ARMED SERVICES BOARD OF CONTRACTAPPEALS
Appeal of

-- ) ) Exelis, Inc. ) ) Under ContractNos. N65236-07-C-5876 ) FA8532-l2-C-0002 )

APPEARANCES FORTHE APPELLANT:

APPEARANCES FORTHE GOVERNMENT: ASBCA No. 60131

Steven M. Masiello, Esq. Joseph G. Martinez, Esq. Christopher W. Myers, Esq.

Dentons US LLP Denver, CO

E. Michael Chiaparas, Esq.

DCMA ChiefTrial Attorney Samuel W. Morris, Esq.

Trial Attorney Defense Contract ManagementAgency Chantilly, VA

OPINION BYADMINISTRATIVE JUDGE D'ALESSANDRIS ON THE GOVERNMENT'S MOTION FORRECONSIDERATION

The Defense Contract ManagementAgency (DCMA) timely moves for reconsideration ofthe Board's 29 August 2016 opinion 1granting in partthe motion to dismiss filed by appellant, Exelis, Inc. (Exelis). In this action, Exelis appeals from a contracting officer's final decision asserting a government claim pursuant to Cost Accounting Standard (CAS) 404, pertainingto Exelis' purportedly noncompliant accounting for the costs ofa building lease. Specifically, the contracting officer found that Exelis had improperly treated a building lease as an operating lease, rather than a capital lease, pursuantto Federal Acquisition Regulation (FAR) 31.205-11(m) (1998).2 Based upon the finding ofa FARviolation, the contracting officer determined that Exelis' accounting treatment was not in compliance with CAS 404, and asserted a government claim in the amount of$3,821,534 due to increased costs purportedlypaid by the government on Exelis' contracts from 2003 through the present.

1 Exelis, Inc., ASBCA No. 60131,**16-1BCA~36,485.** 2 FAR 31.205-11(m) has been revised and reworded and is now codified at 31.205-11(h). The changes are not relevantto the resolution ofthis motion.

### Our opinion granted Exelis' motion in part, holding that the government cannot state a claim for a CAS 404 violation, even assuming thatthe government is correct that Exelis improperly accounted for the building lease as an operating lease rather than a capital lease. DCMA seeks reconsideration ofthatholding, alleging legal error. We deny DCMA's motion.3



### A motion for reconsideration is not the place to present arguments previously made and rejected. "[W]here litigants have once battled for the court's decision, they should neitherbe required, nor without good reason permitted, to battle for it again. Motions for reconsideration do not afford litigants the opportunity to take a 'second bite at the apple' orto advance arguments thatproperly should have beenpresented in

an earlierproceeding." Dixon v. Shinseki, 741 F.3d 1367, 1378 (Fed. Cir. 2014) (citations omitted); see alsoAvantAssessment, LLC, ASBCA No. 58867, 15-1 BCA**~** 

### 36,137 at 176,384.

Moreover, we note that DCMA's argumentregarding the interpretation ofCAS 404 comprisedjustfive and-a-halfpages ofits twelve-page briefin opposition to Exelis' motion to dismiss (gov't opp'n at 3-8). Now, DCMAhas submitted a 34-page briefdevoted solely to this issue. "Put simply, the rulings ofa [board] are not 'mere first drafts, subjectto revision and reconsideration at a litigant's pleasure."' Fru-Con Constr. Corp. v. UnitedStates, 44 Fed. Cl. 298, 301 (1999) (quoting QuakerAlloy Casting Co. v. Gulfco Indus., Inc., 123 F.R.D. 282, 288 (N.D.Ill.1988)). The proper time for DCMAto have made these arguments was in response to Exelis' motion to dismiss, and not in a motion for reconsideration.
Regardless, we have considered DCMA's arguments and they do not change

our holding. DCMA asserts three errors in our opinion: 1) that we misinterpreted the text ofCAS 404; 2) that we incorrectly held that Generally Accepted Accounting Principles (GAAP) play no role in the interpretation ofCAS 404; and 3) that we improperly applied the standard ofreview by assuming that Exelis' lease ofan office building was not a capital lease. None ofDCMA's arguments are persuasive.

I. 

