No. 95-128

IN THE SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1995

UNITED STATES OF AMERICA, PETITIONER

v.

COUNTY OF SAN DIEGO, CALIFORNIA;
GREGORY J. SMITH, SAN DIEGO COUNTY ASSESSOR; AND
PAUL BOLAND, SAN DIEGO COUNTY TAX COLLECTOR

PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

DREW S. DAYS, III
Solicitor General

LORETTA C. ARGRETT
Assistant Attorney General

LAWRENCE G. WALLACE
Deputy Solicitor General

KENT L. JONES
Assistant to the Solicitor General

DAVID ENGLISH CARMACK
JOHN J. MCCARTHY
Attorneys

Department of Justice
Washington, D.C. 20530
(202)514-2217


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     QUESTIONS PRESENTED

1. Whether a federal contractor that manages re-
search equipment owned by the United States may be
subjected to a state ad valorem property tax with
respect to that equipment solely because (i) the con-
tractor obtains "knowledge" from its management
of the research equipment and (ii) that "knowledge"
has an incidental, independent commercial value.
2. Whether, if a federal contractor may be sub-
jected to a state property tax in these circumstances,
the tax maybe based upon the value of the property
owned by the United States-a value that has no re-
lationship to the value of the "knowledge" that the
contractor purportedly obtained.

(i)

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TABLE OF CONTENTS     

Page

Opinions below  . . . . 1
Jurisdiction  . . . . 1
Constitutional and statutory provisions involved . . . . 2
Statement  . . . .   2
Reasons for granting the petition  . . . . 13   
Conclusion . . . .  25
Appendix A . . . .  1a
Appendix B  . . . .  11a
Appendix C  . . . .  27a
Appendix D  . . . .  45a
Appendix E  . . . .   50a                   -
Appendix F  . . . .   51a

     TABLE OF AUTHORITIES

Cases:

City of Detroit V. Murray Corp., 355 U.S. 489
  (1958) . . . .  15, 16
Esso Standard Oil Co. V. Evans, 345 U.S. 495
  (1953) . . . .  15
McCulloch v. Maryland, 17 U.S. (4 Wheat.)316
  (1819) . . . .  24
United States v. Anderson County, 761 F.2d 1169
  (6th Cir. 1985)  . . . . 17
United States v. Boyd, 378 U.S.39 (1964 ) . . . .  16, 19
United States V. California, 113 S. Ct. 1784
  (1993)  . . . .  10, 11, 12, 20
United States v. City of Detroit, 355 U.S. 466
  (1958)  . . . .  l2, 14, 15, 16, 18, 21, 22
United States V. Colorado:
   460 F. SUPP. 1184 (D. Colo. 1978), aff'd, 627
   F.2d 217 (10th Cir. 1980), aff'd mem. sub
    nom. Jefferson County v. United States, 450
   U.S. 901 (1981)  . . . . 10

         (III)

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          IV

Cases-Continued:             

 Page

   627 F.2d 217 (10th Cir. 1980), aff'd sub nom.
   Jefferson County v. United States, 450 U.S.
   901 (1981)  . . . .  8, 16, 17, 18, 20, 22
United States V. County of Fresno, 429 U.S. 462
  (1977)  . . . .   7, 15, 17, 19, 21, 23
United States V. County of Allegheny, 322 U.S.
  174 (1944)  . . . . 15, 22, 23
United States v. Hawkins County, 859 F.2d 20
  (6th Cir. 1988)  . . . .  20, 22, 23
United States V. New Mexico, 455 U.S. 720
  (1982)  . . . .    14, 16, 19, 24
United States V. Nye County, 938 F.2d 1040 (9th
  Cir. 1991) ,cert. denied, 503 U.S. 919 (1992) . . . .  8, 19
United States v. Township of Muskegon, 355 U.S.
  484 (1958) . . . . 15, 16, 17, 19

Constitution and statutes:

U.S. Const. Art. VI, Cl. 2 (Supremacy Clause) . . . .   2
28 U.S.C. 1345  . . . .  2, 6

Cal. Rev. & Tax. Code (West 1987):
   104 . . . .   2, 4
   105  . . . .  2, 4
   107 . . . .   2, 4

Miscellaneous

California State Board of Equalization, Appraised
  of Possessor Interests (Feb. 1974)  . . . .   5

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IN THE SUPREME COURT OF THE UNITED STATES


OCTOBER TERM, 1995

       No. 

  UNITED STATES OF AMERIGA, PETITIONER

         v.

   COUNTY OF SAN DIEGO, CALIFORNIA;
GREGORY J. SMITH, SAN DIEGO COUNTY ASSESSOR; and
PAUL BOLAND, SAN DIEGO COUNTY TAX COLLECTOR

PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
    FOR THE NINTH CIRCUIT

The Solicitor General, on behalf of the United
States of America, petitions for a writ of certiorari
to review the judgment of the United States Court of
Appeals for the Ninth Circuit in this ease.

       OPINIONS BELOW

The opinions of the court of appeals (App., infra,
1a-10a, 11a-26a) are reported at 53 F.3d 965 and
965 F.2d 691. The opinions of the district court
(App., infra, 27a-44a, 45a-49a) are unreported.

       JURISDICTION

 The judgment of the court of appeals (App., infra,
50a) was entered on April 24, 1995. The jurisdiction
of this Court is invoked under 28 U.S.C. 1254(1).

(1)

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                   2
 
   CONSTITUTIONAL AND STATUTORY
     PROVISIONS INVOLVED

Article VI, Clause 2, of the United States Constitu-
tion, 28 U.S.C. 1345, and Sections 104, 105 and 107
of the California Revenue and Taxation Code (West
1987 ) are reproduced at App., infra, 51a-52a.

       STATEMENT

1. The United States Department of Energy funds
and administers nuclear fusion research at several
locations throughout the country, The object of this
research is to develop a magnetically confined fusion
reaction system that is capable of generating com-
mercial electric power. As part of this technically
complex program, the Department has contracted for
research and engineering services from private indus-
try and universities (App., infra, 27a-28a).
Since 1963, the Department has engaged in a series
of research management contracts with a private
scientific research firm named General Atomics.
These contracts require General Atomics to assemble,
maintain and operate a large federally owned experi-
mental fusion device at the contractor's facility in
San Diego, California? General Atomics is reim-
bursed for the costs it properly incurs in performing
this contract, including applicable state and local
taxes. In addition, General Atomics is paid an an-
nual fee of approximately $2.5 million for its services
(App., infra, 12a-13a). The contracts between the

___________________(footnotes)

1 Two nuclear devices were used during the period relevant
to this litigation. The D-III device was in use from 1978 until
it was dismantled in 1984. The D-IIID device was then built
and has remained in use since 1986 (App., infra, 2a & n.1 ).
In this petition, the two devices are referred to collectively
as the "device."

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         3

Department and General Atomics are subject to
unilateral termination by the government (id. at
12a).
The experimental fusion device is the exclusive
property of the United States and is maintained by
General Atomics in a building located on the contrac-
tor's property. The Department retains complete con-
trol over access to the device by all persons, including
the employees of the contractor (App., infra, 28a).2
During the period relevant to this litigation, the
fusion device weighed between 400 and 500 tons (CR
19, at 9) :

The * * * device itself and its associated equip-
ment are a complex assembly of thousands of
individual components and systems, including
many assemblies and subassemblies. When com-
ponents can no longer meet the requirements of
the changed or upgraded experiment they are
removed and new components are designed and
added to the assembly. Hence, the very nature
of the experiment requires that the device can
be taken apart so that its numerous components
can be disassembled, modified, altered or moved
to new locations.

From time to time, the device has been disassembled,
reassembled and modified. Various parts of the device
have been transferred by the Department to other

___________________(footnotes)

2 The government of Japan also provided financial resources
for this fusion research program. In return, between 1980
and 1985, the United States granted Japan fifty percent of
the time available for experimental use of the device (CR
89 (Steele Decl.) at 1-7) ("CR" refers to the docket control
numbers assigned to documents in the original record by the
clerk of the district court and transmitted to the court of
appeals).

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         4

sites for use in associated research projects ( App.,
infra, 28a).
General Atomics has no control over the device, the
components of the -device or the transfer or relocation
of those components by the Department. Use of the
fusion device by General Atomics is strictly limited
to the specific operational and management tasks re-
quired in performing its contract with the Depart-
ment. The Department has permitted no other uses
of the device by the contractor. App., infra, 28a;
CR 17 (Beighly Decl. at 6)).
2. Respondents are the County of San Diego, its
assessor and its tax collector. In the course of an
audit conducted for the 1978 and 1979 tax years,
respondents determined that General Atomics had
a "possessor interest" in the Department's experi-
mental fusion device that was subject to tax under
the State's ad valorem property tax, Cal. Rev. & Tax.
Code  104,105,107 (West 1987).
California imposes an annual ad valorem tax on
the ownership or possession of land and improvements
within the State. Cal. Rev, & Tax Code 104 (West
1987). A "possessor interest" is the taxable interest
that stems from the "[p]ossession of, claim to, or
right to the possession of land or improvements" (id.
 107). The term "improvement" is defined under
state law to include all "buildings, structures, fix-
tures, and fences erected on or affixed to the land."
Id.  105.
Respondents took the position that the "possession
of" the government's experimental fusion device by
General Atomics_gave it a "possessor interest" that
was subject to tax under state law ( App., infra,
13a). Respondents therefore issued property tax as-

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         5

sessments against General Atomics for an, imputed
value of that "possessor interest" in the device for
the years 1978 through 1985 and 1987 through 1989.
Respondents valued the contractor's "possessor in-
terest" by assuming, with certain adjustments, that
the contractor had an interest equivalent to a 307.
share of a five-year lease in the use of the fusion
device? Based on this valuation, respondents assessed
a total amount of tax, penalties and interest for the
years at issue of approximately $1,300,000 (ibid.).
General Atomics paid the taxes assessed for 1978-
1981 and 1987-1988 ($568,002) but did not pay
the taxes assessed for 1982-1985 and 1989 ($721,-
979). Under the terms of the federal contract, the
United States reimbursed General Atomics for the

___________________(footnotes)

3 See CR 89 (Steele Decl. at 2-3); CR 39 (Mere. of the
United States at 19-20). Under what the State refers to as
the "indirect cost approach," the tax assessor calculates the
present value of the taxpayer's Possessor interest in prop-
erty by determining (i) the cost of the property in which the
taxpayer allegedly has a possessory interest, (ii) the average
life and salvage value of the property, (iii) the duration and
extent of the taxpayer's right to use the property, (iv) any
reversionary interest and salvage value of the property and
(v) the appropriate allowance for depreciation. The tax rate
is applied to the resulting valuation to determine the tax to
be paid. See California State Board of Equalization, The
Appraisal of Possessory Interests at AH 517-22 to AH 517-25
(Feb. 1974).
The facts relating to the appraisal and tax calculations
made by respondents have not been developed in detail in
the opinions in this case. At respondents' urging, the district
court concluded that it need not address the factual details
of the challenge of the United States to the appraisal and
valuation methodology applied by respondents. See App.,
infra, 46a-48a; page 11, infra.

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         6

taxes it paid to respondents (App., infra, 13a). Al-
though the assessment was challenged before the
county assessor, neither the United States nor Gen-
eral Atomics thereafter filed state-law refund claims
with respondents or with the state government (id.
at 9a).
3. In 1989, the United States commenced this ac-
tion in federal district court under 28 U.S.C. 1345.'
The United States sought a declaratory judgment
(i) that the tax that respondents sought to impose
was on property owned by the United States and was
therefore in violation of the Constitution, (ii) that
the asserted "possessor interest" of the contractor
in the governments fusion device had been improperly
and unlawfuIIy valued and (iii) that the contractor's
responsibility to maintain and manage the govern-
ment's fusion device did not provide it with a "pos-
sessory interest" in that device under state law. The
United States sought an injunction against any fur-
ther actions to assess or collect the challenged tax
and a refund from respondents of the taxes, interest
and penalties already paid (App., infra, 3a; CR 1,
at 11-13).
a. In the first of its two opinions in this case, the
district court granted partial summary judgment to
respondents (App., infra, 27a-44a). The court ac-
knowledged that a state tax (i) may not be levied
directly on federal property and (ii) may constitu-

___________________(footnotes)

4 Section 1345 (28 U.S. C.) provides:
  Except as otherwise provided by Act of Congress, the
district courts shall have original jurisdiction of all civil
actions, suits or proceedings commenced by the United
States, or by any agency or officer thereof expressly
authorized to sue by Act of Congress.

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         7

tionally be levied on a federal contractor for its pos-
session or use of federal property only if the con-
tractor "derives some beneficial use from its opera-
tion and access to the government-owned * * * device"
(id. at 30a, citing, e.g., United States v. County of
Fresno, 429 U.S. 452 (1977)). The court noted,
moreover, that the contractor's use of the govern-
ment's experimental fusion device was restricted
"solely [to the] performance of its contract with the
[United States]" (App., infra, 31a).
The court nonetheless stated that respondents could
constitutionally impose a tax on the contractor's "use"
of the government's device because "[w] hat [General
Atomics] gains and indeed sells to other customers
is knowledge and expertise in fusion research" (App.,
infra, 31a). Noting that the contractor had earned
approximately $176,000 in "consulting fees * * *
for its expertise gained through work on the * * *
device," 5 the court concluded that "[t] his expertise
is the separate, taxable beneficial use of the * * *
device" that justifies imposition of the State's tax
on the contractor's use of federal property (id. at
31a-32a).
The court stated that "[t] he possessor interest
tax [imposed by respondents] reaches only that sep-
arate beneficial use of government property that [the

___________________(footnotes)

5 The "consulting fees" to which the court referred (a total
of $176,000 earned over several years) represent only 0.04% 
of the contractor's total revenues during that period (CR 38,
at 2-6 (Overskie Decl. ) ). The taxes, penalties and interest
imposed by respondents over this same period ($1,300,000)
exceed by several magnitudes the "consulting fees" that the
court held to be the constitutional basis for imposition of the
state tax on the contractor's "beneficial use" of federal prop-
erty.

