ARMED SERVICES BOARD OF CONTRACT APPEALS Appeal of

-- ) ) Accurate Automation Corporation ) ) Under ContractNos. NOOl78-05-C-3049 ) N00024-07-C-4124 )

APPEARANCE FORTHE APPELLANT:

APPEARANCES FORTHE GOVERNMENT: ASBCA No. 59727

Jerome S. Gabig, Esq.

Wilmer & Lee, P.A. Huntsville, AL

E. Michael Chiaparas, Esq.

DCMA ChiefTrial Attorney CaraA. Wulf, Esq.

Trial Attorney Defense Contract ManagementAgency Boston, MA

OPINION BYADMINISTRATIVE JUDGE THRASHER PURSUANT TO RULE 12.2

This appeal involves a government claimto 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 ofAAC'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 subsequentlypaid by the governmentbut neverpaidby AAC to the employee, i.e., that AAC never incurred the costs. AAC asserts that the costs were deferred compensation paidto the employee in
a later year by issuance ofAAC stock. AAC elected to proceedunder the Board's Expedited Procedure (Rule 12.2). 1 Theparties elected to decide the appeal on the recordpursuantto Board Rule 11.2 Only entitlement is at issue. The Boardhas jurisdiction overthe dispute pursuantto the ContractDisputes Act (CDA) of 1978, 41 

# u.s.c. §§ 7101-7109.

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

1. This appeal involves AAC's performance oftwo Navy (government) Small Business Innovation Research (SBIR) contracts during 2007: Contract No. NOOl78-05-C-3049, awarded on 11 April 2005 and ContractNo. 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 byreference 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 andplasmaresearch (R4, tab 3 at G-110). Thepresident ofAAC is Mr. Robert M. Pap (R4,tab 3 at G-114). On 20 November 2012 AAC submitted a revised,3 certified, incurred costproposal and related books and records for reimbursement ofCFY 2007 incurred costs, which includedpayment ofMr. 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 ofthe compensation ofthe five highest compensated AAC executives includes a column for disclosing accrual ofdeferred compensation. That section ofthe disclosure is blank, indicating no deferred compensationwas paid to Mr. Pap during 2007. (R4, tab 19 at G-235)

3. DCAA'sreview ofAAC's direct and indirect labor costs identified the wages paidAAC's executives to be a high risk areabecause a prioryear audit (CFY 2005) had also identified management employees' wages claimed by AAC but thathadnotbeenpaidtothe employees (ex. G-1, Black decl. 

## iii! 3, 4). Mr. Pap responded to DCAA's draft audit ofAAC's 2005 incurred costproposal by a letterto DCAA and DCMA on 13 June 2008, addressing questions about unpaid wages akin to

3 Therecord is unclear when AAC submitted its initial proposal. The final DCAA audit refers to its review ofthe "revisedNovember 20, 2012"withoutreference to the initial proposal submittal (R4, tab 3 at G-84). However, the record indicates that in September2011 DCAA informed the administrative contracting officer (ACO) that AAC had notyet submitted an adequate proposal (ex. G-3, Ritchey decl. 

### if 3). 4 Appellant's briefcorrectly 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 tothe laborhours 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 impactthe decision inthis appeal. Therefore, I will use the terms interchangeably.

2

### those questioned in CFY2007. Mr. Pap indicated there was no AAC deferred compensation plan in place during 2005, 2006 or2007, stating in relevantpart: First, but not necessarily foremost, is your characterization ofthe 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 ofan 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. Theprimary benefit ofmost deferred compensation is the deferral oftax." There canbe no question that the accrual (but not payment) ofthe subject wages was not done under a "plan" and the employees
were not being awarded anything. Theywouldhave gladly taken the payment ifthe company could have afforded the cash to pay them.

