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Ford Motor Co. v. Korzen





APPEAL from the Circuit Court of Cook County; the Hon. WILLIAM V. BROTHERS, Judge, presiding.


Rehearing denied March 16, 1964.

This case presents the question of whether certain personal property in the possession of the plaintiff Ford Motor Company is exempt from taxation because title to the property is in the plaintiff-intervenor, United States of America.

Ford commenced an equitable action in the circuit court of Cook County seeking to restrain the defendants from collecting personal property taxes upon the subject property in the principal amount of $1,911,811.95. The action was based upon the theory that the property was owned by the United States and therefore was exempt from taxation. The United States has intervened as a party plaintiff.

The case was tried upon a stipulation of facts and the trial court concluded that the United States was the owner of the property in question and that the property was therefore exempt from taxation by virtue of the constitution of the United States and section 19 of the Revenue Act. (Ill. Rev. Stat. 1957, chap. 120, par. 500.) The trial court entered a decree granting injunctive relief and defendants have appealed directly to this court.

Defendants contend that the United States holds mere legal title to the property in question, and that such title does not warrant exemption under section 19 of the Revenue Act. They further contend that Ford, rather than the United States, has such ownership in the property to support a valid tax by Cook County without invading the constitutional rights and immunities of the United States.

Plaintiffs insist, however, that the United States was the owner of the property, and that the possessory interest of Ford as a bailee was not subject to tax under Illinois law and was immune from tax under the Federal constitution. Plaintiffs further contend that a tax upon such property would constitute unlawful discrimination against the United States.

On April 1, 1958, the disputed property was in the possession of Ford in Illinois, and legal title was in the United States pursuant to four types of contracts between Ford and the United States Air Force.

The first type of contract is a simple bailment of government property loaned to Ford. Defendants now concede that this property is not taxable and that the collection of the part of the tax attributable to such property was properly enjoined.

The other three contracts deal with items to be manufactured by Ford or acquired by it from non-governmental sources for the performance of these interrelated contracts. These contracts relate to (1) the manufacture of spare parts, (2) the acquisition of facilities, and (3) the manufacture of engines and acquisition of special tooling.

The spare parts contract and the engine and special tooling contract contain a "Progress Payment Clause." In this clause, a progress payment is defined as a payment "prior to acceptance". This clause prescribes that title to all material of every description, and at whatever stage of manufacture, which is in the plaintiff's possession and is applicable to these contracts, passes from Ford to the Air Force upon the making of the first progress payment, and title to any such material thereafter acquired or produced by Ford passes to the Air Force upon its acquisition or production by the plaintiff. Before a progress payment can be made, there must be a representation and warranty by the contractor that the property is free and clear of all liens and encumbrances of every kind. In addition to the title-vesting language, the progress payment clause contains elaborate and detailed provisions concerning the possession, use, control, risk of loss, and right of rejection of such material.

Ford is in possession of the material until acceptance of the finished items by the Air Force, and bears the risk of loss, destruction or damage of all materials. Plaintiff Ford has control of the manner in which these materials are applied in the performance of the contracts. It has the right to dispose of current production scrap, subject to the provision that it must credit the Air Force with the amount received therefor. Ford has the right to use the material or dispose of it on terms approved of by the government. The proceeds from any disposition of materials must also be credited to the government.

In addition to the progress payment clause, the special tooling contract was subjected to special provisions. These provisions, though analogous to the progress payment clause, are adapted to the circumstance that the special tools, covered therein, do not themselves enter into the final products, but are merely used in the production of those final products. The use of special tools must be in performance of the contract or with prior written approval of the government.

The acquisition of facilities contract is analogous to the spare parts and special tooling contracts, and includes similar formal title-vesting language. The subject matter of the contract is apparently manufacturing machinery necessary for the performance of the other contracts. There are no provisions for readily disposing of them during the course of the contract. In lieu of provisions for diverting the material itself to other purposes, this contract makes analogous provisions in the event that the use of the machinery is so diverted. Detailed reports must be filed as to use, so that appropriate charges may be made, and thus the Air Force, as under the other contracts, will not be paying in full for items some of which ...

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