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         8

contractor] enjoys; it is not a tax on the property
itself" (App., infra, 33a). The court did not dis-
pute that a state tax is unconstitutional if it
fails "to segregate the contractor's benefit from the
value of the government property itself" (id. at 34a,
citing United States v. Colorado, 460 F. Supp. 1184
(D. Colo. 1978), aff'd, 627 F.2d 217 (10th Cir.
1980), aff'd sub nom. Jefferson County v. United
States, 450 U.S. 901 (1981 )), The court stated, how-
ever, that it would not address that issue because the
United States had not challenged the assessment on
that basis in the briefing on the motion before it
(App., infra, 34a, 43a).
The United States regarded the question whether
the state tax "segregate [d] the contractor's benefit
from the value -of the government property itself"
(App., infra, 34a) to be part of its challenge to re-
spondents' `(valuation" of the taxable property. See
page 10, supra. The court deferred to a later proceed-
ing the objections of the United States to respondents'
"valuation" of the contractor's "possessor interest"
(App., infra, 43a).
b. On an interlocutory appeal, the court of ap-
peals affirmed (App., infra, 11a-26a). The court first
held that, "although the tax levied against General
Atomics is nominally an ad valorem property tax,
General Atomics' use of government-owned improve-
ments lies within California's expansive definition of
possessor interest" and is therefore subject to tax
under state law (id, at 15a).
Having determined that the tax complied with
state law, the court then rejected the constitutional
objections of the United States. The court noted
that, in United States v. Nye County, 938 F.2d 1040
(9th Cir. 1991), cert. denied, 503 U.S. 919 (1992),

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         9

the court previously had held that a State may not
constitutionally tax federal property in the hands of
a federal contractor if, by doing so, the State "im-
poses an ad valorem tax on property of the govern-
ment, rather than the contractor's separate private
interest in the property" (App., infra, 15a). The
court held that Nye County was inapplicable to the
present case because California "taxes only General
Atomics' possessor use interest in the device, and
not the underlying value of the device itself" (id.
at 16a).
The court described the private, beneficial use by
the contractor of the government's experimental fu-
sion device as "[t]he information and expertise Gen-
eral Atomics obtains through operation of the device
[which] enables it to profit by providing information
and services to the fusion technology market" (App.,
infra, 22a). The court reasoned that the "valuable
knowledge" and the "information and expertise" (id.
at 18a, 22a) that accrue to General Atomics from its
performance of its contractual duties provide a valid
basis for the State to impose a tax on the contractor
for its "use" of federal property (id. at 22a). The
court concluded that (id. at 20a):

Because the County seeks to tax only General
Atomics' use of the property, and not the prop-
erty's value, it is not an unconstitutional tax on
the United States.

The court of appeals then remanded the case for
further proceedings on the "reserved" issue of the
proper valuation of the tax (id. at 14a).
4. a. On remand, the United States sought "to
challenge respondents' valuation of the contractor's
asserted "possessor interest" in the property. In

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particular, the government contended that here, as in
United States v. Colorado, 460 F. Supp. 1.184 (D.
Colo. 1978), aff'd, 627 F.2d 217 (10th Cir. 1980),
aff'd sub nom. Jefferson County v. United States, 450
U.S. 901 (1981 ) , the ad valorem property tax assess-
ment against the federal contractor is unconstitu-
tional because it improperly taxes a value that ex-
ceeds any possessor interest of the contractor in the
federal property and, instead, taxes the value of the
federal property itself." The United States also
sought leave to amend its complaint to contend that,
in applying an ad valorem property tax to federal
contractors for their "beneficial use" of property of
the United States, the state tax unconstitutionally
discriminates against the United States (App., infra,
7a-8a).7
The district court denied the government's motion
for leave to amend without explanation. Then, rely-
ing on this Court's recent decision in United States
v. California, 113 S. Ct. 1784 (1993), the court dis-
      -.
___________________(footnotes)

6 In support of this contention, the United States sub-
mitted expert appraisal evidence "that the tax assessments
in question are imposed upon values in excess of any possible
interest of the federal contractor herein and thus are neces-
sarily imposed upon property of the United States" ( CR 88
(Mere. of the United States, attaching Steele Decl. at 2)).
7 The government's claim of discrimination is based on the
fact that the State does not generally apply its ad valorem
property tax to other persons who make a "beneficial use"
of "land and improvements" or other "property" owned by
third persons. For example, it does not appear that the State
taxes university professors for the value of their "beneficial
use" of university-owned offices and laboratory equipment
that are placed in their "possession" and which they manage
in the course of obtaining commercially "valuable knowledge,"

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11

missed the remaining "valuation" issues in the case.
The court stated that the challenge of the United
States to respondents' "valuation methodology does
not raise a constitutional issue" and that "there is no
other federal cause of action under which the [United
States] may challenge the valuation methodology used
by the county" (App., infra, 46a). The court con-
cluded that any objections of the United States to re-
spondents' valuation of the contractor's interest in
the federal property there fore arise only "understate
law" (ibid.).
The court then explained that, under this Court's
decision in United States v. California, supra, the
United States could pursue a state-law challenge to
respondents' valuation methodology only upon com-
pliance with the state-law prerequisites to a state-law
cause of action for a refund. Because the United
States and General Atomics had not filed a refund
claim with the State or followed any of the other
state-law prerequisites to a state-law refund suit, the
court dismissed the "valuation" claim asserted by the
United States (App., infra, 47a-48a).
b. The court of appeals affirmed (App., infra, 1a-
10a). The court reiterated its earlier conclusion that,
under state law, General Atomics had a "taxable
possessor interest" in the government's property
"because of its exclusive and independent use of the
nuclear device" (id. at 4a).8 The court then rejected

___________________(footnotes)

8 The evidence reflects that the right to exclude others (in-
cluding General Atomics) from any use of the device belonged
exclusively to the United States (App., infra, 28a). The evi-
dence also reflects that General Atomics did not have any
right to make any "independent" use of the device (ibid.).
The court of appeals acknowledged that its earlier opinion
had erred in suggesting that the "possessor interest" of

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12

the government's claim that the state tax was uncon-
stitutional because it failed to segregate the value of
the contractor's "possessor interest" in the fusion
device from property values belonging wholly to the
United States. Relying on this Court's decision in
United States v. City of Detroit, 355 U.S. 466 (1958],
the court stated that " [i]t is not unconstitutional for
the County to calculate the value of General Atomics'
possessory interest by turning to the value of the
nuclear device" (App., infra, 9a). The court further
noted that the United States was barred from any
state-law challenge to respondents' "valuation" of the
contractor's taxable property interest because neither
the United States nor its contractor had complied
with the state-law requirements for a state-law re-
fund suit (ibid., citing United States v. California,
113 S. Ct. at 1790-1791).
Finally, the court of appeals held that the district.
court did not abuse its discretion in denying the
United States leave to amend its complaint to raise
the discrimination issue (App., infra, 8a). Even
though there was no evidence on this issue in the

___________________(footnotes)

General Atomics was in the nature of a taxable "license"
under California law (App., infra, 5a n.3). The court
stated, however, that the fusion device nonetheless constituted
an "improvement" because the device was in the nature of
a "fixture" that was annexed to the contractor's laboratory
"through gravity" (id. at 6a). In describing the device as a
"fixture" for purposes of the state tax, the court stated that
it was "irrelevant" that the device consisted of numerous
subassemblies and was capable of (indeed, designed spe-
cifically for) disassembly and removal (id. at 6a-7a). The
court also stated that it was "irrelevant" that the "parties
themselves * * * intended the device to remain the personal
property of the United States, as evidenced by their contract"
(id. at 7a).

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record of the case (because the district court had not
allowed the amended complaint to be filed), the court
of appeals asserted that there was "no merit to the
United States' contention that General Atomics, un-
like similarly situated contractors, is being taxed
solely on the basis of the fee and experience that it
acquires"  (ibid. ). The court stated that "even
though the possessor interest is valuable because of
the fee and experience General Atomics reaps, the
tax is based on the possessor interest itself, as it is
in the case of others similarly situated" (ibid.).

  REASONS FOR GRANTING THE PETITION

This case presents two important, recurring ques-
tions that implicate the fundamental, constitutional
relationship of the United States and the States.
The States may not, of course, directly tax prop-
erty of the United States. May the States, however,
tax the property of the United States by imposing a
"property" tax on a private contractor for its "posses-
sion" of federal property when the contractor is per-
mitted only to manage the property and is not per-
mitted to use it for any commercial purpose? Sec-
ondly, if such a "property" tax is constitutionally
permissible on the theory that the contractor has a
"beneficial use" of the property from the "knowl-
edge" it obtains in managing the property for the
United States, may the States value the tax by refer-
ence to the value of the federal property-a value
that is unrelated to the value of the "knowledge" the
private contractor obtains? By concluding that the
State may annually tax federal contractors for a por-
tion of the value of federal property that the con-
tractor simply operates and manages, the court of
appeals has erroneously narrowed the immunity of

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         14

the United States from state taxation and has de-
parted from the decisions of this Court and of other
courts of appeals.
The questions addressed in the present case are
important and recurring ones. Many valuable prop-
erties of the United States are operated and man-
aged by private contractors. Several billions of dol-
lars worth of federal properties are privately oper-
ated under federal management contracts in Cali-
fornia alone. As a result, there is a significant
administrative interest in the prompt resolution of
the questions presented in this case.
1. a. In United States v. New Mexico, 455 U.S.
720 (1982), the Court sought to explain and synthe-
size the doctrine of federal immunity from state tax-
ation. Reviewing the "inconsistent decisions and ex-
cessively delicate distinctions" in this "often con-
fused field" (id. at 730, quoting United States v. City
of Detroit, 355 U.S. 466, 473 (1958) ), the Court con-
cluded that it should "return to the underlying con-
stitutional principle" (455 U.S. at 733) :
The one constant here, of course, is simple enough
to express: a State may not, consistent with the
Supremacy Clause, U.S. Const., Art. VI, cl. 2,
lay a tax "directly upon the United States."
Mayo v. United States, 319 U.S. 441, 447 (1943).
*** [T]he Court has never questioned the
propriety of absolute federal immunity from
state taxation.
As the Court stated in New Mexico, however, a
"more complex problem" arises when a State does
not purport to tax the United States itself but in-
stead purports to tax a federal contractor for its "bene-
ficial use of the [federal] property involved." 455

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         15

U.S. at 741. The Court noted that a tax on the con-
tractor's "beneficial use" of federal property has not
been "seen as falling on the United States" because,
"in that situation, the property is being used in fur-
therance of the contractor's essentially independent
commercial enterprise." Id. at 742. As the Court
explained in United States v. County of Fresno, 429
U.S. 452 (1977) :

[A] State may, in effect, raise revenues on the
basis of property owned by the United States as
long as that property is being used by a private
citizen or corporation and so long as it is the
possession or use by the private citizen that is
being taxed.

Id. at 462, citing City of Detroit v. Murray Corp. of
America, 355 U.S. 489 (1958) ; United States v. City
of Detroit, supra; United States v. Township of
Muskegon, 355 U.S. 484 (1958) ; Esso Standard Oil
Co. v. Evans, 345 U.S. 495 (1953). See also 429
U.S. at 467, quoting United States v. County of Al-
legheny, 322 U.S. 174, 187-188 (1944 ) :

Actual possession and custody of Government
property nearly always are in someone who is
not himself the Government but acts in its behalf
and for its purposes. . . . His personal advan-
tages from the relationship by way of salary,
profit or beneficial personal use of the property
may be taxed as we have held.

A federal contractor may derive a taxable "profit,"
but it does not derive a "beneficial personal use,"
from the mere possession and management of prop-
erty owned by the United States. Indeed, a federal
contractor who merely manages federal property,
and who is not allowed to "use" the property in com-

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         16

mercial activities- (as the contractors were allowed
to do in United States v. City of Detroit, 355 U.S.
at 468, and City of Detroit v. Murray Corp., 355 U.S.
at 491), has no right of "personal use" of the prop-
erty at all.
The Court has made clear that "[t] he vital thing"
in determining whether a taxable beneficial use ex-
ists is whether the federal contractor is "using the
property in connection with its own commercial ac-
tivities." United States v. Township of Muskegon,
355 U.S. at 486, quoted with approval in United
States v. New Mexico, 455 U.S. at 739, and United
Stales v. Boyd, 378 U.S. 39, 45 (1964). That "vital"
connection is lacking when, as in the present case,
the contractor only manages the property and is not
permitted any commercial use of it. A state ad
valorem property tax that is assessed on a contractor
who merely manages federal property unconstitution-
ally falls on property values belonging solely to the
United States. United States v. Colorado, 627 F.2d
217, 221 (10th Cir. 1980) , aff'd sub nom. Jefferson
County v. United States, 450 U.S. 901 (1981).
b. The court of appeals departed from these au-
thorities in this case. The court held that a private
contractor who manages federal property has a tax-
able "beneficial personal use" of that property merely
because the contractor may acquire "valuable knowl-
edge" or "expertise" from its work for the govern-
ment (App., infra, 18a, 20a, 22a). The court's ra-
tionale evidently creates an exception that swallows
the rule, for almost any contractor could be said to
gain "valuable knowledge" or "expertise" in the
course of managing government property. Moreover,
the court's rationale lacks logical substance, for the
acquisition of knowledge and experience is not a

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         17

species of taxable "property" (or even of taxable "in-
come").
The decision of the court of appeals dramatically
departs from the decisions of this Court and of other
circuits. As this Court stated in United States v.
County of Fresno, 429 U.S. at 466 n.15, the rationale
for a tax on a private party's "beneficial personal
use" of governmental property does not apply when
the property is "used only in performing his job" for
the government. A contractor who manages federal
property, and who has no right to use the property
in "commercial activities" (United States v. Town-
ship of Muskegon, 355 U.S. at 486), has no "per-
sonal use" of that property to which the State's tax
constitutionally could apply.
The decision in this case specifically conflicts with
the decision of the Tenth Circuit in United States v.
Colorado, .supra, which this Court affirmed, 450 U.S.
901 (1981). In United States v. Colorado, as in the
present case, a State attempted to tax a federal con-
tractor for its "possessor interest" in property
owned by the United States. The federal contractor
in that case, as in the present case, was responsible
for the Management and operation of the govern-
ment's property and had no right to use the property
in its own commercial activities. The court held that,
when the contractor "is merely performing its con-
tractual obligations on government owned property,"
it cannot be said that the contractor is "using" the
government's property (627 F.2d at 220).9 Because,

__________________(footnotes)

9 United States V. Anderson County, 761 F.2d 1169 (6th
Cir. 1985), involved a similar effort by a State to impose a
"property" tax on a federal contractor whose only interest
in federal property was in "performing its duties under [its]

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18

in this context, `(the efforts of the State of Colorado
to impose a tax on [the federal contractor for its
`possession' of federal property] in reality [imposed]
a tax on the property itself," the court held that the
state tax was "barred under the doctrine of implied
immunity." Id. at 219.10 The court explained that
the tax was invalid because, in ''substance," the State
did not tax a "'use' of government owned property"
but instead applied its "ad valorem general property
tax on property owned by the United States." Id. at
221.11 That is precisely the situation here.

