B-143135, APRIL 14, 1961, 40 COMP. GEN. 581

B-143135: Apr 14, 1961

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CONTRACTS - PRICE REDETERMINATION - TAX CREDITS - IN EXCESS OF CONTRACT OVERPAYMENTS TAX CREDITS WHICH ARE DUE A GOVERNMENT CONTRACTOR AS THE RESULT OF THE RENEGOTIATION OF CONTRACT PRICES. WHICH ARE IN EXCESS OF CONTRACT OVERPAYMENTS REPRESENTING THE DIFFERENCES BETWEEN PROGRESS PAYMENTS AND THE REVISED CONTRACT PRICES SHOULD BE PAID IN FULL BY THE CONTRACTING AGENCY. THERE WAS FORWARDED TO OUR OFFICE YOUR LETTER OF APRIL 29. THE CONTRACTOR NORMALLY WOULD HAVE BECOME ENTITLED TO TAX CREDITS OF $34. BECAUSE OF HAVING REPORTED ON ITS INCOME TAX RETURNS FOR THE YEARS 1954 AND 1955 AMOUNTS RECEIVABLE UNDER THE CONTRACTS WHICH WERE BASED UPON PRICES IN EFFECT BEFORE THE CONTRACT PRICES WERE RENEGOTIATED IN ACCORDANCE WITH THE PRICE REDETERMINATION PROVISIONS OF THE THREE CONTRACTS.

B-143135, APRIL 14, 1961, 40 COMP. GEN. 581

CONTRACTS - PRICE REDETERMINATION - TAX CREDITS - IN EXCESS OF CONTRACT OVERPAYMENTS TAX CREDITS WHICH ARE DUE A GOVERNMENT CONTRACTOR AS THE RESULT OF THE RENEGOTIATION OF CONTRACT PRICES, IN ACCORDANCE WITH THE PRICE REDETERMINATION PROVISIONS OF THE CONTRACTS, AND WHICH ARE IN EXCESS OF CONTRACT OVERPAYMENTS REPRESENTING THE DIFFERENCES BETWEEN PROGRESS PAYMENTS AND THE REVISED CONTRACT PRICES SHOULD BE PAID IN FULL BY THE CONTRACTING AGENCY, WHERE THE AGENCY HAS FUNDS FOR ADJUSTMENT OF THE CONTRACT ACCOUNT, PURSUANT TO SECTION 1481 OF THE INTERNAL REVENUE CODE, 26 U.S.C. 1481, RATHER THAN REQUIRING THE CONTRACTOR TO GO TO THE INTERNAL REVENUE SERVICE FOR RECOVERY OF PART OF THE TAX CREDIT MERELY BECAUSE OF THE UNFAVORABLE BALANCE BETWEEN THE RENEGOTIATED CONTRACT PRICES AND THE TOTAL PROGRESS PAYMENTS, THE PURPOSE OF SECTION 1481 BEING TO MITIGATE THE EFFECT OF RENEGOTIATION TO ELIMINATE EXCESSIVE CONTRACT PROFITS.

TO CAPTAIN W. B. KNIPE, JR., DEPARTMENT OF THE ARMY, APRIL 14, 1961:

BY LETTER DATED JUNE 3, 1960, FROM THE OFFICE OF THE CHIEF OF FINANCE, DEPARTMENT OF THE ARMY, THERE WAS FORWARDED TO OUR OFFICE YOUR LETTER OF APRIL 29, 1960, WITH ENCLOSURES, REQUESTING A DECISION AS TO THE PROPRIETY OF MAKING PAYMENT OF INVOICES SUBMITTED BY THE GENERAL MOTORS CORPORATION, ALLISON DIVISION, IN THE AMOUNTS OF $28,722, $1,870 AND $8,934.80, FOR RECOVERY OF TAX CREDITS IN EXCESS OF THOSE ALLOWED BY THE CONTRACTING OFFICER IN CONNECTION WITH REDETERMINATIONS OF PRICES PAYABLE BY THE GOVERNMENT UNDER CONTRACT NOS. DA 33-008-ORD-807, 847 AND 991, ENTERED INTO BETWEEN SEPTEMBER 10, 1953, AND MAY 28, 1954.

THE CONTRACTOR NORMALLY WOULD HAVE BECOME ENTITLED TO TAX CREDITS OF $34,347, $3,357, AND $11,954.80, BECAUSE OF HAVING REPORTED ON ITS INCOME TAX RETURNS FOR THE YEARS 1954 AND 1955 AMOUNTS RECEIVABLE UNDER THE CONTRACTS WHICH WERE BASED UPON PRICES IN EFFECT BEFORE THE CONTRACT PRICES WERE RENEGOTIATED IN ACCORDANCE WITH THE PRICE REDETERMINATION PROVISIONS OF THE THREE CONTRACTS. BOTH THE CONTRACTING OFFICER AND THE CONTRACTOR CONSIDERED SECTION 1481 OF THE INTERNAL REVENUE CODE OF 1954, 26 U.S.C. 1481, TO BE APPLICABLE TO THE PRICE REDUCTIONS TO THE EXTENT THAT IT AFFECTED INCOME ON WHICH FEDERAL INCOME TAXES HAD BEEN PAID.

HOWEVER, THE CONTRACTING OFFICER ORIGINALLY DETERMINED THAT ALLOWANCES SHOULD BE MADE TO COVER ONLY THE OVERPAYMENTS REPRESENTING THE DIFFERENCES BETWEEN PROGRESS PAYMENTS AND THE REVISED CONTRACT PRICES. ON SUCH BASIS, THE SUMS OF $5,625, $1,487 AND $3,020 WERE ALLOWED AND IT WAS THE CONTRACTING OFFICER'S DETERMINATION THAT THE BALANCE OF THE TAX CREDITS SHOULD BE RECOVERED FROM THE INTERNAL REVENUE SERVICE AS TAX OVERPAYMENTS.

