B-157310, FEB. 7, 1966

B-157310, FEB. 7, 1966

TO MAJOR RALPH JACKSON, USAF:

BY LETTER DATED JULY 21, 1965 (AFAAFED), FROM HEADQUARTERS, UNITED STATES AIR FORCE, THERE WAS FORWARDED TO OUR OFFICE YOUR LETTER DATED JUNE 24, 1965, WITH ENCLOSURES, REQUESTING AN ADVANCE DECISION ON THE PROPRIETY OF MAKING PAYMENT ON BUREAU VOUCHER NO. R-405, IN THE AMOUNT OF $12,462.71, COVERING A RECLAIM OF DOUBLAS AIRCRAFT COMPANY, INCORPORATED, SANTA MONICA, CALIFORNIA, UNDER AIR FORCE COST-PLUS-A FIXED-FEE CONTRACT NO. AF 04/645/-65, DATED NOVEMBER 1, 1956.

THE SUM OF $12,462.71 WAS COLLECTED FROM THE DOUGLAS AIRCRAFT COMPANY AS THE RESULT OF EXCEPTIONS TAKEN UNDER ITEMS 2 AND 3 OF GENERAL ACCOUNTING OFFICE NOTICE OF EXCEPTION NO. 500061, ISSUED ON JULY 10, 1964. THESE ITEMS COVERED THE QUESTIONED AMOUNTS OF $11,328.55 AND $1,134.16, CHARGED TO CONTRACT NO. AF 04/645/-65 AS ALLOCATED PORTIONS OF EXHIBIT COSTS (PUBLIC RELATIONS EXPENSES), AND DEBENTURE BOND EXPENSES, DISTRIBUTED FROM COMPANY OVERHEAD EXPENSE ACCOUNTS FOR ITS FISCAL YEAR ENDED NOVEMBER 30, 1959. THE EXHIBIT COSTS WERE INCURRED BY DOUGLAS WHILE PARTICIPATING IN THE BRUSSELS UNIVERSAL AND INTERNATIONAL EXHIBITION, THE WORLD CONGRESS OF FLIGHT AT LAS VEGAS, NEVADA, AND THE INTERNATIONAL AERONAUTICAL EXHIBITION AT PARIS, FRANCE. THE DEBENTURE BOND EXPENSES REPRESENT AMOUNTS PAID BY DOUGLAS TO CERTAIN FINANCIAL INSTITUTIONS FOR SERVICES RENDERED IN MAKING INTEREST PAYMENTS ON DEBENTURE BONDS OF THE DOUBLAS AIRCRAFT COMPANY.

CONTRACT NO. AF 04/645/-65 INCORPORATED BY REFERENCE A PROVISION THAT ALLOWABLE COSTS OF PERFORMING THE CONTRACT WOULD BE DETERMINED BY THE CONTRACTING OFFICER IN ACCORDANCE WITH THE PROVISIONS OF PART 2 OF SECTION 15 OF THE ARMED SERVICES PROCUREMENT REGULATION (ASPR), AS IN EFFECT ON THE CONTRACT DATE. AT SUCH TIME, PARAGRAPH 15-205, ASPR, CONTAINED THE FOLLOWING PERTINENT PROVISIONS:

"15-205 EXAMPLES OF ITEMS OF UNALLOWABLE COSTS.

IRRESPECTIVE OF WHETHER THE PARTICULAR COSTS ARE TREATED BY THE CONTRACTOR AS DIRECT OR INDIRECT, THE FOLLOWING ITEMS OF COST ARE CONSIDERED UNALLOWABLE, EXCEPT AS INDICATED:

"/A) ADVERTISING, EXCEPT "HELP WANTED" ADVERTISING IN TRADE AND TECHNICAL JOURNALS * * *

"/K) INTEREST ON BORROWING (HOWEVER REPRESENTED), BOND DISCOUNT AND EXPENSES, AND FINANCING CHARGES.

"/R) TAXES AND EXPENSES IN CONNECTION WITH FINANCING, REFINANCING, OR REFUNDING OPERATIONS, INCLUDING THE LISTING OF SECURITIES ON EXCHANGES.'

OUR OFFICE QUESTIONED THE REIMBURSEMENT OF THE SUM OF $11,328.55 AN ALLOWABLE EXHIBIT EXPENSES ON THE BASIS OF A BELIEF THAT THE EXHIBITS SERVED THE MAIN PURPOSE OF PUBLICIZING OR ADVERTISING THE CONTRACTOR'S NAME AND PRODUCTS AND BECAUSE, WITH ONLY TWO EXCEPTIONS, ADVERTISING COSTS WERE TREATED AS UNALLOWABLE UNDER ASPR 15-205 (A). PAYMENT OF THE SUM OF $1,134.16 WAS QUESTIONED PRIMARILY ON THE BASIS OF ASPR 15 205 (R), IT HAVING BEEN CONSIDERED THAT THE COSTS OF SERVICES IN MAKING PAYMENT OF INTEREST ON DEBENTURE BONDS WERE "EXPENSES IN CONNECTION WITH FINANCING" AND THEREFORE UNALLOWABLE UNDER ASPR 15-205 (R). ASPR 15-205 (K), WHICH CLASSED INTEREST ON BORROWINGS AS UNALLOWABLE, WAS ALSO CONSIDERED AS REQUIRING AN EXCEPTION TO THE REIMBURSEMENT OF THE COSTS OF SERVICES RENDERED IN MAKING INTEREST PAYMENTS ON THE DEBENTURE BONDS.

