General Motors Corporation, Detroit Diesel Allison Division v. Les Aspin, Secretary of Defense
Docket: 93-1352
Court: Court of Appeals for the Federal Circuit; June 9, 1994; Federal Appellate Court
The Armed Services Board of Contract Appeals (ASBCA) upheld a downward price adjustment on contracts between the Government and General Motors Corporation (GM), while denying GM’s request for a retroactive accounting practice change. The case revolves around Cost Accounting Standard (CAS) 403, which mandates direct allocation of home office expenses to specific segments. The court reversed the ASBCA's decision, stating that GM's violation of disclosure obligations necessitated a remand for damages determination.
The Department of Defense had awarded GM’s Detroit Diesel Allison Division (DDAD) multiple contracts for manufacturing transmissions and gas turbine engines. GM operates several segments in Indiana, including DDAD-I, which had a contract exceeding $100,000, thus subject to CAS requirements. The standards require GM to allocate home office payments, including state income taxes, directly to DDAD-I.
The Government contended that GM allocated excessive costs to DDAD-I, warranting a downward adjustment of contract payments. In contrast, GM argued for an increase in contract payments based on allocation standards. The case also examined Indiana’s corporate taxes: the Gross Income Tax (GIT), which can be directly allocated to DDAD-I; the Adjusted Gross Income Tax (AGIT), which GM could not allocate to DDAD-I due to its assessment on corporation-wide income; and the Supplemental Corporation Net Income Tax (SNIT), whose allocation was undisputed. The primary issue is the interplay between the GIT and AGIT under federal accounting standards.
The Indiana Tax Code allows corporations to receive a credit against the Adjusted Gross Income Tax (AGIT) equivalent to the Gross Income Tax (GIT) imposed for the same taxable year, as per Ind.Code Sec. 6-3-3-2 (1972). Corporations must compute their income tax under both the GIT and AGIT, paying the higher amount while crediting any GIT payments against AGIT. This approach prevents double taxation on corporations operating in Indiana. In the late 1970s, forms required separate calculations for GIT and AGIT, with the Indiana Revenue Board clarifying that corporations must pay the greater of the two taxes, incorporating payments from either into their total tax liability.
In 1988, the Indiana Department of Revenue affirmed that General Motors (GM) was liable for GIT during 1975-1979, despite a higher AGIT, indicating that the "greater of" principle did not absolve GM of GIT obligations or past payments. However, a 1993 ASBCA ruling, based on testimony from an Indiana revenue officer, determined that when AGIT exceeds GIT, total tax liability is defined by AGIT alone, effectively minimizing GIT's impact on GM's overall tax burden from 1975 to 1979.
GM allocated Indiana state income taxes for its defense segment DDAD-I in various ways: the "pre-1974 method," which allocated GIT directly reflecting DDAD-I's gross revenues and AGIT based on federal income from all sources; the "composite rate method," which proposed averaging state and local tax payments; and the "1975-1979 method." The Government subsequently instructed GM to discontinue the composite rate method. GM's allocation methods significantly affected the costs associated with its defense contract with the Department of Defense (DOD), prompting GM to seek adjustments to contract pricing based on the taxes paid.
In November 1975, DDAD-I revised its Disclosure Statement to retroactively reinstate a pre-1974 method for allocating Indiana taxes, stating the change's impact was negligible. In December 1975, GM indicated it would return to prior accounting practices for Indiana taxes but instead adopted a new 1975-1979 method, which computed separate Gross Income Tax (GIT) and Adjusted Gross Income Tax (AGIT) for its defense and non-defense segments, resulting in direct allocation of GIT to the defense segment. Both parties acknowledged this method violated Cost Accounting Standards (CAS) 403.
By May and October 1984, the Administrative Contracting Officer concluded GM had over-allocated Indiana taxes to DDAD-I from 1975 to 1979, leading to extensive monetary claims against GM, which subsequently appealed to the ASBCA. GM proposed a "claim method" to comply with CAS 403, which allocated all GIT taxes to DDAD-I and the AGIT overage based on a percentage akin to the pre-1974 method. The Department of Defense (DOD) argued this method disproportionately allocated Indiana tax burdens to the defense segment.
The ASBCA heard claims from both the Government for a price adjustment due to the over-allocation and GM for under-allocation, ruling in favor of the Government on both counts. The court reviews only final decisions from boards of contract appeals, and the ASBCA had remanded the consolidated appeals for quantum determination. CAS 403 mandates that contractors allocate home office expenses, including state income taxes, based on identifiable benefits to segments, directly allocating taxes identifiable to specific segments and using representative bases for others.