__________________(footnotes)

management contract" with the Department of Energy. Id.
at 1171. Application of the property tax on the contractor's
"use" of the federal property was invalidated in that case.
The court concluded that the Tennessee tax did not extend to
the contractor's claimed interest in the property. In so
holding, the court reasoned that a contractor who manages
federal property owns no interest in the government property
that is "separate from the ownership of the United States."
Id. at 1174.

10 In United States v. Colorado, 627 F.2d at 219-2207 the
court noted that decisions such as United States V. City of
Detroit, supra, allow the States to tax federal contractors for
their use of federal property such as plants, warehouses
and machinery-that is used by the contractor in producing
commercial products for sale.

11 In the present case, the court of appeals attempted to
distinguish United States V. Colorado by asserting that the
flaw in the State's scheme in that case was that it "taxed the
value of the federal property, rather than a segregated in-
terest in the property based on its use" ( App., infra, 20a).
That purported distinction is not correct. In Colorado. the
court concluded that a contractor who merely performs "man-
agement services" on federal property cannot constitution-
ally be assessed a tax "on property owned by the United
States" (627 F.2d at 219). Nothing in Colorado suggested
that some smaller amount of tax would be permissible when,

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19

The decision of the court of appeals in this case
also conflicts with that court's prior decision in
United States v. Nye County, 938 F.2d 1040 (9th
Cir. 1991), cert. denied, 503 U.S. 919 (1992). In
Nye County, the court held that a federal contractor
who managed federal property could not be taxed
for its "possessor interest" in government property
because "the property belongs to the United States."
938 F.2d at 1043. Although the court stated that a
separate tax might be able to reach the "beneficial
use," if any, of the contractor in such property, the
court concluded that "an ad valorem tax on property
of the United States," assessed merely because it is
in the hands of a private contractor, "is unconstitu-
tional." Ibid.12
The "vital thing" in all of these cases is that a fed-
eral contractor who is engaged by the United States
to manage federal property is not "using the prop-
erty in connection with its own commercial activities')
(United States v. Township of Muskegon, 355 U.S.
at 486). Instead, the contractor is using the govern-
ment's property "only in -performing [its] job"
(United States v. County of Fresno,429U.S. at 466

___________________(footnotes)

as in that case, the contractor managed the government's
property and had no right to use that property in its own
commercial activities.

12 The court of appeals erred in relying (App., infra, 17a-
19a) on United States V. Boyd, supra, and United States V.
New Mexico, supra, for the proposition that a federal con-
tractor who manages federal property may be taxed for its
"possession" of that property. Those cases involved gross
receipt and sales taxes. See 455 U.S. at 738-744; 378 U.S.
at 43. Neither of those cases concerned the question whether
a State may apply an annual ad valorem property tax to a
federal contractor merely for its managerial "possession" of
property owned by the United States.

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         20

n.15). A state property tax imposed on a contractor
who manages federal property is imposed on property
values belonging solely to the United States and is
therefore unconstitutional. United States v. Colorado,
627 F.2d at 211.
2. In assessing the tax in this case, respondents
valued the "possessor interest" of General Atomics
as if it were a 30% interest in a five-year lease on
the government's experimental fusion device. See
page 5 and note 3, supra. That valuation led to as-
sessments of tax, penalties and interest for the years
involved of approximately $1,300,000. See page 5,
supra. The court of appeals concluded that such a
tax on the contractor's "beneficial personal use" of
the fusion device is justified by the "valuable knowl-
edge" and "expertise" that the contractor derived
from its government work (App., infra, 18a, 22a).
The court noted that the contractor used its expertise
in obtaining other consulting work (id. at 22a; see
id. at 32a) which generated (taxable) fees to Gen-
eral Atomics of $176,000. See page 9 & note 5, supra.
The valuation methodology applied by respondents
is constitutionally flawed.13 Even when a contractor
obtains a "beneficial personal use" from its use of
government property, "a contractor may not be taxed
beyond the value of his use." United States v.
Hawkins County, 859 F.2d 20, 23 (6th Cir. 1988).
In this case, as in Hawkins County, the state tax is

___________________(footnotes)

13 The Court of appeals correctly recognized that the United
States may challenge the constitutionality of respondents'
valuation methodology in this proceeding (App., infra, 8a-
9a) even if a challenge to the valuation "on state law
grounds" would be barred by failure to comply with the state-
law prerequisites to a state-law refund suit (id. at 9a-10a,
citing United States V. California, 113 S. Ct. at 1790-1791).

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21

invalid because, even if a "beneficial use" occurred,
the tax is assessed on the value of the government's
property-a value that is entirely unrelated to, and
much greater than, the value of the claimed "use."
The court of appeals recognized that the proper
method of valuation presents a constitutional issue,
for a tax on property values belonging to the United
States would effect "an unconstitutional taxation on
federal property" (App., infra, 9a). The court of
appeals asserted, however, that, in United States v.
City of Detroit, 355 U.S. at 470, this Court broadly
sanctioned the valuation of any "beneficial personal
use" of government property by reference to the
value of the government's property itself. The court
reasoned that an assessment made "by turning to the
value of the nuclear device" was therefore neces-
sarily constitutional (App., infra, 9a).
When, as in United States v. City of Detroit, 355
U.S. at 468, a contractor is using federal property
such as plants and machinery in a "private manu-
facturing business" to produce products for commer-
cial sale, the contractor's interest may be measured
by reference "to the value of the property used" (id.
at 470). This Court has consistently recognized,
however, that a state assessment for the "use" of fed-
eral property by a federal contractor must conform
to the reality of the contractor's "use"; when the
contractor's "use" of the property is limited, the
value assigned to that "use" must be "severed from"
the value of the property belonging to the government
(United States v. County of Fresno, 429 U.S. at
466). Otherwise, what purports to be a permissible
tax on the contractor's private use of government
property is in fact an impermissible tax on property

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         22

values that belong. wholly to the United States.14 The
court of appeals therefore erred in relying on United
States v. City of Detroit for the broad proposition
that any tax based upon a contractor's "beneficial
use" of federal property should be upheld if it is
valued "by turning to the value of the [federal prop-
erty]" (App., infra, 9a). In reaching that conclu-
sion, the court of. appeals departed from the decision
of this Court in United States v. County of Alle-
gheny, 322 U.S. at 187, and of the Sixth Circuit in
United States v. Hawkins County, 859 F.2d at 23.
See also United States v. Colorado, 627 F.2d at 221.
The tax respondents assessed is not confined to the
limited "beneficial personal use" identified by the
court of appeals. Respondents' assessment is based
on the theory that the federal contractor possessed a
30%  interest in a five-year leasehold to use the prop-
erty for its own commercial purposes. See note 3,
supra. But the contractor plainly did not possess
such an interest. Indeed, the contractor had no right
at all to use the fusion device in any commercial ac-
tivity; it had only the duty to manage the use of the
device for the government. See page 4, supra.
Moreover, the resulting tax that respondents as-
sessed bears no relationship to the value of the inci-
dental "beneficial personal use" that the court of

___________________(footnotes)

14 In United States V. County of Allegheny, 322 U.S. at 187,
Justice Jackson wrote for the Court that:
  We have held that where private interests in property
  were so preponderant that all the Government held was
  a naked title and a nominal interest, the whole value was
  taxable to the equitable owner. * * * But that is not the
  situation here, and the State has made no effort to segre-
  gate [the contractor's] interest and tax it.

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         23

appeals described. The tax exceeds by several times
the total economic benefits ($176,000) that the con-
tractor assertedly derived from the "knowledge" and
"expertise" resulting from its management and op-
eration of the government's property. Because the
tax assessed by respondents does not meaningfully
"sever" or "segregate" the value of the alleged "bene-
ficial personal use" from the value of the property
itself, the tax unconstitutionally falls on property
values belonging solely to the United States. See
United States v. County of Allegheny, 322 U.S. at
187; United States v. Hawkins County, 859 F.2d at
23. 3. The questions presented in this case are of sub-
stantial recurring importance. The expansive ra-
tionale adopted by the court of appeals could be
applied to make essentially all property of the United
States that is placed in the custody of federal con-
tractors subject to annual state ad valorem taxes.
There is no obvious basis for distinguishing the "val-
uable knowledge" and "expertise" gained by the man-
ager of an experimental fusion device from the
`(valuable knowledge" and "expertise" gained by a
federal contractor (or federal employee) 15 who has
custody or "possession" of other types of federal
property. The extraordinarily broad potential con-
sequences of the reasoning of the court of appeals
threatens significantly to alter the historical im-

___________________(footnotes)

15 In United States v. County of Fresno, 429 U.S. at 462,
467, the Court upheld application of a state ad valorem tax
on federal employees who have "possessor interests" in fed-
eral property from which they obtain a "beneficial personal
use." The significance of the decision of the court of appeals
in the present case is therefore not necessarily restricted to
property in the possession of federal contractors.

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24

munity of the United States from taxation by the
States.
The value of federal property, fixtures and im-
provements located in the Ninth Circuit that is man-
aged by federal contractors is enormous. We are
advised that three of the government's many agen-
cies (the Department of Energy, NASA and the
Department of Defense) have property managed by
contractors in California alone that exceeds $6.6 bil-
lion in value. It is obvious that the federal property
managed by (or in the "possession" of) federal con-
tractors throughout the entire Nation has an immense
value. An annual tax on even a portion of the value
of such property-assessed and collected by the States
through assessments against contractors (or em-
ployees) who derive "valuable knowledge" and "ex-
pertise" from their "use" of federal property-would
meaningfully disturb the "absolute federal immunity
from state taxation" that this Court has long recog-
nized (United States v. New Mexico, 455 U.S. at
733). The decision in this case has particular importance
in an era when the federal government is increas-
ingly being asked to turn to private management of
its properties. In the constant evolution of govern-
ment, the proper scope of the immunity of the United
States from state taxation is not a hoary irrelevancy.
It is, instead, a practical issue of vital and recurring
importance under our constitutional scheme of gov-
ernment. See McCulloch v. Maryland, 17 U.S. (4
Wheat. ) 316, 431 (1819) (Marshall, C.J. ).

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25

       CONCLUSION
The petition for a writ of certiorari should be
granted.

Respectfully submitted.

         DREW S. DAYS, III
          Solicitor General

         LORETTA C. ARGRETT
          Assistant Attorney General

         LAWRENCE G. WALLACE
          Deputy Solicitor General

        KENT L. JONES
          Assistant to the Solicitor General
         
DAVID ENGLISH CARMACK
         JOHN J. MCCARTHY
          Attorneys

JULY 1995

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APPENDIX  A

UNITED STATES COURT OF APPEALS
  FOR THE NINTH CIRCUIT

  No. 93-56650

D.C. No. CV-89-00085-RCM

UNITED STATES OF AMERICA,
PLAINTIFF-APPELLANT
     v.

COUNTY OF SAN DIEGO, ET AL.,
DEFENDANTS-APPELLEES

Appeal from the United States District Court
for the Southern District of California
Roger C. McKee, Magistrate Judge, Presiding

  Argued and Submitted
April 7, 1995-Pasadena, California

  Filed April 24, 1995

Before: DOROTHY W. NELSON and
WILLIAM C. CANBY, JR., Circuit Judges,
and JACK E. TANNER, * District Judge

* Honorable Jack E. Tanner, Senior United States District
Judge for the Western District of Washington, sitting by
designation.

       (1a)

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2a

       OPINION

CANBY, Circuit Judge:

The United States appeals the district court's grant
of summary judgment in favor of the County of San
Diego. We review de novo the district court's grant
of summary judgment, Atwood v. Newmont Gold
Co., 45 F.3d 1317, 1320 (9th Cir. 1995). We have
jurisdiction under 28 U.S.C.  1291, and we affirm.
        
        I

      BACKGROUND

General Atomics, a private scientific research firm,
conducts nuclear fusion research for the United
States Department of Energy as part of a national
program. The research is performed using a large
nuclear device' that is housed on General Atomics'
property. Although General Atomics maintains, oper-
ates, and helps with the design of the nuclear device,
the device is the personal property of the Department
of Energy. The Department of Energy also retains
control over access- to the nuclear device and the right
to terminate General Atomic's contract. In exchange
for its services, the government pays General Atomics
a sizeable fee. General Atomics also provides, for a
fee, information and services to the fusion research
technology market.

___________________(footnotes)

1 In fact, two nuclear devices are the subject of this appeal.
One of the devices, the "D-III" was in use from 1978 until
1984 when it was dismantled. The other device, the "D- IIID"
was then built and has been in use since 1986. Because there
are no relevant differences between these nuclear devices for
purposes of this appeal, we will simply refer to them as the
"nuclear device" or "device."

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         3a

After a routine audit conducted for the 1978 and
1979 tax years, the County determined that General
Atomics has a possessor interest in the nuclear
device subject to California's ad valorem tax. See
Cal. Rev. & Tax. Code $$104, 105, 107 (West 1987).
Pursuant to its agreement with General Atomics to
pay all state and local taxes, the United States paid
the ad valorem tax for tax years 1978-81 and 1987-
88. No tax was assessed in 1986, and no taxes have
been paid for any other years. General Atomics has
not filed timely refund claims for the years for which
it paid taxes.
In 1989, the United States filed a suit challenging
the constitutionality of the ad valorem tax, the desig-
nation of the device as a "fixture," and the valuation
method used to compute the tax. The district court
granted partial summary judgment in favor of the
County, holding that the device is a "fixture" and
that the tax is constitutional. We considered in an
interlocutory appeal the constitutionality of the tax
and whether General Atomics has a possessor in-
terest in the device. See United States v. County of
San Diego, 965 F.2d 691 (9th Cir. 1992) [herein-
after San Diego I]. We held that the tax is consti-
tutional and that General Atomics "has an independ-
ent possessor interest in [the nuclear device] subject
to California's ad valorem tax." Id. at 693.
After remand, the United States sought leave to
amend its complaint by adding an equal protection
challenge to the tax. The district court denied the
motion. The County then moved for summary judg-
ment on the remaining issues, which the district
court granted. The district court held that no federal
constitutional issues remained and that the United

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         4a

States cannot challenge the disputed taxes on state
law grounds because General Atomics has failed to
satisfy the necessary conditions precedent.
The United States now appeals from the district
court's grant of summary judgment in favor of the
County. The United States contends: that this court
should reexamine its earlier conclusion that General
Atomics has a taxable possessor interest in the de-
vice, that the district court erred in holding that the
nuclear device is a "fixture," that the district court
erred by denying its motion for a leave to amend, and
that the district court erred in concluding that the
United States cannot now challenge the taxes already
imposed on state law grounds.