### The Board's Opinion Properly Interpreted the Text ofCAS 404

DCMA first asserts that the Board's holding "ignores the plain language ofthe prefatory comments contained within CAS 404-20 and the language ofPreamble A to CAS 404, both which recognize thatthere are financial policies and standards with respect to the capitalization oftangible assets that contractors must follow to satisfy the criteria ofCAS 404" (gov'tmot. at 7). In support ofthis argument, DCMA repeats its argument that the lease document itselfmay represent an intangible asset, but that

3 

### DCMA additionally requests that its motion for reconsideration be referred to the Board's SeniorDeciding Group. That request has been denied.

2the leased asset is a tangible asset and thus subjectto CAS 404. We rejected this argument in our opinion and nothing in DCMA's motion causes us to modify our holding.

DCMA alleges error in ourplain meaning interpretation ofCAS 404, arguing that our interpretation is internally inconsistent, and that "[t]he Board cannothave it both ways in this regard

- posit onthe one hand that no lease is subject to CAS 404, while on the other hand acknowledge that the CAS Board intended for some leases to be subject to the Standard" (gov'tmot. at 8). In our opinion we stated that the CAS Board intended "thatCAS 404 would only apply in the eventthat the contractor electedto treat the lease as a capital lease." 

### Exe/is, Inc., ASBCANo. 60131, 16-1 BCA**~** 36,485 at 177,778. Itwouldhave been more precise to state thatthe CAS Board only intended CAS 404 to apply in the eventthat the contractortreated the lease

as apurchase. When CAS 404 was enacted, GAAP did not distinguish between capital and operating leases, and thus the CAS Board would not have had an intent regarding "capital leases." 

### See Accounting Principles Board (APB), Opinion No. 5 (Sept. 1964). However, this is a distinction without a difference. Atthe time of Exelis' lease, FAR31.205-1l(m) (1998), required that "such leased assets (capital leases) be treated as purchased assets." Thus, our opinion assumed that a contractor that electedto treat a lease as a capital lease would, in tum, treat the lease as a purchase and thus be subjectto CAS 404.4

This Board's interpretation is entirely consistent with Preamble A to CAS 404 which states that "[t]he [CAS] Board agrees that assets actually purchased should (if otherwise appropriate for capitalization) be capitalized even when thepurchase transaction is in the form ofa lease agreement." Our opinion did not interpret the plain language ofCAS 404 as applying to some intangible assets but not others.

We note that DCMA's argument admits that the "language ofthe CAS 404 standard itselfis silent as to its application to leased assets" (gov'tmot. at 10). DCMA argues that the prefatory comments to CAS 404, and the preamble to CAS 404 demonstrate an intentby the CAS Boardto incorporate GAAP to bringthe acquisition ofleased assets within the coverage ofCAS 404. However, despite its appeal to interpret the terms ofthe CAS with reference to GAAP, DCMA's motion for reconsideration completely fails to address the fact that GAAP also provides that

4 In opposition to the motion for reconsideration, Exelis appears to argue that a capital lease would only be subject to CAS 404 ifthe contractor were to considerthe lease to be the purchase ofan asset (app. br. at 8 n.3). The question ofwhether

a contractor would be subjectto CAS 404 ifit recognized a lease to be a capital lease pursuant to GAAP but did not recognize the capital lease as a purchase is not before us.

3leases are "contractbased intangible assets." See Exe/is,**16-1BCA~36,485** at 177,777 (citing FAS 141).

DCMA's proposed interpretation also fails because the CAS Board initially proposed language that would have incorporated then current GAAP into the CAS regulation, but the CAS Boardremoved that language from the final rule. See 3 7 Fed. Reg. 20956, 20957 (Oct. 5, 1972) (draft including the following language that was not included in the final standard, "Leasedreal orpersonal property, where the lease provisions are such thatthe lessee acquires an equity in the property, overthe period of the lease, shall be accounted for bythe lessee as tangible capital assets."). This clause would have incorporatedprovisions consistent with APB Opinion No. 5 into the CAS. See APB Opinion No. 5,**~** 15 ("Leases which are clearly in substance installment purchases ofproperty