Forthe above reasons, I believe no adjustments should be made to the 2005 costreport 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 oflack of funds with which to pay them.
(R4, tab lOat G-195-96) (emphasis in original)

4. A review ofAAC's CFY 2007 records also identified claimed labor cost hours that appeared to have been workedby Mr. Pap butwere notpaidby AAC (R4, tab 3 at G-88). As a result, DCAArequested that AAC provideproofofpayment (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 proofof paymentbecause AAC had not yet paid him (R4, tab 13 at G-204). On 20 February 2014, during aphone call where the unpaid wage issue was discussed, Mr. Pap informed DCAAthat the wages had beenpaid because the IRS required him to pay the wages and that he hadproofofpayment (ex. G-1, Black decl. 

## i! 5). On 11 March

32014, in a meeting withDCAA and DCMA where the issue ofunpaid wages was discussed, Mr. Pap again referenced an Internal Revenue Service (IRS) audit and stated thatthe IRS had required him to pay himselfand that he had proofofsuch. DCAArequested documentation ofproofofanything thatwould support his statement that the liability hadbeen 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, statedthat he had been reimbursed for his work by receiving stock in lieu ofsalary and that he would provide DCAA with proofofsuch payment (ex. G-1, Black decl. , 6, ex. G-2, Lynam decl. , 6). DCAAreceived the promised supporting documentation of payment by email on 4 April 2014 which stated "[a ]ttached [are] the stocks certificates provided in lieu ofpay 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 ofthe certificates includes a place for the date ofissuance and three ofthe certificates were dated 16 December2002 (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 1informing AAC that $53,788 ofits claimed CFY2007 incurred costs ($20,430 in wages, $22,398 in associated overhead expenses and $10,960 ofG&A expenses) was found to be unallowable, perFAR 52.216-7, because these costs were billed to and subsequently paidby the government but never paid to Mr. Pap (R4, tab 3 at G-118-19). 6

5 The IRS documentation consisted ofdocuments from the IRS to Mr. Pap, but did not include cancelled checks orbank 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 notpaid. However, $75,433 ofthe questioned costs
was related to Contract No. N00039-0l-C-2206 which was closed by the time ofthe audit (R4, tab 3 at G-118). This appeal only addresses questioned costs related to othertwo contracts, Contract No. NOOl78-05-C-3049 and Contract No. N00024-07-C-4124.

4

### 8. AAC responded to the DCAA Form 1by 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 compensationhas 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 otherthings, that
as president ofAAC he made the decision not to pay himselfthe $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 ofAAC stock. (Id. 

### at 7) Also attached, in support ofMr. Pap's declaration, was the same stock certificate submitted earlier on 4 April 2014, the undated stock certificate (C-6) indicating transfer of20,000 shares ofAAC stock to Mr. Pap (id. 

### at 8).

FinalDCAA Audit



### 9. DCAA issued its final report, DCAAAudit 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 thatthe labor costs found to be unallowable were claimed by and reimbursed to AAC but not paid (incurred) by AAC during CFY 2007 in violation ofFAR52.216-7 (id. 

### at G-89-90). In addition, DCAA's audit ofAAC'sbooks and records failed to disclose anyjournal entries in the books and records indicating a deferred compensationplan was in place during CFY 2007 (id. 

### at G-88-90). Likewise, DCAA's audit ofAAC's books and records failed to disclose anyjournal entries in the books and records atthe time ofthe alleged debt liquidation as would be expected ifthe 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 ofthe Rule 12.2 election was 10 December 2014, since the notice ofappeal was misdirected by the USPS such thatthe Boardreceived it on 8 December and the election was stayed for two days to resolve a procedural matter.