         II

       ANALYSIS

A. Law of the Case

In San Diego I, 965 F.2d at 697-99, we held that
under California law General Atomics has a "tax-
able possessor interest" in the nuclear device owned
by the United States. We are precluded from revisit-
ing this decision by the law of the case doctrine. See
United States v. Caterino, 29 F.3d 1390, 1395 (9th
Cir. 1994). The United States' argument that con-
trolling authority has since made our earlier decision
inapplicable is without merit. In San Diego I we held
that General Atomics has a taxable possessor in-
terest primarily because of its exclusive and inde-
pendent use of the nuclear device.2 San Diego I, 965

___________________(footnotes)

2 Under California law, four factors are relevant to whether
a taxable possessor interest exists: exclusivity, independ-

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5a

F.2d at 697-99. No cases cited by the United States
call into question this analysis.3
B. Is the Nuclear Device a Fixture?
The United States, argues that the district court
erred in concluding that the device is a fixture be-
cause: the district court erroneously stated that the
fixture was bolted down, the device is not one inte-
gral device but thousands of replaceable parts, and
the parties did not intend the device to be a fixture.
Under California law, a device is a fixture if a "rea-
sonable person would consider the item to be a per-
manent part of the property, taking into account
annexation, adaption, and other objective mani-
festations of permanence." Crocker Nat'l Bank v.
City & County of San Francisco, 49 Cal. 3d 881,
887-88, 264 Cal. Rptr. 139, 142 (1989). Whether
something is a fixture is predominantly a legal ques-
tion. Id. The criteria relevant to whether the nuclear
device is a fixture are: "(1) the manner of its an-
nexation to the realty; (2) its adaptability to the use

___________________(footnotes)

ence, durability, and private benefit. See San Diego I, 965
F.2d at 697. In the earlier appeal, "[t] he government chal-
lenge[d] the district court's ruling on three of these factors:
exclusivity, independence, and private benefit." Id.
3 We recognize that our earlier decision may have mis-
paraphrased California law in stating that a license or permit
is a taxable possessor interest in property. San Diego I, 965
F.2d at 694. See County of Los Angeles v. Assessment Ap-
peals Bd., 13 Cal. App. 4th 102, 112, 16 Cal. Rptr. 2d 479,
485 (1993); Service America COrp. v. County of San Diego,
15 Cal. App. 4th 1232, 1238, 19 Cal. Rptr. 2d 165, 169 (1993).
This part of our discussion, however, dealt only with the con-
stitutionality of the tax. See San Diego I, 965 F.2d at 694.
Moreover, we did not rely on a theory of mere license in con-
cluding that the tax is constitutional.

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6a

and purpose for which the realty is used; and (3)
the intention with which the annexation is made."
Id. at 887,264 Cal. Rptr. at 142.
The nuclear device weighs between 400 and 500
tons. `A device can be, and in this case clearly is, an-
nexed to the property through gravity. See Seatrain
Terminals of California, Inc. v. County of Alameda,
83 Cal. App. 3d 69, 75, 147 Cal. Rptr. 578, 582
(1978) (" [T]he mere retention in place by gravity
is sufficient to give [certain kinds of heavy machin-
ery] the character o E permanency and therefore af-
fixation to realty").
The real estate has also been modified to accommo-
date the device. Tunnels have been dug and a rein-
forced concrete flooring has been installed. Thus, the
property has been adapted for the device. See
Crocker Nat'l Bank, 49 Cal. 3d at 887, 264 Cal, Rptr.
at 142. General Atomics property is also peculiarly
valuable as a nuclear fusion research facility only
because of the nuclear device. See Seatrain, 83 Cal.
App. 3d at 76, 147 Cal. Rptr at 582 (important
question to adaptive criterion "is whether the real
property is peculiarly valuable because of the con-
tinued presence of the annexed property thereon").
In light of applicable criteria, the nuclear device
clearly is a fixture.
We find no merit in the "contention of the United
States that it has raised genuine issues of material
fact that preclude summary judgment on whether
the device is a fixture. The district court's erroneous
statement that the nuclear device was bolted down is
of no consequence. The device is annexed to the prop-
erty by gravity. Although the United States cor-
rectly points out that parts of the nuclear device can

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         7a

be removed, this fact is also irrelevant. Most fix-
tures, presumably like the cranes in Seatrain, con-
sist of removable and replaceable parts.' See Sea-
train, 83 Cal. App. 3d at 75-76, 147 Cal. Rptr. at
582. Finally, although "the intention with which the
annexation is made" is relevant to whether the de-
vices are fixtures, "intention" is "determined by the
physical facts or reasonably manifested outward ap-
pearances  . . . . " See Crocker Nat'l Bank, 49 Cal. 3d
at 887, 782, 264 Cal. Rptr. at 142 (citation omitted).
Thus the fact that the parties themselves may have
intended the device to remain the personal property
of the United States, as evidenced by their contract,
is irrelevant.5

C. Leave to Amend

The United States sought to amend its complaint
by adding a count stating that imposing the tax
"solely on the basis that General Atomics acquires

___________________(footnotes)

4 The United States' characterization of the nuclear device
as not one unit, but "thousands of individual components"
none of which are "fixtures" is a distinction that does not
make a difference. Most fixtures that are affixed to real estate
through gravity are made up of replaceable parts, The rele-
vant issue is whether the nuclear device qua nuclear device
is a fixture.

5 The California State Board of Equalization's conclusion
that the device was not a fixture for sales tax purposes is also
irrelevant. Whether the device is a fixture for purposes of
the possessor interest tax is independently reviewed. While
the Board's reasoning itself might be persuasive in some cases,
it is not here. Simply because the Board reached a conclusion
different from the district court does not show that there exist
any genuine issues of material fact relevant to whether the
device is a fixture.

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8a

experience and receives a fee by virtue of performing
contractual services for the United States . . . uncon-
stitutionally discriminates against the United States
and . . . General Atomics . , . ." The district court
did not abuse its discretion in denying the leave to
amend.6 There is no merit to the United States'
contention that General Atomics, unlike similarly sit-
uated contractors, is being taxed solely on the basis
of the fee and experience that it acquires. In San
Diego I, we explicitly held that the County is taxing
General Atomics on its possessor interest, which it
has because of its "exclusive," "independent," and.
"durable" interest in the nuclear device. See San
Diego I, 965 F.2d at 697-98. It is true that in order
to tax General Atomics on this possessor interest,
this interest must privately benefit General Atomics.
See id. at 698. But even though the possessor in-
terest is valuable because of the fee and experience
General Atomics reaps, the tax is based on the pos-
sessory interest itself, as it is in the case of others
similarly situated. There is no discrimination. The
district court did not abuse its discretion in denying
the leave to amend because the amendment would
have been futile. See Sorrosky v. Burroughs, 826
F.2d 794,804-05 (9th Cir. 1987).

D. The Method of Valuation

The district court correctly rejected the United
States constitutional challenge to the method of valu-
ation. The United States insists that the tax assess-

___________________(footnotes)

6 We review for an abuse of discretion the district court's
denial of the motion for leave to amend the complaint. Na-
tional Abortions Fed'n v. Operation Rescue, 8 F.3d 680, 681
(9th Cir. 1993).

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9a

ments are based upon property values wholly owned
by the United States and thus amount to an unconsti-
tutional taxation cm federal property. It is mistaken.
We have already held that the County is taxing Gen-
eral Atomics on its possessor interest in the prop-
erty. San Diego I, 965 F.2d 691. It is not unconsti-
tutional for the County to calculate the value of Gen-
eral Atomics' possessor interest by turning to the
value of the nuclear device. United States v. City of
Detroit, 355 U.S. 466, 470 (1958) ("In measuring
[a beneficial use] tax [as opposed to a tax on the
property itself] it seems neither irregular nor ex-
travagant to resort to the value of the property
used").
Finally, the district court correctly concluded that
the United States could not now challenge the method
of valuation on state law grounds. In order to do so,
the government must proceed on a subrogation theory.
See United States v. California, 113 S. Ct. 1784, 1790-
91 (1993). General Atomics has not filed timely
refund claims for the years for which it paid taxes,
and it has not paid at all for some other years. It
thus has not complied with the state law require-
ments for challenging the method of valuation. See
Cal. Rev. & Tax. Code 5142 (West 1987).7 The
United States as subrogee is subject to these pre-
existing infirmities in General Atomics' claims, and
thus cannot now challenge the method of valuation on
state law grounds. See United States v. State of

___________________(footnotes)

7 The United States mistakenly asserts that the district
court decided that it lacked standing to pursue the claim.
The United States has standing to challenge the method of
valuation as General Atomics' subrogee.

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10a

California, 932 F.2d 1346, 1350-51 (9th Cir. 1991),
aff'd, 113 S. Ct. 1784 (1993) ; United States v. Cal-
ifornia, 113 S. Ct. at 1790-91.8

         III

      CONCLUSION

The County of San Diego is properly taxing, both
as a matter of constitutional law and California law,
General Atomics on its possessor interest in the
nuclear device it operates for the Department of
Energy.
The district court's grant of summary judgment is
AFFIRMED.

AFFIRMED. 







___________________(footnotes)

8 Although the United States may be correct that the statute
of limitations has not run on most of its claims, this fact does
not permit the government to circumvent the state law re-
quirements for challenging the method of valuation as a
subrogee.

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       11a

     APPENDIX B

UNITED STATES COURT OF APPEALS
  FOR THE NINTH CIRCUIT

     No. 91-55321

  D.C. No. CV-89-0085-T (CM)

  UNITED STATES OF AMERICA,
    PLAINTIFF-APPELLANT

        v.

    COUNTY OF SAN DIEGO,
    DEFENDANT-APPELLEE

Appeal from the United States District Court
for the Southern District of California
Howard B. Turpentine, District Judge, Presiding

   Argued and Submitted
February 6, 1992-Pasadena, California
   Filed May 19, 1992

Before: J. CLIFFORD WALLACE, Chief Judge, JAMES R.
BROWNING and OTTO R. SKOPIL, JR., Circuit Judges

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        12a

       OPINION

WALLACE, Chief Judge:

The United States of America (government) ap-
peals from a district court decision denying its mo-
tion for summary judgment and granting partial
summary judgment to the County of San Diego
(County). We are presented with the question of
whether General Atomics, a federal contractor, has
an independent possessor interest in a government-
owned experimental fusion device (device) subject
to California's ad valorem property tax. The district
court had jurisdiction pursuant to 28 U. S. C.1331,
1345. We have jurisdiction over this interlocutory
appeal pursuant to 28 U.S.C. 1292 (b). We affirm.

         I

The United States Department of Energy (Depart-
ment ) funds and administers nuclear fusion research
at several locations throughout the country in an at-
tempt to develop a magnetically confined fusion sys-
tem capable of generating commercial electric power.
See Magnetic Fusion Energy Engineering Act of
1980, 42 U.S.C.  9301 (b) ( 1). General Atomics, a
private scientific reseaarch firm, maintains and op-
erates a federally owned experimental fusion device
at its San Diego facility. Pursuant to seven different
cost reimbursement contracts, General Atomics pro-
vides services to the government with respect to the
design, assembly, operation, and maintenance of the
device. The contracts are terminable at the option of
the Department.  Although located on General
Atomics' property, the device remains the personal
property of the Department, which retains control

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        13a

over access to the device by General Atomics' employ-
ees and others. The district court determined that
the device is a fixture on General Atomics' property,
and the government does not appeal that decision.
Pursuant to the contracts, General Atomics partici-
pates in long and short range planning for use of the
device, subject to the approval of the Department.
General Atomics regularly reports to the Department
on general progress, as well as on the attainment of
specifie planning milestones. The Department main-
tains a permanent on-site representative who moni-
tors and assesses General Atomics' progress by at-
tending planning meetings and reviewing periodic
reports. General Atomics' scientists are required to
publish the results of the experiments and collaborate
with scientists from the United States and foreign
countries at the direction of and discretion of the
Department.
The government pays General Atomics a fee for its
services, averaging approximately $2.5 million per
annum over the past seven years. In addition, all
allowable costs incurred by General Atomics are re-
imbursed by the government. The government is also
obligated to pay all state and local taxes on the de-
vice, including those addressed in this appeal,
The County made its first determination that Gen-
eral Atomics had a taxable possessor interest in the
device after conducting a routine audit for the 1978
and 1979 tax years. In total, General Atomics has
paid taxes, interest, and penalties, less refunds, in
the amount of $568,002.12 for the 1978-81, 1987 and
1988 tax years. Since 1988, General Atomics has
received, but has not paid, tax bills for the years
1982-85 and 1989, plus interest and penalties, in the
amount of $721,979.55. The district court held that

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        14a

General Atomics has a taxable possessor interest in
the device, but reserved the issue of its valuation
pending this appeal. We granted the government's
petition to bring this interlocutory appeal.

          II.

The government argues that the County's levy of
an ad valorem property tax on General Atomics' use
of the device violates the supremacy clause of the
United States Constitution. We review the district
court's order granting summary judgment de novo.
Winebrenner v. United States 924 F.2d 851, 853
(9th Cir. 1991).    

A.

