B-105262, DEC 26, 1951

B-105262: Dec 26, 1951

Additional Materials:

Contact:

Edda Emmanuelli Perez
(202) 512-2853
EmmanuelliPerezE@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

WHEREIN THERE WAS CONSIDERED AN APPEAL BY NORTHROP AIRCRAFT. OTHER THAN ITS USE AS THE MEDIUM EMPLOYED BY THE DEPARTMENT OF THE AIR FORCE FOR THE COLLECTION AND REPAYMENT OF THE AMOUNT INVOLVED IS NOT PERTINENT TO THE CASE. THE QUESTION CONSIDERED BY THE ARMED SERVICES BOARD OF CONTRACT APPEALS IN THE REFERRED-TO DECISION WAS WHETHER THE GOVERNMENT IS ENTITLED TO THE INTEREST RECEIVED BY THE CONTRACTOR FROM THE STATE OF CALIFORNIA INCIDENTAL TO THE RECOVERY OF STATE UNEMPLOYMENT INSURANCE TAXES ERRONEOUSLY ASSESSED AND COLLECTED BY THE STATE IN CONNECTION WITH THE PERFORMANCE OF CERTAIN COST-PLUS-A-FIXED-FEE CONTRACTS. THE TOTAL AMOUNT OF THE INTEREST ALLOCABLE TO THE COST-PLUS-A-FIXED FEE CONTRACTS UNDER WHICH THE TAXES WERE ASSESSED IS REPORTED AS BEING $78.

B-105262, DEC 26, 1951

PRECIS-UNAVAILABLE

THE SECRETARY OF DEFENSE:

IN THE AUDIT AT HAWTHORNE, CALIFORNIA, OF CERTAIN GOVERNMENT CONTRACTS WITH NORTHROP AIRCRAFT, INC., THERE HAS COME TO MY ATTENTION DECISION NO. 669 BY THE ARMED SERVICES BOARD OF CONTRACT APPEALS, DATED MAY 28, 1951, WHEREIN THERE WAS CONSIDERED AN APPEAL BY NORTHROP AIRCRAFT, INC., FROM A DECISION AND ACTION OF THE CONTRACTING OFFICER IN WITHHOLDING THE SUM OF $55,088.97 FROM MONEYS OTHERWISE DUE THE CONTRACTOR UNDER CONTRACT NO. AF33(038)-1817. SUCH CONTRACT, OTHER THAN ITS USE AS THE MEDIUM EMPLOYED BY THE DEPARTMENT OF THE AIR FORCE FOR THE COLLECTION AND REPAYMENT OF THE AMOUNT INVOLVED IS NOT PERTINENT TO THE CASE.

THE QUESTION CONSIDERED BY THE ARMED SERVICES BOARD OF CONTRACT APPEALS IN THE REFERRED-TO DECISION WAS WHETHER THE GOVERNMENT IS ENTITLED TO THE INTEREST RECEIVED BY THE CONTRACTOR FROM THE STATE OF CALIFORNIA INCIDENTAL TO THE RECOVERY OF STATE UNEMPLOYMENT INSURANCE TAXES ERRONEOUSLY ASSESSED AND COLLECTED BY THE STATE IN CONNECTION WITH THE PERFORMANCE OF CERTAIN COST-PLUS-A-FIXED-FEE CONTRACTS. THE TOTAL AMOUNT OF THE INTEREST ALLOCABLE TO THE COST-PLUS-A-FIXED FEE CONTRACTS UNDER WHICH THE TAXES WERE ASSESSED IS REPORTED AS BEING $78,497.89. OF THIS AMOUNT $55,088.97, ALLOCABLE TO SIX OF THE CONTRACTS INVOLVED, WAS WITHHELD BY THE DEPARTMENT OF THE AIR FORCE, BUT SUBSEQUENTLY PAID TO THE CONTRACTOR AS A RESULT OF THE BOARD'S DECISION.

THE FACTS OF THE MATTER ARE FULLY SET FORTH IN THE BOARD'S DECISION. BRIEFLY SUMMARIZED, SUCH FACTS ARE SHOWN TO BE THAT THE CONTRACTOR PAID UNDER PROTEST AN ADDITIONAL ASSESSMENT OF STATE UNEMPLOYMENT INSURANCE TAXES FOR THE YEAR 1943; THAT THEREAFTER THE GOVERNMENT REIMBURSED THE CONTRACTOR FOR THE AMOUNT THEREOF ALLOCABLE TO COST REIMBURSABLE CONTRACTS; THAT WITH APPROVAL OF THE ADMINISTRATIVE OFFICE THE CONTRACTOR INSTITUTED LEGAL ACTION TO RECOVER THE ADDITIONAL AMOUNT PAID; THAT AS THE RESULT OF A RULING BY THE SUPREME COURT OF THE STATE OF CALIFORNIA, THE STATE REFUNDED TO THE CONTRACTOR THE AMOUNT OF THE ADDITIONAL ASSESSMENT TOGETHER WITH INTEREST THEREON; THAT THE CONTRACTOR RETURNED TO THE GOVERNMENT ITS PORTION OF THE PRINCIPAL AMOUNT OF THE REFUND LESS COST OF LEGAL SERVICES, BUT REFUSED TO PAY OVER TO THE GOVERNMENT ANY PORTION OF THE INTEREST RECEIVED THEREON; AND THAT THE CONTRACTING OFFICER WITHHELD FROM CURRENT REIMBURSEMENTS THE INTEREST APPLICABLE TO SIX OF THE CONTRACTS INVOLVED.