ON NOVEMBER 2, 1959, THE FORMAT OF THE CONTRACT COST PRINCIPLES OF PART 2, SECTION 15, ASPR, PARAGRAPHS 204 AND 205, WAS CHANGED IN CERTAIN RESPECTS AND PROVISION WAS MADE FOR ALLOWANCE OF THE COSTS OF PARTICIPATION IN EXHIBITS UNDER CERTAIN CONDITIONS. THAT PROVISION WOULD NOT HAVE BEEN NECESSARILY APPLICABLE TO COST-TYPE CONTRACTS PREVIOUSLY ENTERED INTO, BUT IT DEMONSTRATED THE THEN CURRENT BELIEF OF THE DEFENSE AGENCIES THAT EXHIBIT COSTS SHOULD BE TREATED AS ALLOWABLE COSTS OF PERFORMING COST-TYPE CONTRACTS. HOWEVER, THE PRACTICE OF ALLOWING SUCH COSTS APPEARS TO HAVE BEEN DISCONTINUED WITH RESPECT TO THE CONTRACTOR EXPENDITURES INCURRED ON AND AFTER JULY 1, 1961, IN VIEW OF SECTION 636 OF THE DEPARTMENT OF DEFENSE APPROPRIATION ACT OF 1962, PUBLIC LAW 87-144, 75 STAT. 365, 381. SEE 42 COMP. GEN. 152.

THE CONTRACTOR HAS TAKEN THE POSITION THAT THE ALLOCATED COSTS IN QUESTION ARE ALLOWABLE UNDER A REASONABLE INTERPRETATION OF THE VARIOUS PROVISIONS OF PART 2, SECTION 15, ASPR, IN EFFECT AS OF THE DATE THE CONTRACT WAS ENTERED INTO.

ASPR 15-201 PROVIDED, IN PART, THAT THE TESTS USED IN DETERMINING THE ALLOWABILITY OF COSTS SHOULD INCLUDE (A) REASONABLENESS, (B) APPLICATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND PRACTICES, AND (C) ANY LIMITATION AS TO THE TYPES OR AMOUNTS OF COST ITEMS SET FORTH IN PART 2, SECTION 15, OR OTHERWISE INCLUDED IN THE CONTRACT. ASPR 15-203 LISTED THREE CATEGORIES OF INDIRECT COSTS FOR CONSIDERATION SUBJECT TO THE LIMITATIONS OF THIS PART.' THE SECOND AND THIRD CATEGORIES (B) AND (C) WERE DESCRIBED AS "SELLING AND DISTRIBUTION EXPENSES, WHICH ARE COSTS INCURRED IN CONNECTION WITH THE MARKETING OF THE CONTRACTOR'S PRODUCTS; " AND AS "GENERAL AND ADMINISTRATIVE EXPENSES, WHICH ARE COSTS INCURRED IN THE GENERAL MANAGEMENT, SUPERVISION AND CONDUCT OF THE BUSINESS AS A WHOLE.' ASPR 15-204 (E) LISTED AS ALLOWABLE COSTS CERTAIN TYPES OF CORPORATE EXPENSES, INCLUDING REGISTRY AND TRANSFER CHARGES RESULTING FROM CHANGES IN OWNERSHIP OF SECURITIES ISSUED BY THE CONTRACTOR.

THE CONTRACTOR CITED MOST OF THE FOREGOING PROVISIONS OF THE CONTRACT COST PRINCIPLES, CONTENDING THAT EXHIBIT COSTS WERE ALLOWABLE AS GENERAL AND ADMINISTRATIVE EXPENSES OR AS SELLING AND DISTRIBUTION EXPENSES; THAT THE COSTS OF SERVICES IN MAKING PAYMENTS OF INTEREST ON DEBENTURE BONDS ARE COMPARABLE TO THE COSTS OF SERVICES RENDERED IN THE MAKING OF DIVIDEND PAYMENTS ON COMMON AND PREFERRED STOCKS, AS TO WHICH NO EXCEPTIONS HAD BEEN TAKEN TO REIMBURSEMENTS MADE; AND THAT THE PORTION OF THE ASPR WHICH MOST NEARLY COVERED THE PARTICULAR SERVICE CHARGES WAS ASPR 15-204 (E), WHICH SPECIFICALLY MAKES THE COST OF VARIOUS OTHER ROUTINE CORPORATE ACTIVITIES ALLOWABLE.

