Court Opinion

ID: 9380812
Source: CourtListenerOpinion
Date Created: 2023-03-21 15:00:07.766661+00
Date Added: 2024-06-11T17:17:27.789425
License: Public Domain

ARMED SERVICES BOARD OF CONTRACT APPEALS
 Appeal of -                                 )
                                             )
 Voxtel, Inc.                                )         ASBCA No. 60129
                                             )
 Under Contract Nos. FA8750-05-C-0041 et al. )

 APPEARANCES FOR THE APPELLANT:                        Eric Nackarud, Esq.
                                                        Counsel

                                                       Marcus W. Eyth, Esq.
                                                        Davis Wright Tremaine LLP
                                                        Portland, OR

                                                       Kate H. Kennedy, Esq.
                                                        Davis Wright Tremaine LLP
                                                        Seattle, WA

 APPEARANCE FOR THE GOVERNMENT:                        Samuel W. Morris, Esq.
                                                        DCMA Chief Trial Attorney
                                                        Defense Contract Management Agency
                                                        Chantilly, VA

          OPINION BY ADMINISTRATIVE JUDGE CATES-HARMAN

        Appellant Voxtel, Inc. (Voxtel) appeals from a final decision of the Defense
Contract Management Agency (DCMA or government) administrative contracting
officer (ACO) unilaterally establishing final overhead rates. In that decision, the ACO
found that Voxtel included unallowable costs related to independent research and
development (IR&D), rent, executive compensation, and depreciation in its indirect
cost rate proposals for fiscal years (FY) 2007-2009. We have jurisdiction pursuant to
the Contract Disputes Act (CDA), 41 U.S.C. §§ 7101-7109. We sustain in part and
deny in part the appeal.

                                   FINDINGS OF FACT

      Background

       1. Voxtel is a small business that develops and manufactures advanced
3D imaging technologies (compl. ¶ 3). Voxtel’s primary customer since its inception
in 1999 has been the U.S. government. For the years in question (FY 2007-2009), its
work was almost exclusively federal contracts, including Small Business Innovative
Research (SBIR) contracts. (Tr. 2/18-19) Voxtel is organized as a subchapter S
corporation, and its sole owner is its president and chief executive officer,
George Williams (tr. 2/12).

       2. For purposes of this appeal, the relevant contracts include one contract
awarded to Voxtel in 2005 by the United States Air Force Research Laboratory
(No. FA8750-05-C-0041), another awarded in 2008 by the Office of Naval Research
(No. N00014-08-C-0101), and a small business and innovation research (SBIR)
contract with the Naval Surface Warfare Center, issued in 2006
(No. N00178-06-C3024) (R4, tabs 1-2, 5).

         Contract Requirements

        3. Each of the contracts incorporated by reference Federal Acquisition
Regulation (FAR) 52.216-7, ALLOWABLE COST AND PAYMENT (DEC 2002), 1
which imposes obligations upon both the government and contractors (R4, tabs 1
at 16, 2 at 42, 5 at 83). 2 This clause requires the government to pay the contractor as
work progresses in amounts determined to be allowable by the contracting officer and
in accordance with the version of FAR subpart 31.2 in effect on the date of the
contract. See FAR 52.216-7(a)(1). This includes “[p]roperly allocable and allowable
indirect costs, as shown in the records maintained by the Contractor for purposes of
obtaining reimbursement under Government contracts . . . .” FAR 52.216-
7(b)(1)(ii)(F).

       4. FAR 52.216-7 also requires contractors to submit to the Defense Contract
Audit Agency (DCAA) an adequate final indirect cost rate proposal (ICP) based upon
the contractor’s actual cost experience for that particular fiscal year. Those ICPs are
due within six months of the expiration of each fiscal year. See FAR 52.216-
7(d)(2)(i)-(ii).

       5. Except for the SBIR contract, the relevant contracts incorporate by reference
DFARS 252.215-7002, COST ESTIMATING SYSTEM REQUIREMENTS, which
generally requires contractors to have an acceptable cost estimating system and
disclose it to the government (R4, tab 1 at 18, 5 at 87).

1
    One of the contracts renumbers this clause as 52.216-07 (R4, tab 1 at 16).
2
    The parties numbered pages in their Rule 4 submissions with a prefix of letters
         and/or leading zeros. We have dropped the prefix and leading zeros and just
         cite the numeric page number.

                                            2
       Voxtel’s FY 2007-2009 ICPs

        6. Voxtel failed to submit its ICPs for FY 2007-2009 within the required time
frame set forth in FAR 52.216-7(d)(2)(i)-(ii). DCAA informed Voxtel in nine separate
letters between 2008 and 2013 that its ICPs were overdue (R4, tab 14). It was revealed
much later that Voxtel did submit its 2007 ICP to DCAA on August 31, 2011 (ex. 134
at 2).

        7. In a memorandum dated December 16, 2014, DCAA advised DCMA that
Voxtel had failed to provide its ICPs for 2007-2009, and that DCAA would therefore
be unable to provide an audit opinion on proposed rates and costs. Instead, DCAA
recommended that DCMA “unilaterally determine contract costs using a decrement
factor [of] up to 16.2 percent applied to contract costs (direct and indirect)” for the
subject years. (R4, tab 14 at 117) This decrement was to be applied to both active and
already completed contracts, as well as for fiscal years in the future when the active
contracts were completed (id.).

       8. Meanwhile, at some point in 2014, Voxtel informed DCMA and DCAA that
its 2007-2009 ICPs would be submitted in January 2015; Voxtel did in fact submit the
ICPs on January 21, 2015 (R4, tabs 15-18; tr. 2/56-57).

       9. Neither DCAA nor DCMA advised Voxtel that its ICPs would not be
audited (tr. 2/58, 61). There is also no indication in the record that Voxtel knew that
when the ICPs were submitted that DCAA had already recommended the 16.2%
decrement.

        10. After Voxtel submitted the 2007-2009 ICPs at DCMA’s request, DCAA
auditor Nicole Hilliard performed both an “adequacy” and a “nomenclature” review
(tr. 1/30-32).

        11. An “adequacy review” is a checklist or set of steps that DCAA uses to
verify that the contractor included all the required schedules in its ICP (tr. 1/31,
2/136). It is described in part on the standard DCAA form used for adequacy reviews
in the following manner:

              Adequacy reviews of contractor [ICPs] include verification
              for completeness and accuracy. The reviewer should
              verify the [ICP] includes the required schedules . . . . The
              reviewer should also perform a general review of the
              submission to verify math calculations in the schedules and
              perform a cross-check of amounts that are common to two
              or more of the schedules.

                                            3
(Ex. 113 at 252; see also tr. 1/31)

       12. A “nomenclature review involves “visually reviewing the accounts and
amounts claimed in direct and indirect cost pools to try to identify any unallowable
costs” (tr. 1/31). The DCAA Contract Audit Manual (January 2015) describes a
nomenclature review in the following manner:

           (1) Nomenclature Review. Using a copy of the
               contractor’s post-closing trial balance, which has been
               reconciled in accordance with the guidance in [§] 6-610,
               the auditor should select for thorough analysis those
               accounts which are new and/or significant in amount, vary
               from developed trends, or which on the basis of
               nomenclature review or past experience appear to be
               sensitive in nature and likely to contain questionable
               costs. However, categories of indirect expense should not
               be accepted or rejected solely on the basis of a
               nomenclature review. The actual content of accounts
               being evaluated must be established through testing of
               transactions.

(DCAA Contract Audit Manual § 6-608.2(c)(1) (2015)) (emphasis added)

        13. On cross-examination, Ms. Hilliard conceded that even though she
conducted only adequacy and nomenclature reviews, Voxtel’s ICPs for 2007-2009 were
adequate for audit (tr. 1/63). DCMA ACO Laura Musgrave, who authored the final
decision that is the subject of this appeal, testified that she and Ms. Wada decided to
“go ahead and set rates” rather than request a full audit (tr. 1/121). In ACO Musgraves’
view, ordering an audit did not make good business sense given the delay it would have
caused on the processing of already significantly delinquent ICPs (tr. 1/120). Another
factor influencing the decision to forego an audit was that DCMA was “in transition
with ACOs at the time;” i.e., ACO Musgrave was in the process of taking on the
workload of the prior ACO, who was deploying (tr. 1/121).

       14. With respect to the procedures to be followed in the case of delinquent
ICPs, the DCAA Audit Manual provides as follows:

              a. The contracting officer is responsible for obtaining an
              adequate final indirect rate proposal from the contractor
              within the six-month period after the end of its fiscal year.
              Audit teams should assist the contracting officer by:

                     ....

                                            4
             (4) Supporting the contracting officer in calculating a
             unilateral contract cost decrement based on history, when
             the contracting officer cannot obtain a proposal.

             b. Headquarters Policy is responsible for coordinating
             directly with DCMA, and other administrative Agencies, to
             help identify significantly delinquent contractors that
             require administrative action. Administrative actions are
             at the discretion of the contracting officer, and may include
             further coordination with the contractor in cooperation
             with the audit team, and applying a unilateral contract cost
             decrement.

                    ....

             d. When a proposal is significantly delinquent, audit teams
             should periodically coordinate with the contracting officer
             to determine its status and offer necessary assistance. If,
             through proper coordination, the FAO [field audit office]
             determines that it is unlikely that an auditable proposal is
             forthcoming, the FAO may close the assignment . . . .

(DCAA Contract Audit Manual § 6-707.2 (2015))

      Summary of Relevant Communications Between the Parties

      15. As a result of Ms. Hilliard’s adequacy and nomenclature reviews, she and
ACO Musgrave communicated with Voxtel representatives on a number of occasions
between February and May 2015. The communications were primarily with
Voxtel’s contracts administrator, Debra Ozuna, although Voxtel’s president,
Mr. Williams, participated in one conference call. To summarize, those
communications included the following:

     -Email exchanges on February 19, 2015 and March 8, 2015 between
      Ms. Hilliard and Ms. Ozuna concerning information from Voxtel about certain
      entries DCAA was questioning;

     -A May 1, 2015 email request from ACO Musgrave to Voxtel to engage in a
      conference call, along with the resulting conference call, which took place on

                                          5
       May 8, 2015 and was memorialized in an undated document authored by
       ACO Musgrave; 3

      -Email exchanges that took place on May 14-15, 2015 between ACO Musgrave
       and Ms. Ozuna concerning 1) a proposed draft indirect cost rate/allocation
       agreement ACO Musgrave prepared; 2) Voxtel’s rejection thereof; and
       3) Voxtel’s provision of additional information/documentation responding to
       DCMA’s concerns; and

      -A final email exchange on May 15, 2015 between ACO Musgrave and
       Ms. Ozuna wherein ACO Musgrave sought and Ms. Ozuna provided
       confirmation of Voxtel’s position on various questions previously raised by
       DCMA.

(R4, tabs 21 at 249-51, 24 at 409-10, 25, 26 at 432-33, 438-39, 49)

        16. The testimony of Ms. Hilliard and ACO Musgrave indicates that DCAA
and DCMA generally did not believe that the information Voxtel provided in the
above-described communications sufficiently answered the government’s questions
(tr. 1/34-37, 132-33; see also R4, tab 21 at 248-49). They considered the information
to be vague, conclusory, incomplete, and contradictory. This was the environment
under which ACO Musgrave prepared and issued her final decision in July 2015.

       17. After that date, however, Voxtel began providing additional, more focused
information to DCMA in an effort to support the costs ACO Musgrave disallowed.
Voxtel continued to submit additional information supporting its costs up to the date of
the hearing, which resulted in an evolution of DCMA’s position on several issues and
the elimination of one issue altogether. 4

      18. The following findings address in turn each of the three remaining
allowability issues in this appeal – cost of goods sold, rental expenses, and executive
compensation (referred to by the parties as “unpaid owner’s salary”).

3
  The Rule 4 file contains a document which both parties appear to agree are notes
       prepared by Ms. Musgrave summarizing the discussions that took place during
       that conference call; accordingly, we accept it as such (R4, tab 49; see app. br.,
       Appellant’s Proposed Finding of Fact [APFF] ¶ 86 (referencing said document
       as being Ms. Musgrave’s notes of the conversation); gov’t reply br., ¶ 30
       (no objection to APFF ¶ 86)).
4
  During the hearing, the parties resolved all of their differences with respect to the
       depreciation costs (tr. 2/85; see gov’t br. at 32-33; app. br. at 1).

                                            6
       Cost of Goods Sold

       Background

        19. Voxtel uses an accounting package known as QuickBooks, software that is
frequently used by small businesses. QuickBooks has a category of costs known as
Cost of Goods Sold (COGS). During the time period in question Voxtel’s practice
was to use the COGS account to track all costs incurred to purchase materials, whether
direct or indirect. Thus, Voxtel used it to track the costs of materials purchased
directly for a contract, “indirect tools” (indirect costs incurred for items of general
use), and indirect costs associated with independent research and development
(IR&D). (Tr. 2/31-32)

       20. With respect to IR&D costs, Mr. Williams testified that at the conclusion of
a contract, Voxtel engineers may believe that the technology they were working on
warrants further investigation, even though contract funding has run out. In those
circumstances, Voxtel performs this further IR&D at its own expense, tracking the
costs by contract and reporting them annually as required by the SBIR program.
(Tr. 2/19-20)

        21. Mr. Williams then described a specific instance where Voxtel was working
on a 3D imager to locate underwater mines, but government funding ran out. Voxtel
nevertheless continued to develop the technology at its own expense. (Tr. 2/23-25)
Mr. Williams referenced an email dated December 2, 2015 which he stated was related
to this specific instance of IR&D, in which Navy employee Paul Schlegel wrote the
following:

              [M]y recollection of the issue was Voxtel was working on
              a critical technology that would benefit the ALMDS
              program . . . . Together we were attempting on this
              contract to obtain additional Navy funds for advancing this
              SBIR. While there was a valid requirement the Navy
              funding was first approved and later we were told the
              SBIR Navy funds had been reduced and our follow on
              efforts would not be funded. Your IRAD was a good faith
              attempt to keep progress going as at the time we had been
              told our Navy follow on efforts were simply delayed. We
              did not ask nor direct you to make the IRAD decision.

