Boeing Co. v. United States

• Decision Date: 02 June 1982
• Docket Number: No. 268-79C.,268-79C.
• Citation: 680 F.2d 132
• Parties: The BOEING COMPANY v. The UNITED STATES.
• Court: U.S. Claims Court

680 F.2d 132

The BOEING COMPANY v. The UNITED STATES.

No. 268-79C.

United States Court of Claims.

June 2, 1982.

Harold F. Olsen, Seattle, Wash., atty. of record, for plaintiff; Perkins, Coie, Stone, Olsen & Williams, Seattle, Wash., of counsel.

Stephen G. Anderson, with whom was Asst. Atty. Gen., J. Paul McGrath, Washington, D. C., for defendant.

Before COWEN, Senior Judge, and DAVIS and BENNETT, Judges.

ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

DAVIS, Judge:

This case presents a contest over the amount owed to plaintiff, The Boeing Company (Boeing), by the defendant for certain costs incurred under a cost-plus-fixed fee contract between the Air Force and Boeing. The more precise issue is whether claimant properly allocated home office tax expenses to its various divisions. We affirm the decision of the Armed Services Board of Contract Appeals (ASBCA), denying plaintiff's claim.

In September 1972, Boeing was awarded a research and development contract by the Air Force. Payment was to be on a cost-plus-fixed fee basis; costs were generally defined in the agreement; and the fixed fee set. The contract included a "Cost Accounting Standards" clause which required that the contractor comply with all cost accounting standards in effect on the date of the award of the particular contract and any standards effective at the time future government contracts were entered into by that contractor during this contract's performance period.¹ Cost Accounting Standards were promulgated by the Cost Accounting Standards Board (CASB) pursuant to 50 U.S.C.App. § 2168 (1976).

The present dispute centers on Cost Accounting Standard 403 (CAS 403), 4 C.F.R. § 403 (1981), which was included in this contract as of January 1, 1974. It provides the method by which government contractors are to allocate home office expenses to different segments of a corporate organization. The home office expenses now involved are several types of state and local taxes: real property; personal property; sales; use; business and occupation; and fuel and vehicle taxes. The controversy focusses first on the meaning of CAS 403 as applied to these expenses of Boeing, and then on the validity of the standard if its meaning is other than Boeing claims.

I

Boeing manufactures aircraft and other products for commercial and governmental use. Its Washington State business, that part of its operation with which we are concerned in this proceeding, was conducted through a corporate headquarters in Seattle and several operating divisions (segments) and subsidiaries. Boeing operates several Seattle-area plants, each of which is assigned to one division for administrative and maintenance purposes. This is usually the segment that predominantly uses the facility, most often the Commercial or Aerospace division, although most of the plants are utilized by all of the divisions. Control of a plant shifts along with usage — if another division becomes the predominant user of the facility, it assumes control over it.

Each Boeing division that controls the property, manufactures the goods or makes the sale subject to taxation, initially determines and records the amount of tax costs it incurs. Sales taxes are paid by each division and the other expenses are reported to the headquarters in the State of Washington and paid by the main office. The latter expenses are then allocated back to each segment and further allocated to particular contracts.

The specific question concerns Boeing's method of allocating its Washington state and local tax expenses between its various divisions. It has distributed these costs to each segment in proportion to the number of employees working in each segment; this is known as the employee base or headcount allocation system. The contracting officer disallowed part of plaintiff's claimed tax costs because they were derived by the headcount method which he held does not comply with CAS 403. According to the contracting officer, CAS 403 mandates the use of an assessment base method of tax cost allocation. Under this method, costs are allocated by using the base which was used to measure the particular tax. For example, because property taxes are assessed on the value of property, segment A would be allocated the property taxes attributable to the property it controls.²

This contracting officer's decision was upheld in comprehensive opinions by the Armed Services Board of Contract Appeals. The Boeing Co., ASBCA No. 19,224, 77-1 BCA ¶ 12,371, confirmed on reconsideration, The Boeing Company, ASBCA No. 19,224, 79-1 BCA ¶ 13,708. That tribunal held that CAS 403 requires that home office expenses be identified with and allocated to particular segments, if possible. It found that the tax costs before us could be specifically identified by use of an assessment base method of allocation.³ Boeing's headcount method was rejected as not complying with the requirement that costs be specifically identified with a division to the maximum extent practical.

Plaintiff appeals to this court and both parties have moved for summary judgment.

