61 F.3d 920 (Fed. Cir. 1995), 91-1424, GTE Government Systems Corp. v. Perry

Citation61 F.3d 920
Party NameGTE GOVERNMENT SYSTEMS CORPORATION, Appellant, v. William J. PERRY, Secretary of Defense, Appellee.
Case DateJuly 18, 1995
CourtUnited States Courts of Appeals, United States Courts of Appeals. United States Court of Appeals for the Federal Circuit

Page 920

61 F.3d 920 (Fed. Cir. 1995)

GTE GOVERNMENT SYSTEMS CORPORATION, Appellant,

v.

William J. PERRY, Secretary of Defense, Appellee.

No. 91-1424.

United States Court of Appeals, Federal Circuit

July 18, 1995

Editorial Note:

This opinion appears in the Federal reporter in a table titled "Table of Decisions Without Reported Opinions". (See FI CTAF Rule 47.6 and FI CTAF App. V, IOP 9 regarding use of unpublished opinions)

40 Cont.Cas.Fed. (CCH) P 76,818

ASBCA

REVERSED.

Before ARCHER, Chief Judge, [*] RICH, and RADER, Circuit Judges.

ARCHER, Chief Judge.

GTE Government Systems Corporation (GSC), a wholly owned subsidiary of General Telephone & Electronics (GTE), appeals the decision of the Armed Services Board of Contract Appeals (ASBCA or board), 1 holding that the stock purchase discount afforded eligible employees under GTE's Employee Stock Purchase Plan (ESPP) is not a reimbursable cost as compensation for personal services under GSC's contract with the Department of Defense. We reverse the decision of the board.

I.

In 1980, the government awarded GSC a cost-type contract for engineering services in connection with the MX missile system. The contract contained a standard clause entitled "ALLOWABLE COST, INCENTIVE FEE, AND PAYMENT (1979 MAR)" in the form prescribed in Defense Acquisition Regulation (DAR) 7-203.4(b). This clause required the government to pay GSC its costs determined to be allowable in accordance with certain regulations, including DAR 15-205.6(a)(1).

Under GTE's voluntary ESPP, employees of GTE and its subsidiaries who had completed 30 days of service on an offering date under the plan were eligible to participate in the ESPP. In this case, the offering period extended from July 1980 to May 1982. Participating employees were eligible to purchase one share of GTE stock for each $50 of the employee's annual basic rate of pay up to a maximum of 800 shares. The purchase price per share was the lesser of 85% of the fair market value on the date the offer commenced or 85% of the average market price on the last date of the offering. Payment for the stock was made through payroll deductions.

At the commencement date, the fair market value of GTE's stock was $26.07 per share and on the closing date its average market price was $28.31. Participating employees, therefore, could purchase stock at $22.16 per share, representing 85% of the commencement date price. This yielded an effective discount of $6.14 per share from the closing date price, or a discount of 21.7%. Participating employees acquired rights as shareholders at the close of business on the last day of the offering period and received stock certificates as soon as practicable thereafter.

GTE's ESPP is a "qualified" plan within the meaning of Internal Revenue Code (IRC) § 423. Under a qualified plan, participating employees generally are not required to recognize taxable income on the discount portion of their stock purchase until the stock is sold. Concomitantly, Congress provided in IRC§ 421 that an employer corporation generally is not permitted any deduction under IRC § 162 (relating to ordinary and necessary business expenses) for the discount portion of the purchase price for stock transferred to employees under a qualified employee stock purchase plan. 2 According to GTE, its discount costs were deductible, but "GTE chose not to deduct them by 'qualifying' its ESPP under IRC § 423 for a special tax treatment for its employees and thus relinquished its right to deduct the ESPP costs."

In 1984, after the ASBCA's decision in Singer Co., ASBCA No. 18,857, 82-1 BCA ¶ 15,684, 3 GTE began claiming the ESPP discount as an allowable compensation cost by adjusting its General and Administrative (G & A) rates applicable to government contracts for past years not yet closed, including the year 1981 here at issue. After its G & A rates were audited, the government advised GTE that the ESPP discount was unallowable as a compensation cost. GTE appealed to the ASBCA which sustained the contracting officer's decision. This appeal followed.

II.

Under the Contract Disputes Act, this court's standard of review is:

[T]he decision of the agency board on any question of law shall not be final or conclusive, but the decision on any question of fact shall be final and conclusive and shall not be set aside unless the decision is fraudulent, or arbitrary, or capricious, or so grossly erroneous as to necessarily imply bad faith, or if such decision is not supported by substantial evidence.

41 U.S.C. § 609(b). There is no dispute as to the facts. This case involves only the interpretation of contract and regulatory provisions, which are questions of law. Thus, this court's review is de novo.

The issue in this case is whether the stock purchase discount under GTE's ESPP, a qualified plan, is allowable as a compensation cost under DAR 15-205.6, Compensation for Personal Services. That DAR provision provides:

(a) General

(1) (CWAS) Compensation for personal services includes all remuneration paid currently or accrued, in whatever form and whether paid immediately or deferred, for services rendered by employees to the contractor during the period of contract performance (except as otherwise provided in 15-205.6(f)). It includes, but is not limited to, salaries, wages, directors' and executive committee members' fees, bonuses (including stock bonuses), incentive awards, employee stock options, employee insurance, fringe benefits, contributions to pension, annuity, and management employee incentive compensation plans, allowances for off-site pay, incentive pay, location allowances, hardship pay and cost of living differential.... Except as otherwise specifically provided in this 15-205.6, such costs are allowable to the extent that the total compensation of individual employees is reasonable for the services rendered and they are not in excess of those costs which are allowable by the Internal Revenue Code and regulations thereunder....

The board interpreted this provision of the DAR as establishing "tax allowability as a touchstone for the allowability of compensation costs." It relied on the last sentence of this provision and on the...

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