(App. supp. R4, tab S-56; tr. 2/23)

       22. Mr. Williams testified that Voxtel did not claim in its ICPs any direct costs
recorded under the COGS account. However, he also testified that he did not review

                                           7
the entries for the FY 2007-2009 ICPs. Instead, he stated that he “would expect to find
IR&D expenses and indirect tools . . . [claimed under the COGS account], all these
kinds of things used by engineers that can’t be applied to a specific cost objective.”
(Tr. 2/32)

        23. IR&D costs are not broken out separately in the ICPs from other indirect
costs (tr. 2/112). Mr. Williams explained his understanding of how direct and indirect
costs can be distinguished in the COGS account:

                A The direct costs are all reported for a job number. So
                they apply to a specific job, which would be the contract
                job number in our system. And then an indirect cost would
                have an indirect charge number, whether it be a tool cost or
                an [IR&D] cost I think are the primary categories that
                would be there.

                Q So if a cost has a job number, you would treat that as a
                direct cost?

                A Well, I think it’s important to separate. Maybe it’s a
                lexicon but when you say job or tracking number, a job
                being a specific contract number is a direct cost. In our
                accounting system, there is the accounting number and the
                designator, where there is where the cost objective is,
                whether it is specific or nonspecific. The contract number
                that’s in that account is a direct cost.

                Q So it’s a subaccount in the cost of goods sold?

                A It’s a double-number system. So it’s not a sub-account. .
                . . You can sort on either the contract number or you can
                sort on the accounting number. It’s just a typical double –
                a double-number tracking system. One tracks the cost
                objective, the other accounting – the accounting number.

(Tr.2/113-14)

       24. Mr. Williams testified that this method of tracking IR&D costs has been
subject to review by both DCAA and DCMA over the years, and neither agency has
ever expressed any concerns (tr. 2/32-33).

       25. In his testimony, Mr. Williams only discussed job numbers in the abstract –
he did not discuss any specific job numbers that Voxtel assigned to IR&D costs. He

                                             8
was also unable to confirm whether Voxtel has any written procedures describing how
its IR&D costs should be identified. (Tr. 2/114-16)

        26. As part of its supplement to the government’s Rule 4 file, Voxtel produced
its Financial and Accounting Standards and Internal Controls manual (hereinafter
Accounting Manual), which in Section 20.0, Cost Accounting, states in part:

             20.1.4 Cost Identification

             All costs are identified as to the following characteristics:
             Direct and Claimed, Direct and Unclaimed, Indirect and
             Claimed, or Indirect and not Claimed.

             Direct costs shall be further identified by project.

             20.1.4.1 Indirect Costs

             Indirect costs are further identified based on the following
             classifications:

                 • Fringe Benefits or Labor Burden
                 • Overhead
                 • General & Administrative

             These classifications create cost pools for purposes of
             allocation to cost objectives.

                    ....

             20.2.1 Project Number Structure

             The project number should have three segments:

             First, the three letter identification of the client (DOD for
             example) followed by

             Second, the last two digits of the year when the contract
             was issued

             Third, the last four digits of the contract number.

             Additional segments may be added to meet contract
             requirements or in the interest of good business

                                            9
              management. Examples of additional suffixes would be to
              track CLINS or preproduction costs.

                      ....

              20.2.6 Unclaimed Costs (Unallowable)

              The majority of unclaimed costs Voxtel experiences shall
              be G&A costs and are easily dealt with by utilizing the
              9XXXX accounts and not including them in government
              claims.

              On the rare occasion where there is a direct expense Voxtel
              chooses not to claim. These costs will be burdened just as
              claimed costs with associated indirect costs. The entire
              amount is then unclaimed.

(App. supp. R4, tab S-40 at 36-40)

       Discussions Between the Parties concerning COGS

       27. By email dated February 19, 2015, Ms. Hilliard requested that Voxtel
“explain what is included in the Cost of Goods Sold account . . . in the claimed indirect
pool” (R4, tab 21 at 250). Voxtel responded that “[t]hese are all purchases of services
and materials purchased directly for commercial sales or government contracts” (id.
at 249). On the basis of this answer, Ms. Hilliard advised DCMA that these direct
costs should be charged as such, and recommended that they be 100% excluded from
the indirect pool (id. at 248).

        28. In March 2015, DCMA supervisor Deborah Wada assigned
ACO Musgrave to review Ms. Hilliard’s workpapers on Voxtel’s ICPs (R4, tab 21
at 247). In a May 1, 2015 email, ACO Musgrave requested a conference call between
herself and Voxtel representatives, and described her questions about Voxtel’s ICPs in
detail. With respect to the COGS account, she noted the following:

              Cost Of Goods Sold‐Account No. 5000. Amounts were
              questioned for Cost of Goods Sold due to lack of
              supporting documentation. Voxtel provided response
              indicating these were costs for services and materials
              purchased direct for contracts. Explanation and supporting
              documentation are needed.

(R4, tab 24 at 415)

                                           10
       29. The conference call took place on May 8, 2015, with Ms. Ozuna and
Mr. Williams participating on behalf of Voxtel. ACO Musgrave’s notes summarizing
the parties’ discussion with respect to the COGS account state the following:

              Amounts $274,162.31, $150,963.36, and $161,494.62 for
              FY2007, 2008, and 2009 respectively were questioned for
              Cost of Goods Sold due to lack of supporting
              documentation. Voxtel provided response to DCAA
              indicating these were costs for services and materials
              purchased direct for government contracts.

              During discussions Debra shared for those years they did
              not assign Job #s to any commercial work and directed
              their bookkeeper to log any work without job # to
              overhead. Debra also confirmed the cost of goods sold
              was for goods purchased directly for both commercial and
              government work and agreed it should not have been
              included as indirect.

(R4, tab 49 at 2200)

        30. On May 14, 2015, ACO Musgrave prepared a draft indirect cost
rate/allocation agreement based upon the information she had been provided to date
from Voxtel. She forwarded it to Ms. Ozuna and asked that she advise whether Voxtel
would agree to the proposed arrangement. (R4, tab 25) Ms. Ozuna responded the
same day, indicating that Voxtel would not agree, and stating the following with
respect to the COGS account figures:

              Turns out that I was wrong. We have materials costs
              related to IR&D in this account that until recently we
              weren’t assigning job numbers to. These costs went
              directly into this account, but because they weren’t
              purchases for specific jobs, they weren’t assigned a job
              number and are considered overhead costs. As such, the
              amounts in the overhead section for this account are
              correct.

(R4, tab 24 at 409)

      31. At ACO Musgrave’s request, the following day Ms. Ozuna confirmed
ACO Musgrave’s understanding that “[m]aterial costs related to IR&D are in this
account. Also cost associated with jobs that did not have a job number assigned and
so were deemed appropriate to charge indirect.” (R4, tab 26 at 432)

                                          11
      32. On the basis of Voxtel’s multiple representations, ACO Musgrave’s
general impression with respect to the COGS account data was as follows:

              I really felt that I had been provided so many various
              explanations for what was in this account, including direct
              costs, and there had been no additional documentation
              provided. It was unclear that there was additional
              documentation that would be coming. Because of the cost
              principles in FAR 31, no documentation was provided, it
              was not clear to me that it did include IR&D costs, so due
              to lack of supporting documentation and the potential
              inclusion of direct costs in that account, I disallowed the
              costs for all three years.

(Tr. 1/132-33)

       Conclusions Regarding COGS in COFD

      33. By final decision dated July 13, 2015, ACO Musgrave formalized her
impressions with respect to the costs included in the COGS account:

              I am disallowing Costs of Goods Sold for FYs 2007, 2008
              and 2009 in the amounts of $274,162.31, $150,963.36, and
              $161,494.62 respectively . . . . Voxtel initially explained
              that costs in this indirect pool were direct costs for
              commercial and government contracts. Voxtel said that
              during these years job numbers were not assigned to
              commercial contract work and so all direct commercial
              work was charged in this account as an indirect charge.
              Voxtel later explained that this account consisted of IR&D
              material costs, as well as work that did not have a job
              number assigned . . . . No documentation was provided to
              substantiate that this account included IR&D material costs
              or to otherwise establish these costs as allowable indirect
              expenses. Voxtel has failed to show that any of the costs
              in the account bear a causal/beneficial relationship to
              government work or otherwise meet the FAR allocability
              tests. Thus, due to lack of documentation and direct work
              inclusion in this overhead account, I am disallowing these
              costs.

(R4, tab 29 at 457)

                                          12
      Additional COGS Information Provided by Voxtel After Issuance of the COFD

       34. At some point after ACO Musgrave issued her final decision, Voxtel
provided DCMA with additional information relevant to the COGS issue for FY
2007-2009 (gov’t br., Proposed Finding of Fact [GPFF] ¶ 99 (citing R4, tabs 50,
52-53; tr. 1/130-32)).

        35. Job numbers that include both a contract number and the identifier
“VOXR&D” are at the heart of the parties’ dispute with respect to the allowability of
IR&D costs. The government contends that the presence of a contract number in those
job numbers is conclusive on the question of whether those costs were indirect or
direct. Voxtel disagrees, arguing that the addition of the identifier “VOXR&D”
signified that the cost was an allowable IR&D cost. (See generally gov’t br. at 40-41;
gov’t reply at 18-19; app. br. at 38; app. sur-reply at 8-11)

      COGS Data for FY 2007

       36. For FY 2007, the government’s Rule 4 file contains a one-page document
that ACO Musgrave testified was “provided subsequent to the issuance of the COFD,
supporting documentation for [the COGS] account” (tr. 1/130; R4, tab 50). It lists
costs using one of the following job numbers: allowable indirect, VOXR&D:Job 1, or
NSWC C3024:VOXR&D (R4, tab 50). On the basis of the information contained in
this document, ACO Musgrave revised her opinion and determined that the costs for
job numbers allowable indirect ($86,852.07) and VOXR&D:Job 1 ($126,265.65) were
allowable indirect costs (tr. 1/130; GPFF ¶ 102; R4, tab 50). However, the costs for
job number NSWC C3024:VOXR&D she viewed as direct and therefore unallowable
costs because “C3024” correlated with a Department of Defense contract Voxtel
performed in 2007 and 2008 (see tr. 1/130-31, 186-87). The total cost associated with
job number NSWC C3024:VOXR&D is $61,044.59 (R4, tab 50).

       37. In its supplement to the Rule 4 file, Voxtel produced documentation that
appears to list all of the costs recorded in the COGS account for FY 2008, both direct
and indirect (app. supp. R4, tab S-24). The documentation also includes a summary of
the costs which provides totals by job number. In addition to the costs already found
to be allowable by ACO Musgrave (allowable indirect and VOXR&D:Job 1), this
summary includes the costs for job number NSWC C3024:VOXR&D – NSWC
C3024, listed as $61,044.59. (Id. at 1) We find that this job number represents the
same cost account as job number NSWC C3024:VOXR&D, found in the
government’s documentation, given the name similarities and the fact that the dollar
amounts for both are identical (id., R4, tab 50)

                                         13
      COGS Data for FY 2008

       38. ACO Musgrave testified that the documentation for FY 2008 and FY 2009
was provided later than the documentation provided for FY 2007 (tr. 1/131). Because
it was “significantly different” from the documentation provided for FY 2007, she
requested that it be reviewed by Ms. Hilliard (id.; tr. 1/188). This information was
submitted to the Board by the government as part of its Rule 4 file (R4, tabs 52-53).

       39. The 2008 information consists of a 34-page document; our review of that
document shows that the first page summarizes Ms. Hilliard’s analysis of the data
appearing on the following 33 pages (tr. 1/131-32; R4, tab 52). The data on the
subsequent 33 pages is presented in the form of individual job numbers, including
allowable indirect and VOXR&D:Job 1 (R4, tab 52 at 2224-27, 2251-54). Other job
numbers are more complex, with prefixes consisting of federal agency
names/abbreviations (or other prefixes, the meaning of which are unknown), and a
several digit/letter string, such as ARMY CP406:AR, DOE 18025, HARR
59407:HAR, and NASA AA27C:NA (See, e.g., R4, tab 52 at 2227, 2231, 2238, 2240).
None of these more complex job numbers include the full VOXR&D identifier;
however, one job number includes what appears to be a truncated version thereof:

             NSWC C3024:VO               $44,875.04

(R4, tab 52 at 2242)

        40. Ms. Hilliard’s analysis of the 2008 documentation lists the total dollar
amount for allowable indirect as $59,295.02 and for VOXR&D:Job 1 as $44,095.30
(R4, tab 52 at 2220), both amounts which ACO Musgrave now considers to be
allowable (tr. 1/131-32).

        41. In its supplement to the Rule 4 file, Voxtel submitted documentation that
appears to list all of the costs recorded in the COGS account for FY 2008, both direct
and indirect (app. supp. R4, tab S-30). The submission also includes a summary of the
costs which provides totals by job number. In addition to the costs already found to be
allowable by ACO Musgrave (allowable indirect and VOXR&D:Job 1), this summary
lists two job numbers that include the VOXR&D identifier:

             HARR 59407:VOXR&D – HARR59407                   $14,922.00
             NSWC C3024:VOXR&D – NSWC C3024                  $44,875.04
                                                             $59,797.04

(App. supp. R4, tab S-30 at 1) Thus Voxtel’s documentation includes one job number
that did not appear in the documentation provided by the government – HARR
59407:VOXR&D – HARR59407.