...should be recorded as purchases."). However, this provision was removed from CAS 404 as adopted. Thus, DCMA's argument that the CAS Board intended to incorporate GAAP is notwell grounded. See Teledyne, Inc. v. UnitedStates, 50 Fed. Cl. 155, 174 (2001), ajf'dsub. nom. Allegheny Teledyne Inc. v. UnitedStates, 316 F.3d 1366 (Fed. Cir. 2003) ("Where, as here, [an] interpretation ofCAS

...hinges on language that was eliminated from the final rule, the argumenthas no merit"); see also Mass. Ass'n of Health Maint. Orgs. v. Ruthardt, 194 F.3d 176, 185 (1st Cir. 1999) (holding that "Congress sometimes can speak as clearly by opting not to enactproffered language as by enacting it") (citing and quotingINSv. Cardoza-Fonseca, 480 U.S. 421, 442-43 (1987) ("Fewprinciples ofstatutory construction are more compelling than the proposition that Congress does not intend sub silentio to enact statutory language that it has earlier discarded in favor ofother language.")).

DCMA further asserts that "[a] leading authority in CAS reached the same conclusion" that it was necessary to resort to GAAPto determine whether a lease results in a rental orpurchase requiring the application ofCAS 404 (gov't mot. at 15 n.8) (citing DARRELLJ. OYER, ACCOUNTING FOR GOVERNMENT CONTRACTS-COST ACCOUNTING STANDARDS§ 13.03(2)0) (Matthew Bender ed., 2016). However, DCMAignores the fact thatthis same authority states in the very same section ofthat work that "[i]fa capital lease is improperly classified as an operating lease, the governmentwill review theperiodic charges for allowability. The rule is that any capital lease costs in excess ofthe prescribed depreciation charges are unallowable." OYER, ACCOUNTING FOR GOVERNMENT CONTRACTS§ 13.03(2)0) (emphasis added). Significantly, Oyer states thatthe government will review the misclassification ofa lease for allowability, a determinationpursuantto the FAR, and not that the misclassification ofa lease would result in a CAS 404 violation.
Finally we note that DCMA'sproposed interpretation ofthe preamble suffers from several deficiencies. In our opinion, we cited the statement in the CAS Board's regulatory preamble that the CAS Board is "willingthat the contractor determine, for each acquisition, whether it is apurchase and hence subject to this capitalization policy

4(which must comply withthe criteria established in this Standard) or a rental transaction and hence subjectto established regulations onrental costs," as evidence in support ofour interpretation ofthe plain language ofCAS 404 as not applying to lease transactions. In its motion for reconsideration (gov'tmot. at 18), DCMA "suggests" that the Board interpret the preamble as follows:

Those lease acquisitions which are treated as purchases [under GAAP] will be subjectto this standard

.... The Board is, therefore, willing that the contractor determine, for each acquisition, whether it is a purchase [under GAAP] and hence subject to his capitalization policy (which must comply with the criteria established in this Standard) or a rental transaction [under GAAP] and hence subject to established regulations on rental costs.

38 Fed. Reg. 5319 (Feb. 27, 1973) (Bracketed text inserted by DCMA) First, the propertextual analysis ofa regulation does not involve reading words into the text that

are not there. See, e.g., Momenta Pharmaceuticals, Inc. v. Amphastar Pharmaceuticals, Inc., 686 F.3d 1348, 1354 (Fed. Cir. 2012) (rejecting interpretation ofstatute that "wouldread words into the statute in violation ofthe express language chosen by Congress"). Second, as noted above, GAAP did not distinguish between capital and operating leases at the time that CAS 404 was drafted. Thus, to the extent that DCMA's proposed interpretation could be correct, it would need to incorporate the then relevant GAAP, and not the later adopted FAS 13. See BAESys. Info. &Elec. Sys. Integration, Inc., ASBCA No. 44832, 01-2 BCA

### ir 31,495 at 155,523. When CAS 404 was adopted in 1973, GAAP addressed accounting for leases primarily through APB OpinionNo. 5, which indicated that leases that were "clearly in substance installmentpurchases ofproperty" should be capitalized. APB OpinionNo. 5 did not specifically require capitalization ofwhat are today referred to as capital leases that do not transfer ownership. DCMA notes that the opinion includes "certain leases that are purchase-equivalents" as examples ofleases that should be recorded as purchases (gov'treply at 8-9). Specifically, APB No. 5 refers to leases where the "term ofthe lease corresponds substantially to the estimated useful life ofthe property, and the lessee is obligated to pay costs such as taxes, insurance, and maintenance, which are usually considered incidental to ownership," as leases that should be accounted for as purchases. APB OpinionNo. 5, 