SUCH CONTRACTS CONTAIN THE STANDARD DISPUTES CLAUSE WHICH PROVIDES THAT ALL DISPUTES CONCERNING QUESTIONS OF FACT ARISING UNDER THE CONTRACT SHOULD BE DECIDED BY THE CONTRACTING OFFICER SUBJECT TO WRITTEN APPEAL BY THE CONTRACTOR WITHIN 30 DAYS TO THE HEAD OF THE DEPARTMENT CONCERNED OR HIS DULY AUTHORIZED REPRESENTATIVE, AND INCORPORATE BY REFERENCE THE REGULATIONS SET FORTH IN SECTION 26.9, CHAPTER I, TITLE 26, OF T.D. 5000 WHICH PROVIDES IN PART, AS FOLLOWS:

"AMONG THE ITEMS WHICH SHALL NOT BE INCLUDED AS A PART OF THE COST OF PERFORMING A CONTRACT OR SUBCONTRACT OR CONSIDERED IN DETERMINING SUCH COST, ARE THE FOLLOWING: *** INTEREST INCURRED OR EARNED ***."

INASMUCH AS THE QUESTION AS TO WHETHER THE GOVERNMENT IS ENTITLED TO THE INTEREST ALLOCABLE TO ITS CONTRACTS CONSTITUTES A PLAIN QUESTION OF LAW RATHER THAN A QUESTION OF FACT, IT DOES NOT APPEAR THAT THE DISPUTE WAS ONE THAT PROPERLY COULD HAVE BEEN ADJUDICATED WITH FINALITY BY THE ARMED SERVICES BOARD OF CONTRACT APPEALS BUT RATHER SHOULD HAVE BEEN REFERRED TO THIS OFFICE FOR FINAL DECISION OR SETTLEMENT IN ACCORDANCE WITH THE AUTHORITY CONTAINED IN THE BUDGET AND ACCOUNTING ACT, 1921, 42 STAT. 24.

IN ADDITION TO THE OBJECTION THAT THE ARMED SERVICES BOARD OF CONTRACT APPEALS HAD NO CONCLUSIVE JURISDICTION OF THE MATTER, IT IS THE VIEW OF THIS OFFICE THAT THE DECISION RENDERED BY THE BOARD ERRONEOUSLY HOLDS THAT THE CONTRACTOR IS NOT REQUIRED TO PAY OVER TO THE UNITED STATES THE INTEREST APPLICABLE TO THE GOVERNMENT CONTRACTS. WHILE IT IS TRUE THAT THE MONEY USED TO PAY THE TAX ASSESSMENT ORIGINALLY WAS THAT OF THE CONTRACTOR, THE CONTRACTOR SUBSEQUENTLY WAS REIMBURSED BY THE GOVERNMENT. CONSEQUENTLY, FOLLOWING SUCH REIMBURSEMENT, THE PAYMENT OF THE ADDITIONAL ASSESSMENT PROPERLY MAY BE CONSIDERED AS HAVING BEEN MADE FOR THE GOVERNMENT'S ACCOUNT AND ANY INTEREST AWARDED BY THE COURT IN CONNECTION WITH THE REFUND OF THE OVERASSESSMENT OF THE TAX SHOULD BE PAID OVER TO THE GOVERNMENT.

