Lockheed Corp. v. Widnall, 95-1025

• Decision Date: 15 May 1997
• Docket Number: No. 95-1025,95-1025
• Citation: 113 F.3d 1225
• Parties: 41 Cont.Cas.Fed. (CCH) P 77,101 LOCKHEED CORPORATION, Appellant, v. Sheila E. WIDNALL, Secretary of the Air Force, Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

Page 1225

113 F.3d 1225

41 Cont.Cas.Fed. (CCH) P 77,101

LOCKHEED CORPORATION, Appellant, v. Sheila E. WIDNALL, Secretary of the Air Force, Appellee.

No. 95-1025.

United States Court of Appeals Federal Circuit.

May 15, 1997.

Neil O'Donnell, Rogers, Joseph, O'Donnell & Quinn, San Francisco, CA, argued, for appellant. With him on the brief was Patricia A. Meagher. Of counsel on the brief was Robert C. Gusman, Lockheed Corporation, of Calabasas, California.

Harold D. Lester, Jr., Commercial Litigation Branch, Civil Division, Department of Justice, Washington, D.C., argued, for appellee. On the brief were Thomas P. McLish, Attorney, Frank W. Hunger, Assistant Attorney General and David M. Cohen, Director.

Clarence T. Kipps, Jr., Miller & Chevalier, Washington, D.C., for amici curiae. With him on the brief were Kevin C. Dwyer and Alan C. Brown.

Before ARCHER, Chief Judge, PLAGER, and RADER, Circuit Judges.

ARCHER, Chief Judge.

Lockheed Corporation (Lockheed) appeals the decision of the Armed Services Board of Contract Appeals (ASBCA or Board), ASB CA No. 36,910, 94-3 BCA & 27,101, disallowing certain interest payments under Defense Acquisition Regulation (DAR) § 15-205.17 (1969). The Board held that the interest paid on an underpayment of state taxes was not allowable as reimbursable corporate overhead because it represented "interest on borrowings" within the meaning of DAR § 15-205.17. We reverse.

BACKGROUND

Lockheed timely filed its federal income tax and state franchise tax returns for years 1973 and 1974 and paid its computed tax liabilities in full. In 1982 the Internal Revenue Service (IRS) audited Lockheed's 1973 and 1974 tax returns and disallowed several deductions resulting in a greater taxable income. No additional federal taxes were due as a result of the increased taxable income because Lockheed had net operating losses which could be carried over to those years. However, because the State of California's tax laws do not permit operating losses to be carried over, these adjustments to its state tax returns resulted in an additional liability to California of $708,397 in franchise taxes and $645,226 in interest.

Lockheed allocated the additional state franchise tax and interest to the overhead for its various business segments in accordance with the company's accounting practices. In 1982, however, two business segments were no longer in existence. As a result, Lockheed included the amount that would have been allocated to these segments in its residual expense pool for fiscal year 1979, which was the first fiscal year with an open indirect cost rate.

When Lockheed's allocations to its residual corporate overhead were reviewed in connection with its 1979 corporate overhead review, the contracting officer challenged the allowability of the interest on the additional state taxes. According to the contracting officer, that interest payment was an unallowable expense under the cost principle in DAR § 15-205.17. Lockheed disagreed on the ground that the interest was not "interest on borrowings" as defined in DAR § 15-205.17. The contracting officer chose two contracts as test vehicles ¹ and issued a final decision disallowing Lockheed's claims for the interest on the state taxes allocated to overhead. ² Lockheed appealed the contracting officer's determination to the ASBCA.

The ASBCA sustained the contracting officer's decision in a 3-2 decision. A majority of the Board ruled that the interest assessed by California was unallowable pursuant to DAR § 15-205.17. The majority reasoned that DAR § 15-205.41 is the only exception to DAR § 15-205.17 which permits interest on state taxes to be treated as an allowable cost, and it found that none of the conditions of that cost principle were satisfied. The two dissenting opinions rejected the majority's conclusion that the state tax deficiency was a form of borrowing for purposes of DAR § 15-205.17.

DISCUSSION

The DAR ³ set forth the cost principles for determining what costs are allowable under the cost-reimbursement contracts at issue in this case. Under these regulations, the total cost of a contract is defined as "the sum of the allowable direct and indirect costs allocable to the contract." DAR § 15-201.1. The allowability of an item of cost is determined by considering its reasonableness, its allocability, its compliance with generally accepted accounting principles, and whether there are any limitations or exclusions set forth in the DAR or the contract. DAR § 15-201.2. One such limitation or exclusion is found at DAR § 15-205.17. It provides:

Interest and Other Financial Costs. Interest on borrowings (however represented), bond discounts, costs of financing and refinancing operations, legal and professional fees paid in connection with the preparation of prospectuses, costs of preparation and issuance of stock rights, and costs related thereto, are unallowable except for interest assessed by State and local taxing authorities under the conditions set forth in 15-205.41.

DAR § 15-205.17. The Board decided this case solely on the ground that the interest payment on the state tax deficiency is unallowable as a cost under DAR § 15-205.17. ⁴

Lockheed contends that the Board's decision treating the additional state taxes as "borrowings" is inconsistent with the plain language of the regulation. It argues that DAR § 15-205.17 applies, not to interest generally, but to interest "on borrowings." According to Lockheed, the Board disregarded this qualifying language and, as a result, interpreted "interest" too broadly. Lockheed also contends that such an expansive application of the regulation to interest on an inadvertent tax deficiency is inconsistent with the policy underpinning of the regulation and its historical evolution.

The government, on the other hand, also relies on the plain language of the regulation and points to the further qualifying language that interest on borrowings "(however represented)" is not an allowable cost. It argues that Lockheed erroneously seeks a narrow construction of this language to include only intentional borrowings. The government also asserts that the exception for interest incurred under the conditions set forth in DAR § 15-205.41 would be meaningless under Lockheed's interpretation of the regulation and that the regulatory history cited by Lockheed cannot be considered authoritative.

The interpretation of a regulation is a question of law which we review de novo. Reflectone, Inc. v. Dalton, 60 F.3d 1572, 1575 (Fed.Cir.1995) (in banc). To interpret a regulation we must look at its plain language and consider the terms in accordance with their common meaning. Perrin v. United States, 444 U.S. 37, 42, 100 S.Ct. 311, 314, 62 L.Ed.2d 199 (1979); see also Rio Hondo Mem'l Hosp. v. United States, 231 Ct.Cl. 657, 689 F.2d 1025, 1034 n. 11 (1982) ("In any case, the interpretation of regulations must give way to the plain meaning of the regulations themselves.").

By its terms, DAR § 15-205.17 applies to "interest on borrowings." A borrowing is generally defined as a loan. See Eitan A. Aveneyon, Dictionary of Finance 64 (1988) (defining borrowing as "[t]he process of receiving a loan from a lender, for a certain period, for a consideration in the form of interest"). Contrary to the Board's interpretation, a loan does have an intent element: it requires an intent to receive something with the intent to return the same or equivalent. See Webster's Third New International Dictionary 256 (1971) (defining borrow as "to receive temporarily from another, implying or expressing the intention either of returning the thing received or of giving its equivalent to the lender").

This interpretation is consistent with the scope and language of DAR § 15-205.17, which by its terms applies to the costs of raising capital. DAR §...