                                          14
       42. We find that for the 2008 COGS data, job number NSWC C3024:VOXR&D
– NSWC C3024, found in Voxtel’s documentation, represents the same cost account as
job number NSWC C3024:VO, found in the government’s documentation, given the
name similarities and the fact that the dollar amounts for both are identical. (Id.; R4,
tab 52 at 2242)

       COGS Data for FY 2009

    43. The 2009 documentation submitted in the government’s Rule 4 file consists of
a 23-page document; our review of that document shows the first page summarizes
Ms. Hilliard’s analysis of the data appearing in the following 22 pages (R4, tab 53).
Like the data provided for 2008, the data provided for 2009 is presented in the form of
individual job numbers, including allowable indirect and VOXR&D:Job 1 (R4, tab 53
at 2271-72, 2278). There are also a total of five sets of job numbers that include the
VOXR&D identifier or what appears to be a truncated version thereof:

              DOE 84919:VOXR&                   $  3,000.00
              Hex Array:VOXR&D                    64,402.34
              NASA AA27C:VOXR                     50,000.00
              NSWC C3024 VOXR                     10,870.00
              SMDC C0126:VOXR                     30,320.00
                                                $158,592.34

(R4, tab 53 at 2265-67, 2273-74). Numerous other entries, however, consist of agency
names/abbreviations and a several digit/letter string without the VOXR&D identifier,
such as ARMY CP005 and DOE 18025 (R4, tab 53 at 2256-58, 2260-62)).

        44. Ms. Hilliard’s analysis of the 2009 documentation lists the total dollar
amount for allowable indirect as $642.28 and for VOXR&D:Job 1 as $2,260 (R4,
tab 53 at 2255). ACO Musgrave now considers those amounts to be allowable
(tr. 1/132, see GPFF ¶ 105).

         45. In its supplement to the Rule 4 file, Voxtel submitted documentation that
appears to list all of the costs recorded in the COGS account for FY 2009, both direct
and indirect (app. supp. R4, tab S-36). The submission also includes a summary of the
costs which provides totals by job number. In addition to the costs already found to be
allowable by ACO Musgrave (allowable indirect and VOXR&D:Job 1), this summary
lists five job numbers that include the VOXR&D identifier:

              DOE 84919:VOXR&D-DOE 84919                      $ 3,000.00
              NASA AA27C:VOXR&D-NASA AA27C                     50,000.00
              NSWC C3024:VOXR&D-NSWC C3024                     10,870.00
              RAY 72094:VOXR&D-RAY 72094                       64,402.34

                                           15
              SMDC C0126:VOXR&D-SMDC C0126                        30,320.00
                                                                $158,592.34

(App. supp. R4, tab S-36 at 1)

       46. We find that for the 2009 COGS data, the job numbers in both the
government’s Rule 4 file and Voxtel’s supplemental Rule 4 file that include the
VOXR&D identifier (or a truncated version thereof) represent the same cost accounts,
given that the names are substantially the same and the associated costs for each are
identical (id.; R4, tab 53 at 2265-67, 2273-74).

        47. In evaluating which costs she considered allowable and which she
considered unallowable, ACO Musgrave focused on Ms. Ozuna’s prior assertion that
IR&D costs were not assigned job numbers, along with the fact that many of the job
numbers “specifically identified contracts” (tr. 1/187; see R4, tab 24 at 409).
ACO Musgrave did not interpret those job numbers to represent IR&D costs
(tr. 1/187).

        48. Neither Ms. Hilliard nor ACO Musgrave discussed their analysis of the
subsequently provided documentation with any Voxtel representative (tr. 1/189).
ACO Musgrave indicated that had Voxtel provided that information earlier, it “would
likely have been acceptable documentation as it pertain[ed] to allowable indirect costs
and Voxtel R&D costs” (tr. 1/186). However, to the extent that documentation
included “multiple contract direct job numbers that [were] tied to specific contracts
[and were] easily identifiable” she would not have found those costs to be allowable
(id.).

       49. Although the data contained in the 2007-2009 COGS account
documentation submitted separately by the government and by Voxtel is largely
consistent, none of the individual job numbers in the data provided to the Board appear
to conform to the formulation for “project numbers” described in Section 20.2.1 of
Voxtel’s Accounting Manual, which states that [t]he project number should have three
segments . . . [beginning with] the three letter identification of the client . . . [followed
by] the last two digits of the year when the contract was issued . . . [and then] the last
four digits of the contract number” (app. supp. R4, tab S-40 at 38-39; see also R4,
tabs 50, 52-53; app. supp. R4, tabs S-24, S-30, S-36). For this reason, we find that this
provision of Voxtel’s Accounting Manual is not determinative for purposes of
distinguishing between Voxtel’s direct and indirect costs.

                                             16
         Appellant’s Expert Witness

        50. Voxtel’s expert witness, Mr. Paul Cederwall, has a bachelor’s degree in
business administration – accounting from California Polytechnic State University,
and a master’s degree in administration from Central Michigan University (ex 133
at 403). He is licensed as a certified public accountant in both Washington and
California (id.; tr. 2/125). For approximately 32 years, he was an auditor with DCAA,
retiring as the manager of a branch office. During his time at DCAA, he had extensive
experience with auditing, including the auditing of incurred cost proposals (tr. 2/124),
and specifically the issues involved in this appeal (IR&D, rent, and compensation)
(tr. 2/125). Since 2006 he has been a chief financial member of Pacific Northwest
Consultants, LLC, a firm providing advisory services in government contracting
accounting, auditing and other areas. (Ex. 133 at 403-04) He has been working with
Voxtel as a client since the issuance of the COFD (tr. 2/127). Voxtel proffered him,
and he was accepted, as an expert witness in the area of cost allowability and tax as it
interrelates with the FAR cost principles (tr. 2/130-31).

        51. Mr. Cederwall authored an expert report dated August 28, 2017 (ex. 133). 5
The report laid out a chronology of the interactions between the government and
Voxtel and critiqued the sufficiency of the audit process, which he described as
“nothing more than the identification of accounts where significant variability existed
within the three-year period under review” (id. at 329). Attached to the report were
several exhibits that consisted primarily of accounting data representing those costs
(id. at 337-55, 380-97 (exs. E-H)). Chief among Mr. Cederwall’s criticisms of
DCAA’s work is the description of the review as a “quick informal look”
at Voxtel’s ICPs for 2007-2009; nowhere in DCAA’s guidance, contract audit manual,
audit programs, or instructions are “quick informal looks” described or authorized (id.
at 341-42, 347, 353). Mr. Cederwall described DCAA’s evaluation of Voxtel’s ICPs
as “not well-supported” (tr. 2/184). There was no audit performed and simply no
reason an audit could not have been performed (tr. 2/136-40). Mr. Cederwall noted
that an adequacy review was not an audit, and did not support the conclusions reached
by the government, and while the nomenclature review was a “good first step,” it was
“not conclusive in itself; you still need to do transaction testing. It’s just a way of
identifying where your risks are.” (Tr. 2/185).

5
    Mr. Cederwall subsequently provided Voxtel with a brief addendum to this report.
         That addendum, dated September 1, 2017, does not materially impact any of
         our findings or conclusions in this decision. (See ex. 134)

                                           17
       Mr. Cederwall’s Opinion on the Data Contained in the COGS Account

       52. In performing his analysis of Voxtel’s ICPs, Mr. Cederwall relied on the
propriety of Voxtel’s accounting policies, practices and procedures. DCAA performed
pre-award accounting system reviews in 2003 and 2007, and in 2015, at the request of
DCMA, performed another audit of Voxtel’s accounting system, finding it adequate
for government contracting. (Ex. 133 at 341) On the basis of that 2015 audit,
Mr. Cederwall opined that Voxtel’s methodology for accumulating and reporting
IR&D costs was adequate (tr. 2/134). He further opined that an adequate accounting
system “can be relied upon to ensure that costs are properly accounted for and
allocated to final cost objectives in a manner that meets government contracting
requirements” (ex. 133 at 341).

       53. Mr. Cederwall testified that Voxtel tracks COGS using a “job cost system,”
and “as transactions are entered into the system, they are identified to . . . a contract or
an IR&D project” (tr. 2/155, 157). Unique job numbers are established for each
government contract and for each IR&D project (ex. 133 at 337). Relying upon
Voxtel’s accounting system (which DCAA had found to be adequate for government
contracting), Mr. Cederwall opined that the type of costs reported under the COGS
account for each FY 2007-2009, including those associated with IR&D, should be
considered allowable (ex. 133 at 341; tr. 2/163).

        54. Mr. Cederwall also testified that Voxtel’s IR&D costs consist of materials,
labor, and other direct costs, yet DCAA and DCMA objected only to the materials
portion of the IR&D costs, which in his opinion is an inconsistent treatment of the
costs – if you object to materials, “certainly the labor is going to follow suit”
(tr. 2/161-63; see also tr. 2/158-59; ex. 133 at 339 (noting same inconsistency)).

        55. Exhibit E to Mr. Cederwall’s expert report consists of six pages of job
numbers representing “IR&D Materials Charged to Cost of Goods Sold” during FY
2007-2009 (ex. 133 at 381-86). This documentation is consistent with the portion of
Voxtel’s documentation that reflects job numbers using the VOXR&D identifier (id.;
see app. supp. R4, tabs S-24, S-30, S-36). It is also consistent with the
government’s documentation (see R4, tabs 50, 52, 53), with one exception. For 2008,
Exhibit E includes job number VOXR&D – HARR 59407, the total cost for which is
listed as $14,922.00. (See ex. 133 at 383; app. supp. R4, tab S-30 at 1 (reflecting
substantially the same job number with identical associated cost))

                                            18
         Rental Expenses

         Background

       56. At its inception in 1999, Voxtel was located in Portland, Oregon, but later
moved to Beaverton, 6 a Portland suburb. In 2009, Voxtel opened a second site at the
University of Oregon in Eugene. (Tr. 2/13-14) The costs associated with a lease
between Voxtel and the University of Oregon during 2009 are the focus of the parties’
dispute with respect to rental expenses.

         Discussions Between the Parties Concerning Rental Expenses

        57. In her initial February 19, 2015 email to Ms. Ozuna, Ms. Hilliard requested
clarification on Voxtel’s rental expenses, noting that “[t]he amount claimed for Rent in
the indirect pool varies significantly year over year. Can you please explain the reason
for these variances? Does this involve a related party?” (R4, tab 19 at 240).
Ms. Ozuna responded as follows:

                Up until 2011, the rent expenses fluctuated based on the
                amount of square footage we were renting at our two
                facilities. One in Beaverton, OR, the other in Eugene, OR.
                We moved into a facility owned by a related party, the rent
                claimed, since that time is based on the DCAA guidelines
                using percentage of building occupied and actual costs.

(Id. at 240-41) Ms. Hilliard considered this explanation to be insufficient, and
recommended to DCMA that unless Voxtel provided additional detailed information
on the questioned rental expenses they should be 100% excluded from the indirect
pool (R4, tab 21 at 248-49).

       58. ACO Musgrave’s May 1, 2015 email to Ms. Ozuna requesting the
conference call stated the following:

                Rent ‐ Account No. 7400. Amounts questioned for
                FY2009 for Rent due to lack of supporting documentation
                and significant unexplained variance in rent costs between
                2008 to 2009. Voxtel explained the rent expenses
                fluctuated based on square footage being used/rented at the

6
    The Beaverton location is referred to variously by the parties and in the record as
         “Beaverton,” “Beach Metro” and “the Round at Beaverton” (see, e.g., tr. 1/127-
         129; R4, tab 24 at 425). For purposes of this decision, we will refer to that
         location as the “Beaverton property.”

                                            19
              two facilities. Explanation and supporting documentation
              are needed.

(R4, tab 22 at 402)

      59. ACO Musgrave’s notes of the call itself state that Ms. Ozuna “indicated
[Voxtel] could provide specific lease agreements to verify and support cost of rent.
[Voxtel] was advised to refer to FAR 31.205-36(b)(3) which provides specific
guidance for rental costs.” (R4, tab 49 at 2200)

       60. Voxtel did not provide any lease-related documents until after
ACO Musgrave forwarded to Ms. Ozuna the draft indirect rate/cost allocation
agreement. At that time, Ms. Ozuna provided what she described as the first page of
the lease agreements for both locations. (R4, tab 24 at 409)

       61. The first document was actually the first page of a summary of basic
provisions contained in the lease between Voxtel and the University of Oregon. That
page identified the landlord, the tenant, the premises, the term of the lease and the
amount of the rent ($5,620 per month for the first year and rent for subsequent years to
be determined). (R4, tab 24 at 424) ACO Musgrave considered this document to be
“acceptable documentation of a lease agreement” (tr. 1/115).

        62. The second document was the first page of a letter dated April 26, 2005 on
a commercial realtor’s letterhead addressed to Mr. Williams. That document indicated
it was intended to “confirm your expressed intent to lease office space under the
following terms and conditions” and that the “Tenant agrees to extend its existing
lease to be coterminous with the expansion Lease.” (R4, tab 24 at 425). It also
identified the premises (the Beaverton property), the lease term and a rental rate that
appears to be a rate per square foot. (Id.) ACO Musgrave did not consider this
document to be sufficient documentation of the lease agreement or the increased rental
costs (tr. 1/115-16).

       63. ACO Musgrave emailed Ms. Ozuna on May 15, 2015 stating that in the
purported lease agreements, she did not “see the amount specified for [the University
of Oregon lease] for the period of May 1, 2009 through April 30, 2010. I also do not
see any verification of the square footage leased for 2009 in Beaverton, only the rate
per sq foot.” (R4, tab 26 at 432) Ms. Ozuna replied via email later that day, stating
that she would “review what I sent you for rent verification and make sure that I
provide what’s needed to accurately reflect rent” (id.).

                                          20
       Conclusions Regarding Rental Expenses in COFD

       64. With respect to rental costs, the COFD provided the following:

              I am disallowing Rent costs for FY 2009 in the amount of
              $144,799.87 in accordance with FAR 31.205-36—Rental
              Costs. Regarding the unsupported significant increase in
              rental cost for 2009, Voxtel explained that two facilities
              were leased that year and the cost was based on square
              footage utilized. As supporting documentation for one of
              the properties Voxtel provided only a letter of intent to
              lease and said the actual lease agreement would be
              produced, but after additional inquiries, no lease or other
              supporting documentation was provided. A letter of intent
              is insufficient supporting documentation. Due to lack of
              adequate documentation, I am disallowing $144,799.87,
              which is the unsupported portion of the 2009 rental costs.

