Hercules Incorporated v. United States

Citations: 292 F.3d 1378; 52 Fed. Cl. 1378; 2002 U.S. App. LEXIS 10767; 2002 WL 1174550Docket: 01-5103

Court: Court of Appeals for the Federal Circuit; June 5, 2002; Federal Appellate Court

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Hercules Incorporated appealed the March 28, 2001 judgment of the United States Court of Federal Claims, which granted partial summary judgment to the United States regarding the application of Cost Accounting Standards (CAS) and Federal Acquisition Regulations (FAR) in their contract. The Federal Circuit affirmed the lower court's ruling, determining that CAS regulations (48 C.F.R. 9904.406 and 9904.410-40(b)(1)) were consistent with the incorporated FAR clauses (48 C.F.R. 31.205-41, 52.216-7(h)(2), and 31.201-5).

Hercules operated the Radford Army Ammunition Plant under cost-reimbursement contracts until 1995 when it switched to a firm fixed-price contract. The contract included FAR clauses relevant to tax reimbursements. After selling its shares in Himont, Inc. in 1987, Hercules incurred a substantial increase in its state income tax liability, advising the contracting officer of a projected $12.7 million liability, with $6.9 million allocable to the government. The contracting officer disallowed part of this tax cost attributable to capital gains from the sale, prompting Hercules to submit a certified claim under the Contract Disputes Act.

The Court of Federal Claims ruled that Hercules's state income tax payment was an allowable cost for the Radford facility but required further evidence regarding the allocation method used by Hercules. Subsequently, the government agreed to a specific allocation, resulting in a reimbursable cost of $4,870,466. The court later entered judgment for Hercules, who received a total of $6,673,808.50, including interest, from this judgment.

Hercules sought a tax refund from Virginia for its 1987 taxes, leading to a settlement on June 21, 1995, which granted a $10.5 million refund. A dispute arose regarding the reimbursable amount to the government, resulting in a final decision from the contracting officer requiring Hercules to refund $4,725,000, representing 45% of the refund, corresponding to the government’s tax liability under the Radford facility contract. Hercules made partial payments of $880,000 in March 1998 and $41,710.72 in April 1999, reducing the owed amount to $3,803,289.28, plus interest. The court ruled in favor of the government, stating that its share of the refund should be calculated using the same factors as before. Hercules appealed this decision.

The appellate jurisdiction is established under 28 U.S.C. 1295(a)(3). Summary judgment is appropriate when no material fact disputes exist. The court reviews such judgments and the law's interpretation de novo. Contract interpretation relies on the plain language of the agreement, and unambiguous terms govern the meaning. Hercules contested the Court of Federal Claims' finding that the incorporated FAR clauses do not conflict with CAS 406, arguing that CAS 406 mandates adherence to historical cost accounting for state income tax refunds. The government countered that the FAR clauses dictate the outcome, asserting a contractual right to the tax refund share, independent of Hercules' accounting practices. The court agreed with the government, affirming that the FAR clauses govern this case without conflict with CAS.

The Cost Accounting Standards (CAS) aim for uniformity in cost measurement and allocation for federal contracts. CAS 406 focuses on selecting time periods for cost estimation and reporting, while CAS 410 provides criteria for allocating general and administrative expenses based on their causal relationships. However, neither standard addresses contractor liability for tax refunds associated with reimbursed contracts; this is governed by the Federal Acquisition Regulation (FAR) clauses, not CAS. CAS 406 mandates consistency in expense adjustments but does not exempt contractors from FAR requirements regarding specific cost items, contrasting with earlier rulings like United States v. Boeing Co., where CAS prevailed over inconsistent regulations.

The FAR "Taxes" clause stipulates that refunded taxes credited as allowable contract costs must be returned to the government, with interest only credited for the period the contractor was reimbursed. The "Allowable Cost and Payment" clause requires contractors to pay refunds or credits related to reimbursed costs to the government, while the "Credits" clause mandates that any income or rebates associated with allowable costs must also be credited back. These clauses ensure the government receives refunds when previously reimbursed costs are reduced.

Hercules disputes the Court of Federal Claims' reliance on Grumman Aerospace Corp. v. United States, arguing it is outdated due to the subsequent implementation of CAS, which enforces consistent accounting practices.

The case parallels Grumman, which interpreted similar Armed Services Procurement Regulation (ASPR) clauses as requiring the passing of refunded taxes to the government based on the same apportionment factors used for prior reimbursements. In Grumman, after receiving a tax refund for a 1968 franchise tax, the court determined that the government was entitled to a share of that refund, reflecting the previously reimbursed costs. The court rejected Grumman's reliance on accounting principles, asserting that contract language was paramount. 

Hercules' argument that Grumman is not applicable due to its reliance on the Wunderlich Act and lack of consistent accounting practice was dismissed, as the legal interpretation in Grumman was unaffected by these factors. Hercules also contended that the refusal to apply Litton Systems, which protects contractors from retroactive changes in cost allocation methods without adequate notice, was erroneous. However, the court found Litton inapplicable because the Cost Accounting Standards (CAS) did not conflict with the contract’s FAR clauses, and Hercules did not face undue prejudice by determining the government's share of the Virginia tax refund based on the 1987 apportionment factors.

The judgment of the United States Court of Federal Claims was affirmed.