               ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeal of --                                  )
                                              )
Accurate Automation Corporation               )      ASBCA No. 59727
                                              )
Under Contract Nos. NOOl 78-05-C-3049         )
                    N00024-07-C-4124          )

APPEARANCE FOR THE APPELLANT:                        Jerome S. Gabig, Esq.
                                                      Wilmer & Lee, P.A.
                                                      Huntsville, AL

APPEARANCES FOR THE GOVERNMENT:                      E. Michael Chiaparas, Esq.
                                                      DCMA Chief Trial Attorney
                                                     Cara A. Wulf, Esq.
                                                      Trial Attorney
                                                      Defense Contract Management Agency
                                                      Boston, MA

               OPINION BY ADMINISTRATIVE JUDGE THRASHER
                          PURSUANT TO RULE 12.2

        This appeal involves a government claim to recover $53,788 paid to Accurate
Automation Corporation (AAC) for labor hours which were found to be unallowable
by a Defense Contract Audit Agency (DCAA) audit of AAC's final indirect cost rate
proposal for the contractor's fiscal year (CFY) 2007 (proposal). The government
asserts the claimed unallowable costs were billed to and subsequently paid by the
government but never paid by AAC to the employee, i.e., that AAC never incurred the
costs. AAC asserts that the costs were deferred compensation paid to the employee in
a later year by issuance of AAC stock. AAC elected to proceed under the Board's
Expedited Procedure (Rule 12.2). 1 The parties elected to decide the appeal on the
record pursuant to Board Rule 11. 2 Only entitlement is at issue. The Board has
jurisdiction over the dispute pursuant to the Contract Disputes Act (CDA) of 1978,
41 u.s.c. §§ 7101-7109.




1
  The Contract Disputes Act, implemented by Board Rule 12.2, provides that this
       decision shall have no value as precedent, and in the absence of fraud shall be
       final and conclusive and may not be appealed or set aside.
2
  The record consists of the Rule 4 file (tabs 1-29), exs. G-1 to -4, and ex. A-1.
                          SUMMARY FINDINGS OF FACT

       1. This appeal involves AAC's performance of two Navy (government) Small
Business Innovation Research (SBIR) contracts during 2007: Contract
No. NOOl 78-05-C-3049, awarded on 11 April 2005 and Contract No. N00024-07-C-4124,
awarded on 11 May 2007 (contracts). Both contracts were structured as
cost-plus-fixed-fee (CPFF) contracts. (R4, tab 1 at G-1 to -6, tab 2 at G-44 to -46)
Additionally, both contracts incorporated by reference Federal Acquisition Regulation
(FAR) 52.216-7, ALLOWABLE COST AND PAYMENT (DEC 2002) (R4, tab 1 at G-23, tab 2
at G-62).

       2. AAC is a closely held corporation involved in research and design related to
robotics, unmanned systems and plasma research (R4, tab 3 at G-110). The president
of AAC is Mr. Robert M. Pap (R4, tab 3 at G-114). On 20 November 2012 AAC
submitted a revised, 3 certified, incurred cost proposal and related books and records
for reimbursement of CFY 2007 incurred costs, which included payment of Mr. Pap's
salary4 (R4, tab 3 at G-87; ex. G-3, Ritchey decl. if 11). On 25 February 2014, ACC
submitted a revised proposal (final proposal) to correct various omissions in the 2012
submission (R4, tab 3 at G-84). The final proposal section requiring disclosure of the
compensation of the five highest compensated AAC executives includes a column for
disclosing accrual of deferred compensation. That section of the disclosure is blank,
indicating no deferred compensation was paid to Mr. Pap during 2007. (R4, tab 19
at G-235)

       3. DCAA's review of AAC's direct and indirect labor costs identified the
wages paid AAC's executives to be a high risk area because a prior year audit
(CFY 2005) had also identified management employees' wages claimed by AAC but
that had not been paid to the employees (ex. G-1, Black decl. iii! 3, 4). Mr. Pap
responded to DCAA's draft audit of AAC's 2005 incurred cost proposal by a letter to
DCAA and DCMA on 13 June 2008, addressing questions about unpaid wages akin to

3
  The record is unclear when AAC submitted its initial proposal. The final DCAA
       audit refers to its review of the "revised November 20, 2012" without reference
       to the initial proposal submittal (R4, tab 3 at G-84). However, the record
       indicates that in September 2011 DCAA informed the administrative
       contracting officer (ACO) that AAC had not yet submitted an adequate
       proposal (ex. G-3, Ritchey decl. if 3).
4
  Appellant's brief correctly notes that Mr. Pap was a salaried employee, not a wage
       employee (app. br. at 12, 14; see, e.g., R4, tab 19 at G-235). However, DCAA
       often refers to the labor hours claimed and reimbursed at issue in this appeal as
       "wages," as does Mr. Pap (see, e.g., R4, tab 10 at G-195-96). The distinction
       does not substantively impact the decision in this appeal. Therefore, I will use
       the terms interchangeably.