THE CONTRACTOR APPEALED TO THE ARMED SERVICES BOARD OF CONTRACT APPEALS AND THE BOARD RENDERED A DECISION IN THE CONTRACTOR'S FAVOR ON APRIL 25, 1960, ASBCA NOS. 5206, 5207, AND 5208. IN A SUBSEQUENT DECISION OF DECEMBER 13, 1960, THE BOARD DISMISSED THE GOVERNMENT'S MOTION FOR RECONSIDERATION OF THE CASE.

APPARENTLY, AS OBSERVED BY THE BOARD, THE GOVERNMENT WOULD HAVE INTERPOSED NO OBJECTION TO A FULL ALLOWANCE OF THE TAX CREDITS IF THE GOVERNMENT HAD WITHHELD LESSER SUMS THAN IT DID WHEN MAKING PROGRESS PAYMENTS UNDER THE CONTRACTS. WE AGREE WITH THE BOARD'S CONCLUSION THAT THE PRICE REDETERMINATION AGREEMENTS WERE INTENDED TO INCLUDE AN ALLOWANCE FOR THE TOTAL OF CERTAIN TAX CREDITS, AND NOT PART OF THEM AS THE GOVERNMENT CONTENDED.

YOU HAVE REFERRED TO A LETTER DATED JUNE 23, 1959, IN WHICH THE DIRECTOR, TAX RULINGS DIVISION, INTERNAL REVENUE SERVICE, ADVISED THE DEPARTMENT OF THE ARMY ON A STATED HYPOTHETICAL SITUATION THAT SECTION 1481 OF THE INTERNAL REVENUE CODE WAS INTENDED TO PREVENT TAXPAYERS FROM BEING PLACED IN A "BOX" WHERE CREDITS ALLOWED WERE ERRONEOUSLY COMPUTED; AND THAT THE ARMY SHOULD PAY THE BALANCE DUE IN SETTLEMENT OF THE CONTRACTOR'S ACCOUNT. IN REPLY TO A LETTER DATED SEPTEMBER 12, 1960, WHICH SET FORTH THE ACTUAL SITUATION EXISTING UNDER THE CONTRACTS WITH THE GENERAL MOTORS CORPORATION, ALLISON DIVISION, THE DIRECTOR STATED THAT HIS OFFICE HAS CONSISTENTLY TAKEN THE POSITION THAT THE PROVISIONS OF SECTION 1481 ARE MANDATORY AND CONFER UPON TAXPAYERS THE RIGHT TO HAVE THE AMOUNT OF TAXES PAID ON EXCESSIVE PROFITS APPLIED IN SETTLEMENT OF ACCOUNTS WITH A CONTRACTING AGENCY. IT WAS EXPLAINED THAT THE INTERNAL REVENUE SERVICE WILL, ONLY AS A MATTER OF POLICY, CONSIDER A TAX CREDIT DUE A CONTRACTOR AS A TAX OVERPAYMENT IN ORDER NOT TO PUT THE CONTRACTOR IN THE UNENVIABLE POSITION OF BEING SHUNTED FROM ONE AGENCY OF GOVERNMENT TO ANOTHER.

A REVIEW OF SECTION 1481 OF THE INTERNAL REVENUE CODE FAILS TO SHOW THAT ANY SPECIFIC PROVISION WAS MADE RESPECTING THE TREATMENT OF TAX CREDITS WHICH MAY BE IN EXCESS OF CONTRACT OVERPAYMENTS DETERMINED AT THE TIME OF RENEGOTIATION OF CONTRACT PRICES. THAT SECTION WAS, HOWEVER, DESIGNED TO MITIGATE THE EFFECT OF RENEGOTIATION TO ELIMINATE EXCESSIVE PROFITS; AND WE ARE OF THE OPINION THAT, WHERE A CONTRACTING AGENCY HAS FUNDS AVAILABLE FOR MAKING AN APPROPRIATE ADJUSTMENT, THE POSITION OF THE INTERNAL REVENUE SERVICE IS CONSISTENT WITH THE STATUTE. IN THAT CONNECTION, WE BELIEVE IT IS REASONABLE TO ASSUME THAT A REFUSAL TO MAKE FULL ALLOWANCE FOR ANY SUCH TAX CREDITS WOULD NOT BE JUSTIFIED MERELY BECAUSE OF AN UNFAVORABLE BALANCE BETWEEN THE RENEGOTIATED CONTRACT PRICE AND THE TOTAL OF THE PROGRESS PAYMENTS MADE UNDER THE CONTRACT.

THE RECORD SHOWS THAT, AFTER THE ARMED SERVICES BOARD OF CONTRACT APPEALS RENDERED ITS INITIAL DECISION, THE CONTRACTING OFFICER CHANGED HIS ORIGINAL DETERMINATION IN THE MATTER AND ISSUED CONTRACT MODIFICATIONS INCREASING THE AMOUNTS OBLIGATED UNDER THE CONTRACTS.

WE HAVE ALSO ASCERTAINED INFORMALLY THAT THERE ARE SUFFICIENT FUNDS AVAILABLE TO MAKE PAYMENT ON THE CLAIMS.

ACCORDINGLY, PAYMENT OF THE CLAIMED AMOUNTS OF $28,722, $1,870 AND $8,934.80 IS AUTHORIZED, IF OTHERWISE CORRECT. THE CORRESPONDENCE AND DOCUMENTS ENCLOSED WITH YOUR LETTERS ARE RETURNED.