511. AAC submitted a second declaration on 19 March 2015 that stated in pertinentpart:

Rather than have Accurate Automation perish from insolvency, in those years whenAccurate 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 myselfentered 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 ofhis compensation for hours he worked during CFY 2007. There is no dispute Mr. Pap worked the hours orthat he was notpaid in CFY 2007 for the work. However, the parties differ overwhetherMr. Pap was everpaid (i.e., after CFY 2007) for these hours and, ifhe was, whether the form ofcompensation 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 ofthese hours unallowable for reimbursement under the contract (gov'tbr. at 9-11). In contrast, appellant asserts Mr. Pap was reimbursed for these hours in 2008 bythe issuance ofshares ofAAC 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 ofactual payment" and FAR 52.216-7(b)(l)(ii) because it authorizes reimbursementwhenthere are labor "costs incurred, butnot necessarily paid, for" as in this case were incurred inthe form ofa deferred compensationplan (app. br. at 18-19, 24).

FAR 31.205-6, COMPENSATION FORPERSONAL SERVICES, addresses the allowability ofdeferred compensation plans at subparagraph (k) andrequires that the plan exist (be awarded) priorto or during the accountingperiod 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 CFY2007 and the debt underthat agreement was liquidated in 2008 by the issuance of stock. This, appellant argues, satisfies the requirements ofFAR 52.216-7 and FAR31.205-6 (app. br. at 18-35). I have reviewed and considered appellant's arguments and find them unpersuasive; appellanthas failed to meet its burden ofproof that such a plan was in place before or during CFY2007 orthat the issuance ofstock evidences liquidation ofAAC's debt to Mr. Pap. Appellant's only evidence ofsuch a

6plan are two sworn declarations submitted by appellant afterthe fact and an undated stock certificate. The two declarations, taken together, assert Mr. Pap entered into a deferred compensationplan by a verbal agreement with AAC (through its deceased chieffinancial officer, Mr. Bailey)8 sometime priorto 2007 and these specific hours at issue were reimbursed under that plan in July 2008 by the issuance of20,000 shares of AAC stock (findings 8, 11). The only evidence proffered in support ofits declaration regarding the liquidation ofthe debt is an AAC stock certificatethat reflects issuance of20,000 shares ofAAC stock to Mr. Pap (id.). However, the stock certificate is undated and does not indicate on the face ofthe document why it was issued (findings 6, 8). Likewise, there is no other evidence that indicates the date ofthe stock issue or connects the proposed certificate with liquidation ofAAC's debt to Mr. Pap.

In addition, the record is devoid ofany contemporaneous evidence ofa deferred compensationplan existingpriorto 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 highestpaid 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'sreview ofAAC's books and records failed to disclose anyjournal entries inthe books andrecords atthe time ofthe asserted debt liquidation (issuance ofthe stock) that the debt was liquidated (finding 9). Ifsuch a plan existed in 2007, even ifverbal, 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 andrecords.
Furthermore, Mr. Pap's own statements contradicthis declarations. DCAA noted and raised this same issue as a result oftheirreview ofAAC's 2005 cost proposal. Mr. Pap responded by letter in June 2008 specifically addressing the existence ofa deferred compensationplan and unequivocally stated there was no deferred compensationplan in place in 2005, 2006 or 2007 (finding 3). When DCAA provided him an opportunitytoprovideproofofpayment ofthe costs questioned for the same reasons in AAC's CFY 2007 proposal, his first response in January 2014 was that he had notbeenpaidyet (finding 5). Appellant wouldnowhave us believe, contrary to his prior statements, that a plan did exist in 2007 and hewas paid in 2008. I do not find this credible. 

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

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

7because the debt was liquidated by forgiveness ofthe debt. 

### Ifthe 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 notbeenprejudiced (app. br. at 36-41). I disagree, the government has beenprejudiced 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 wouldresult in forfeiture.

CONCLUSION

Forthe reasons stated, this appeal is denied.

Dated: 6 April 2015

Administrative Judge Armed Services Board ofContract Appeals

I certify that the foregoing is a true copy ofthe Opinion and Decision ofthe Armed Services Board ofContractAppeals in ASBCANo. 59727, Appeal ofAccurate Automation Corporation, rendered in conformance with the Board's Charter.

Dated:

8 JEFFREY

### D. GARDIN Recorder, Armed Services Board ofContract Appeals