We first consider whether the California statute in
question constitutionally taxes possessor interests in
federally owned property. California authorizes
counties to assess and collect ad valorem taxes on
possessory interests in real property owned by a tax
exempt entity and improvements thereon. Cal. Const.
art. XIII; Cal. Rev. & Tax. Code $$104, 107 (West
1987) ; Cal. Code Regs. tit. 18,  21 (b) (1990). A
possessory interest includes "[possession of, claim
to, or right to the possession of land or improve-
ments." Cal. Rev. & Tax, Code  107(a). The de-
vice is a fixture, and therefore qualifies as an "im-
provement." See- id.  105(a). The California courts
have defined "possessor interest" as "includ[ing]
the right of a private individual or corporation to
use government-owned tax exempt land or improve-
ments, and this right is considered a private interest
taxable by the state and its taxing agencies." United
States v. County of Fresno, 50 Cal. App. 3d 633, 638
(1975), aff'd, 429 U.S. 452 (1977). In addition, a

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15a

license or permit is a taxable possessor interest in
property. See Stadium Concessions, Inc. v. City of
Los Angeles, 60 Cal. App. 3d 215, 222 (1976)
(Stadium Concessions), citing Kaiser Co. v. Reid, 30
Cal., 2d 610, 618 (1947) (Kaiser).
General Atomics' right to "use" the device, in the
form of a license, is regulated by the terms and
procedures contained in the contracts. Therefore, al-
though the tax levied against General Atomics is
nominally an ad valorem property tax, General
Atomics' use of government-owned improvements lies
within California's expansive definition of possessor
interest. See United States v. County of Fresno, 50
Cal. App. 3d at 638.
In United States v. Nye County, Nevada, 938 F.2d
1040 (9th Cir. 1991) (Nye County), cert. denied,
112 S. Ct. 1292 (1992), we held that taxation pur-
suant to a Nevada statute was unconstitutional be-
cause it imposed an ad valorem tax on property of
the government, rather than the contractor's separate
private interest in the property. Id. at 1043. We
found that because the statute levied a tax on the
contractor "in the same amount and to the same ex-
tent as though the lessee or user were the owner of
the property," Nev. Rev. Stat.  361.159(1), it made
"no attempt to segregate and tax any possessor in-
terest [the contractor] may have in the property."
Nye County, 938 F.2d at 1043. As such, the statute
violated the supremacy clause. In dicta, we affirmed
the power of the state to assess a tax on federally
owned tax-exempt property used by a contractor,
stating that "[w]hile Nye County could no doubt
enact a statute taxing a lessee's possessor interest
in, or a user's beneficial use of, property owned by

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16a

the United States, the statute under which it levied
taxes against [the contractor] is not such a tax
measure." Id.
The California statute does not suffer from the con-
stitutional infirmity found in the Nevada statute. Cali-
fornia's ad valorem tax statute taxes only General
Atomics' possessor use interest in the device, and
not the underlying value of the device itself. There-
fore, if General Atomics has a possessor interest in
the device, that interest may be taxed constitutionally
by the California statute.
      
   B.

We now turn to the question whether the County's
tax levy in this case violates the supremacy clause
of the United States Constitution. The supremacy
clause prohibits state taxation of federal property
without the consent of the sovereign. United States
v. New Mexico, 455 U.S. 720, 733 (1982) (New
Mexico) ; U.S. Const. art. VI, cl.2. In United States
v. County of Fresno, 429 U.S. 452 (1977) (Comfy
of Fresno ), California taxed possessory interests in
federally owned housing held by federal forest
rangers. `The Supreme Court declined to invalidate
the tax, stating that to the extent a state can isolate
a private person's interest in property owned by the
government, it can tax that interest. Id. at 462,
After upholding the tax on a forest ranger's use of
federal housing, the Court opined that such a tax
would not, however, be permitted on an employee's
use of federal property, such as a fire ax or tower,
which "he used only in performing his job . . . . The
employee does not put either the ax or the tower to
`beneficial personal use,' and it is not part of his

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         17a

'profit' or his 'salary.' " Id. at 466 n.15 (emphasis
in original) (citation omitted).
The government contends that General Atomics is
not subject to taxation because it does not put the
device to "personal beneficial use." It makes three
related arguments. First, the government likens Gen-
eral Atomics' use of, the device to a forest ranger's
use of a fire ax. It contends that to have a "beneficial
personal use" of federally owned property, an entity
must have been granted a right to use the federally
owned property in its own discretion to pursue some
private purpose, citing County of Fresno.
Nothing in County of Fresno, however, implies that
incidental benefits accruing to General Atomics as a
result of its performance of contractual duties cannot
also constitute "personal beneficial use." In County
of Fresno, for example, forest rangers were required
to live in federally owned cabins as part of their
employment duties. Although the rangers fulfilled
contractual obligations by living in the cabins, the
Court nonetheless found that the County of Fresno
could tax their use of the property because they bene-
fitted personally from the housing. As the rangers
received a taxable benefit for use of the cabins, so
too did General Atomics' performance of the con-
tracts result in incidental taxable benefits stemming
from participation in research directed at producing
commercially valuable technical information,
Next, the government contends that General
Atomics is a mere business invitee, and that its use
of the device is related solely to performance of
"service" contracts for the Department. This argu-
ment was rejected by the Supreme Court in United
States v. Boyd, 378 U.S. 39, 44-45 (1964) (Boyd).
The management contracts in Boyd required the con-

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18a

tractors to perform maintenance and construction
work at federal facilities under the direction of the
government The contractors owned none of the prop-
erty involved, and received a fixed annual fee for
their services. Tennessee levied a use tax on the
property. The Court found irrelevant the fact that
the property was being used for the government's
benefit, stating that the contractors' actions remained
"commercial activities carried on for profit, " Id. at
44.
 Similarly, in this case, the annually negotiated fees
earned by General Atomics are substantial, and "[n] o
one suggests that [General Atomics] has put profit
aside in contracting with the [Department]." Id. at
45. Receipt of these fees and access to the device
enable General Atomics to participate in the field of
fusion research, an activity it could not otherwise
afford to conduct on its own. General Atomics par-
ticipates extensively in the planning process and ob-
tains information and expertise by conducting fusion
research for the Department. This research differs
from mere "service" of federal property in that its
very purpose is to obtain valuable knowledge, rather
than merely to operate and maintain the device,
General Atomics benefits financially from the sale
and application of knowledge obtained from experi-
ments conducted with the use of the device. And its
participation in determining the nature of the re-
search conducted necessarily involves a level of use
exceeding that of a business invitee providing con-
tract services, 
In New Mexico, the Supreme Court recognized that
federal contractors "receive a variety of additional
benefits from the [ir] contract [s with the govern-

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19a

ment]. Most obviously, they develop expertise and
acquire valuable technical information." 455 U.S. at
724 n.3. General Atomics obtains like benefits from
its contracts with the Department. Therefore, the
County's taxation of this beneficial use is not a tax
on federal property, but rather a tax on an "essen-
tially independent commercial enterprise." Id. at
742. The government also argues that General Atomics
has no property interest in the device because the
contracts expressly prohibit its use for private pur-
poses. That General Atomics is prohibited from using
the device for purposes other than performance of
contractual duties is irrelevant to our inquiry. Con-
tractual restrictions do not preclude a determination
of a taxable beneficial use of property. See United
States v. Township of Muskegon, 355 U.S. 484, 487
(1958). The government's focus on contractual limi-
tations avoids the essential underlying issue: whether
General Atomics makes beneficial use of the device
concurrent with its performance of contractual duties
for the Department.
The government attempts to distinguish New
Mexico and Boyd on the basis that they addressed
sales, gross receipts, and compensating use taxes, and
not an ad valorem property tax like the one levied
against General Atomics. However, because Califor-
nia's possessory interest statute includes taxation for
use of property, the "use" versus property" distinc-
tion urged by the government, and discussed in Nye
County, is not persuasive here. United States v.
County of Fresno, 50 Cal. App. 3d at 638; Nye
County, 938 F.2d at 1042-43. In light of California's
interpretation of the ad valorem property tax as in-
cluding use, we are persuaded that the reasoning of

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   20a

New Mexico and Boyd apply equally to the tax levied
in this case. Therefore, we affirm the district court
determination that General Atomics has a personal
beneficial interest in the device.
The cases cited by the government in support of
its position are readily distinguishable. The statute
in United States v Colorado, 627 F.2d 217 (10th Cir.
1980), aff'd, 450 U.S. 901 (1981), like the statute in
Nye County, taxed the value of the federal property,
rather than a segregated interest in the property
based on its use. Id. at 218. Similarly, the court in
United States v. Hawkins County, Tennessee, 859
F.2d 20 (6th Cir. 1988), cert. denied, 109 S. Ct. 1638
(1989), found that the contractor made "beneficial
use of the government-owned property" because it
earned a profit on its cost-plus contracts, but held
that the state statute did not tax such "beneficial
use." Id. at 23. These cases are inapplicable to the
statute addressed here. Finally, tbe government relies
on United States v. Anderson County, Tennessee, 761
F.2d 1169 (6th Cir. ), cert. denied, 474 U.S. 919
(1985), which invalidated a tax because the state
supreme court had already held that the contractor
did not possess a taxable interest under Tennessee's
statute. Id. at 1172-75. In contrast, California's
statute imposes a tax on General Atomics' separate
possessor interest in the device, and no state court
has ruled that General Atomics lacks such an interest
in the device. Because the County seeks to tax only
General Atomics' use of the propery, and not the
property's value, it is not an unconstitutional tax on
the United States.

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        21a

     C.

We have determined that General Atomics has a
possessor interest in the device stemming from its
personal beneficial use. The government concedes that
General Atomics "benefits from its federal contract by
way of its fixed fee and by acquisition of experience."
Nonetheless, it argues that General Atomics' use of
the device is not taxable because it is conducted at the
direction and discretion of the Department, for the
sole benefit of the government. Although the govern-
ment does not argue that General Atomics is its agent,
this arguments amounts to the same.
In New Mexico, the Supreme Court held that the
"underlying constitutional principle" of the suprem-
acy clause is that "a State may not . . . lay a tax
`directly upon the United States.' " 455 U.S. at 733
(citations omitted). New Mexico addressed the ques-
tion: "to what extent may a State impose taxes on
contractors that conduct business with the Federal
Government?" Id. at 722. The Court pointed out
that "immunity may not be conferred simply because
the tax has an effect on the United States, or even
because the Federal Government shoulders the entire
burden of the levy." Id. at 734. It concluded
that tax immunity is appropriate in only one
circumstance: when the levy falls on the United
States itself, or on an agency or instrumentality
so closely connected to the Government that the
two cannot realistically be viewed as separate
entities, at least insofar as the activity being
taxed is concerned.

Id. at 735.

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22a

General Atomics is an independent corporate en-
tity with involvement in fusion research predating its
contracts with the government. It brought skill and
knowledge to the experiment that the government
needed and did not have. Should the Department seek
to conduct an experiment with its own employees, it
may do so. Having chosen a different path, however,
the government cannot persuasively argue that Gen-
eral Atomics' use of the device is such that it should be
treated as an instrumentality of the government and
thus enjoy immunity from taxation. See Boyd, 378
U.S. at 48.
The information and expertise General Atomics ob-
tains through operation of the device enables it to
profit by providing information and services to the
fusion technology market. Therefore, with respect to
the activity being taxed, we agree with the district
court that General Atomics' interest in the device
sufficiently distinguishes it from the government, such
that a tax on General Atomics is not a tax on the
government in violation of the supremacy clause.

         D.

Finally, we point out that New Mexico also fash-
ioned a separation of powers framework for analyz-
ing supremacy clause challenges to state taxation:

[i]f the immunity of federal contractors is to be
expanded beyond its narrow constitutional limits,
it is Congress that must take responsibility for
the decision, by so expressly providing as respects
contracts in a particular form, or contracts under
particular programs. And this allocation of re:
sponsibility is wholly appropriate, for the political

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        23a

process is uniquely adapted to accommodating the
competing demands in this area. But absent con.
gressional action, we have emphasized that the
States' power to tax can be denied only under the
clearest constitutional mandate.

455 U.S. at 737-38 (internal quotations and citations
omitted ). Thus, New Mexico requires courts to con-
strue constitution lilimts on state taxation narrowly.
Here, as in New Mexico, Congress could have, but did
not, bar state and local taxation of the Department's
"activities." We therefore will not "establish as a
constitutional rule something that [the Department]
was unable to obtain statutorily from Congress." Id.
at 744.      

 III

The government contends that even if the County's
levy of the possessor interest tax does not violate the
supremacy clause, General Atomics is not subject to
the tax as a matter of California law. The existence
of a taxable possessor interest under California law
is determined by objective circumstances, rather than
the language of the contracts. Stadium Concessions,
60 Cal. App. 3d at 223. Four factors are weighed:
exclusivity, independence, durability, and private
benefit. See 18 C.C.R. 21 (a) (1) ; Freeman v. County
of Fresno, 126 Cal. App. 3d 459, 463 (1981) (Free-
man); Stadium Concessions, 60 Cal. App. 3d at 223.
The government challenges the district court's ruling
on three of these factors: exclusivity, independence,
and private benefit.
A possessor interest must carry "the degree of
exclusiveness necessary to give the occupier "or user
something more than a right in common with others."

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        24a

United States v. County of Fresno, 50 Cal, App. 3d
at 638 (emphasis in original). The government ar-
gues that because General Atomics cannot exclude the
government, or anyone it directs, from using the
device, General Atomics' use is not "exclusive."
Exclusivity is broadly defined under California law.
See Stadium Concessions, 60 Cal. App. 3d at 224. An
exclusive use, however, is not destroyed by "multiple,"
"concurrent," or "alternating" uses of the property.
Id. Nor is exclusivity affected by the temporary and
revocable status of a possessor interest. Board of
Supervisors v. Archer, 18 Cal. App. 3d 717, 725
(1971 ) (Archer). Contractual conditions that limit
General Atomics' use of the device go to valuation,
not exclusivity. Id.; Freeman, 126 Cal. App. 3d at
465. Therefore, we hoId that General Atomics' use of
the property is `Exclusive" within the meaning of that
term because it is not "shared by the general public."
Freeman, 126 Cal. App. 3d at 463-64; see also United
Air Lines v. County of San Diego, 2 Cal. Rptr. 2d
212, 217 (Ct. App. 1991) (upholding ad valorem
property tax on airline's use of municipal airport
runway).
The government also contends that General Atomics'
use of the device is not "independent)' because it man-
ages the device at the direction of the government for
the government, not for private business purposes. A
use is independent, however, when "much is left to the
routine control and supervision of the [user]" even
though the government retains "ultimate control."
Stadium Concessions, 60 Cal. App. 3d at 225. General
Atomics participates in both the broad and detailed
stages of planning and alone operates the device.
Hundreds of General Atomics' employees perform

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         25a

nearly all functions under the contracts. Routine
control is exercised by General Atomics. Though the
government retains ultimate control over the device,
this fact bears upon only the value of General Atomics'
interest, not its taxability. See Freeman, 126 Cal.
App. 3d at 465; Archer, 18 Cal. App. 3d. at 725.
In arguing a lack of private benefit, the govern-
ment contends that the "acquisition of experience
that the District Court determined . . . to constitute
the taxable private benefit does not give [General
Atomics] an interest in the property subject to the
possessor interest use tax." It relies on Kaiser for
the proposition that a tangible possessor interest is a
"usufructuary right, that is, the right of using and
enjoying the profits of a thing belonging to another,
without impairing the substance." 30 Cal. 2d at 621
(internal quotations omitted). The government con-
tends that General Atomics is a mere business invitee
serving the purposes of the Department, rather than
any private business interest.
California law allows taxation of an interest in
government property if the "possession" or "use" of
the property privately benefits the user. Cox Cable
San Diego, Inc. v. County of San Diego, 185 Cal. App.
3d 368, 381 (1986). Cox Cable defines private benefit
as "the right to obtain an economic benefit from the
use or possession of property." Id. This right includes
use of tax exempt property under government control.
Id. General Atomics receives a fee for managing the
device, as well as substantial saleable expertise. The
fact that General Atomics' activities fulfill contract
obligations to the government does not negate the fact
that General Atomics also obtains an economic benefit
from its use of the device.