                                           2
those questioned in CFY 2007. Mr. Pap indicated there was no AAC deferred
compensation plan in place during 2005, 2006 or 2007, stating in relevant part:

             First, but not necessarily foremost, is your characterization
             of the unpaid wages (and related fringe benefits) referred
             to in your report as "Deferred Compensation". In
             virtually every definition I can find, deferred
             compensation refers to a plan for awarding employees.
             "Deferred compensation is an arrangement in which a
             portion of an employee's income is paid out at a date after
             which that income is actually earned. Examples of
             deferred compensation include pensions, retirement plans,
             and stock options. The primary benefit of most deferred
             compensation is the deferral of tax." There can be no
             question that the accrual (but not payment) of the subject
             wages was not done under a "plan" and the employees
             were not being awarded anything. They would have
             gladly taken the payment if the company could have
             afforded the cash to pay them.



             For the above reasons, I believe no adjustments should be
             made to the 2005 cost report as originally submitted.
             Additionally, the same situation exists in the 2006 and
             2007 cost reports for the same reason-wages were
             accrued for individuals performing labor on contracts and
             those wages have not yet been paid because of lack of
             funds with which to pay them.

(R4, tab lOat G-195-96) (emphasis in original)

       4. A review of AAC's CFY 2007 records also identified claimed labor cost
hours that appeared to have been worked by Mr. Pap but were not paid by AAC (R4,
tab 3 at G-88). As a result, DCAA requested that AAC provide proof of payment (R4,
tab 17 at G-212).

       5. AAC (Mr. Pap) made several responses to DCAA's request for proof. First,
at a conference held on 21 January 2014, Mr. Pap confirmed there was no proof of
payment because AAC had not yet paid him (R4, tab 13 at G-204). On 20 February
2014, during a phone call where the unpaid wage issue was discussed, Mr. Pap
informed DCAA that the wages had been paid because the IRS required him to pay the
wages and that he had proof of payment (ex. G-1, Black decl. i! 5). On 11 March


                                          3
2014, in a meeting with DCAA and DCMA where the issue of unpaid wages was
discussed, Mr. Pap again referenced an Internal Revenue Service (IRS) audit and
stated that the IRS had required him to pay himself and that he had proof of such.
DCAA requested documentation of proof of anything that would support his statement
that the liability had been liquidated. (R4, tab 21 at G-241; ex. G-1, Black decl., 6,
ex. G-2, Lynam decl. , 7)

        6. During the 11 March 2014 meeting, Mr. Pap, for the first time, stated that
he had been reimbursed for his work by receiving stock in lieu of salary and that he
would provide DCAA with proof of such payment (ex. G-1, Black decl. , 6, ex. G-2,
Lynam decl. , 6). DCAA received the promised supporting documentation of
payment by email on 4 April 2014 which stated "[a]ttached [are] the stocks certificates
provided in lieu of pay in 2007 for the two employees as well as the IRS documents
for 2007" (R4, tab 23 at G-278; ex. G-1, Black decl., 12). 5 Pertinent to this appeal,
there were four AAC stock certificates attached (numbered certificates C-3, C-4, C-5,
C-6); three issued to Mr. Pap (C-4, C-5, and C-6) and one issued to Mrs. Pap (C-3).
The face of the certificates includes a place for the date of issuance and three of the
certificates were dated 16 December 2002 (C-3, C-4, and C-5). However, a certificate
issuing 20,000 shares to Mr. Pap was undated (C-6). (R4, tab 23 at G-280-83) Also
attached was a document indicating Mrs. Pap transferred 2,501,000 shares to Mr. Pap
on 6 November 2008 (R4, tab 23 at G-284).

        7. AAC's responses did not persuade DCAA and, on 27 May 2014, DCAA
issued a Form 1 informing AAC that $53,788 of its claimed CFY 2007 incurred costs
($20,430 in wages, $22,398 in associated overhead expenses and $10,960 of G&A
expenses) was found to be unallowable, per FAR 52.216-7, because these costs were
billed to and subsequently paid by the government but never paid to Mr. Pap (R4, tab 3
at G-118-19). 6



5
  The IRS documentation consisted of documents from the IRS to Mr. Pap, but did not
       include cancelled checks or bank statements to show amounts drafted from
       AAC' s accounts to pay Mr. Pap. DCAA concluded that the IRS documents
       provided were not adequate support for Mr. Pap's assertion that the wages had
       been paid. (R4, tab 21 at G-241; ex. G-1 Black decl., 6, ex. G-2, Lynam decl.
       , 7)
6
  The DCAA audit actually reviewed three AAC contracts questioning $95,863 in
       direct labor costs that were not paid. However, $75,433 of the questioned costs
       was related to Contract No. N00039-0l-C-2206 which was closed by the time
       of the audit (R4, tab 3 at G-118). This appeal only addresses questioned costs
       related to other two contracts, Contract No. NOOl 78-05-C-3049 and Contract
       No. N00024-07-C-4124.