THE BOARD APPARENTLY REJECTED THE GOVERNMENT'S CLAIM ON THE BASIS OF WHAT IT CONSIDERED TO BE "THE INJUNCTION OF T.D. 5000," AS CONTAINED IN THE ABOVE-QUOTED PROVISION THEREOF. HOWEVER, INSOFAR AS THE INSTANT QUESTION IS CONCERNED, THE RIGHTS OF THE PARTIES WOULD APPEAR TO BE CONTROLLED BY THE SPECIAL AGREEMENT AS EVIDENCED BY THE EXCHANGE OF CORRESPONDENCE BETWEEN THE GOVERNMENT AND THE CONTRACTOR AFTER THE QUESTION AS TO THE PROPRIETY OF THE ADDITIONAL ASSESSMENT AROSE. AT THAT TIME IT WAS RECOGNIZED BY BOTH THE GOVERNMENT AND THE CONTRACTOR THAT THE QUESTION AS TO THE PROPRIETY OF THE ADDITIONAL ASSESSMENT PRESENTED A DISPUTED LEGAL QUESTION, AND THAT SUBSTANTIAL DOUBT EXISTED THAT THE GOVERNMENT WAS UNDER ANY LEGAL DUTY TO REIMBURSE THE CONTRACTOR FOR SUCH PAYMENTS. HOWEVER, THE CORRESPONDENCE INDICATES THAT PRIMARILY FOR THE CONVENIENCE OF THE CONTRACTOR THE GOVERNMENT AGREED PROMPTLY TO REIMBURSE THE CONTRACTOR FOR THE TAX PAYMENTS PROVIDED THE CONTRACTOR, IF REQUESTED BY THE GOVERNMENT, WOULD TAKE ALL STEPS NECESSARY TO PROSECUTE A CLAIM FOR REFUND AND TO PROPORTIONATELY CREDIT THE COST-PLUS-A-FIXED-FEE CONTRACTS IN QUESTION "WITH ANY RECOVERY WHICH MAY BE OBTAINED." THE CONTRACTOR BY LETTER OF APRIL 21, 1944, AGREED "TO PROPORTIONATELY CREDIT THE CPFF CONTRACTS INVOLVED WITH ANY FUNDS RECOVERED IN SAID LITIGATION." THE TERMS "ANY RECOVERY" AND "ANY FUNDS" IN THEIR NORMAL USAGE ARE CERTAINLY SUFFICIENTLY BROAD TO INCLUDE INTEREST AND, HAVING IN MIND THE PERTINENT FACTS OF THE MATTER THEN EXISTING, NO REASONABLE BASIS WHATEVER IS PERCEIVED FOR CONSTRUING THOSE TERMS AS HAVING BEEN INTENDED TO BE EXCLUSIVE OF INTEREST. WHILE IT IS TRUE THAT, BY FURTHER LETTER OF JUNE 2, THE CONTRACTOR STATED "IF A RECOVERY IS MADE, WE AGREE TO CREDIT THE CPFF CONTRACTS INVOLVED WITH THEIR PROPER SHARE OF THE REFUND," THERE APPEARS NO REASON TO BELIEVE THAT THAT STATEMENT WAS INTENDED TO RESTRICT IN ANY WAY THE PRIOR SIMILAR STATEMENTS.

SUCH BEING THE CASE, IT SEEMS OBVIOUS THAT THE CONTRACTOR AGREED TO CREDIT ITS GOVERNMENT CONTRACTS WITH ANY PROPORTIONATE AMOUNTS WHICH MIGHT BE PAID OVER TO IT BY THE STATE IN CONNECTION WITH THE TRANSACTION. THIS CONCLUSION FINDS DEFINITE SUPPORT IN THE FACT THAT UNDER THE TERMS OF THE SAME AGREEMENT THE GOVERNMENT AGREED TO BEAR THE LITIGATION EXPENSES APPLICABLE TO THE CPFF CONTRACTS THUS MAKING IT APPARENT THAT TO THE EXTENT THE SUIT FOR RECOVERY PERTAINED TO THOSE CONTRACTS IT WAS INTENDED AS BEING FOR THE ACCOUNT OF THE GOVERNMENT AND THAT THE REIMBURSEMENT BY THE GOVERNMENT OF THE TAX MONEY CREATED A TRUST RELATIONSHIP BETWEEN THE PARTIES REQUIRING THE CONTRACTOR TO ACCOUNT FOR THE INTEREST ALLOCABLE TO THOSE CONTRACTS FROM AND AFTER THE DATE OF REIMBURSEMENT. OF COURSE TOO THERE IS A COMPLETE LACK OF EQUITY IN FAVOR OF THE CONTRACTOR IN THE MATTER, SINCE OBVIOUSLY THERE IS NO MORAL OR EQUITABLE REASON WHY THE CONTRACTOR SHOULD BE PERMITTED TO RETAIN THE BENEFIT DERIVED FROM BOTH THE STATE'S REFUND AND THE PAYMENT MADE TO IT BY THE GOVERNMENT.

WHILE THE FOREGOING DOES NOT EXHAUST THE REASONS WHICH COULD BE STATED AS REQUIRING A HOLDING THAT THE INTEREST ALLOCABLE TO THE GOVERNMENT CONTRACTS MUST BE RECOVERED FROM THE CONTRACTOR, IT IS BELIEVED THAT THEY ARE SUFFICIENT TO SHOW THAT THERE EXISTS NEITHER A LEGAL NOR EQUITABLE BASIS FOR THE CONCLUSION REACHED BY THE ARMED SERVICES BOARD OF CONTRACT APPEALS. ACCORDINGLY, ACTION LOOKING TOWARD COLLECTION OF THE AMOUNT OF SUCH INTEREST, SHOULD BE INITIATED ADMINISTRATIVELY. IF THE CONTRACTOR PRESENTLY HOLDS NO GOVERNMENT CONTRACTS UNDER WHICH SET-OFF MAY BE MADE, AND ADMINISTRATIVE ACTION TO COLLECT THE INDEBTEDNESS OTHERWISE IS UNSUCCESSFUL, THE MATTER SHOULD BE REFERRED TO THE CLAIMS DIVISION OF THIS OFFICE FOR COLLECTION IN ACCORDANCE WITH THE USUAL PROCEDURE.

A REPORT AS TO THE FINAL ACTION TAKEN BY YOUR DEPARTMENT IN THE MATTER WILL BE APPRECIATED.