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        26a

In conclusion, we point out that in recent years,
California courts have applied the possessor interest
factors

"in a less demanding way so as to find a taxable
interest in most cases in which the private use of
public property has been special to the person
concerned an-d valuable . . . [T]he focus has been
on the belief that the holder of a valuable use of
public property that is tax exempt should con-
tribute taxes to the public entity which makes its
possession possible and provides a certain amount
of exclusivity."

Id. at 382, quoting Freeman, 126 Cal. App. 3a at 463
(emphasis deleted). In accord with this trend in Cali-
fornia law, we conclude that General Atomics' interest
in the fusion device is taxable by the California
statute.

AFFIRMED.

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       27a

      APPENDIX C

           [Filed Jun. 25, 1990]

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF CALIFORNIA

     Case 89-0085-T (CM)

UNITED STATES OF AMERICA, ET AL., PLAINTIFFS

        V.

COUNTY OF SAN DIEGO, ET AL., DEFENDANTS


OPINION AND ORDER

       I. FACTS.

The United States Department of Energy ("U.S.")
funds and administers nuclear fusion research and
development at several facilities throughout the COun-
try, including Lawrence Livermore Laboratory,
Princeton University, and the General Atomics
("GA") research facility in San Diego, California.
The goal of this research is to develop nuclear fusion
into a commercially viable means of energy produc-
tion. At issue in this case is an attempt by the County
of San Diego ("the County") to impose a possessor
interest tax on GA's use of an experimental fusion

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        28a

research device which is owned by the U.S. The
assessments were levied on GA's possessor interest
in the Doublet DIII and DIIID experimental nuclear
fusion devices ("the Doublet device"), located on GA-
owned real property at GA's San Diego research
facility.'
The Doublet device is a doughnut-shaped magnetic
plasma accelerator, which weighs 400-500 tons and
is surrounded by a vast network of cooling, ventila-
tion, and power equipment. The U.S. funded and
owns the Doublet device, which was designed and
constructed by GA under contract with the U.S. The
U.S. also engaged GA to administer and operate the
Doublet device, in conjunction with other scientists
from the U.S. and foreign countries, at the discre-
tion and direction of the U.S. Under the cost-plus
fee contract with GA, the U.S. retains ownership and
complete ultimate authority over the use of the device.
The U.S. is also contractually obligated to pay all
state and local taxes on the device.
The County levied a tax assessment on GA's pos-
sessory interest in the Doublet device, which led to
this lawsuit. The U.S. seeks to have tlie tax declared
unconstitutional and seeks an injunction against the
County prohibiting it from assessing or collecting on
its prior assessments. Both parties now move for
summary judgment.

___________________(footnotes)

1 The DIII device was in operation from 1978-1984; the
DIIID device has been in operation since 1986. The Doublet
DIII/DIIID device is a larger, improved version of the
Doublet DI and II devices, which were invented and funded
by GA years ago.

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29a

      II. DISCUSSION.

This "possessor interest tax" was imposed pur-
suant to Cal. Rev. & Tax. Code 107 (West 1987)12
The U.S. argues that this tax violates the supremacy
clause of the U.S. Constitution because GA has been
granted no taxable possessor interest in the U. S 
owned device. Thus, the U.S. argues, this tax is not
a tax on GA, but rather an unconstitutional tax on
the Federal Government's property.
The County counters that GA has a taxable bene-
ficial use of the device, which is taxable under Cali-
fornia law as a fixture to GA's realty. The County
also asserts that this court has no jurisdiction to re-
solve the question of whether GA's possessor interest
was properly valued.
Thus, the issues before the court are: 1) whether
GA has a taxable beneficial use of the Doublet de-
vice; 2) whether that beneficial use is a possessor
interest, in real property under California law; 3)
whether the device is an improvement to realty un-
der California law; and, 4) whether this court has
jurisdiction to resolve the question over the valuation
of GA's beneficial interest in the device.

A. THE SUPREMACY CLAUSE.

The U.S. argues that the County's tax is barred
by the supremacy clause of the U.S. Constitution,
because it is a state tax on Federal Government's

___________________(footnotes)

2 Cal. Rev. & Tax. Code 107 defines "possessor interests"
as  (a) Possession of, claim to, or right to the possession
of land or improvements, except when coupled with owner-
ship of the land or improvements in the same person.
  (b) Taxable improvements on tax-exemp land.

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30a

property, prohibited by McCulluch v. Maryland, 4
Wheat. 316 (1819). While McCulluch does proscribe
state taxes on federal property, subsequent cases have
held that a state may permissibly tax federal prop-
erty in the hands of a private party, so long as the
private party has some sort of independent bene-
ficial interest in the property. See, e.g., United
States v. County of Fresno, 429 U.S. 452 (1977);
United States v. New Mexico, 455 U.S. 720 (1982);
United States v. Boyd, 378 U.S. 39 (1864) ; United
States v. City of Detroit, 355 U.S. 466 (1958).
The rule was most recently stated in Fresno, where
the Court stated, "a State may . . . raise revenues
on the basis of property owned by the United States
as long as that property is being used by a private
citizen or corporation and so long as it is the posses-
sion or use by the private citizen that is being
taxed." 429 U.S. at 462.3 Examples of such taxable
beneficial uses are profits or salaries derived from the
use of the federal property. Id. at 466 n.15 (citing
United States v. City of Detroit, supra, 355 U.S. at
471 ). A tax on such a use is permissible even if the
Federal Government is contractually obligated to pay
the tax, as the U.S. is here. United States v. Boyd,
378 U.S. 39, 44 (1963). Thus, the question presented
is whether GA. derives some beneficial use from
its operation and access to the government-owned
Doublet device.

___________________(footnotes)

3 A state may tax a private party's beneficial use or posses-
sion of federal property so long as that tax does not discrimi-
nate against the federal government See Fresno, supra, 429
U.S. at 462. There is no contention here that the County's
tax is discriminatory. The only issue is whether GA has a
taxable beneficial interest in the Doublet device.

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         31a

In Fresno, the Court found a beneficial use in U.S.
Park rangers' residence in government-owned hous-
ing. The rangers were required to live in the fed-
erally owned houses and the Forest Service deducted
from the rangers' pay an amount estimated as the
fair rental value of this housing. The County of
Fresno imposed a possessor interest tax on the
rangers, calculating the taxable amount of the posses-
sory interest as the fair rental value of the housing
as well. The Court upheld the tax on the rangers'
possessor interests in the houses, since the rangers
derived a beneficial personal use from the housing.
Thus, the Court concluded, "the `legal incidence' of the
tax . . . falls neither on the Federal Government nor
on federal property. The tax is imposed solely on
private citizens who work for the Federal Govern-
ment." Id. at 464.
The Court distinguished a ranger's personal bene-
fit in free housing from a ranger's use of a fire ax or
a fire tower, stating that such tools would be used
solely in the performance of the ranger's job, thus con-
ferring on him no separate, taxable benefit. 429 U.S.
at 466 n.15.
Here, the U.S. equates GA's use of the Doublet
device with the ranger's use of a fire ax. GA's man-
agement of, and experimentation with the Doublet
device are performed solely in GA's performance of its
contract with the U.S. Thus, the U.S. argues, GA
obtains no separate benefit from its use of the device.
This conclusion is clearly incorrect.
What GA gains and indeed sells to other customers
is knowledge and expertise in fusion research. The
deposition testimony of GA personnel quantifies con-
sulting fees earned by GA for its expertise gained

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  32a

through work on the Doublet device. GA scientists
publish papers detailing their findings from work on
the device, and GA has sold its expertise gained
through work on the device to various customers, in-
cluding the U.S. and foreign governments. This ex-
pertise is the separate, taxable beneficial use of the
Doublet device enjoyed by FA.
Similarly, in United States v. New Mexico, 455
U.S. 720 (1982 ), the Court found a taxable bene-
ficial use in a Department of Energy contractor,
Sandia, which managed the government owned Sandia
Laboratories and engaged in federally sponsored re-
search there. After discussing the contractual fee re-
ceived by Sandia, the Court noted, "Sandia and its
parent receive a variety of additional benefits from
the contract. Most obviously, they develop expertise
and acquire valuable technical information." Id. at
724 n.3, In upholding a tax on Sandia's use of federal
property in performance of its contracts, the Court
again noted that Sandia "obtains obvious benefits from
its contractual relationship with the United States."
Id. at 740 n.13. "[I]n that situation, the property is
being used in furtherance of the contractor's essen-
tially independent commercial enterprise." Id. at 742.
Here, GA similarly obtains the benefit of expertise
and technical information in fusion research from its
performance of its contract with the U.S. The
County's taxation on this benefit is not a tax on fed-
eral property, but a tax on GA's "essentially inde-
pendent commercial enterprise." Id.
By arguing that GA's use of the device is solely
at Department of Energy discretion, the U.S.
asserts that GA is therefore really an agent of the

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        33a

government. This very argument was rejected in New
Mexico and Boyd. In Boyd, Union Carbide was held
to have received a beneficial use through its manage-
ment and operation of the Department of Energy's
Oak Ridge nuclear plant. 378 U.S. at 48. "Of course
there are governmental directives and instructions
which must be obeyed [by Union Carbide] . . . . But
Carbide . . . brought to the Oak Ridge operation both
skill and judgment the United States needed and did
not have . . . . We cannot conclude that Carbide  . . . . 
[is] so incorporated into the government structure as
to become [an] instrumentalist [y] of the United States
and thus enjoy governmental immunity." Id. See
also United States v. Anderson County, 575 F. Supp.
574, 578 (E.D. Term. 1983), aff'd, 761 F.2d 1169,
cert. denied, 474 U.S. 919 (1985) (noting in dicta
that "defendants could tax Union Carbide's use of the
[plant's] real property. [citing United States v.
County of Fresno, supra] The Court has no reserva-
tions concerning a local tax upon Union Carbide.").
The U.S. attempts to distinguish Boyd and New
Mexico because they involved sales taxes, rather than
ad valorem taxes or possessor interest taxes, like the
one assessed here. The U.S. fails to show that the
distinction between a sales or use tax and an ad
valorem or possessor interest tax compels a different
result. The possessor interest tax here reaches only
that separate beneficial use of government property
that GA enjoys; it is not a tax on the property itself.
It is a tax on GA's business activity, carried on for
profit, to the extent that activity involves government
property. In short, because only GA's beneficial use is
taxed, the tax is one on the privilege of doing business
in California. See New Mexico supra, 455 U.S. at

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34a

738-39 n.12. It is not a tax on the Federal Govern-
ment or its property.
The U.S. cites several cases in which ad valorem 
possessor interest taxes were declared invalid. All
are distinguishable.
Several found no beneficial use conferred on private
contractors who operated military or nuclear facilities
because those contractors were so constrained in their
use of the facilities, obtaining no marketable private
benefit. E.g., United States v. Hawkins County, 661
F. Supp. 857 (E.D. Term. 1987), aff'd on different
grounds, 859 F.2d 20 (6th Cir. 1988), cert. denied,
109 S. Ct. 1638 (1989). Here, the expertise GA gains
and sells sets it apart from contractors whose only
benefit is the contractual fee they receive.
Other cases have turned on findings that no real
property interest was conveyed under state laws,
which define such real property interests far more
restrictively than does California, E.g., United States
v. Jackson County, 696 F. Supp. 479 (W.D. Mo.
1988) (Missouri law) ; United States v. Anderson
County, 761 F.2d 1169 (6th Cir.), cert. denied, 474
U.S. 919 (1985) (Tennessee law). Finally, one case
turned on the County Assessor's failure to segregate
the contractor's benefit from the value of the govern-
ment property itself. United States v. State of
Colorado, 460 F. Supp. 1184 (D. Colo. 1978), aff'd,
627 F.2d 217 (10th Cir. 1980) ; aff'd sub nom. Jeffer-
son County v. U.S., 450 U.S. 901 (1981). This led
the court to conclude that the Assessor was not taxing
the contractor's beneficial use, but was taxing the fed-
erally owned property itself. Id. at 1188. The U.S.
here makes no such attack on San Diego County's
assessment of GA's taxable possessory interest.

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        35a

Because GA does have a taxable beneficial interest
from its access to the Doublet device, the assessment
is not a tax on federal property itself, and does not
violate the supremacy clause of the Constitution.
Therefore, the U.S. motion for summary judgment is
denied.

B. POSSESSOR INTEREST UNDER CALI-
  FORNIA LAW.

The next issue is whether the tax is valid under
California law, Imposed under Cal. Rev. & Tax Code
107 (West 1987), the County's tax is on GA's "pos-
sessory interest" in the device. Whether GA has such
a possessor interest depends on objective circum-
stances, rather than on the language of the contract
between the U.S. and GA. Stadium Concessions, Inc.
v. City of Los Angeles, 60 Cal. App. 3d 215, 223
(1976) ("a reviewing court must measure the situa-
tion by an objective standard, rather than by accept-
ing the literal language of the written instrument as
controlling the nature of the relationship estab-
lished" ). Thus, the fact that the U.S. retains title to
the device and the fact that the U.S GA contract does
not expressly convey any lease or similar real property
interest does not win the argument for the U.S.
The U.S. also argues that G.A. has no possessor
interest because it can only use the device in perform-
ing the contract, and only with the consent of the
U.S. In other words, the U.S. argues that, rather
than a lease or periodic tenancy or similar traditional
real property interest, G.A. has only a license. But
under California law, "a possessor interest may be
. . . the interest of . . . a mere permittee or licensee."

