Follow the Money: Contractor Cannot Recover Corporate Affiliate’s Costs for Tax Assessments

In International Development Solutions, LLC, v. Department of State, CBCA 6400, et al. (March 16, 2022), the Civilian Board of Contract Appeals considered whether International Development Solutions, LLC (“IDS”) could recover taxes/fees paid to the government of Afghanistan by affiliated companies that IDS alleged were related solely to the performance of certain task orders. Specifically, IDS had task orders under an indefinite delivery, indefinite quantity contract issued by the Department of State for protective and support services containing cost-reimbursement line items for “License, Tax, Permits, Visa and Registration Fees.” The CBCA denied the entirety of the contractor’s claims, emphasizing a previously rejected novation request, the lack of evidence connecting the tax assessments to contract performance, the lack of evidence concerning the relevant Afghanistan tax law, and the complex corporate structure of the contractor’s parent companies that remained unclear even after the hearing on the merits.

In 2012, ACADEMI Training Center, Inc. (“ACADEMI”), which owned 49% of IDS, purchased the remaining 51% interest in IDS and sought novation of the IDS contract and task orders. The State Department denied the novation request, and IDS remained the contracting party. In 2017, the government of Afghanistan assessed taxes and penalties against the parent company of the aforementioned ACADEMI, and the parent company (along with another corporate affiliate) paid the assessments. But IDS asserted that the taxes “relate[d] exclusively to” the performance of IDS’s task orders during 2010-2015, and IDS brought claims against the State Department for approximately $36.7 million for reimbursement under its task orders. 

The CBCA held, first, that IDS was the contractor because the Government rejected the novation request, and the contractor did not change by operation of law. Therefore, IDS did not show that the contractor made the tax payments—i.e., the contractor did not incur the costs. As the ASBCA recently held (which we reported on here), without a legal obligation for the contractor to pay, a cost is not “incurred” for purposes of reimbursement under government contracts. Second, the CBCA rejected the contractor’s argument that ACADEMI was IDS’s nominal subcontractor, and found that IDS did not show how the taxes paid by a corporate affiliate—if ACADEMI was a subcontractor—passed through to IDS. Third, the CBCA held that IDS did not present sufficient evidence to establish how the taxes assessed against and paid by the parent company were related to IDS’s contract performance (i.e., the contractor did not show that the claimed costs were allocable to the task orders). Although there was testimony that the affiliated companies had internally allocated the tax payments to the two task orders, this accounting method was only a record of the companies’ own determination that the payments related to the task orders; according to the CBCA, it did not establish allocability. Finally, the CBCA found that there lacked sufficient information establishing the basis for the Afghanistan tax assessment or the relationship between the tax assessment and IDS specifically.

This decision serves as a cautionary reminder on the importance of presenting sufficient evidence to show that the contractor incurred the claimed costs and that the costs are allocable to the contract in question.