(R4, tab 29 at 458)

       Additional Rental Expense Information Provided by Voxtel After Issuance of the
       COFD

       65. After issuance of the COFD Voxtel submitted transaction details for the
questioned rental expenses at the Beaverton property (tr. 1/128-29; R4, tab 47). At the
hearing ACO Musgrave testified that she would allow the rental costs for the
Beaverton property that had previously been in dispute (tr. 1/129).

       66. With respect to the University of Oregon location, the transaction detail
Voxtel submitted shows 22 payments of $5,620.00 each, for a total of $123,640.00 in
calendar year 2009 (R4, tab 47). ACO Musgrave had already found that 12 months of
those lease payments were allowable, but disallowed the remaining 10 payments (tr.
1/129, 203).

        67. After filing this appeal in 2015, Voxtel submitted two documents in its
supplement to the Rule 4 file which purportedly relate to the challenged rental costs
at the University of Oregon location. The first document is an email from an
employee in the Office of the Vice President for Research and Innovation at the
University of Oregon. It is dated June 9, 2015, addressed to Voxtel’s president, and
states in its entirety that “[i]n 2009, Voxtel’s rent was $11,440.” (App. supp. R4, tab
S-51)

                                           21
       68. The second document is one page in length and is entitled “Confirmation of
Payment Schedule of Voxtel-UO Lease: YEAR 2009” (hereinafter Confirmation of
Payment) (app. supp. R4, tab S-59). This document was signed on February 11, 2016
by the Assistant Vice President for Research Business Administration, Office of
Research and Innovation, at the University of Oregon, and on February 22, 2016 by
Mr. Williams. The document states in its entirety:

              Summary

              This is to confirm that the lease payments for the space
              occupied by Voxtel at the Lorry Lokey Laboratories have
              been made as noted below on a continuous basis by Voxtel
              from January of 2009 through the date noted in the
              signature below.

              Payment arrangements made under the 2009 Lease
              between UO and Voxtel

              Starting in January 2009, two payments of $5620 were due
              each month January through August ($11,240 per month),
              after that time, payments of $5620 were due on a monthly
              basis, increasing according to the terms of the lease.

(Id.)

        69. Mr. Williams described the second document, the Confirmation of Payment
signed in February 2016, as an “addendum or amendment” to the University of Oregon
lease (tr. 2/34; see also tr. 2/89). To explain this purported amendment, he testified
that Voxtel was required to use “all union labor . . . to move our stuff in and out of the
facility and to hook up all our electricity. Even to hang white boards on the wall
required State of Oregon employees.” (Tr. 2/16) He further testified that

              this was a new facility. It was being run by a professor.
              And one of the things that they didn’t realize was that we
              could not do our own fit-up costs on the facility.

              So we signed the lease and as it evolved, we had to modify
              the lease based on circumstances, which included us not
              being able to actually authorize any, even as much as I said
              hanging a white board on the wall in that facility.

(Tr. 2/90) This meant that the University had expenses it had not anticipated, which
required the parties to modify the lease (tr. 2/90-91).

                                           22
       70. This so-called “amendment” purporting to modify the lease was “created so
that our records would be consistent with actual practices” (tr. 2/34). The employee
who originally negotiated the purported amendment, however, subsequently left the
company and Voxtel was unable to locate the emails where it was documented (tr.
2/91).

      71. Mr. Williams conceded that he did not believe signing an amendment in
2016 made it “retroactive to 2009” (tr. 2/89-90).

       72. After the initiation of this appeal, Voxtel submitted to the Board and the
government a full copy of the University of Oregon lease. The lease indicates it is for
space located within the Lorry Lokey Laboratories Building on the University of
Oregon campus. Executed on May 1, 2008, it had a lease term of three years with two
possible two-year extensions (app. supp. R4, tab S-28 at 1-2, 7, 26).

       73. Section 3 of the lease defined Voxtel’s obligation to pay rent and any other
charges due under the lease. Under Section 3.1, Rent, on the first day of each month
Voxtel was to pay a “Base Rent” of $5,620. This amount was for the first year of the
lease, which began to run on May 1, 2008; subsequent year charges were to be
determined at the beginning of those years. (App. supp. R4, tab S-28 at 2, 8-9)

        74. Section 3 of the lease also referenced Voxtel’s obligation to pay any
“Additional Rent” due, defined in Section 3.4 as “[a]ll taxes, insurance costs, utility
charges and/or any other amount Tenant is required to pay by this Lease, and any other
sum that Tenant is required to pay Landlord or third parties” (app. supp. R4, tab S-28
at 8-9).

        75. Section 6 of the lease, Alterations and Improvements, defined the rights
and obligations of the parties with respect to any changes made to the premises. Under
Section 6.1, Landlord Improvements, the University of Oregon had no obligation to
perform any improvements or alterations upon the premises. This section also stated
that the premises were being leased in an ‘“as-is/where-is’ condition.” Section 6.2,
Tenant Improvements, prohibited Voxtel from making any alterations or
improvements to the premises without the University’s prior written consent. (App.
supp. R4, tab S-28 at 13)

       76. Section 14 of the lease contained provisions dealing with various other
issues. Section 14.6, Complete Agreement, provided as follows:

             There are no oral agreements between Landlord and
             Tenant affecting this Lease, and this Lease supersedes and
             cancels any and all previous negotiations, arrangements,
             brochures, agreements and understandings, oral or written,

                                          23
              if any, between Landlord and Tenant or displayed by
              Landlord to Tenant with respect to the subject matter of
              this Lease, the Premises or the Building. There are no
              implied or express representations between Landlord and
              Tenant or between any real estate broker and Tenant other
              than those contained in this Lease, and any reliance with
              respect to any representations is solely upon
              representations contained in this Lease. This Lease may
              not be amended or modified in any respect whatsoever
              except by an instrument in writing signed by Landlord and
              Tenant.

(App. supp. R4, tab S-28 at 24)

      77. There is nothing in any section of this lease referring to an obligation on
Voxtel’s part to pay fit-up costs in any amount.

       Appellant’s Expert Witness on Rental Costs

       78. Mr. Cederwall’s written report did not discuss the allowability of any
specific rental costs. Instead, it merely stated the following:

              DCAA should not have questioned 100 percent of claimed
              rent expenses for 2007, 2008, and 2009 nor should the
              ACO have questioned most of the rent expense incurred in
              2009. Rental costs are specifically allowable under FAR
              31.205-36. . . . There simply is no valid basis for taking
              exception to these costs.

(Ex. 133 at 344)

       79. In his testimony, Mr. Cederwall conceded that a deposit should not have
been claimed, and that rent from January 2010 should have been reported to 2010, not
2009 (tr. 2/190-91).

        80. Since the hearing, the parties have reduced the amount of the disputed
rental expenses to a total of $44,960, consisting of the eight additional monthly rental
payments of $5,620 each made in January through August 2009 by Voxtel to the
University of Oregon. These payments were purportedly for the fit-up costs. (App. br.
at 33-34; app. sur-reply br. at 11; gov’t reply br. at 16-17)

                                           24
         Executive Compensation (Unpaid Owner’s Salary) 7

         Background

       81. Voxtel personnel, including Mr. Williams, used timecards to track the work
they performed on a daily basis. Mr. Williams’ time is billed at a fixed rate of
between $90 and $95 an hour for the time periods at issue. Voxtel produced copies of
monthly time sheets as part of its supplemental Rule 4 file showing Mr. Williams’
work on a daily basis for calendar years 2007 and 2009. (Tr. 2/11-12; app. supp. R4,
tabs S-26, S-35)

      82. Mr. Williams testified that during the relevant time period, Voxtel recorded
some of his compensation as wages on his IRS Form W-2 and the remainder on a
“K-1,” which is Schedule K-1 to IRS Form 1120 S, the tax form used by subchapter
S corporations. The K-1 Schedule records the shareholder’s share of income,
deductions, credits and so forth. (Tr. 2/46; see generally R4, tabs 43-45)

       83. This separate, non-W-2 compensation is referred to in Voxtel’s ICP data as
“Sub S Owner’s Unpaid Salary” (see, e.g., R4, tab 18 at 162, 200, 236). However,
Voxtel contends that “unpaid salary” is a misnomer, that the term (or a variation
thereof) has been used as a “placeholder,” and that the funds were in fact actually paid
to Mr. Williams (tr. 2/74; see also tr. 2/181).

       84. According to Mr. Williams, the rationale for allocating his compensation in
this manner arises out of an audit DCAA conducted in 2003. At that time the
government expressed concern about Voxtel’s cash flow, stating that it wanted to
make sure Voxtel would have sufficient cash reserves to continue performance if
extraordinary circumstances occurred (tr. 2/38, 40-41). As a result of that discussion,
and at DCAA’s suggestion, Mr. Williams elected to begin reinvesting a portion of his
compensation into the company (tr. 2/41-42). This process was allegedly
accomplished through the writing of two checks, one of which was “to be deposited to
a separate bank account . . . for paid in capital” (tr. 2/42).

        85. On cross-examination Mr. Williams was asked “how do you determine
whether you’re going to pay [your salary] or reinvest it” (tr. 2/91). Mr. Williams
testified as follows:

                We actually pay all of it. The portion that’s actually then
                sent to the paid-in capital account changes year to year but
                it’s usually everything in excess of the minimum that --

7
    Throughout the record this issue is referenced the majority of the time as “unpaid
         owner’s salary;” accordingly, for purposes of consistency we will use that term.

                                             25
             you know right above the payroll level, the FICA level,
             which changes year to year.

             And in addition, we’ll pay out, as necessary, we may pay
             out with a direct check. I may take additional pay, as
             needed with a direct check as well.

(Tr. 2/91)

      86. Mr. Williams was also asked to provide further explanation concerning
“the way you paid yourself the reinvested salary. You said that you write a check to a
bank account? I’m trying to understand what your process is.” (Tr. 2/99).
Mr. Williams responded as follows:

             Sure. You know without it, I’ll just go over the first part of
             the process. And I think we established the timecards are
             entered, the payroll account is debited, and that’s the same
             as mine or any other account. And then from that, checks
             are written in the employee’s name, it could be mine, to a
             savings account. And there’s any number of several
             savings accounts. So one way would be we write the
             check then to an account that payroll money could use to a
             savings account.

             And then also, we can write a check in my name, which is
             a two-part check. One will go to distributions and the
             other would go to a paid capital account. That’s a typical
             method that would be used.

             Q Okay and then what happens to that? What happens to
             that cash?

             A Well, the W-2 portion, the payroll company then writes
             a check in the employee’s name. And then on the
             distribution, it’s distributed out at the end of the year to
             me. It passes through to me as the sole shareholder.

             Q Are you paid cash?

             A It’s a distribution, yes.

             Q You receive a distribution?

                                           26
                A Yes, it’s not a service. It’s not a good. It’s a monetary
                value, a dollar value transaction.

                Q Does the money remain inside the company?

                A No, the money transitions to me.

                Q The money transitions to you?

                A As through the pass-through entity is my understanding,
                yes. All the revenues and liabilities are going to passed
                [sic] through to the shareholder at the end of the year.

(Tr. 2/99-101)

       87. Mr. Williams did not disclose any identifying information about the
“separate bank account . . . for paid-in capital” (tr. 2/42), such as the bank name or
account number. The record also does not contain evidence such as bank statements
or cancelled checks from this or any particular bank account.

       88. We were nevertheless able to locate references to three different bank
accounts in the record – a U.S. Bank account, a Washington Mutual account, and a
Chase Bank account. Those references appear in two different documents. The first is
a “check detail” dated December 31, 2012, which indicates it is for account number
1040, U.S. Bank – Checking – 8769 (R4, tab 20 at 246). 8

        89. The second document is a 30-page journal of accounting entries for
calendar year 2007 (app. supp. R4, tab S-23). This document contains references to all
three bank accounts. The U.S. Bank account appears at monthly intervals on debit
entries valued at $0.00 (see, e.g., app. supp. R4, tab 23 at 12, 14-16 (January through
April 2007)). There are also three credit entries for account number 1020, Washington
Mutual. Two of those entries include dollar values ($1,300 and $75,000), immediately
followed by debit entries in the corresponding amount to account 2600, Distributions
(id. at 6). Finally, there is one credit entry for account number 1060 – Chase Bank –
entry number 7795 in the amount of $194,860.50, immediately followed by a debit
entry in the same dollar amount to account 2600, Distributions (id. at 30).

      90. DCMA submitted Voxtel’s corporate tax returns (IRS Form 1120 S) for
2007-2009 in its Rule 4 file (R4, tabs 43-45). The figures on line 7 of those returns,
which record” Medicare Wages and Tips,” are identical to the figures recording

8
    This document is discussed in more detail in finding 97.

                                             27
Mr. Williams’ W-2 wages for all three years – $98,988 for 2007, $110,524 for 2008,
and $143,153 for 2009 9 (R4, tabs 40-42, 43 at 2097, 44 at 2215, 45 at 2139).

        91. Line 21 of the Form 1120 S records “ordinary business income (loss)” (see,
e.g., R4, tab 43 at 2097). This figure is reached by subtracting from gross receipts
(at line 1c) certain deductions such as officer compensation, employee salaries, repairs,
maintenance, employee benefit programs and so forth (see id.). Line 1 of Schedule
K-1 (hereinafter referred to as K-1 distribution) records the same figure as the figure
entered at line 21 for “ordinary business income (loss)” (id. at 2098, 2106).

       92. Voxtel produced Mr. Williams’ individual tax returns for the relevant
three-year period. Voxtel’s corporate tax returns or Mr. Williams’ individual tax
returns do not specifically identify that portion of the K-1 distribution that represents
Mr. Williams’ non-W-2 wage compensation (R4, tab 43 at 2106-07, tab 44 at 2125-26,
tab 45 at 2148-49; see tr. 2/18, 79; exs. 107 at 208-09, 108 at 94, 110 at 120).

       93. Contractors submitting ICPs are required to reconcile wages they’ve
reported quarterly on IRS Form 941 with their claimed payroll account (tr. 1/41). For
FY 2007, the reconciliation recorded as unpaid owner’s salary is the same amount
($194,064.10) as is recorded on the trial balances in account 4050, Other Income, an
entry Ms. Hilliard characterized as an “offsetting amount” (tr. 1/41-42; R4, tab 21
at 260, 262, 298). The correlation in these entries is also true for FY 2008 – the same
amount ($21,933.41) is recorded as unpaid owner’s salary in the reconciliation as is
recorded on the trial balances in account 4050, Other Income (tr. 1/42-43; tab 21
at 311, 313, 344).