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        36a

Id. at 222 (emphasis in original) (quoting Ehrman &
Flavin, Taxing California Property 50 (1967)).
This distinguishes the limited real property interests
recognized under different states' laws, upon which
turned the decisions in Anderson County and Jackson
County. California's broader view of a possessor
interest arises from its need to tax in some way the
tremendous amount of federally owned property
within the state. See Freeman v. County of Fresno,
126 Cal. App. 3d 459, 462 (1981). Thus, even though
G.A. is only a licensee, it may have a taxable pos-
sessory interest under California law. The factors
for determining whether this interest exists are ex-
clusivity, independence, durability, and private bene-
fit. Stadium Concessions, supra, 60 Cal. App. 3d at
223.

  1.   Exclusivity.

Exclusivity is defined broadly under California law,
see Cal. Admin. Code tit. 18, 21 (e) (1977), and has
been broadly interpreted by California courts. See
Freeman v. County of Fresno, 126 Cal. App. 3d 459,
461 n.1 (1981). Exclusivity will be found so long as
the user may exclude the general public from the
subject property. Exclusivity may exist despite con-
current uses, Cal. Admin. Code tit. 18, 21 (e) (2)
(1977), and despite the temporary and revocable
status of a possessor interest. Board of Supervisors
v. Archer, 18 Cal. App. 3d 717, 725 (1971), Thus,
exclusivity is not defeated because GA's right of access
to the device is shared by other research scientists, is
limited in duration, and is revocable. Indeed, the
right of the U.S. to dictate conditions under which GA
may use the device "goes to valuation, not exclusivity."

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        37a

Freeman, supra, 126 Cal. App. 3d at 465; Archer,
supra, 18 Cal. App. 3d at 725.
The rationale for defining exclusivity so broadly is
found in Freeman, where the court explained that
"the holders of a valuable use of public property that
is tax exempt should contribute taxes to the public
entity which makes its possession possible and pro-
vides a certain amount of exclusivity." 126 Cal. App.
3d at 463. Thus, for example, since G.A. could call
the San Diego police to evict trespassers to the Doublet
device, California law holds that G.A. can be forced
to pay for the privilege. In short, G.A. enjoys the kind
of state-enforced exclusivity which justifies a state
tax. Therefore, G.A.'s interest in the device is ex-
clusive under California law.

  2. Independence.

The second factor, independence, exists since G.A.
is left largely unsupervised in its use of the device.
Only one U.S. representative is on site, whereas G.A.
has hundreds of personnel toiling on the device, carry-
ing out tasks to meet the government's broad one year
and five year plans for the device, which themselves
are formulated in conjunction with G.A. scientists.
Though the U.S. has ultimate control over the device,
"much is left to the routine control and supervision"
of G.A. Stadium Concessions, supra, 60 Cal. App. 3d
at 225. Thus, G.A. has sufficient independence.

  3. Durability.

Durability, the third factor, also requires an exami-
nation of all the circumstances of the rationship be-
tween the U.S. and G.A. See Freeman, supra, 126

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        38a

Cal. App. 3d at 463 ("The pretax trend has found
courts testing the requirement of a reasonably certain
period of enjoyment by an examination of the agree-
ment in writing and the history of the relationship of
the parties, thereby finding durability because of the
passage of time even though the agreement may have
been cancelable at the will of the parties."). Here,
GA has been involved with the U.S. for close to twenty
years, and the current contract does not expire until
1993. Thus, GA's use is sufficiently durable. The
revocability of the agreement, and the possibility of
Congressional funding cuts, go only to value of the
interest, not its existence. See Archer, supra, 18 Cal.
App. 3d at 725.

  4. Private benefit.

The final factor, private benefit, exists here as well.
GA receives a fee for its management of the device,
as well as substantial and saleable expertise, as de-
tailed in the discussion of GA's beneficial use.
Thus, all four factors are satisfied, and G.A. has a
taxable possessor interest in the device so long as the
device is an improvement to real property under Cali-
fornia law. In other words, if the device is indeed a
fixture, as determined by the County Assessor, the
assessment is valid under California law.

C. FIXTURE UNDER CALIFORNIA LAW.

  1. Preemption.

The U.S. first argues that 48 C.F.R.  52.245-5(c)
(4) (1989) preempts any state law characterizing the
device as a taxable improvement to real property in
the form of a fixture. That section, which is required

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39a

to be inserted in all government contracts of this type,
provides that government property shall not become
a fixture, nor lose its identity as personal property by
being attached to real property. Though federal reg-
ulations have the preemptive force of federal law,
Fidelity Federal Savings & Loan Assn. v. De La
Cuesta, 458 U.S. 141, 153 (1981), this regulation is
merely a required contract clause, not a law of general
application. Thus, it does not bind third parties such
as the County.
If Congress had truly intended to displace state
law, it could have expressly provided, as in the De La
Cuesta case. There, the preemptive regulation re-
quired in government contracts was found in a body of
regulations preceded by a preamble which read, "fed-
eral associations shall not be bound by or subject to
any conflicting State law  . . . . " 41 C.F.R. 18286,
18287 (1976). The Court relied on this language in
concluding that state law was expressly preempted by
the regulations. De La Cuesta, supra, 141 U.S. at
158. The U.S. cites no similarly clear indication of
Congressional intent to displace state taxation schemes
here. 4 Thus, the assessment is not preempted by
federal law.

  2. Fixture V. Personal Property.

Whether the device is a fixture is a more intriguing
question. A device is a fixture under California law
if a `(reasonable person would consider the item to be

___________________(footnotes)

4 Indeed, such preemption would render the U.S. contractual
obligation to pay state and local taxes a nullity. This further
demonstrates that the regulation was not intended to preempt
a tax like the one at issue here. If it had been, the U.S. would
not have to have agreed to pay local taxes.

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         40a

a permanent part of the property, taking into account
annexation, adaptation, and other objective manifes-
tations of permanence." Crocker National Bank v.
City and County of San Francisco, 49 Cal, 3d 881,
887-88 (1989 ). California statutory law specifically
defines a fixture as something affixed to real property
"by roots, as in the case of trees, vines, or shrubs; or
imbedded in it, as in the case of walls; or permanently
resting upon it, as in the case of buildings; or perma-
nently attached. to what is thus permanent, as by
means of cement, plaster, nails, bolts, or screws."
Cal. Civ. Code 660 (West 1982). Application of both
the "reasonable person" factors from Crocker and the
specific criteria of the statutory definition leads to the
conclusion that the device is a fixture.
Here, the Doublet device is enormous, apparently
the size of a one-story building. It weighs 400-500
tons, and is attached by three steel columns to a 4-6
foot thick slab of steel reinforced concrete, which rests
on steel pilings driven down to bedrock. Under the
device runs a network of tunnels through which piping
and conduit run. Thus, the device is clearly affixed
to the real property in a way that indicates perma-
nence.
As for adaptation, the device is housed in a build-
ing which, if not specially constructed to house the
device, has certainly been modified substantially to
accommodate it.5 The device is fueled by two large

___________________(footnotes)

5 The parties disagree on how to characterize the building
in which the Doublet device is housed. The County calls it a
permanent, specially designed structure, while the U.S. calls
it a standard, temporary warehouse. However, the U.S. does
not dispute the specific dimensions and other physical char-

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        41a

generators and is serviced by specially constructed
water and cooling towers, underground trenches, lines
and pumps for liquid gases, and two 20-ton cranes on
overhead rails. The device is shielded by specially
designed concrete shielding walls to prevent the escape
of neutrons into the environment. Thus, the adapta-
tion of this uniquely large, complicated, and cumber-
some device indicates permanence as well.
In addition, as clear from the above description,
the device is "embedded," "permanently resting," and
"permanently attached" to the land within the defi-
nitions of Cal. Civ. Code 660.
The U.S. argues that an issue of fact exists as to
whether the device is a fixture. The affidavits, how-
ever, illuminate no genuine dispute of material fact;
the parties merely draw different conclusions from the
facts set forth above. The U.S. does not specifically
counter any of those facts with contrary assertions.
Thus, this issue is resolved on the County's motion
for summary judgment.
The U.S. also points to the contract with GA, which
states that the device will not be deemed a fixture,
but will remain personal property of the Federal Gov-
ernment. That contractual provision, however, is not
dispositive.
California courts hold that such contractual ex-
pressions of intent do not bind the Tax Assessor on
the question of whether a device is a fixture or not.
See Kaiser Co. v. Reid, 30 Cal. 2d 610, 630 (1947),
modified, 30 Cal. 2d 725 (1947). This seems incon-
sistent with the California Supreme Court's pro-

___________________(footnotes)

acteristics of the building. Thus, while there is a disagree-
ment over the consequence of several facts, there is no triable
disputed issue of fact.

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        42a

nouncement in Crocker that the intent of the parties
is the ultimately dispositive factor in considering
whether something is permanently affixed to land. 49
Cal. 3d at 881 ("the element of intent is regarded as a
crucial and overriding factor, with the other two cri-
teria [annexation and adaptability] being considered
only as subsidiary ingredients relevant to the determi-
nation of the intent." (quoting Seatrain Terminals of
California, Inc. v. County of Alameda, 83 Cal. App.
3d 69, 74-75 (1978)). Nevertheless, there is no indi-
cation in Crocker or any other California Supreme
Court authority that Kaiser is limited or discredited.
Further, if faced with the question today, the Cali-
fornia Supreme Court would adhere to Kaiser's con-
clusion that the parties are not free to immunize a
fixture from taxation merely by stating that the prop-
erty at issue shall remain personal property. Such
provisions only bind the parties; they do not bind the
Tax Assessor.
Here, despite the government's self-serving con-
tractual language that the Doublet device is personal
property, the physical facts are otherwise. Thus, the
device is a fixture under California law, and is there-
fore taxable as an improvement to GA's real property.'

___________________(footnotes)

6 The device is not truly a permanent improvement to the
property, since one day in the future, it will have served its
purpose, and will be removed, or perhaps replaced by the next
generation of experimental fusion reactors. Under California
real property law, "permanence" is a term of art, and should
not be read or applied literally. Thus, "permanence is to be
distinguished from perpetuity. . . . It is sufficient if the
article appears to be intended to remain where fastened until
worn out, [or] . . . is superseded by another more suitable
for the purpose." Seatrain Terminals of California, Inc. v.
County of Alameda, 83 Cal. App. 3d 69, 77-78 (1978). Here,

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        43a

D. JURISDICTION OVER VALUATION.

Finally, the County contends that this court has no
jurisdiction to consider whether the assessment was
properly valued. This is plainly wrong, since the
United States is a party, and since it has a contractual
obligation to pay the tax. See United States v. Nevada
Tax Commission, 439 F.2d 435 (9th Cir. 1971).
However, it is not clear at this juncture whether the
United States has exhausted its administrative reme-
dies. In addition, the actual valuation of the Doublet
device has not been put at issue in these motions.
Therefore, the court does not pass on the issue of
whether the County's valuation of GA's possessor in-
terest is correct.

     III. CONCLUSION.

The Court finds that the tax assessments at issue do
not violate the supremacy clause of the Constitution;
therefore, IT IS HEREBY ORDERED, that the mo-
tion for summary judgment by the U.S. is DENIED.
Because there remains at issue the question of
whether the County properly valued GA's possessor
interest in the Doublet device, IT IS HEREBY OR-
DERED, that the motion for summary judgment by
the County is GRANTED IN PART.
The court finds that GA has a taxable possessor
interest in the Doublet device, which is a fixture under
California law. Therefore, IT IS HEREBY OR-
DERED, in accordance with this opinion that these

___________________(footnotes)

though the device may not be on GA's property forever, its
presence is sufficiently permanent, since it is intended to
remain until the new technology it will spawn renders it
obsolete.

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         44a

issues are decided as a matter of law in favor of the
County.
The court finds that it has jurisdiction to review a
final administrative decision as to whether the County
correctly valued GA's interest in the Doublet service.
However, the court does not reach or decide the issue
of whether that valuation was correct, but leaves that
decision for further proceedings.
Accordingly, IT IS HEREBY ORDERED, that the
motion practice cut-off date is continued to August 6,
1990, and the trial date is continued to August 28,
1990.
                                    /s/ Howard B. Turpentine,
                                          HOWARD B. TURPENTINE

Dated: June 21, 1990        United States District Judge

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        45a

       APPENDIX D

             [Filed Sep. 27, 1993]

  UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF CALIFORNIA


     No. CV 89-0085 T (CM)

  UNITED STATES OF AMERICA, PLAINTIFF

          v.

  COUNTY OF SAN DIEGO, ET AL., DEFENDANTS


ORDER GRANTING SUMMARY JUDGMENT


          I

     FACTUAL BACKGROUND

General Atomics ("GA") manages and operates a
federally-funded nuclear fusion device. GA's use of
the device creates a taxable possessor interest under
California law because GA gains knowledge and ex-
pertise in fusion research. The County defendants
("County") constitutionally levy a tax on this private
interest in the device. United States v. County of San
Diego, 965 F.2d 691 (9th Cir. 1992). The remaining
issue is whether the County used an improper method
to value GA's possessor interest.

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        46a

The County moves for summary judgment on the
ground that the federal issues are resolved and the
United States ("US" ) cannot challenge the valuation
methodology under state law. The County contends
that an action cannot be maintained under state law
unless the taxes were paid and timely claims for re-
fund filed within four years of payment. GA paid
the taxes for tax years 1978, 1979, 1980, 1981, 1987
and 1988 more than four years ago, and it did not
file a claim for refund for those years. GA has not
paid the tax for any other tax year.

