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565.0000 United States Contractors

Annotation 565.1260

(e) Title-Passage Clauses

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565.1260 Government Demonstration Contract. A taxpayer is a bioengineering company whose research is funded primarily by grants, co-operative agreements, or contracts with various departments of the United States government. The taxpayer is currently working on a demonstration project with the United States government to produce methane from municipal solid waste and tuna sludge, which methane will be used to produce electricity. The taxpayer will purchase equipment for the project from various vendors and will be reimbursed by the government. The contract with the United States government contain title passage clause which is substantially identical to that provided by FAR 52.245–5(e).

Under the title passage clause, title of items of direct cost passes to the government upon the vendor's delivery of the property to the contractor. Title to "all other property," the cost of which is reimbursable as an item of indirect cost, passes to the government upon issuance of the property for use in performing the contract, commencement of processing of the property for use in contract performance, or reimbursement of the cost by the government, whichever occurs first. The Board has previously determined that, under the Aerospace rule, the clause provides for accelerated passage of title to items of both direct and indirect (i.e., overhead items) cost to the United States prior to use by the contractor. Therefore, under this title passage clause, the taxpayer may purchase property for use in performance of the contract for resale to the United States, which purchase is excluded from tax under Regulation 1668. The taxpayer should timely issue its vendors resale certificates substantially conforming to Regulation 1668. The following resale to the United States is exempt from tax under section 6381. 12/11/95.