U.S. v. Lockheed Corp.
| Decision Date | 15 April 1987 |
| Docket Number | No. 86-1177,86-1177 |
| Citation | 817 F.2d 1565 |
| Parties | 34 Cont.Cas.Fed. (CCH) 75,258 UNITED STATES, Appellant, v. LOCKHEED CORPORATION and Lockheed Missiles and Space Co., Appellees. Appeal |
| Court | U.S. Court of Appeals — Federal Circuit |
Terrence S. Hartman, Commercial Litigation Branch, Dept. of Justice, of Washington, D.C., argued for appellant. With him on the brief were Richard K. Willard, Assistant Attorney General and David M. Cohen, Director. Donald J. Kinlin, Dept. of the Air Force, Wright-Patterson Air Force Base, Ohio, of counsel.
Clarence T. Kipps, Jr., Miller & Chevalier, Chartered, of Washington, D.C., argued for appellees. With him on the brief were Joseph G. Twomey and Robert C. Gusman, of Calabasas, Cal., of counsel. Also on the brief were Robert K. Huffman and Thomas D. Chevalier, Miller & Chevalier, Chartered, of Washington, D.C., of counsel.
Before DAVIS, Circuit Judge, BENNETT, Senior Circuit Judge, and BISSELL, Circuit Judge.
The United States appeals from a decision of the Armed Services Board of Contract Appeals (ASBCA or Board) approving the manner in which the California Franchise Tax expense paid by the Lockheed Corporation (Lockheed) home office is allocated by Lockheed to its various unincorporated divisions and wholly-owned subsidiaries (segments) which comprise Lockheed. We affirm.
Extensive findings of fact and a lengthy and thorough discussion of the issues may be found in the Board's opinion. 86-1 BCA p 18,614 (ASBCA 1985). Familiarity with that opinion will be presumed. Reference to the Board's findings of fact will be cited by their paragraph number as "FF ---."
In the cases of Lockheed Corporation and Lockheed Missiles & Space Company, Inc., 80-1 BCA p 14,222 (ASBCA 1980) and 80-2 BCA p 14,509 (ASBCA 1980), the Board found that Lockheed's two-step four-factor method (Lockheed Method) for allocating California Franchise Tax expense from Lockheed's home office to its individual segments complied with Cost Accounting Standard 403, 37 Fed.Reg. 26680 (1972) (CAS 403), captioned "Allocation of Home Office Expenses to Segments." The government was unable to perfect an appeal of those decisions because the contract at issue was not subject to the Contract Disputes Act of 1978, 41 U.S.C. Sec. 601 et seq. (1982). Hence this appeal, which arises in the context of contracts that were entered into by the parties subsequent to the effective date of the Contract Disputes Act. The parties stipulated before the Board that collateral estoppel and res judicata The government contended that the Lockheed Method did not comply with CAS 403 and Interpretation No. 1 to CAS 403 (Interpretation No. 1). Lockheed contended that the previous decisions correctly held that the Lockheed Method complies with CAS 403. A statement of issues and extensive stipulations were agreed upon and the parties presented the appeal to the Board on a stipulated record.
ere not applicable in the present dispute.
The parties agreed that CAS 403 requires the allocation of California Franchise Tax expense from Lockheed's home office to its individual segments based on the causal relationship, i.e., the assessment base for the tax. The government asserted that under CAS 403 and Interpretation 1 the California Franchise Tax expense must be allocated only to those individual segments doing business within the State of California, and that no credits should be allocated to loss segments. This assertion was based upon its contention that the Cost Accounting Standards Board (CASB), in promulgating CAS 403 and Interpretation No. 1, determined that doing business within each taxing jurisdiction is the relevant cause of the incurrence of state income and franchise taxes, thereby comporting with CASB's concept of beneficial or causal relationship between such expenses and receiving segments. The government further contended that doing business within the jurisdiction means having apportionment factors within the state (i.e., for the California Franchise Tax, having property, payroll and sales within the State) and that segment net income is not a significant and relevant cause of the California Franchise Tax.