### ir 11b.

To the extent DCMA is correctthat this language demonstrates that APB OpinionNo. 5 couldbe interpreted as controlling capital leases, it simply makes the deletion oflanguage consistent with APB OpinionNo. 5 from the final language of CAS 404 more significant. As noted above, the CAS Board initially considered language that would effectively incorporate APB OpinionNo. 5 into CAS 404, but deleted that language from the final version ofthe standard. See Teledyne, 50 Fed. Cl.



### 5

### at 174 ("Where, as here, [an] interpretation ofCAS

...hinges on language that was eliminated from the final rule, the argument has no merit.").

In addition, we note that the new CAS Board adopted CAS 404 without modification. See57Fed.Reg.14,191(Apr.17,1992). AsthenewCASBoardhad the opportunity to incorporate the new GAAP treatment ofcapital leases, and did not, there is no basis to assume that it was the CAS Board's intent to incorporate future revisions to GAAP. Thus, we see no basis to modify our interpretation ofplain language ofCAS 404.

II. The Board's Opinion Properly Determined that it Was NotNecessary to Resort to GAAP to Interpret CAS 404

DCMA asserts thatthe Board committed legal error in holding that GAAP, particularly FAS 13 and ASC 840, did notplay a role in interpreting CAS 404 (gov't mot. at 21). DCMA's argument is essentially the same as its argument regarding the proper interpretation ofthe plain meaning ofCAS 404. As described in detail in our opinion, and again above, we reject DCMA'sproposed interpretation ofCAS 404 as requiring compliance with GAAP. DCMA first argues that our opinion contained "clear legal error" in statingthat "tothe extent there is a gap [in the language ofCAS 404], the government incorrectly attempts to use a GAAP provision to control the CAS when the hierarchy for interpretation ofCAS standards provides thatthe CAS controls" (Exe/is, 

### 16-1 BCA**~** 

### 36,485 at 177,778), because GAAP properly can be used to fill gaps in the CAS. However, DCMAreads that sentence out-of-context. Directly below the quoted language, the opinion states that the CAS "provides that the contractor can select whetherto treat the lease as a capital lease or an operating lease

.... The government seeks to use GAAP, the lowest level ofthe hierarchy, to interpret the top level ofthe hierarchy because ofa purported 'gap."' Id. 

### at 177,779. The point being that even ifthere were a gap in the CAS, DCMA is notproposing to

use GAAP simply to fill a gap in the standard, butto force a different way of measuring costs on the contractor, changing the meaning ofthe standard, and creating

a conflictbetween CAS and GAAP.

DCMA additionally argues that the term "assets acquired by lease" is a technical term ofart not defined by the CAS and thus requiring reference to GAAP (gov't mot. at 22). As noted above, this logic also undercuts DCMA's argument because reference to GAAP also provides that leases are intangible assets (FAS 141) and, thus, not subjectto CAS 404. In addition, DCMA cites former DAR and FARprovisions and an unadopted amendment to the CAS as evidence ofthe CAS Board's intent. (Gov'tmot. at 22-27) As explained in our opinion, the plain language ofthe CAS controls and ifit were necessary to resort to interpretative aids, the contemporaneous preamble to CAS 404 is the most persuasive authority. We see no
reason to amend the Board's opinion.

6III. The Board's Opinion Applied the Correct Standard ofReview

DCMA's final argument is thatthe Board misapplied the standard ofreview by failing to grant all assumptions and inferences in favor ofthe government. Specifically, DCMA asserts that the Board improperly accepted Exelis' assertion that the building lease in question was an operating lease not subject to CAS. (Gov't mot. at 27-28) Contrary to DCMA's assertions, our opinion clearly held that, even if Exelis' lease were a capital lease, it would not result in a CAS violation. 16-1 BCA ii 36,485 at 177,775 ("Even ifthe government is correct that Exelis' accounting for the building lease is in violation ofthe FAR, we hold that the government cannot establish

a CAS violation.").