         II

       DISCUSSION

A. No Constitutional Issue Remains
The County relies on United States v. California,
113 S. Ct. 1784 (1993), in which the US challenged
a state tax assessment levied on a federal contractor.
Although the US was contractually obligated to pay
the tax, the US could not raise a " `colorable consti-
tutional challenge'" to the tax assessment. Id. at
1787. The United States Supreme Court concluded
that the US did not have a federal cause of action
"to challenge a state tax on state-law grounds simply
because it is the Government." Id. at 1792.
The County correctly contends that the US's con-
stitutional arguments have been resolved in this case.
County of San Diego, supra, 965 F.2d 691. Under
the principles set forth in California, there is no
other federal cause of action under which the US
may challenge the valuation methodology used by the
County. California, supra, 113 S.Ct. at 1792. The
valuation issue is governed by state law, and there-

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        47a

fore the challenge is a challenge to a state tax-on
state-law grounds. The US's arguments to the con-
trary are unpersuasive.
The declaration of the US's appraiser concludes
that an error in valuation resulted in the imposition
of an "excess" tax. However, the cases cited by the
US, do not support the contention that an "excess"
tax is a tax on the US. The US relies on three cases,
United States v. Colorado, 460 F. Supp. 1184 (Colo.
1978), aff'd 627 F.2d 217 (10th Cir. 1980,), aff'd
sub nom. Jefferson County v. United States, 450 U.S.
901 (1981) ; County of Los Angeles v. Assessment
App. Bd., 16 Cal. Rptr. 2d 479 (1993); and Service
America Corp. v. County of San Diego, 19 Cal. Rptr.
2d 165 (1993).
The only case involving a constitutional issue is
Colorado, and the state tax there was held invalid
because the user of federal property was taxed " `in
the same amount and to the same extent' as if it
were the owner of the property." 460 F'. Supp. at
1188. GA is not taxed as if it were the owner of the
device. The possessor interest tax is levied on the
"possessor use interest in the device and not the
underlying value of the device itself." County of
San Diego, supra, 965 F.2d at 694.
As there is no support for the US's contention that
a constitutional issue exists, there is no federal claim
on which the US may proceed.

B. The US Cannot Proceed Under California Law.

Nor is there a state cause of action on" which the
US may proceed. In California, the Court held that
the US could challenge a state tax assessment paid"
on behalf of a federal contractor, if the US was sub-
rogated to " `a right free of a pre-existing infirm-

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        48a

ity.' " 113 S. Ct. at 1791 quoting Guaranty Trust Co.
v. United States, 58 S. Ct. 785 (1938). Since the con-
tractor in California failed to fully comply with the
"conditions precedent to a cause of action for a tax
refund" under state law, the contractor and the US
were barred from bringing suit. Id. at 1787.
The "conditions precedent" to a suit challenging
a possessor interest tax assessment include (1) pay-
ment of the taxes assessed and (2) filing of claims
for refund within four years of payment.. Cal. Rev.
& Tax. Code,  5097, subd. (a), and 5142. A suit
cannot be maintained unless these conditions were
met prior to filing suit. Id.; see also Ehrman &
Flavin, Taxing California Prop., (Third Ed. (1989))
$330.02 and 30.04.
These "conditions precedent" to bringing or main-
taining an action have not been met for any tax year.
Taxes were paid for tax years 1978, 1979, 1980,
1981, 1987 and 1988, but claims for refund were not
submitted within four years of the payments. An
action to challenge the assessments for these tax
years is barred by state law. Cal. Rev. & Tax. Code,
$$5097, subd. (a), and 5142. Taxes have not been
paid for any other year. Consequently, the US is
"not subrogated to `a right free of a pre-existing in-
firmity' " for any tax year.

         III

      CONCLUSION

The Court need not reach the merits of the US's
remaining claim, that an error occurred in valuing
GA's possessor interest. The Court finds that the
US cannot proceed under federal law, because a chal-
lenge to the valuation methodology does not raise a

                     Page Break                     
constitutional issue. The Court further finds that the
conditions precedent to suit under state law were not
met. There are no genuine issues of material fact
as to whether the US can proceed under either fed-
eral or state law. Accordingly, IT IS HEREBY OR-
DERED, that the motion for summary judgment by
the County is GRANTED.

    /s/ Howard B. Turpentine
     HONORABLE Howard B. TURPENTINE
     United States District Judge

Dated: 9/27/93

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        50a

       APPENDIX E

UNITED STATES COURT OF APPEALS
    FOR THE NINTH CIRCUIT


       No. 93-56650

    CT/AG# : CV-89-00085-RCM

     UNITED STATES OF AMERICA
      PLAINTIFF-APPELLANT

          v.

     COUNTY OF SAN DIEGO
     DEFENDANT-APPELLEE


Appeal from the United States District Court
  for the Southern District of California
       (San Diego)


THIS CAUSE came on to be heard on the Tran-
script of the Record from the United States District
Court for the Southern District of California (San
Diego ) and was duly submitted.
ON CONSIDERATION WHEREOF, It is now
here ordered and adjudged by this Court, that the
judgment of the said District Court in this cause be,
and hereby is AFFIRMED.
Filed and entered April 24, 1995.

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        51a

       APPENDIX F

   CONSTITUTIONAL AND STATUTORY
     PROVISIONS INVOLVED

1. Article VI, Clause 2, of the Constitution pro-
vides:

  This Constitution, and the laws of the United
States which shall be made in Pursuance thereof;
and all Treaties made, or which shall be made,
under the Authority of the United States, shall
be the supreme Law of the Land; and the Judges
in every State shall be bound thereby, any Thing
in the Constitution or Laws of any State to the
Contrary notwithstanding.

2. 28 U.S.C. 1345 provides:

  Except as otherwise provided by Act of Con-
gress, the district courts shall have original ju-
risdiction of all civil actions, suits or proceedings
commenced by the United States, or by any
agency or officer thereof expressly authorized to
sue by Act of Congress.

3. Sections 104, 105 and 107 of the California

Revenue and Taxation Code, Cal, Code Ann. (West
1987 ), provide in pertinent part:

 104. Real estate or real property
   "Real estate" or "real property" includes:
   (a) The possession of, claim to, ownership
   of, or right to the possession of land.
            *  *
   (c) Improvements.

 105. Improvements
          

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52a

"Improvements" includes:

(a) All buildings, structures, fixtures, and
fences erected on or affixed to the land.

*   *   *   *

 107. Possessor interests; scow-ity for payment
  of taxes; leasehold estates; collection pro-
  cedures.

"Possessor interest" means the following:

(a) Possession of, claim to, or right to the
possession of land or improvements, except
when coupled with ownership of the land
or improvements in the same person.

(b) Taxable improvements on tax-exempt
land.   *  *  **

* U.S. GOVERNMENT PRINTING OFFICE; 1995 387147 20093

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TABLE OF AUTHORITIES

Page

Boyle v. United Technologies Corp., 487 U.S. 500
(1988)  . . . . 6 
United States v. City of Detroit, 355 U.S. 466 (1958)  . . . . 4 
United States v. Colorado, 627 F.2d 217 [10th Cir.
1980), aff 'd, 450 U.S. 901 (1981)  . . . .  2
United States v. County of Allegheny, 322 U.S. 174
(1944)  . . . . 4 
United States v. County of Fresno, 429 U.S. 452
(1977)  . . . .  1, 5
United States v. Hawkins County, 859 F.2d 20 (6th Cir.
1988)  . . . . 4
United States v. Township of Muskegon, 355 U.S. 484
(1958)  . . . .  1

(I)

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In the Supreme Court of the United States

      OCTOBER TERM, 1995

No. 95-128

UNITED STATES OF AMERICA, PETITIONER

v.

COUNTY OF SAN DIEGO, CALIFORNIA; GREGORY J.
SMITH, SAN DIEGO COUNTY ASSESSOR; and PAUL
BOLAND, SAN DIEGO COUNTY TAX COLLECTOR

ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
   FOR THE NINTH CIRCUIT

REPLY BRIEF FOR THE UNITED STATES

1. Respondents err in contending that the decision
in this case is an ordinary application of the settled
principle that a State may tax the "private beneficial
use of federal property" (Br. in Opp. 7). As this Court
has explained, the "vital thing" in determining wheth-
er a taxable "beneficial use" exists is whether the fed-
eral contractor is "using the property in connection
with its own commercial activities" (United States v.
Township of Muskegon, 355 U.S. 484,486 (1958)) or is,
instead, using the property "only in performing [its]
job" (United States v. County of Fresno, 429 U.S. 452,
466 n.15 (1977)). When the contractor "is merely per-
forming its contractual obligations on government
         (1)

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         2

owned property," it cannot be said that the contractor
has a "private beneficial use" of the property. United
States v. Colorado, 627 F.2d 217,220 (10th Cir. 1980),
aff'd, 450 U.S. 901 (1981). See Pet. 15-16.
In the present case, the contractor constructed,
managed and operated property for the government but
was not permitted any independent, commercial use of
that property (Pet. App. 28a; Pet. 4). The income that
the contractor received from its federal contract work
is taxable by the States; but the federal property that
the contractor managed is not. United States v. Colo-
rado, 627 F.2d at 220. The annual ad valorem tax on
the value of the federal property that the contractor
managed was unconstitutionally imposed "on property
owned by the United States." Id. at 221.
The court of appeals recognized that the federal
contractor in this case was not permitted to use the
government's property in independent commercial ac-
tivities. The court of appeals nonetheless reasoned
that the contractor could be taxed for the value of that
property because of the "valuable knowledge" and "ex-
pertise" that the contractor obtained from its work for
the government (Pet. App. 18a,20a,22a). For the
reasons explained at length in the petition-which
respondent does not address or rebut-that analysis is
a marked departure from precedent and conflicts with
the decisions of this Court and other courts of appeals.
See Pet. 16-20.
2. a. In contending that the State's annual ad
valorem tax is properly apportioned to the contrac-
tor's "beneficial personal use" of the government's
property, respondents incorrectly describe certain
relevant facts. First, respondents suggest that the
state tax is properly imposed on the value of the
federal property because the federal contractor re-

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3

ceived several hundred million dollars "under the
contracts covering the use of the device" (Br. in Opp.
8). The contracts did not, as respondents' statement
suggests, involve "use of the device" by the federal
contractor. Instead, the contracts involved the con-
struction, maintenance and operation of the device by
the contractor under the specific direction and
control of the federal government (Pet. App. 28a). No
revenues were obtained by the contractor from any
independent "use" of the device.
The revenues referred to by respondents consisted
entirely of reimbursement for the costs of construc-
tion and operation of the federal property and the
contractor's annual service fee (Pet. App. 12a-13a).
These revenues are subject to state tax. What the
State may not tax, but is attempting to tax in this
case, is the property of the United States itself.
Respondents go on to state that the federal contrac-
tor received significant additional revenues from fu-
sion research, and they imply that these revenues
were the result of the knowledge and expertise devel-
oped from the contractor's work with the Doublet de-
vice. See Br. in Opp. 8. The affidavit on which respon-
dents rely, however, states specifically that these
other sources of revenue were not obtained from use
of the Doublet device and also were not obtained from
application of the "knowledge" or "expertise" the con-
tractor acquired in performing the government con-
tract. The affidavit explains that virtually all of the
contractor's commercial revenues were derived from
private and government contracts that did not relate
to the Doublet device and that "only $176,000 [of its
commercial revenues] involved Doublet-derived tech-
nology" (CR 38, Overskie Decl. at 3).

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4

The tax that respondents assessed bears no
relationship to the value of the incidental "beneficial
personal use" described by the court of appeals, The
tax exceeds by several times the total economic
benefits ($176,000) that the contractor assertedly
derived from the "knowledge" and "expertise" result-
ing from its management and operation of the govern-
ment's property.  Because the tax assessed by
respondents does not meaningfully "sever" or "segre-
gate" the value of the alleged "beneficial personal
use" from the value of the property itself, the tax
unconstitutionally falls on property values belonging
solely to the United States. See, e.g., .United States v.
County of Allegheny, 322 U.S. 174, 187 (1944); United
States v. Hawkins County, 859 F.2d 20, 23 (6th Cir.
1988).
b. Respondents do not dispute that the decision in
this case conflicts with County of Allegheny and
Hawkins County. Indeed, although we relied on
those decisions in the petition (Pet. 22-23 & n.14),
respondents' brief simply ignores them.
Respondents contend (Br. in Opp. 11-12) that the
decision in this case is consistent with this Court's
decision in United States v. City of Detroit, 355 U.S.
466, 470 (1958). That contention is incorrect for the
reasons we explain in the petition (Pet. 21-22). When,
as in City of Detroit, the contractor is given free and
unrestricted commercial use of federal property in
conducting a manufacturing business, a tax on the
full value of the property is sustainable. Ibid. That
decision does not support, however, a suggestion that
the States may impose a tax on the value of federal
property that is placed in the hands of a contractor
who is not allowed to use the property in independent,
commercial endeavors. Instead, as this Court has

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5

held on several occasions, when the contractor's
"use" of the property is limited, the value assigned to
that "use" must be "severed from" the value of the
property belonging to the government (United States
v. County of Fresno, 429 U.S. 452, 466 (1977)).
Moreover, in this case, the contractor had no right at
all to use the fusion device in any commercial
activity, it had only the duty to manage the use of the
device for the government. See Pet. 4.
3. The expansive rationale adopted by the court of
appeals would make essentially all property of the
United States that is placed in the custody of federal
contractors or employees subject to annual state ad
valorem taxes. There is no logical basis for distin-
guishing the "valuable knowledge" and "expertise"
gained by the manager of the government's experi-
mental fusion device from the "valuable knowledge"
and "expertise" gained by a federal contractor or
employee who has custody or possession of other types
of government property. See Pet. 23 & n.15.
As the petition notes (Pet. 24), the value of federal
property that would be subject to annual state prop-
erty taxes under the reasoning of the decision in this
case is enormous. Respondents contend, however, that
the burden of such taxes must be unimportant because
the United States "voluntarily assumed the tax bur-
den" by agreeing to reimburse federal contractors for
valid state taxes (Br. in Opp. 14). That contention is
based on a flawed economic analysis.
The United States has no option, other than liti-
gation, to avoid the burden of unconstitutional state
taxes imposed on its contractors.  If the United
States declined to reimburse federal contractors for
such taxes, the economic burden of the taxes would
still flow to the United States. When state property

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         6

taxes are imposed on federal property in the hands of
a contractor, the contractor will either demand reim-
bursement or raise its contract price to cover the
additional costs that the taxes represent. Taxes im-
posed on contractors-like other types of unavoidable
costs-eventually flow to the consumer of the service
being taxed, either directly (through reimbursement)
or indirectly (through higher contract prices). See
Boyle v. United Technologies Corp., 487 U.S. 500,511-
512(1988). A contractor will not perform a service for
which it cannot obtain a payment that encompasses
all of its costs (plus a profit). The burden of unconsti-
tutional taxes on federal property thus falls ulti-
mately on the United States as a matter of economic
reality, not from any "voluntary" assumption of that
burden by the United States.
Because the decision in this case conflicts with
decisions of this Court and of other courts of appeals,
and because the rationale employed by the court of
appeals would materially erode the constitutional
immunity of the United States from taxation by the
States, further -review by this Court is warranted.
See Pet. 1424. 

 * * * * *

For the reasons stated herein and in the petition,
the petition for a writ of certiorari should be granted.
Respectfully submitted.

          DREW S. DAYS, III
          Solicitor General

AUGUST 1995