLIERS WERE PERSUADED TO INSTITUTE THE NECESSARY LITIGATION FOR SUCH PURPOSES, IT BEING UNDERSTOOD AND AGREED THAT THE EXPENSES RESULTING THEREFROM WOULD BE REIMBURSED BY THE GOVERNMENT. IN THIS SITUATION, THE QUESTION NOW IS PRESENTED WHETHER THE SAID EXPENSES SO INCURRED MAY BE REGARDED AS REIMBURSABLE ITEMS OF COST UNDER THE TERMS OF THE CONTRACT.

THE ITEMS OF COST FOR WHICH REIMBURSEMENT MAY BE MADE UNDER THE TERMS OF THE COST-PLUS-A-FIXED-FEE CONTRACT HERE INVOLVED, AS WELL AS UNDER THE TERMS OF THE APPROVED STANDARD FORMS OF OTHER COST-PLUS-A FIXED-FEE CONTRACTS, ARE LIMITED TO SUCH EXPENDITURES AS ARE DIRECTLY CONNECTED WITH THE WORK COVERED BY THE CONTRACT AND AS ARE APPROVED OR RATIFIED BY THE CONTRACTING OFFICER. FURTHER, IN LIMITATION OF THE GOVERNMENT'S LIABILITY THEREUNDER, THESE CONTRACTS CONTAIN PROVISIONS TO THE EFFECT THAT THE FIXED FEE PAID TO THE CONTRACTOR FOR THE WORK CONSTITUTED COMPLETE COMPENSATION FOR THE CONTRACTOR'S SERVICES, INCLUDING PROFIT AND GENERAL OVERHEAD EXPENSES, AND THAT, EXCEPT AS SPECIFICALLY AUTHORIZED IN THE CONTRACT, NO OVERHEAD EXPENSES OF ANY KIND SHALL BE INCLUDED IN THE COST OF THE WORK.

IN THE LIGHT OF THE FOREGOING, SINCE THERE IS NOTHING IN THE PROVISIONS OF THE CONTRACT HERE INVOLVED SPECIFICALLY PROVIDING THAT ATTORNEY'S FEES OR THE EXPENSE OF DEFENSE OR PROSECUTION OF SUITS IS TO BE PAID BY THE GOVERNMENT AS A PART OF THE COST OF THE WORK, SUCH EXPENSES, ORDINARILY, WOULD BE REGARDED AS A PART OF THE CONTRACTOR'S GENERAL OVERHEAD EXPENSE, COMPENSATION FOR WHICH IS TO BE PRESUMED AS HAVING BEEN INCLUDED IN THE FIXED FEES PAID. HOWEVER, IN VIEW OF THE FACT THAT, IN THE INSTANT CASE, THE INCURRING OF THE LITIGATION EXPENSES BY THE CONTRACTOR WAS AT THE REQUEST, AND UNDER THE CONTROL AND SUPERVISION, OF THE GOVERNMENT, THERE APPEARS NO REASONABLE BASIS FOR THE ASSUMPTION THAT THE COST THEREOF WAS SO INCLUDED. RATHER, THE CIRCUMSTANCES THUS PRESENTED APPEAR ANALOGOUS TO THOSE CONSIDERED BY THE COURT OF CLAIMS IN THE CASE OF CENTRAL CONSTRUCTION CORPORATION V. THE UNITED STATES, 63 C.1CLS. 290, 296, WHEREIN, WITH REFERENCE TO THE REIMBURSEMENT OF A COST-PLUS CONTRACTOR FOR ATTORNEYS' FEES INCURRED, IT WAS HELD:

ORDINARILY WE WOULD NOT HOLD THAT FEES TO COUNSEL WERE NECESSARILY A PART OF THE COST OF THE WORK CONTEMPLATED IN CONTRACTS OF THIS CHARACTER. BUT IN THIS CASE THE PLAINTIFF WAS REQUESTED BY THE CONTRACTING OFFICER TO PERFORM CERTAIN SERVICES FOR THE BENEFIT OF THE GOVERNMENT, AND IN THE COURSE OF THE WORK UNDER THE CONTRACT THESE SERVICES COULD NOT BE PROPERLY PERFORMED IN THE INTEREST OF THE GOVERNMENT WITHOUT THE EMPLOYMENT OF AGENCIES EQUIPPED FOR THEIR EFFECTIVE PERFORMANCE. THE PLAINTIFF HAD TO EMPLOY SUCH AGENCIES AND WAS, IN EFFECT, AUTHORIZED TO DO SO, AND HAVING EMPLOYED THEM AND PAID THEM THEIR REASONABLE CHARGES, THE PLAINTIFF SHOULD BE REIMBURSED THE AMOUNT SO PAID * * *.