       94. The same is not true, however, for FY 2009. The reconciliation recorded
unpaid owner’s salary in the amount of $141,995.86, while the trial balances recorded
$165,850.58 in account 4050, Other Income. With respect to that discrepancy in
amount, Ms. Hilliard suggested that “[i]t’s possible that the contractor had additional
other income in that year that was recorded in that account.” (Tr. 1/43-44; R4, tab 21
at 357, 360, 394)

         Discussions Between the Parties Concerning Owner’s Unpaid Salary

       95. In her February 19, 2015 email to Ms. Ozuna, DCAA auditor Hilliard
requested information about the costs Voxtel identified in the ICPs as unpaid
owner’s salary:

9
    The figure on line 7 of Mr. Williams’ tax return for 2009 has been rounded up to the
         next dollar, as compared to the figure in his 2009 W-2 (compare R4, tab 42
         at 2092 with R4, tab 45 at 2139).

                                            28
              For each year, was the unpaid owner’s salary claimed as a
              direct cost or included in the indirect pool? Which GL
              account was used for the expense? Has this salary been
              paid and if so, can you please provide dates and proof of
              payment?

   (R4, tab 21 at 250)

       96. Ms. Ozuna responded via email dated March 8, 2015, stating in part:

              The pay was based on hours worked and were charged to
              the account listed on the time card. The accounts included
              indirect hours, which involved corporate business, and
              direct engineering hours. The salary was paid both in
              monthly payroll, and some was kept on reserve in as “other
              income” to the corporate [sic]. An example of how the
              hours/payroll for the “Other Income” are accounted for is
              attached. This was discussed with our DCAA auditor back
              in 2005/2006.

              The paid in capital was needed to purchase equipment and
              finance operations.

(R4, tab 19 at 240)

       97. The following day Ms. Ozuna provided a copy of the example mentioned
in her March 8, 2015 email (R4, tab 20 at 243). That document is the “check detail”
dated December 31, 2012 for account number 1040, U.S. Bank – Checking – entry
number 8769 (id. at 246). This document shows a series of accounting entries, the first
for account number 4050, Other Income, in the amount of $13,538.80. That entry is
followed by 25 debit entries in various amounts identified as being from account
number 7700, Payroll, and adding up to $13,538.80. (Id.) Because this document
appears to relate to activity outside the time period of this appeal, we consider it of
limited evidentiary value to our decision.

      98. After reviewing Voxtel’s response, by email dated March 11, 2015
Ms. Hilliard advised DCMA of the following:

              The unpaid owner’s salary was not paid. The contractor
              claimed the cost in the indirect pool and recognized these
              costs as income to the company. Debra Ozuna did provide
              a copy of a “payment” to the owner in which the net
              amount equals zero and the total is recorded as other

                                          29
                 income. These costs should be 100% excluded from the
                 indirect pool.

(R4, tab 21 at 248-49)

       99. On May 1, 2015, ACO Musgrave requested a conference call with Voxtel,
and ACO Musgrave described her question about unpaid owner’s salary in the
following manner:

                 Payroll - Account No. 7700. Amounts questioned for
                 unpaid [owner’s] salary. Explanation provided to DCAA
                 regarding payroll stated [owner’s] salary was both paid
                 monthly and some kept on reserve as ‘other income’.
                 Explanation and supporting documentation are needed.

(R4, tab 22 at 402-03)

       100. ACO Musgrave’s notes from the May 8, 2015 conference call state the
following with respect to this issue:

                 Explanation provided to DCAA regarding payroll stated
                 [owner’s] salary was both paid monthly and some kept on
                 reserve as ‘other income’.

                 During discussions Debra and George (owner) explained
                 the owner charges hourly wage and bills either direct to a
                 job or indirect. A varying portion of each billing is paid to
                 the owner and the remainder of his billed hours (both
                 direct and indirect work) are expensed in “unpaid
                 owner’s salary” and reinvested in the company as “other
                 income” to avoid paying the associated payroll tax. 10
                 Voxtel did not have an explanation for how the choice is
                 made for what hours will be paid out to the owner and
                 which will be expensed in the overhead pool. . . . Voxtel
                 will provide additional documentation with samples of
                 owner’s hours billed/hours paid/hours expensed to help
                 clarify.

10
     Voxtel denies having ever stated that it was attempting to avoid payroll tax, or that it
        was in fact engaging in such action (tr. 2/69-70). The government has not used
        the statement to support its claim that such costs were unallowable. The Board
        therefore makes no finding with respect to the statement in ACO Musgrave’s
        notes and considers the statement irrelevant for purposes of this appeal.

                                              30
(R4, tab 49 at 2200-01)

       101. After ACO Musgrave emailed Ms. Ozuna the draft indirect rate/cost
allocation agreement, Ms. Ozuna forwarded to her a sample paystub and a
“$0.00 check,” which she described as “show[ing] how these transactions are entered.
Additionally, since the $0.00 check doesn’t actually show the breakdown of the costs”
she indicated she was also providing a “transaction list for the payroll account that
shows both the paycheck and the $0.00.” (R4, tab 24 at 409)

        102. The documents Ms. Ozuna provided consist of the following: 1) a check
made out to Mr. Williams dated August 31, 2009 in the amount of $8,049.95 for the
pay period August 1 through 14, 2009, attached to a check stub showing a description
of his current and year-to-date earnings, deductions, taxes and adjustments; 2) another
document dated August 31, 2009 with the words “0.00 Check To Charge Hours [and]
Record Owner Investment” handwritten across the top and including a list of figures,
none of which include a correlating description or explanation; and 3) a document
titled “Transaction Detail By Account” for August 2009 with 29 entries and
handwritten at the bottom “payroll account: snapshot of both checks showing hours
and jobs charged” (R4, tab 24 at 418-20). Some of the entries on this last page have
handwritten asterisks next to them; the handwriting at the bottom of the document
identifies the source as George Williams)” (id. at 420).

       103. ACO Musgrave considered these documents to be “inconclusive” because
they contained no information indicating that the unpaid owner’s salary was ever
actually paid. They had no impact on her opinion regarding whether the unpaid
owner’s salary figures were allowable (see tr. 1/118-19).

      104. ACO Musgrave’s subsequent request that Ms. Ozuna confirm
Voxtel’s position concerning this issue stated as follows:

              Payroll ‐ Account No. 7700: You’ve provided a sample
              paystub and the $0.00 check. Also a transaction list for the
              payroll account that shows both the paycheck and the
              $0.00. From discussions I understand the owner charged
              direct and indirect when appropriate, for the portion of
              payment due that the owner decided to not be paid but to
              reinvest back to the company it was charged in “unpaid
              owners expense” and also specified in “other income”.

(R4, tab 26 at 432)

       105. Ms. Ozuna replied to ACO Musgrave later that day, stating the following:

                                          31
              [Y]es, that’s correct. Except, it wasn’t charged to unpaid
              owner’s expense. The hours on the $0.00 check are
              charged at [Mr. Williams’] rate against both direct and
              non‐direct to payroll and then offset to other income.

(R4, tab 26 at 432)

       Conclusions Regarding Unpaid Owner’s Salary

       106. With respect the unpaid owner’s salary, the COFD provided:

              I am disallowing Payroll costs, specifically regarding
              “unpaid owner’s salary” costs, for FYs 2007, 2008 and
              2009 in the amounts of $194,064.10, $21,933.41, and
              $149,995.86 respectively . . . . Voxtel maintained during
              discussions that the owner charged direct and indirect
              when appropriate, however, the owner only took a portion
              of the wage earned as payment. The remainder for each
              job was charged as unpaid owner’s salary and
              redistributed back into the company in “Other Income”.
              In addition, the portion of any individual job charged to
              unpaid owner’s salary was varied by individual job and
              included portions unpaid for both direct and indirect work.
              Voxtel also [stated] . . . that unpaid owner’s salary was
              designated as a method to reinvest a portion of the
              owner’s earned salary . . . [and] the funds were not
              actually paid out but were instead funneled back into the
              company accounted for as “Other Income”. However, for
              owners of closely held corporations such as Voxtel, FAR
              31.205-6(a)(6)(iii) specifies that compensation in excess
              of the costs deductible as compensation under the tax code
              provisions of 26 U.S.C. are unallowable. Even if not in
              violation of FAR 31.205-6, FAR 31.201-5 requires that
              income relating to any allowable costs and received by or
              accruing to the contractor shall be credited to the
              Government either as a cost reduction or by cash refund;
              therefore, I am disallowing these costs.

(R4, tab 29 at 458) At the time of the hearing the ACO’s opinion had not changed; in
her view “[u]npaid owner’s salary is an unallowable cost, according to federal
regulation. Clearly, it is in excess of what was paid. It was a credit back to the
company. Both of those make it an unallowable cost.” (Tr. 1/130)

                                          32
         Appellant’s Expert Witness on the Allowability of the Unpaid Owner’s Salary

       107. To determine the additional compensation that Voxtel alleges is included
in Mr. Williams’ K-1 distributions, his W-2 wages must be subtracted from his total
compensation. That information appears in three tables for 2007-2009 at Exhibit H of
Mr. Cederwall’s expert report. (Ex. 133 at 395-97; see also tr. 2/177, 214)

       108. Each table consists of between 25 and 29 entries representing payments
made to Mr. Williams on or about the last day of each month of the year, out of the
7700 – Payroll account. Some of the entries record the payment type as “check” and
some record it as “paycheck.” (Ex. 133 at 395-97). In a column entitled “Split,” those
recorded as “check” read “1040 US B...” (truncated) and those recorded as “paycheck”
read “1030 Payc...” (truncated). (Id.)

       109. The three tables show Mr. Williams’ total compensation as being
$293,848.50 for 2007, $307,548.81 for 2008, and $309,003.48 for 2009 (id.).
Subtracting his W-2 wages for those three years, 11 the portion of the K-1 distributions
that would allegedly be attributable to Mr. Williams’ unpaid salary are
$194,860.50 for 2007, $197,024.81 for 2008, and $165,850.58 for 2009.

       110. In his report, Mr. Cederwall noted the discrepancy between the above
figures and the dollar amounts ascribed by DCAA to unpaid owner’s salary:

               According to DCAA, the amount of “unpaid salary” was
               determined from Schedule L of the incurred cost
               submissions. Based on my analysis of Voxtel’s accounting
               records, these amounts were inaccurate. I was unable to
               determine the source of the amounts included in the
               Schedule L’s or replicate those totals. The following
               schedule shows a comparison of what amounts questioned
               by DCAA (and DCMA) with the amounts supported by
               Voxtel’s accounting records.

11
     Mr. Williams’ W-2s show “Medicare Wages and Tips” for 2007-2009 as
         $98,988.00 for 2007, $110,524.00 for 2008 and $143,152.90 for 2009 (R4, tabs
         40-42).

                                           33
                                  Unpaid              Salary
                                 Salary per        Included on
                        Year     DCAA 12            Form K-1
                        2007      194,064            194,861
                        2008       21,933            197,025
                        2009      141,996            165,851

(Ex. 133 at 355) The figures identified as “unpaid salary per DCAA” are substantially
the same as the figures appearing on the reconciliation of IRS Form 941 with the
claimed payroll account (see findings 93-94).

        111. Mr. Cederwall opined that the methodology employed by Voxtel in
accounting for compensation costs to government contracts was appropriate, allowable
and calculable (tr. 2/172). Mr. Cederwall verified the compensation paid to
Mr. Williams in 2007, 2008 and 2009, and found it to be consistent with
Voxtel’s accounting records; that is, the amount of Mr. Williams’ compensation
correlated to the time sheets that Mr. Williams billed (tr. 2/214). His review also
verified that the compensation reflected in the W-2 and K-1 was paid to Mr. Williams
(tr. 2/177), and was reported on his personal tax returns (2/178). Mr. Cederwall
further testified that the allocation of compensation between the W-2 and the K-1 did
not alter the costs recorded on Voxtel’s books (tr. 2/174, 176). He found that the
unpaid salary amounts were charged to both the indirect cost pool and as direct costs
to specific final cost objectives (ex. 133 at 351).

        112. Mr. Cederwall testified that compensation through a K-1 distribution was
not unusual. It did not represent an unallowable distribution of profit. Mr. Cederwall
considered it allowable compensation because of the “job cost system that they have
set up, where they are using timecard[s]. They are using hourly rate[s]. They are
posting those transactions into the accounting records, into the job cost records.” (Tr.
2/180) He further stated that the method of payment is not relevant, it’s merely the
manner in which Voxtel chose to account for the transaction, and there is no restriction
in the FAR that would limit the payment of compensation to a W-2. Mr. Cederwall
testified that in his opinion, the real question is whether Voxtel has an adequate system
for labor tracking and labor distribution and whether there is anything unreasonable
about the amount of compensation. (Tr. 2/180) These issues were not challenged by
the ACO in her decision.

      113. Mr. Cederwall further testified that ordinary business income or loss is not
simply a distribution of profit, but could include “many other components,” including
some of Mr. Williams’ compensation (tr. 2/201-02, 205). Mr. Cederwall did not

12
     The figures on this table were rounded up by Mr. Cederwall.

                                              34
identify or ascribe dollar values to any of the “many other components” included in the
ordinary business income (loss) figures recogrded on Voxtel’s tax returns (tr. 2/201).