                                          4
        8. AAC responded to the DCAA Form 1 by letter on 5 June 2014 through its
legal counsel stating "there is nothing in FAR § 52.216-7 which requires an incurred
cost to be liquidated," and "Mr. Pap's deferred compensation has been liquidated"
through AAC stock issued to Mr. Pap (R4, tab 5 at 4). Attached to the letter from
AAC's counsel was a sworn declaration by Mr. Pap stating, among other things, that
as president of AAC he made the decision not to pay himself the $20,430 so that AAC
could pay suppliers and non-officer employees by electing to take the wages as
deferred compensation on a later date. He also stated that he was later compensated by
the company on or about July 2008 by AAC issuing him 20,000 shares of AAC stock.
(Id. at 7) Also attached, in support of Mr. Pap's declaration, was the same stock
certificate submitted earlier on 4 April 2014, the undated stock certificate (C-6)
indicating transfer of 20,000 shares of AAC stock to Mr. Pap (id. at 8).

Final DCAA Audit

       9. DCAA issued its final report, DCAA Audit Report, No. 1211-2007A10100001,
dated 12 June 2014, (audit report) recommending the government disallow the questioned
costs (R4, tab 3 at G-84 ). The audit repeated its initial finding that the labor costs found
to be unallowable were claimed by and reimbursed to AAC but not paid (incurred) by
AAC during CFY 2007 in violation of FAR 52.216-7 (id. at G-89-90). In addition,
DCAA's audit of AAC's books and records failed to disclose any journal entries in the
books and records indicating a deferred compensation plan was in place during CFY
2007 (id. at G-88-90). Likewise, DCAA's audit of AAC's books and records failed to
disclose any journal entries in the books and records at the time of the alleged debt
liquidation as would be expected if the wages were liquidated by stock issuance (id.
at G-89).

        10. On 8 September 2014, the contracting officer issued a final decision
(COFD) demanding payment in the amount of $53,788 based upon the finding in the
audit report (R4, tab 4). AAC appealed the COFD and elected the Board's Expedited
Procedure (Rule 12.2) on 20 November 2014. 7 The parties waived a hearing and
elected to submit the appeal on the record under Board Rule 11 on 26 January 2015
(Bd. corr. ltr. dtd. 26 January 2015).




7
    The effective date of the Rule 12.2 election was 10 December 2014, since the notice
         of appeal was misdirected by the USPS such that the Board received it on
         8 December and the election was stayed for two days to resolve a procedural
         matter.

                                             5
       11. AAC submitted a second declaration on 19 March 2015 that stated in
pertinent part:

                     Rather than have Accurate Automation perish from
              insolvency, in those years when Accurate Automation was
              not cash flow positive, I took deferred compensation.
              Although I cannot be more specific about the exact date
              that Mr. Bailey (representing Accurate Automation) and
              myself entered into the deferred compensation agreement,
              it happened long before 2007.

(Ex. A-1, Pap decl.   if 3)
                                       DECISION

        This appeal results from Mr. Pap's decision to forego a portion of his
compensation for hours he worked during CFY 2007. There is no dispute Mr. Pap
worked the hours or that he was not paid in CFY 2007 for the work. However, the
parties differ over whether Mr. Pap was ever paid (i.e., after CFY 2007) for these
hours and, if he was, whether the form of compensation meets the requirements of
FAR 52.216-7. The government asserts Mr. Pap was never paid for the hours in
question despite the fact AAC billed the government under the contract and was
reimbursed for the hours. This, the government argues, violates the provisions of
FAR 52.216-7 rendering the cost of these hours unallowable for reimbursement under
the contract (gov't br. at 9-11). In contrast, appellant asserts Mr. Pap was reimbursed
for these hours in 2008 by the issuance of shares of AAC stock as deferred
compensation (app. br. at 18-19) This, appellant argues, meets the requirements of
FAR 52.216-7(b)(l)(i) because it is an "other form of actual payment" and
FAR 52.216-7(b)(l)(ii) because it authorizes reimbursement when there are labor
"costs incurred, but not necessarily paid, for" as in this case were incurred in the form
of a deferred compensation plan (app. br. at 18-19, 24).