The Board held, contrary to the government's contentions, that Lockheed's California Franchise Tax expense must be allocated indirectly to its segments pursuant to the last sentence of CAS 403.40(b)(4) because direct allocation of tax expenses under CAS 403 requires a direct link or mechanical calculation which traces the tax to its source and the very basis underlying apportionment of unitary business income is the impossibility specifically to identify the income of a multistate business to any individual state. The Board further held that the causal relationship required by CAS 403 requires the consideration of segment net income as one of the factors in the allocation base and, having so found, then pursuant to the parties stipulation, the Lockheed Method complied with CAS 403 and was to be used by the parties for such allocation purposes. The Board further concluded that Interpretation 1 was not an issued cost accounting standard promulgated pursuant to statute and that the Department of Defense was without authority to adopt an invalid standard. The government appeals to this court pursuant to the Contract Disputes Act of 1978, 41 U.S.C. Sec. 607(g)(1)(A) (1982).
(1) Whether the Board correctly held that the California Franchise Tax for a multistate enterprise cannot be allocated directly to the individual segments of that enterprise pursuant to CAS 403.
(2) Whether the Board correctly held that the causal relationship required by CAS 403 mandates consideration of segment net income as one of the factors in the allocation base.
OPINIONUnder our scope of review, the Board's conclusions of law are not final and are thus freely reviewable. 41 U.S.C. Sec. 609(b) (1982); American Electronic Laboratories, Inc. v. United States, 774 F.2d 1110, 1112 (Fed.Cir.1985). This court is not required to grant finality to the Board's legal interpretation of CAS 403 and Interpretation 1 as the interpretation of regulations which are incorporated into government contracts is a question of law which this court is free to resolve. United States v. Boeing Co., 802 F.2d 1390, 1393 (Fed.Cir.1986). "However, 'legal interpretations by tribunals having expertise are helpful to us, even if not compelling.' " Id., citing Erickson Air Crane Co. of Washington, Inc. v. United States, 731 F.2d 810, 814 (Fed.Cir.1984).
I
The California Franchise Tax is a tax imposed on a corporation doing business in the State of California and is "measured by its net income," subject to a minimum tax of $200. FF 15. In the case of a taxpayer which operates only in California, the tax is computed by multiplying the taxpayer's net income by the applicable tax rate. FF 17. If corporations have net income from sources both within and outside the State of California, the tax imposed is "measured by the net income derived from or attributable to sources within California." FF 17. Hence, the tax is computed by multiplying the taxpayer's total net income by an allocation or apportionment percentage by the applicable tax rate. FF 15, 17 and 18. The apportionment percentage is the average of the ratios of the taxpayer's California property to its total property, its California payroll to its total payroll, and its California sales to its total sales. FF 19. Thus, California's formula for apportioning business income derived from or attributable to sources both within and outside the state for purposes of California Franchise Tax liability can be expressed as follows:
Total Cal
Business Cal. Property Cal. Payroll Cal. Sales Business
Income x of Enterprise k of Enterprise k of Enterprise = Income
-------------- ------------- -------------
of Total Property Total Payroll Total Sales of
Enterprise of Enterprise of Enterprise of Enterprise Enterpri-
se
--------------------------------------------------
3
-------------
For income year 1974, Lockheed's total net business income was $29,963,748. FF 28. To apportion this net income to California and other sources, Lockheed used its apportionment percentage, which it computed by adding the percentage of Lockheed's California property as a portion of its total property (85.5875%), the percentage of its California payroll as a portion of its total payroll (75.0711%) and the percentage of its California sales as a portion of its total sales (51.8551%) and dividing the sum of these percentages (211.5137%) by three. Lockheed then multiplied the resulting California percentage, 70.5046% by its total net income to derive the portion of this total business net income derived from or attributable to California sources, $21,125,821. After minor adjustments, the balance of $21,089,316 multiplied by the applicable California franchise rate of 9 percent produced a tax liability of $1,898,038. After adding to this figure a $26,291 tax on "tax preference" items, Lockheed's total California Franchise Tax liability for income year 1974 was $1,924,329. FF 28.
Lockheed's net income of $29,963,748 for income year 1974 is the sum of the net income (net losses) of its segments, summarized as follows (in millions):
CALAC GELAC LMSC ALL OTHERS TOTAL
------- ----- ----- ---------- -----
($75.5) $54.5 $59.3 ($8.3) $30.0
FF 30
The amount of each segment's income year 1974 property, payroll and sales are summarized as follows (in millions):
Property CALAC GELAC LMSC ALL OTHERS TOTAL
---------- ------- ----- ------
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