        114. Mr. Cederwall explained in his expert report that FAR 31.205-6(d)
broadly defines allowable compensation to include cash, corporate securities such as
stocks, bonds, and other financial instruments, or other assets, products, or services
(ex. 133 at 353). He further stated that under FAR 31.205-6(a)(6)(ii), compensation
for owners of closely held businesses must be reasonable for the work performed and
not be a distribution of profits. He noted that the FAR does not liken the W-2 with
compensation or the K-1 with profit, and that a K-1 is not exclusively a distribution of
profit. (Id. at 354)

       115. In his expert report, Mr. Cederwall also challenged the government’s
contention that any compensation not reported on IRS Form W-2, Wage and Tax
Statement, is unallowable on government contracts. Contrary to the
government’s stated position that the income reported on a K-1 represents a
distribution of profits, Mr. Cederwall explained that the FAR does not limit allowable
compensation to amounts reported on Form W-2. By way of illustration, he pointed
out that Mr. Williams was compensated in 2008 for 777 hours at $95.50 per hour, and
2,344 hours at $99.55 per hour, for a total of 3,121 hours and $307,549 in total
compensation. Of that total compensation, $110,524 was reported on his W-2, while
the remaining $197,025 was included on his K-1. The K-1 for 2008, however, showed
income to Mr. Williams of $1,077,281, which Mr. Cederwall explained included the
$197,025 in compensation that was not distributed on Mr. Williams’ W-2. As
Mr. Cederwall noted, “[t]he difference between the $1,077,281 and the $197,025 in
compensation is $880,256. . . . [which] could be a distribution of profits but has not
been claimed as an expense by Voxtel. The full amount, $1,077,281 was considered in
the preparation of Mr. Williams’ personal income tax return for 2008.” (Ex. 133
at 354) Mr. Cederwall further noted that DCMA stated that it was not challenging the
reasonableness of Mr. Williams’ compensation but was challenging the method of
payment. He then explained that calculating Mr. Williams’ compensation on the basis
of his W-2 wages only, his effective rate of payment would be $32, $35 and
$46 per hour for the calendar years 2007-2009 respectively. Mr. Cederwall stated that
those rates were “not commensurate with Mr. Williams[’] position in the company, his
educational background, his experience, knowledge, skills, and abilities.” (Ex. 133
at 353-354)

       116. Mr. Cederwall testified that the government applied Mr. Williams’
K-1 compensation to the indirect costs only, instead of prorating it against the various
cost objectives (tr. 2/181). The significance of this application was that the
government was taking away more than Voxtel booked, which had the effect of
Mr. Williams paying the government for every hour he “work[ed] indirect” (tr. 2/182).

                                           35
Stated differently, the government erroneously disallowed more costs than the
contractor charged (id.).

       117. In his written report, Mr. Cederwall opined that the “credit” provision
found at FAR 31.201-5 does not apply in these circumstances, because the unpaid
owner’s salary was not credited to the contractor or Mr. Williams as sole shareholder
but was reported as income to Mr. Williams (ex. 133 at 352-353). At the hearing,
Mr. Cederwall testified that it was unclear to him why ACO Musgrave stated in the
COFD that she was disallowing the unpaid owner’s salary under authority of the
credits clause, FAR 31.201-5, when “[t]here was no income generated from these
wages. . . . [Y]ou can’t invoke [the credits] clause if there’s no income” to the
company (tr. 2/184). On cross-examination, the government did not challenge
Mr. Cederwall’s opinion with respect to whether FAR 31.201-5 applies.

                                 DECISION

       Allowability in General

       Our analysis is guided by the regulations in effect at the time the contracts were
executed. The Boeing Co., ASBCA Nos. 57549, 57563, 13 BCA ¶ 35,427 at 173,786.
Under FAR 31.201-2, the costs at issue in this appeal are allowable if they meet the
following requirements: they are reasonable, allocable, and they comply with
generally accepted accounting principles and practices appropriate to the
circumstances, the terms of the contract, and any limitations set forth in FAR subpart
31.2. See FAR 31.201-2(a)(1)-(5); Fiber Materials, Inc., ASBCA No. 53616, 07-1
BCA ¶ 33,563 at 166,251. It is incumbent on the contractor to provide adequate
supporting data to support its indirect cost proposal. See FAR 52.216-7(d)(2)(i). But
the government bears the burden of proof to demonstrate that a cost is unallowable.
Technology Sys., Inc., ASBCA No. 59577, 17-1 BCA ¶ 36,631 at 178,389; Johnson
Controls World Servs., Inc., ASBCA Nos. 46674, 47296, 96-2 BCA ¶ 28,464
at 142,166 (citations omitted).

       With respect to the first requirement of allowability – reasonableness – a cost
will be considered reasonable if “in its nature and amount, it does not exceed that
which would be incurred by a prudent person in the conduct of competitive business.”
FAR 31.201-3(a). However, “[n]o presumption of reasonableness shall be attached to
the incurrence of costs by a contractor.” Id. If an “initial review of the facts results in
a challenge of a specific cost by the contracting officer . . . the burden of proof shall be
upon the contractor to establish that such cost is reasonable.” Id.

                                            36
      Determining reasonableness “depends upon a variety of considerations and
circumstances,” including-

              (1) Whether it is the type of cost generally recognized as
              ordinary and necessary for the conduct of the
              contractor’s business or the contract performance;

              (2) Generally accepted sound business practices,
              arm’s-length bargaining, and Federal and State laws and
              regulations;

              (3) The contractor’s responsibilities to the Government,
              other customers, the owners of the business, employees,
              and the public at large; and
              (4) Any significant deviations from the
              contractor’s established practices.

FAR 31.201-3(b).

     The FAR also imposes upon contractors the obligation to maintain sufficient
documentation to support their incurred costs:

              [a] contractor is responsible for accounting for costs
              appropriately and for maintaining records, including
              supporting documentation, adequate to demonstrate that
              costs claimed have been incurred, are allocable to the
              contract, and comply with applicable cost principles in this
              subpart and agency supplements. The contracting officer
              may disallow all or part of a claimed cost that is
              inadequately supported.

FAR 31.201-2(d).

       Voxtel protests that the COFD, issued without the benefit of an audit or
understanding of Voxtel’s accounting system and practices, lacks factual and legal
support. But the findings of fact made by a contracting officer in a COFD are not
binding in any subsequent judicial proceeding. TPI Int’l Airways, Inc., ASBCA
No. 46462, 96-2 BCA ¶ 28,373 at 141,695 (citing Melvin Wilner d/b/a Wilner
Construction Co. v. United States, 24 F.3d 1397, 1401 (Fed. Cir. 1994)). A judicial
proceeding following a contracting officer’s decision proceeds de novo, which
precludes reliance upon the contracting officer’s decision. Id. Once an action is
brought before the Board, the parties start with a clean slate. Id. We now turn to the
specific costs at issue in this appeal.

                                           37
       Allowability of the IR&D Costs Reported Under the COGS Account

       The parties’ dispute concerning the COGS account turns on whether some of
the costs included in that account represented indirect IR&D costs rather than direct
costs attributable to a specific contract. Under the FAR, “direct cost” is defined as

              any cost . . . identified specifically with a particular final
              cost objective. Direct costs are not limited to items that are
              incorporated in the end product as material or labor. Costs
              identified specifically with a contract are direct costs of
              that contract. All costs identified specifically with other
              final cost objectives of the contractor are direct costs of
              those cost objectives.

FAR 2.101. The FAR defines an “indirect cost” as “any cost not directly identified
with a single final cost objective, but identified with two or more final cost objectives
or with at least one intermediate cost objective.” Id. “Indirect cost rate” is defined as
“the percentage or dollar factor that expresses the ratio of indirect expense incurred in
a given period to direct labor cost, manufacturing cost, or another appropriate base for
the same period.” Id.

       The FAR further defines IR&D costs as costs from projects “falling within the
four following areas: (1) [b]asic research, (2) applied research, (3) development, and
(4) systems and other concept formulation studies.” FAR 31.205-18(a). IR&D costs
do not include “the costs of effort sponsored by a grant or required in the performance
of a contract.” Id. Thus IR&D costs are allowable as indirect expenses on contracts to
the extent they are allocable and reasonable. See FAR 31.205-18(c); see also FAR
31.203(b) (indirect costs are those that can be allocated to two or more final cost
objectives).

        DCMA cites the conflicting and contradictory statements Voxtel originally
made concerning whether the COGS account included direct costs only, or both direct
and indirect costs (gov’t br. at 40; gov’t reply br. at 18). DCMA further asserts that
costs associated with job numbers that include a contract number were attributable to a
specific contract and were therefore direct costs (gov’t br. at 40-41). DCMA points to
the description in Voxtel’s Accounting Manual for how direct costs are to be
identified, stating that the ACO relied upon this methodology in disallowing costs in
the COGS account that were “identified with a client, year and contract number”
(gov’t reply at 18; see finding 26).

       In response, Voxtel argues that the relevant signifier for determining whether
costs are IR&D costs is the identifier “VOXR&D.” For example, “HARR
59407:VOXR&D – HARR59407” signifies that the entry represents IR&D efforts by

                                           38
Voxtel. As additional support for this assertion, Voxtel points to the testimony of
Mr. Williams regarding Voxtel’s practice of tracking IR&D costs by contract and
reporting them annually under the SBIR program. 13 (App. br. at 38; app. sur-reply br.
at 8-10)

         DCMA does not respond to Mr. Williams’ testimony regarding the SBIR
program. Instead, DCMA makes the very narrow assertion that Voxtel “provided
no testimony or supporting documentation . . . [that it identified] IR&D work with the
letters R&D” (gov’t reply br. at 19; see also id. at 4 (response to APFF ¶ 45)). While
it is true that no witness testified with respect to the VOXR&D signifier, the
government’s assertion ignores the voluminous data contained in the record showing
that Voxtel routinely included VOXR&D in certain job numbers – data that was
submitted separately by DCMA and Voxtel in their respective Rule 4 submissions, and
by Mr. Cederwall in his expert report, all of which is virtually identical in nature (see
findings 36-46, 55). DCMA does not dispute the authenticity or veracity of this data
but focuses its criticism at Voxtel’s expert for his failure to audit the COGS account or
perform transaction testing (GPFF ¶¶ 37, 107). Ironically, the same criticism could be
leveled at the government (findings 7, 10, 13). As the DCAA audit manual indicates,
a nomenclature review alone is not a sufficient basis to reject a category of indirect
expenses. Instead, “[t]he actual content of accounts being evaluated must be
established through testing of transactions” (finding 12), something the government
has not done here.

        Instead, DCMA’s position rests heavily on ACO Musgrave’s conclusion that
costs associated with job numbers tied to specific contracts were direct costs (see
findings 47-48; gov’t br. at 41; gov’t reply br. at 18-19 (asserting relevance of contract
number)). DCMA’s reliance on the description of Voxtel’s Accounting Manual
concerning how direct costs are to be identified—three letters for the client, two digits
for the contract year, and four digits for the contract number—is simply not credible
given that none of the accounting data in the record appears to follow that formulation
(see gov’t reply at 18; findings 26, 49).

        While it is clear that Voxtel’s conflicting statements concerning the COGS
account confused DCAA and DCMA early on and made it difficult to determine which
costs were direct or indirect (findings 27-32), after the COFD was issued, Voxtel
submitted a significant quantity of data to the government showing specific cost
entries in the COGS account that included both a contract number and the VOXR&D
identifier (findings 34, 36, 38-40, 43-44). Voxtel’s supplement to the Rule 4 file also
included much of the same data (findings 37, 41-42, 45-46). We must take this

13
     While Voxtel does not identify the specific statutory or regulatory basis for this
         obligation, DCMA does not deny that it exists.

                                              39
evidence into consideration given the de novo nature of our review. See Wilner v.
United States, 24 F.3d 1397, 1401-02 (Fed. Cir. 1994).

       We acknowledge that the evidence presented by Voxtel to support the IR&D
costs was long overdue, not always easily understood, and in some instances
contradictory. However, we find persuasive the cumulation of evidence represented
by 1) the data Voxtel submitted; 2) confirmation from government personnel that the
IR&D work was related to NSWC C3024; 3) Mr. Williams’ detailed explanation of the
naming convention; and 4) his explanation of how IR&D costs are billed to contracts.
(Findings 19-23, 36-46)

       Equally persuasive are the review and conclusions reached by Voxtel’s expert,
Mr. Cederwall (although the government appears to give little weight to his
testimony). Contrary to the government’s assessment, we find that Mr. Cederwall’s
education, professional background and experience demonstrate an extensive
knowledge in the area of government contracts, allowability of costs, DCAA practice
and procedures, and audits (both generally and specifically with respect to ICPs).
Similarly, Mr. Cederwall’s extensive professional background and history
demonstrates his knowledge of accounting and tax issues relating to the FAR. Without
objection, Mr. Cederwall provided helpful testimony concerning the IR&D issue.
(Findings 50-54). He discussed the reliability of Voxtel’s accounting system, and his
opinion that an adequate accounting system can be relied upon to ensure that costs are
properly accounted for and allocated to the final cost objective. (Finding 52). Thus,
while Voxtel’s accounting system may have been unsophisticated, it does not affect
the credibility of the documentation provided in support of the costs claimed.

        In addition, Mr. Williams’ testimony concerning the manner of tracking
Voxtel’s SBIR costs, together with Mr. Cederwall’s review of the accounting of the
claim costs, supports the inference that the job numbers in the COGS account that
included the “VOXR&D” identifier were intended to record IR&D costs Voxtel
incurred at its own expense (findings 20-24, 36-46, 49, 52-53, 55). The inclusion of a
contract number was designed to identify the contract inspiring the IR&D work for
SBIR reporting purposes, not to signify that the entry represented a direct cost
associated with a contract. We find that consistent with FAR 31.201-2(d), appellant
has met its burden of proof and adequately demonstrated that the IR&D costs claimed
in this appeal have been properly incurred and accounted for and were reasonable.
(Findings 36-46)

        The government bears the burden of proof in demonstrating that a cost is
unallowable by operation of a specific contract provision or regulation. Kellogg
Brown & Root Services, Inc., ASBCA No. 56358 et al., 14-1 BCA ¶ 35,639
at 174,521. We do not believe the government can meet its burden of demonstrating
that the claimed IR&D costs are unallowable on this record. DCMA only contends

                                          40
that the costs are unallowable. The government has presented no evidence adequately
demonstrating that the costs claimed were not properly included with the IR&D efforts
or that they were double counted. There has been no challenge to the amount or
reasonableness of the claimed costs. As the Board has previously held:

             Where there is no dispute over the reasonableness in nature
             or amount of costs incurred, nor over the allocability of
             amounts charged to a contract, and the Government seeks
             to disallow costs solely upon the basis they are
             ‘unallowable,’ as here, the Government bears the burden of
             proving that the costs are of the type made
             specifically unallowable by regulation or contract
             provision.