        FAR 31.205-6, COMPENSATION FOR PERSONAL SERVICES, addresses the
allowability of deferred compensation plans at subparagraph (k) and requires that the
plan exist (be awarded) prior to or during the accounting period during which the work
is performed. FAR 31.205-6(k)(2). Appellant makes several arguments why these
costs are allowable because there was a deferred compensation agreement in place in
CFY 2007 and the debt under that agreement was liquidated in 2008 by the issuance of
stock. This, appellant argues, satisfies the requirements of FAR 52.216-7 and
FAR 31.205-6 (app. br. at 18-35). I have reviewed and considered appellant's
arguments and find them unpersuasive; appellant has failed to meet its burden of proof
that such a plan was in place before or during CFY 2007 or that the issuance of stock
evidences liquidation of AA C's debt to Mr. Pap. Appellant's only evidence of such a


                                            6
plan are two sworn declarations submitted by appellant after the fact and an undated
stock certificate. The two declarations, taken together, assert Mr. Pap entered into a
deferred compensation plan by a verbal agreement with AAC (through its deceased
chief financial officer, Mr. Bailey) 8 sometime prior to 2007 and these specific hours at
issue were reimbursed under that plan in July 2008 by the issuance of 20,000 shares of
AAC stock (findings 8, 11). The only evidence proffered in support of its declaration
regarding the liquidation of the debt is an AAC stock certificate that reflects issuance
of 20,000 shares of AAC stock to Mr. Pap (id.). However, the stock certificate is
undated and does not indicate on the face of the document why it was issued (findings
6, 8). Likewise, there is no other evidence that indicates the date of the stock issue or
connects the proposed certificate with liquidation of AAC's debt to Mr. Pap.

        In addition, the record is devoid of any contemporaneous evidence of a deferred
compensation plan existing prior to or during CFY 2007. The DCAA auditors failed
to find any indication that such a plan existed in AAC's books and records and
appellant has not identified any such references. Additionally, AAC's final proposal,
submitted in 2014, included a section requiring AAC to disclose the compensation of
its five highest paid executives. AAC did not identify in that section that any deferred
compensation was awarded to Mr. Pap; the deferred compensation column is blank.
(Findings 2, 9) Likewise, DCAA's review of AAC's books and records failed to
disclose any journal entries in the books and records at the time of the asserted debt
liquidation (issuance of the stock) that the debt was liquidated (finding 9). If such a
plan existed in 2007, even if verbal, and was liquidated in 2008, I would expect some
reference to it to be included in appellant's final proposal and recorded somewhere in
appellant's books and records.

        Furthermore, Mr. Pap's own statements contradict his declarations. DCAA
noted and raised this same issue as a result of their review of AAC's 2005 cost
proposal. Mr. Pap responded by letter in June 2008 specifically addressing the
existence of a deferred compensation plan and unequivocally stated there was no
deferred compensation plan in place in 2005, 2006 or 2007 (finding 3). When DCAA
provided him an opportunity to provide proof of payment of the costs questioned for
the same reasons in AAC's CFY 2007 proposal, his first response in January 2014 was
that he had not been paid yet (finding 5). Appellant would now have us believe,
contrary to his prior statements, that a plan did exist in 2007 and he was paid in 2008.
I do not find this credible.

Forgiveness ofIndebtedness and Forfeiture

       Appellant argues in the alternative, the logical reason that there is no record of
liquidation of the debt in AAC's books, ifthere was no deferred compensation, is

8
    Appellant states that Mr. Bailey died in July 2011 (app. br. at 2).

                                               7
because the debt was liquidated by forgiveness of the debt. If the debt was forgiven,
the costs would comply with FAR 52.216-7 and, thus, be allowable (app. br. at 35-36).
Appellant fails to identify any evidence to support this hypothesis and I fail to find any
in the record. Appellant also argues that to find these costs unallowable and require
AAC to return the money it received would constitute forfeiture because the
government has not been prejudiced (app. br. at 36-41). I disagree, the government
has been prejudiced by AAC billing and being reimbursed for costs it did not incur.
Consequently, I fail to find any basis that a ruling against appellant in this appeal
would result in forfeiture.

                                     CONCLUSION

       For the reasons stated, this appeal is denied.

       Dated: 6 April 2015




                                                  Administrative Judge
                                                  Armed Services Board
                                                  of Contract Appeals


     I certify that the foregoing is a true copy of the Opinion and Decision of the
Armed Services Board of Contract Appeals in ASBCA No. 59727, Appeal of Accurate
Automation Corporation, rendered in conformance with the Board's Charter.

       Dated:



                                                  JEFFREY D. GARDIN
                                                  Recorder, Armed Services
                                                  Board of Contract Appeals




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