THE CONTRACTOR INDICATED THAT ITS PRODUCTS AND SERVICES WERE DISPLAYED IN THE EXHIBITS AND STATED THAT ITS PARTICIPATION IN TWO OF THE THREE EXHIBITIONS WAS REQUESTED BY THE GOVERNMENT. IT WAS SUGGESTED IN EFFECT THAT THE PRINCIPAL OBJECTIVE IN PARTICIPATION IN THE EXHIBITIONS WAS THE PROMOTION OF GOOD PUBLIC RELATIONS RATHER THAN TO SOLICIT BUSINESS IN THE SENSE THAT THE TERM ,ADVERTISING" HAS BEEN DEFINED AS "TO CALL PUBLIC ATTENTION, IN ORDER TO AROUSE A DESIRE TO PURCHASE OR INVEST, THROUGH MASS CIRCULATION MEDIA DIRECTLY REACHING NUMEROUS, NOT SPECIFICALLY ADDRESSED, POTENTIAL PURCHASERS OR INVESTORS.' THERE ARE INDICATIONS THAT CERTAIN ADVERTISING ACTIVITIES WERE CONDUCTED AT THE EXHIBITIONS BUT IT APPEARS THAT SUCH ACTIVITIES COULD BE CONSIDERED CONSISTENT WITH A PRIMARY PURPOSE OF PROVIDING THE EXHIBITS IN THE INTEREST OF PROMOTING GOOD PUBLIC RELATIONS AS AN INCIDENT TO THE MANAGEMENT OF THE CONTRACTOR'S BUSINESS AS A WHOLE.

ASPR 15-205, IN EFFECT ON THE DATE OF THE CONTRACT, CONTAINED NO REFERENCE TO EXHIBIT COSTS AND THERE IS NO EVIDENCE TO SHOW THAT THERE WAS ANY UNDERSTANDING OF THE PARTIES TO THE CONTRACT OF NOVEMBER 1, 1956, THAT EXHIBIT COSTS AT NATIONAL AND INTERNATIONAL EXHIBITIONS WOULD BE TREATED AS UNALLOWABLE ADVERTISING COSTS AS OPPOSED TO TREATMENT AS ALLOWABLE GENERAL AND ADMINISTRATIVE EXPENSES. NEITHER DOES IT SEEM TO BE MATERIAL WHETHER PARTICIPATION IN ALL THREE EXHIBITS WAS REQUESTED BY AN AGENCY OF THE UNITED STATES. IT WOULD APPEAR IN SUCH CIRCUMSTANCES THAT IT REMAINED A MATTER FOR THE CONTRACTING OFFICER TO DETERMINE WHETHER PORTIONS OF THE EXHIBIT EXPENSES COULD BE CHARGED TO COST-PLUS CONTRACTS WITH THE GOVERNMENT ON A REASONABLE AND EQUITABLE BASIS IN ACCORDANCE WITH THE STANDARDS OF ASPR 15-201 AND 15-203.

ASPR 15-205 (R) CONTAINED NO DIRECT REFERENCE TO EXPENSES INCURRED IN MAKING BOND INTEREST PAYMENTS AND IT APPEARS QUESTIONABLE WHETHER IT WAS INTENDED BY THE LANGUAGE OF THAT SUBPARAGRAPH OF THE APPLICABLE COST PRINCIPLES THAT PAYMENTS OF THE TYPE HERE INVOLVED WOULD BE FOR CONSIDERATION AS "EXPENSES IN CONNECTION WITH FINANCING, REFINANCING, OR REFUNDING OPERATIONS" OF A PARTICULAR CONCERN. SUCH FINANCING OPERATIONS USUALLY ARE CONCLUDED, IN THE CASE OF CORPORATE DEBENTURES, UPON THE ISSUANCE AND SALE OF THE CORPORATE BONDS THROUGH LISTING ON EXCHANGES OR OTHERWISE. WITH RESPECT TO ASPR 15-205 (K) AND THE COMPARABLE SUBPARAGRAPH (G) WHICH CONCERNS DIVIDEND PAYMENTS, IT IS APPARENT THAT THE TWO SUBPARAGRAPHS WOULD REQUIRE ONLY THAT THE AMOUNTS OF THE DIVIDEND PAYMENTS AND THE BOND INTEREST PAYMENTS BE TREATED AS UNALLOWABLE COSTS. IN OUR OPINION, THEY DO NOT EFFECT THE ALLOWABILITY ON A PRO-RATA BASIS OF INDIRECT CLERICAL OR OTHER COSTS INCURRED IN MAKING THE DIVIDEND AND BOND INTEREST PAYMENTS.

IT APPEARS THAT THE REIMBURSEMENTS HERE INVOLVED WERE NOT CONTRARY TO ANY OF THE PROVISIONS OF THE APPLICABLE COST PRINCIPLES OF PART 2, SECTION 15, ASPR, AS IN EFFECT ON THE DATE OF CONTRACT NO. AF 04/645/ 65, AND THAT THE ACTION OF THE CONTRACTING OFFICER IN APPROVING THE PARTICULAR REIMBURSEMENTS CANNOT BE SAID NOT TO HAVE BEEN BASED UPON REASONABLE GROUNDS. ACCORDINGLY, BUREAU VOUCHER NO. R-405 IS RETURNED HEREWITH AND YOU ARE ADVISED THAT PAYMENT ON THE VOUCHER IS AUTHORIZED IN THE CLAIMED AMOUNT OF $12,462.71.