Johnson Controls World Servs., Inc., 96-2 BCA ¶ 28,464 at 142,166 (citing
Lockheed-Georgia Co., ASBCA No. 27660, 90-3 BCA ¶ 22,957 at 115,276; Rockwell
Int’l Corp., ASBCA No. 20304, 76-2 BCA ¶ 12,131 at 58,302). Not only did the
government make inadequate attempts to challenge the costs by way of audit, but little
attempt was also made through testimony or supportable arguments to show that the
costs claimed here were unallowable by contract or regulation or did not include costs
of efforts sponsored by a grant or required in the performance of another contract
(findings 10-13, 51, 115-16). See FAR 31.205-18(c). While DCAA determined that
each of Voxtel’s ICPs for fiscal years 2007-2009 were adequate for audit a decision
was made not to audit them (finding 13). Even after Voxtel responded to the COFD
with additional and substantial data, ACO Musgrave disregarded that data – although
she conceded in testimony that had Voxtel provided it earlier “it would likely have
been acceptable documentation as it pertain[ed] to allowable indirect costs and Voxtel
R&D costs” (finding 48; see also finding 47). On this record, the government has not
demonstrated that any particular IR&D cost claimed by Voxtel in the 2007, 2008 or
2009 ICP was unallowable (findings 51, 54).

       “[P]arties are responsible for presenting their cases so that the Board can make
appropriate findings of fact and conclusions of law thereby disposing of the merits of
the appeal.” Trace, Inc., ASBCA No. 56594, 09-1 BCA ¶ 34,128 at 168,750; see
United States v. Dunkel, 927 F.2d 955, 956 (7th Cir. 1991); Nassar Grp. Int’l, ASBCA
No. 58451 et al., 22-1 BCA ¶ 38,206 at 185,550; Env’l Chem. Corp., ASBCA
No. 59280, 22-1 BCA ¶ 38,166 at 185,362; Meld LLC v. GSA, CBCA Nos. 6357,
6721, 22-1 BCA ¶ 38,040 at 184,736. The record here contains little evidence to
conclude that the IR&D costs are unallowable. Accordingly, based upon our review of
the evidence in this appeal we find the IR&D costs disallowed by the Government in

                                          41
the amounts of $61,044.59 (2007), $47,573.04 (2008), 14 and $158,592.34 (2009) for a
total of $267,209.97 are allowable (findings 36-46).

         Allowability of the Rental Costs at the University of Oregon Location

         DCMA challenges the allowability of eight rental payments of $5,620 each
(January through August 2009), alleging that they have not been adequately
documented as required under FAR 31.201-2(d) (gov’t br. at 38-40). DCMA argues
that the Confirmation of Payment document, which Mr. Williams characterized as an
amendment to the University of Oregon lease, should be given no evidentiary weight.
DCMA notes that the document does not even purport to be a lease amendment, and
that it appears to have been created in 2016 for the sole purpose of supporting the
additional 2009 rental payments (the so-called “fit-up” costs). DCMA also alleges that
Mr. Williams’ testimony regarding this document constituted parol evidence that
should be disregarded. (Gov’t br. at 39)

        The government also discounts the 2015 email from the University’s Office of
Vice President for Research and Innovation. DCMA points out that it is not signed by
either party and post-dates the expiration of the lease, and therefore should also be
given no evidentiary weight. (Gov’t reply br. at 17)

        Voxtel concedes that the payments for fit-up costs were not authorized under
the terms of the original lease itself (APFF ¶ 107 (such costs were “not included as a
condition of Voxtel’s lease”)). Voxtel contends, however, that the record is still
sufficient to find these costs allowable. According to Voxtel, the Confirmation of
Payment and the 2015 email, read in conjunction with the lease and proof of payment,
and considered with Mr. Williams’ testimony regarding fit-up costs, all constitute the
adequate support that DCMA contends is missing. (App. br. at 34-35 (citing APFF
¶¶ 106-11)) Voxtel also disputes DCMA’s contention that Mr. Williams’ testimony
regarding the Confirmation of Payment constituted parol evidence that should be
excluded from consideration (app. br. at 35).

        The documentation submitted by Voxtel simply does not support a finding of
allowability. The Confirmation of Payment is dated February 22, 2016, seven years
after the payments were made, and after the initiation of this appeal. Mr. Williams
conceded it was created after the fact so that Voxtel’s records would be “consistent

14
     We note that in briefing this issue, the dollar figure DCMA identified as
        unallowable COGS/IR&D costs for FY 2008 is $47,573.04 (gov’t br. at 42).
        Although Voxtel noted that the source of this figure is “unclear” (app. br. at 36
        n.9), and it differs from our calculation of the IR&D costs for FY 2008 (see
        findings 38-42), this is the figure that Voxtel requested the Board find
        allowable for FY 2008 (app. br. at 50).

                                             42
with actual practices” and that it was not retroactive to 2009. (Finding 70, see also
finding 68, 71) The 2015 email is dated six years after the payments were made and
is not even factually accurate, as Voxtel only paid the dollar figure identified in the
email for the first eight months of 2009, not the entire year (findings 67, 80).

        The Confirmation of Payment also does not qualify as an “amendment” to the
lease, as Mr. Williams appeared to claim in his testimony (finding 69; see also
findings 68, 70). It is true that, as argued by Voxtel, the document is a writing signed
by the parties, which Section 14 of the lease requires (finding 76; see app. br. at 35
(citing Section 14.6 of the lease)). However, to be a valid amendment under Oregon
law, 15 the document still must contain all of the elements necessary to find the
existence of a contract. See Glaser v. Haskin, 140 Or. 392, 398 (1932) (“The
proposition that a prior contract may be modified or rescinded by a subsequent
contract implies that such subsequent contract must have the elements necessary to the
formation of a valid original contract.”) (internal citation omitted).

        The elements of contract formation include “(1) whether both or all parties . . .
manifest objectively an intent to be bound by the agreement; (2) whether the essential
terms of the agreement are sufficiently definite to be enforced; (3) whether there is
consideration; and (4) whether the subject matter of the agreement and its performance
are lawful.” 1 WILLISTON ON CONTRACTS § 3:2 (4th ed.). The Confirmation of
Payment falls far short of this standard. It does not manifest any intention to be bound
by future obligations; by its title it indicates it was drafted merely to confirm that the
payments were actually made, and its substance recounts only the historical fact that
“[s]tarting in January 2009, two payments of $5620 were due each month January
through August” (finding 68). It also does not describe any consideration for Voxtel
in exchange for the increased payments (id.)

       Moreover, none of the documentary evidence described above states the
rationale for the payments or shows that the payments were authorized under the lease
terms. This information is necessary because determining allowability also requires us
to determine whether the costs were reasonable. This is true under both the general
FAR cost principle on allowability and the specific cost principle relating to rental
costs. See FAR 31.201-3(a)-(b); FAR 31.205–36(b).

       Under the general allowability principle, to be reasonable these costs “in [their]
nature and amount” must not “exceed that which would be incurred by a prudent
person in the conduct of competitive business.” FAR 31.201-3(a). There is no
presumption of reasonableness in these circumstances; in fact, if a particular cost is

15
     The law of Oregon applies to contracts “for services to be rendered in Oregon, or for
         goods to be delivered in Oregon, if Oregon or any of its agencies or
         subdivisions is a party to the contract.” Or. Rev. Stat. § 15.320(1).

                                             43
challenged, the burden of proof switches from the government to the contractor to
establish that the cost is reasonable. Id.

       In his testimony, Mr. Williams stated that Voxtel was required to use union
labor “to move our stuff in and out of the facility and to hook up all our electricity.
Even to hang white boards on the wall required State of Oregon employees” (finding
69). The government contends that this testimony should be excluded as inadmissible
parol evidence 16 (gov’t br. at 39). Even if we were to find that this testimony was
admissible, it is simply not persuasive. It is the only evidence in the record that
provides even a hint of information as to the purported rationale for the fit-up costs.

       Without more, it is not sufficient for the Board to evaluate the reasonableness of
these costs under the criteria set forth in FAR 31.201-3. From this record we are
unable to determine whether 1) the fit-up costs are the type of costs generally

16
     The government fails to provide anything more than a bald assertion that the parol
          evidence rule excludes this evidence, and Voxtel doesn’t do much more (gov’t
          br. at 39; app. br. at 35). Determining whether the parol evidence rule should
          exclude this testimony is a far more complicated analysis:

                 The parol evidence rule is a rule of substantive law that
                 prohibits consideration of extrinsic evidence to alter the
                 terms of a written agreement that ‘has been adopted by the
                 parties as an expression of their final understanding.’”
                 Barron Bancshares, Inc. v. United States, 366 F.3d 1360,
                 1375 (Fed. Cir. 2004) (citing David Nassif Assocs. v.
                 United States, . . . 557 F.2d 249, 256 (Ct. Cl. 1977)).
                 Therefore, a writing that is final and complete is an
                 integrated agreement, and the effect of integration is the
                 inadmissibility of prior or contemporaneous agreements to
                 modify or contradict the terms of the agreement. See
                 David Nassif Assocs., 557 F.2d at 256; RESTATEMENT
                 (SECOND) OF CONTRACTS §§ 213, 215 (AM. LAW. INST.
                 1981). Where a fully or completely integrated agreement
                 exists, the writing cannot be supplemented with evidence
                 of consistent or inconsistent additional terms or prior
                 agreements that cover the same subject matter. Rumsfeld
                 v. Freedom NY, Inc., . . . 329 F.3d 1320, 1328 (Fed. Cir.
                 2003); RESTATEMENT (SECOND) OF CONTRACTS §§ 214,
                 216 [(AM. LAW INST. 1981)].

U.S. Coating Specialties & Supplies, LLC, ASBCA No. 58245, 17-1 BCA ¶ 36,710
      at 178,759-60.

                                             44
recognized as being ordinary and necessary to Voxtel’s business or for contract
performance; 2) the agreement for Voxtel to pay for the fit-up costs was the result of
sound business practices and arm’s length bargaining, and otherwise complied with
applicable law; 3) the nature of Voxtel’s obligations to other parties and persons
required the fit-up costs to be paid; and 4) paying the fit-up costs was a “significant
deviation” from Voxtel’s established business practices. See FAR 31.201-3(b).

       The record also lacks evidence sufficient to satisfy the requirements of the
specific cost principle for rental expenses. That cost principle requires that the rental
rates be reasonable at the time of the lease decision, after consideration of
              (i)     rental costs of comparable property, if any;

              (ii)    market conditions in the area;

              (iii)   the type, life expectancy, condition, and value of the
                      property leased;

              (iv)    alternatives available; and

              (v) other provisions of the agreement.

FAR 31.205-36(b)(1). Such evidence would include, at a minimum, the value of the
space at the University of Oregon and whether Voxtel had any alternatives to paying
double the lease’s rental rate for eight months to cover the fit-up costs. See id. In the
absence of such evidence, the Board cannot determine whether Voxtel’s decision to
pay this amount was reasonable.
         Voxtel argues that the allowability cost principle does not require “‘nice neat
little files’ or contemporaneous records to support the costs claimed in an incurred cost
proposal” (app. br. at 34 (quoting Bearingpoint, Inc., ASBCA No. 55354, 09-2 BCA
¶ 34,289)). In Bearingpoint, which addressed allocability, not allowability, the record
included invoices documenting costs incurred during the contract period, including
labor costs for a subcontractor. For the labor costs, the contractor was unable to
provide all of the timesheets supporting the invoices but presented three witnesses –
including two with personal experience coordinating the subcontractor’s services –
who testified about the detailed process they used to verify the invoices’ accuracy.
Bearingpoint, 09-2 BCA ¶ 34,289 at 169,387, 169,389-90. The contracting officer
conceded at the hearing that the contractor “did have paper records” but stated that
they were “a mess. . . . [T]he paper records ideally . . . should tie in, they should have
nice neat little files with labels and just something showing the paper backs up . . . the
electronic system . . . .” Id. at 169,388. The Board held that neither the FAR nor any
provision in the contract required the contractor to maintain their records in the
manner testified to by the contracting officer, and found in favor of the contractor on

                                            45
the allocability of the labor costs. Id. at 169,393. The Board specifically noted that
appellant had presented a “robust, prima facie case” that included “credible [witness]
testimony . . . [that was] supported by documents.” Id. Such is not the case here,
where there is no credible documentary evidence showing the rationale for the
additional payments, and the testimony of only one individual, who did not negotiate
the arrangement for the increased rental payments and therefore did not have first-hand
knowledge of the parties’ discussions – including why double the rent for those eight
months was the figure required to reimburse the University for the purported union
labor costs (findings 67-71).

       Contrast Bearingpoint with Analytical Assessments Corp., ASBCA Nos. 52393,
52394, 01-2 BCA ¶ 31,483, where the Board found that the evidence was insufficient
to support allowability. In Analytical Assessments, the evidence consisted of invoices
that summarized in a conclusory fashion only the totals for various cost categories,
along with evidence that the services were provided and paid for and the costs were
not questioned by the government. Id. at 155,426. We consider the nature of the
evidence herein to be similar to the evidence described in Analytical Assessments, in
both its paucity and generality. To find otherwise would “nullify the duty of the
[contractor] . . . to adhere to the pertinent FAR record keeping provisions.” Id. Voxtel
has not persuaded us that the additional rental costs meet the requirements of the FAR.
We therefore find that DCMA has met its burden of proof with respect to the
unallowability of the eight additional payments of $5,620 between January and August
2009, and hold that those payments, totaling $44,960.00, are unallowable.

       Costs Recorded as Unpaid Owner’s Salary

       Unpaid Owner’s Salary As Unallowable Profit Under the Compensation Cost
       Principle

       Compensation for personal services is generally allowable, subject to certain
exceptions. FAR 31.205-6(a). It includes compensation paid in the form of cash,
corporate securities, or other assets, products, or services. FAR 31.205-6(d).
Compensation paid to certain individuals (such as owners of closely held corporations,
sole proprietors and the like) gives rise to the need for special considerations. FAR
31.205–6(a)(6)(i). For example, compensation paid to such persons must not be a
distribution of profits. FAR 31.205-6(a)(6)(ii)(B).