II

The initial problem is the proper meaning of CAS 403. Boeing claims that the ASBCA's interpretation is inconsistent with this court's prior rulings in Boeing Co. v. United States, 202 Ct.Cl. 315, 480 F.2d 854 (1973) (Boeing I) and Lockheed Aircraft Corp. v. United States, 179 Ct.Cl. 545, 375 F.2d 786 (1967); that the CASB did not intend to overrule those earlier decisions and did not reject the "broad benefits" test they enunciated.⁴ We are also told, in this connection, that CAS 403 utilizes the same allocation concepts as the former regulation, Armed Services Procurement Regulation (ASPR) § 15-201 et seq. In Boeing's view, the new standard does not mandate use of the assessment base method but is flexible in permitting any approach which measures benefits to the receiving segments from the tax expenditures.

A. The fundamental flaw in this analysis is its failure to recognize the importance of the new provision in CAS 403 requiring that costs be allocated directly to segments. The portion of the new standard that is controlling in this case is 403.40. It provides for a three tier process for allocating home office expenses. CAS 403.40(a)(1), 4 C.F.R. § 403.40(a)(1) (1981).⁵

A prime requirement is direct allocation of these expenses "to the maximum extent practical." If direct allocation of the individual expenses is impractical, they must be grouped into homogeneous pools and allocated according to criteria prescribed in 403.40(b). Under that subsection, central payments made by the home office are to be allocated directly to the individual segments if they can be so identified. 4 C.F.R. § 403.40(b)(4) (1981).⁶ Otherwise, they are to be distributed "using an allocation base representative of the factors on which the total payment is based." Id. Expenses not directly allocable and not subject to grouping in pools are considered residual expenses and are allocated "by means of a base representative of the total activity of each segment * * *" 4 C.F.R. § 403.40(c) (1981). Allocation as a residual expense is to be minimized. 4 C.F.R. § 403.40(a)(1) (1981).

The primary question, then, is whether the two opposed accounting methods in dispute — the headcount method and the assessment base method — specifically identify tax expenses with individual segments. The parties agree that the assessment base method does directly allocate the tax expenses to individual Boeing divisions. Transcript at 580, Testimony of Dr. Howard Wright, June 3, 1975. See The Boeing Co., ASBCA No. 19,224, 77-1 BCA ¶ 12,371 at 59,891; The Boeing Co., ASBCA No. 19,224, 79-1 BCA ¶ 13,708 at 67,236 (reconsideration decision). Plaintiff also concedes that the headcount method is not a means of direct allocation but a surrogate measure of business activity. By the literal terms of the new accounting standard, therefore, the assessment base system is permissible and the headcount approach seems improper.

Contrary to Boeing, this standard of direct allocation is a new requirement. The regulation construed in Lockheed and Boeing I, old ASPR § 15-201, -202, -203, -205, 32 C.F.R. § 15.201 et seq. (1974), did not call for specific identification for tax expenses. The old ASPR contained a direct identification provision in 15-202(a). However, that provision applied only to direct costs, defined as those "which can be identified specifically with a particular cost objective." 32 C.F.R. § 15.202(a) (1974). Tax costs are considered indirect, defined as those "which, because of * * * their incurrence for common or joint objectives, * * * are not readily subject to treatment as a direct cost." 32 C.F.R. § 15.203(a) (1974). Both of our prior decisions treated the taxes there involved as indirect costs and did not apply the direct identification section. Lockheed, 179 Ct.Cl. at 558, 564, 375 F.2d at 793, 797; Boeing, 202 Ct.Cl. at 320, 321, 480 F.2d at 857; The Boeing Co., ASBCA No. 11866, 69-2 BCA ¶ 7898 at 36,749, 36,752-754. But the indirect cost section in the former ASPR did not require specific identification — merely compliance with "generally accepted accounting principles," 15.203(d), and distribution based on the "benefits accruing to the several cost objectives." 15.203(c). In contrast, as we have pointed out, CAS 403 generally mandates direct allocation of home office expenses whether considered as direct or as indirect. 4 C.F.R. § 403.40(a)(1), (b)(4). That requirement is both new and important.

Boeing rests secondarily on the provision of the new accounting standard limiting application of the specific identification requirement to circumstances where it is "practical." See 4 C.F.R. § 403.40(a)(1); note 5, supra. The company defines practical, not as economically feasible, but as capable of "fair and accurate cost accounting." It then defines fair accounting as being able to measure benefit to the segments from community services and, since it...