The court has previously interpreted CAS 403, particularly in Boeing Co. v. United States, where it was determined that Boeing's headcount allocation method for Washington state and local income taxes violated CAS 403. The court mandated that home office expenses should be directly allocated to individual segments whenever identifiable. It defined "to the maximum extent practical" as economically feasible, requiring the specific allocation of costs directly associated with a particular segment.
In this context, the GIT tax is directly associated with GM's Indiana defense segment due to its basis in gross receipts from Indiana, necessitating a direct allocation under CAS 403. Conversely, AGIT is based on unitary corporate income and cannot be directly tied to any single segment, thus GM is not required to allocate AGIT to its defense segment. The distinction between GIT and AGIT lies in their different assessment bases and purposes.
The claim method, which directly allocates GIT to the defense segment, is the only method that correctly applies CAS 403 in this case. The ASBCA erred by rejecting this method and incorrectly concluded that AGIT subsumed GIT when AGIT was larger. This misunderstanding fails to recognize that GIT is distinctly tied to GM's defense segment. The ASBCA's conclusion that GIT was subsumed by AGIT disregards significant factors relevant to the allocation requirements under CAS 403.
The Indiana Code specifies that the Adjusted Gross Income Tax (AGIT) does not encompass the Gross Income Tax (GIT); instead, corporations receive a credit against AGIT equal to the amount of GIT, which is subtracted from AGIT liability. This distinction is significant as the revenues from GIT and AGIT are allocated to different funds; GIT revenues go to the State General Fund, while AGIT funds are directed to the Property Tax Relief Fund after subtracting GIT. An official opinion from the Indiana Attorney General in 1964 confirmed that only the AGIT overage contributes to the Property Tax Relief Fund, reinforcing that GIT retains its identity regardless of AGIT amounts.
The former Administrator of the Indiana Department of Revenue emphasized the legislative intent to keep GIT and AGIT separate, stating that without the credit, all revenues could potentially fund the Property Tax Relief Fund, jeopardizing state operations. The concept of "the greater of the two taxes" is merely a calculation tool, not a merger of tax identities.
Under Cost Accounting Standards (CAS) 403, companies must allocate home office expenses, including state income taxes, directly to applicable segments. GIT is specifically associated with GM's defense segment, necessitating its allocation under CAS 403.
Additionally, the Cost Accounting Standards Board mandates that contractors disclose any changes in accounting methods. GM's contract stipulates that any method change must be reported prospectively, and its last disclosed accounting method was pre-1974. GM's adoption of a new method between 1975 and 1979 was not disclosed, and GM misled the government regarding this change, resulting in increased costs to the government. The Armed Services Board of Contract Appeals (ASBCA) determined that GM failed to disclose its accounting method change properly.
Substantial evidence indicates that GM did not disclose its change in accounting methods, but reinstatement of the pre-1974 method is not an appropriate remedy since it violates Cost Accounting Standards (CAS) 403. The remedy for GM’s violation is specified in paragraph (5) of the CAS clause in GM's contract, which mandates adjustment of the contract price to cover any increased costs incurred by the United States due to GM's non-compliance. GM's failure to disclose its accounting method change, which resulted in increased costs, means GM is liable for damages equivalent to these increased costs plus interest.
The increased costs to the Department of Defense (DOD) arose from GM's use of the undisclosed 1975-1979 method compared to the pre-1974 method. The court remands the case for the calculation of these damages. Additionally, GM is required to allocate Indiana state income taxes specifically to its defense segment, reversing the Board's prior decision on this issue. The court affirms the Board's finding of GM's failure to disclose the 1975-1979 method, which led to increased costs for the government.
The court does not need to address whether the proposed claim method or the pre-1974 method is correct since the increased costs due to non-disclosure have been established. GM had the opportunity to change its disclosed accounting method but did not follow the required procedures. The majority's reversal and remand effectively affirm the Board's conclusions, including the damage calculations, which are based on the difference between the undisclosed and disclosed methods. Each party will bear its own costs in this matter.
GM claims it is entitled to an upward cost adjustment based on mandatory regulations that apply to both the government and the contractor, arguing that it underallocated its true tax cost. However, the regulations permit GM to exclude taxes from its costs if it chooses, establishing a maximum allowable amount rather than a required one. GM's inclusion of a lesser tax amount indicates that it did not follow its disclosed cost accounting practices, which obligates it to accept a contract price adjustment if this deviation results in increased costs to the United States. The Armed Services Procurement Regulations mandate that GM must consistently adhere to its disclosed cost accounting practices. Additionally, to determine DDAD-I's share of GM's Indiana business activity, GM utilized a three-factor formula involving payroll, property, and sales to calculate the amount owed under AGIT and SNIT. The Cost Accounting Standards (CAS) require compliance with all applicable standards and outline procedures for changes; however, in this instance, only GM's specific methods changed, not the general cost accounting standards. Violation of the CAS clause has specified remedies per the contract.