        DCMA contends that the unpaid owner’s salary was paid to Mr. Williams as a
distribution of profit. This argument is premised on Voxtel’s claim that the unpaid
owner’s salary is included in the figure that appears on line 21 of the Form 1120 S and
line 1 of Schedule K-1, both of which record ordinary business income/loss (gov’t br.
at 35-36; gov’t reply br. at 12). Defining “profit” as “‘net income’ for a given period
of time” (gov’t br. at 36), DCMA argues that because “Voxtel included

                                          46
Mr. Williams’ unpaid salary as part of its ordinary income, it is part of [Voxtel’s]
profit” (id. at 36-37). In other words, DCMA is claiming that the figure recorded as
ordinary business income/loss on Voxtel’s tax returns can only be profit and nothing
else.

       The government’s challenge here suffers from the same defects of proof that
plagued the IR&D issue above. The government has done little more than provide
wholesale conclusions about the nature of a K-1 distribution. As we have noted, the
government decided not to conduct a full audit given the delay it would have caused in
the processing of already significantly delinquent ICPs (findings 7, 13). As a result,
DCAA’s findings and recommendations lacked any real support. Nevertheless, after
ACO Musgrave issued her decision and Voxtel filed this appeal, Voxtel provided
additional data and information to the government (findings 81, 108, 112, 115).
Ultimately, it was that data that allowed the parties to eliminate one issue altogether
(depreciation) and to reduce disagreement in other areas (findings 17, 34, 65, 72, 80).
While the government’s original decision not to conduct a full audit may have made
sense at one time, after Voxtel filed this appeal the government was on notice that it
would need to prove the costs were unallowable. See Technology Systems, Inc.,
17-1 BCA ¶ 36,631 at 178,389 (government bears burden of proof in cost allowability
cases). The responsibility was on the government to prove that the compensation in
question was profit and therefore unallowable.

       Voxtel demonstrated through documents and its expert witness that the
compensation claimed on the K-1 was not profit (finding 113-15). Mr. Cederwall
reviewed Mr. Williams’ compensation for 2007, 2008 and 2009. He compared it with
Voxtel’s accounting records and time sheets to confirm it all matched and that the
allocation of compensation between the W-2 and the K-1 did not alter the costs
recorded on Voxtel’s books. He verified that the compensation reflected on the W-2
and K-1 was reported on Mr. Williams’ personal tax returns (finding 111).
Mr. Cederwall opined that compensation through a K-1 distribution did not represent
an unallowable distribution of profit (finding 115). Further, based upon his more than
30 years of experience with DCAA, payment through a K-1 distribution as a means of
providing compensation for services performed is not a unique practice (findings 50,
112). When asked during the hearing why he considers it to be allowable
compensation rather than a distribution of profit, he pointed to Voxtel’s job cost
system and the use of timecards. “They are using hourly rate[s]. They are posting
those transactions into the accounting records, into the job cost records” (finding 112).
He testified that the method of compensation was not relevant; it merely reflected how
Voxtel accounted for the transactions. The real question was whether Voxtel had an
adequate system for labor tracking and labor distribution, and whether there was

                                           47
anything unreasonable about the amount of compensation 17. DCAA found
Voxtel’s accounting system to be adequate for government contracting, and
Mr. Cederwall concluded that Voxtel’s accounting system tracked the costs incurred
(findings 52-53, 55). Neither party has pointed to anything in the FAR that requires all
compensation to be reported on a W-2. (Id., finding 115)

       The government did not present expert testimony or cite any case law directly
addressing how a K-1 distribution should be treated for purposes of government
contracts cost allowability, and it does not appear that the Board has previously
addressed this issue. However, in an analogous context – determining whether a
bonus paid to the CEO of a Subchapter S corporation was allowable under FAR
31.205-6(f) or was actually profit and therefore unallowable – the Board examined
“several factors to assess when a bonus was actually a distribution of profits: whether
any dividends were declared (i.e., whether the bonus was actually a disguised
dividend), how large a share of the bonus pool was allocated to the top executive(s),
and how ‘substantial’ the rest of the compensation was.” SplashNote Sys., Inc.,
ASBCA No. 57403, 12-1 BCA ¶ 34, 899 at 171,609. As SplashNote indicates,
determining the nature of a particular payment or transaction is a fact-specific
inquiry. 18

       Appellant argues that Mr. Williams’ W-2 wages alone – which are recorded as
hourly entries on weekly time sheets – cannot account for all of his compensation;
otherwise, he must have worked far fewer hours or have been paid at a much lower
hourly rate (app. br. at 41; app. sur-reply br. at 14-15). The weekly time sheets reflect
the work performed by Mr. Williams and only make sense when the compensation
paid as W-2 wages is combined with the other compensation accounted for in the
record. Otherwise, Mr. Williams’ compensation would not reconcile with the time

17
   There was no challenge by the government that the compensation received by
       Mr. Williams was unreasonable or excessive.
18
   This fact-specific inquiry is not unique to government contracts cases. In the
       context of taxation cases, courts routinely examine the “objective economic
       realities” surrounding a transaction to determine its true nature, regardless of
       how it is characterized by the parties. See Boulware v. United States, 128 S. Ct.
       1168, 1171(2008) (citing Frank Lyon Co. v. United States, 435 U.S. 561, 573
       (1978)). Such determinations should be made “in view of all the evidence.”
       David E. Watson, P.C. v. United States, 714 F.Supp.2d 954, 961 (S.D. Iowa
       2010). Moreover, in taxation cases evaluating whether dividends are profit or
       compensation, the “characterization of funds disbursed by an S corporation to
       its employees or shareholders turns on an analysis of whether the ‘payments
       at issue were made . . . as remuneration for services performed.’”
       David E. Watson, 714 F.Supp.2d at 963 (quoting Joseph Radtke, S.C. v.
       United States, 895 F.2d 1196, 1197 (7th Cir. 1990)).

                                           48
records and what is recorded on Voxtel’s books but would also leave his effective pay
rate at $32, $35 and $46 per hour for 2007-2009 respectively. Those rates would not
be commensurate with Mr. Williams’ position in the company, his educational
background, his experience, knowledge, skills and abilities (finding 115). We find that
appellant has provided sufficient evidence to demonstrate that the wages paid to
Mr. Williams were included in the K-1 distribution. The government has not
persuasively challenged otherwise, despite having the burden of proof.

       We have made no findings with respect to the correlation between a K-1
distribution and profit. This is not inadvertence but because of the lack of evidence to
make such findings. We find that the government has not carried its burden of proof
with respect to whether the unpaid owner’s salary constituted unallowable profit under
FAR 31.205-6(a)(6)(ii)(B).

       DCMA’s Deductibility and Credits Arguments, Which It Appears To Abandon,
       Are Unpersuasive

        Finally, we note that in its opening brief, DCMA makes two additional
arguments addressing the treatment of the unpaid owner’s salary. In the first, DCMA
correctly points out that as the sole shareholder of Voxtel, Mr. Williams’ salary is
subject to special scrutiny under FAR 31.205-6(a)(6) (gov’t br. at 34). DCMA then
correctly argues that because Voxtel did not report the unpaid owner’s salary on
Form W-2 and did not separately identify it on its corporate income tax return, the
unpaid owner’s salary was not deductible on Voxtel’s income tax return (id. at 35)
(citing GPFFs ¶¶ 56-57). This argument is based upon a subsection of the
compensation cost principles stating that “[f]or owners of closely held corporations,
compensation in excess of the costs deductible as compensation under the Internal
Revenue Code (26 U.S.C.) and regulations under it are unallowable” (id. (citing FAR
31.205-6(a)(6)(iii)). While we agree that Mr. Williams’ salary is subject to special
scrutiny under FAR 31.205-6 (a)(6), the language in FAR 31.205-6(a)(6)(iii) simply
does not support the argument the government is making.

       Voxtel challenges the government’s use of FAR 31.205-6(a)(6)(iii) and argues,
among other things, that DCMA’s analysis misinterpreted the plain meaning of that
subsection as applying to costs in excess of those deducted, when in reality the
regulation addresses costs exceeding those that are deductible (app. br. at 44). Voxtel
also reminds us that the regulatory history of FAR 31.205-6(a)(6)(iii) likewise
does not appear to reflect any intent to bar compensation when it is reasonable and
within the allowable compensation cap, if any, imposed by the IRS (id. at 46).
Noticeably absent is any reply by the government responding to these arguments.

       By way of illustration, Voxtel points out that IRS Code § 162(m) imposes a
$1 million cap on deductible compensation for certain employees of public

                                           49
corporations (app. br. at 44). A cost that exceeds this cap could form a basis for a
challenge under FAR 31.205-6(a)(6)(iii), but that is not the situation we encounter
here. The government has produced no evidence demonstrating that Mr. Williams’
compensation was beyond that which is deductible under the Internal Revenue Code.
Neither is there anything in the record challenging the reasonableness of the
compensation received by Mr. Williams and reported in his W-2 forms or through the
K-1 distribution. Conversely, the record contains ample evidence tying that reported
compensation to the hourly work performed by Mr. Williams for Voxtel (findings 81,
83). We find the government’s argument that Mr. Williams’ compensation is
unallowable on deductibility grounds was not proven and is inconsistent with the
language of FAR 31.205-6(a)(6)(iii) limiting “compensation in excess of the costs that
are deductible as compensation” under the Internal Revenue Code.

        DCMA second additional argument alleges that even if the unpaid
owner’s salary were allowable, Voxtel was required to credit those amounts back to
the government under the credits cost principle, FAR 31.201-5 (gov’t br. at 37).
DCMA claims that even if the unpaid owner’s salary were allowable, FAR 31.201-5
required Voxtel to credit the unpaid owner’s salary to the government, which it did not
do (id.). DCMA justifies its use of the FAR’s credit provision by stating that Voxtel
“reversed the ‘unpaid salary’ expense entry on its books with an offsetting amount
recorded as ‘other income’” (id. at 34).

        In response, Voxtel notes that the credits cost principle provides that “the
applicable portion of any income, rebate, allowance, or other credit relating to any
allowable cost and received by or accruing to the contractor shall be credited as a cost
reduction or by cash refund” (app. br. at 42) (quoting FAR 31.201-5)). Voxtel argues
that a credit under this provision represents a correction for an overpayment, in
contrast to what the K-1 distribution represents: Mr. Williams’ earned compensation,
based upon the labor hours he billed, multiplied by his hourly rate, as evidenced by the
monthly time sheets Voxtel produced (id. at 42-44; app. sur-reply br. at 14-15). 19

       The primary purpose of FAR 31.201-5 is to provide the government with a
refund when a cost that has been reimbursed to a contractor is later reduced. Hercules

19
     Again, DCMA chose not to respond to appellant’s counter-arguments on the credits
         issue. We could consider DCMA’s arguments concerning deductibility and
         credits, to be waived. See Golden IT, LLC v. United States, 157 Fed. Cl. 680,
         695 (Fed. Cl. 2022) (“This Court will not permit a party to raise a phalanx of
         thin arguments . . . thereby forcing the opposing party to spend time and
         briefing space to engage with all of them — only to abandon them in the face of
         the counterarguments, and yet insist that the Court adjudicate the entire initial
         salvo.”).

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Inc. v. U.S., 292 F.3d 1378, 1382 (Fed. Cir. 2002). The government should receive the
benefit of that reduction. While not intended to be all-encompassing, examples of the
types of “income, rebate, allowance, or other credit” covered by FAR 31.201-5 are
taxes, debt concessions, correction of an overpayment, recovery of allowable site
restoration costs, and recoveries from insurers or other third parties. That is not the
case here, where the costs at issue consist of compensation for Mr. Williams’ services
that were sufficiently supported 20 (findings 108, 110-11, 115). Under this set of facts,
the government has not adequately established that the compensation included in the
K-1 distribution was subsequently excused or refunded back to the corporation.

       Accordingly, we find that DCMA has failed to meet its burden of proof with
respect to the unallowability of the executive compensation costs represented by the
unpaid owner’s salary. We therefore hold that those costs are allowable in the
following total amounts:

                             FY 2007        $194,064.10
                             FY 2008          21,933.41
                             FY 2009         149,995.86 21
                                            $365,993.37

(Finding 106; see gov’t br. at 42; app. br. at 50)

20
   We note that Voxtel’s expert testified that the credits provision should not apply in
      these circumstances because the unpaid owner’s salary was actually paid to
      Mr. Williams, and there was no income generated from those payments (finding
      117).
21
   We note that in briefing this issue, the dollar figure DCMA identifies as unallowable
      compensation costs for FY 2009 is $149,995.86 (gov’t br. at 42). Although
      Voxtel notes that the source of this figure is “unclear” (app. br. at 28 n.6), this is
      the figure that Voxtel requests the Board find allowable for FY 2009 (app. br.
      at 50).

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                                    CONCLUSION

       We sustain the appeal with respect to the allowability of $267,209.97 in IR&D
costs and $365,993.37 in executive compensation costs for FY 2007-2009. We deny
the appeal with respect to the allowability of $44,960 in rental costs for FY 2009.

       We return this matter to the parties to recalculate the rates in accordance with
this decision.

       Dated: March 9, 2023

                                                   STEPHANIE CATES-HARMAN
                                                   Administrative Judge
                                                   Armed Services Board
                                                   of Contract Appeals

 I concur                                          I concur

 RICHARD SHACKLEFORD                               J. REID PROUTY
 Administrative Judge                              Administrative Judge
 Acting Chairman                                   Vice Chairman
 Armed Services Board                              Armed Services Board
 of Contract Appeals                               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. 60129, Appeal of Voxtel,
Inc., rendered in conformance with the Board’s Charter.

       Dated: March 16, 2023

                                              PAULLA K. GATES-LEWIS
                                              Recorder, Armed Services
                                              Board of Contract Appeals

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