WHAT WAS SAID THEREIN APPEARS APPLICABLE TO THE REIMBURSEMENT TO THE PRIME CONTRACTOR HERE INVOLVED FOR THE EXPENSES INCURRED IN THE DETERMINATION OF ITS LEGAL OBLIGATION TO PAY THE ALABAMA USE TAX. THAT IS TO SAY, WHERE, AS HERE, FOR THE BENEFIT OF THE GOVERNMENT, THE CONTRACTOR IS REQUESTED TO RESIST THE COLLECTION FROM IT OF AN AMOUNT WHICH IT OTHERWISE WOULD BE REQUIRED TO PAY UNDER A COST-PLUS-A-FIXED FEE CONTRACT, IT WOULD APPEAR THAT THE CONTRACTOR PROPERLY MAY BE REIMBURSED FOR SUCH COSTS INCURRED AS ARE DIRECTLY ATTRIBUTABLE THERETO.

WITH REFERENCE TO THE COSTS INCURRED BY THE CONTRACTOR'S VENDOR IN THE LEGAL DETERMINATION OF WHETHER SALES TO COST-PLUS-A-FIXED-FEE CONTRACTORS ARE ENTITLED TO THE SAME EXEMPTIONS FROM STATE TAXATION AS ARE ACCORDED SALES MADE DIRECTLY TO THE FEDERAL GOVERNMENT, SINCE IT IS EVIDENT FROM THE FACTS PRESENTED THAT THIS SERVICE WAS INTENDED TO BE AND WAS PERFORMED EXCLUSIVELY FOR THE BENEFIT OF THE GOVERNMENT, THE REASONS ASSIGNED ABOVE FOR THE REIMBURSEMENT OF SIMILAR COSTS DIRECTLY INCURRED BY THE CONTRACTOR WOULD APPEAR TO EXTEND TO THE REIMBURSEMENT OF THE COSTS HERE INVOLVED. MOREOVER, SINCE THE GOVERNMENT, UNDER THE TERMS OF THE CONTRACT, WAS REQUIRED TO REIMBURSE THE CONTRACTOR FOR SUCH AMOUNT AS WAS PAID FOR THE MATERIALS NECESSARY TO THE PERFORMANCE OF THE CONTRACT WORK, WITHOUT REGARD TO WHETHER OR NOT THE PRICE THEREOF INCLUDED SALES TAXES PAID BY THE VENDOR, IT WOULD APPEAR THAT THE EXPENSES INCURRED AT THE REQUEST AND ON BEHALF OF THE GOVERNMENT IN AN EFFORT TO REDUCE THE CONTRACT COST TO THE GOVERNMENT, BY THE ELIMINATION OF SUCH TAXES, PROPERLY MAY BE REGARDED AS "REASONABLY INCIDENT TO THE PERFORMANCE OF THE WORK AND TO SERVE A USEFUL PURPOSE IN FULFILLING THE CONTRACT REQUIREMENTS," AND, AS SUCH, REIMBURSABLE BY THE GOVERNMENT.

ACCORDINGLY, YOU ARE ADVISED THAT THE REIMBURSEMENT OF THE EXPENSES INCURRED IN THE PROSECUTION OF THE LITIGATION HERE INVOLVED IS AUTHORIZED, PROVIDED SUCH EXPENSES ARE PROPERLY SUBSTANTIATED, ARE APPROVED OR RATIFIED BY THE CONTRACTING OFFICER, AND ARE VERIFIED IN ACCORDANCE WITH THE TERMS OF THE CONTRACT.