In ouropinion, we found that "Exelis accumulated andreported its lease costs for the Summit ParkBuilding as an operating lease" (see also compl. ii 18, answer ii 18). Further, we noted that the DCMA final decision determined that "Exelis improperly accounted for the SummitPark Building lease as an operating lease when it should have been treated as a capital lease because the present value ofthe lease payments, at the inception ofthe lease, was greaterthan 90 percent ofthe fair market value ofthe building" (see also compl. ii 21, answerii 21). Exe/is, 16-1BCAii36,485 at 177,776, ii 7. Assuming all facts in favor ofthe government, this fails to state a claim given our legal conclusion that leases are not tangible assets andtherefore are not subject to CAS 404 unless the contractortreats the lease as a purchase.

DCMA alleges thatthe Board erred by accepting Exelis' assertion that it "did notpurchase or acquire the building and thereby properly characterizedthe lease pursuantto GAAP" (gov'tmot. at 29). However, as noted above, the contracting officer's final decision allegedthat Exelis has a capital lease because the net present value ofthe lease was greaterthan 90 percent ofthe value ofthe building, not that the lease transferred ownership ofthe property to Exelis at the end ofthe lease term (see also compI. ii 10, answerii 10). To the extent DCMA is alleging thatthe lease transaction legally constitutes an acquisition, we are bound to accept as true the facts

as pleaded by the government, but we are "notbound to accept as true a legal conclusion couched as a factual allegation." AcceptanceIns. Companies, Inc. v. UnitedStates, 583 F.3d 849, 853 (Fed. Cir. 2009) (quotingBellAtlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)). Thus, we accept as true that Exelis had a lease thathad a netpresentvalue greaterthan 90 percent ofvalue ofthe building and that this would be a capital leasepursuant to FAS 13 and FAR 31.205-11(m). However,

we still hold that these facts, assumed to betrue, do not constitute a violation of CAS 404 because the lease is not a tangible asset, and Exelis did nottreatthe lease as
a purchase.

7DCMA additionally alleges that there could be a CAS violation ifExelis did not comply with its own CAS 404 capitalizationpolicies as set forth in its CAS disclosure statement (gov'tmot. at 30-31). However, DCMA did not allege any such violations in the contracting officer's final decision upon which this Board'sjurisdiction is premised. As we noted in the standard ofreview in our opinion, to survive a motion to dismiss for failure to state a claim, the complaint must allege facts "'plausibly suggesting (not merely consistent with)' a showing ofentitlement to relief." 

### Cary v. UnitedStates, 552 F.3d 1373, 1376 (Fed. Cir. 2009) (quoting

### BellAtlantic Corp. 550 U.S. at 557);

### American General Trading & 

### Contracting WLL, ASBCA No. 56758, 12-1 BCA

### if 34,905. The allegation "mustbe enough to raise a right to reliefabove the speculative level." 

### Cary, 552 F.3d at 1376. In addition, the "complaint must contain sufficient factual matter, accepted as true, to 'state a claim to reliefthat is plausible on its face."' 

### Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting 

### Twombly, 550 U.S. at 570). Here, the contracting officer's final decision, and the complaint, do not make 

### any allegations regarding noncompliance with a CAS disclosure statement. Moreover, DCMA did not raise such an argument in its opposition to Exelis' motion to dismiss. DCMA'sbelatedly-raised argument is pure speculation and insufficientto prevent entry ofa motion to dismiss for failure to state a claim.

CONCLUSION

Forthe reasons stated above, DCMA's motion for reconsideration is denied in its entirety.

Dated: 1March 2017

I concur

# ~HL_~ N. STEMPLER Administrative Judge Acting Chairman Armed Services Board ofContractAppeals

8 DAYID D'ALESSANDRIS Administrative Judge Armed Services Board ofContract Appeals

RICHARD SHACKLEFORD Administrative Judge Vice Chairman Armed Services Board ofContractAppealsI certify that the foregoing is a true copy ofthe Opinion and Decision ofthe Armed Services Board ofContractAppeals in ASBCA No. 60131, Appeal ofExelis, Inc., rendered in conformance with the Board's Charter.

Dated:

9 JEFFREY D. GARDIN Recorder, Armed Services Board ofContractAppeals