TITLE:  Department of Energy--Disposition of Interest Earned on State Tax Refund Obtained by Contractor, B-302366, July 12, 2004
BNUMBER:  B-302366
DATE:  July 12, 2004
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   Decision

   Matter of:   Department of Energy--Disposition of Interest Earned on State
Tax Refund Obtained by Contractor

   File:            B-302366

   Date:           July 12, 2004

   DIGEST

   The federal government is legally entitled to a refund of state taxes plus
interest that the state of Washington gave to Fluor Hanford, Inc. (FHI)
for taxes that FHI paid under a contract with the Department of Energy. 
Because the department previously reimbursed FHI for those taxes, the
department is entitled to retain and to credit to its appropriations the
principal portion of the state tax refund.  However, the department may
not retain or credit to its appropriations interest amounts paid by the
state along with the refunded taxes.  The interest amounts must be
credited to the general fund of the Treasury as miscellaneous receipts,
pursuant to 31 U.S.C. SA 3302(b).

   DECISION

   This responds to a request from Keith A. Klein, Manager of the Richland
Operations Office of the Department of Energy, for an advance decision
under 31 U.S.C. S 3529 regarding amounts refunded to the department by a
department contractor. Fluor Hanford, Inc. (FHI), a contractor performing
work for the department at the Hanford Nuclear Reservation, transmitted to
the department a refund it obtained from the State of Washington for
business and occupation taxes that FHI had previously paid and passed on
to the department for reimbursement under its contract.  The state tax
refund also included interest accrued and paid under state law.  Mr. Klein
asks whether the interest may be credited to the department's
appropriations or must it be deposited into the Treasury as miscellaneous
receipts.

   As explained below, we conclude that the amount of the interest should be
deposited into the general fund of the Treasury as miscellaneous receipts,
pursuant to 31 U.S.C. S 3302.

   BACKGROUND

   According to the Department of Energy, it has a management contract with
FHI for cleanup activity at the Hanford Nuclear Reservation.  Letter from
Keith A. Klein to Thomas H. Armstrong, Feb. 9, 2004.  Under that contract,
the department reimburses FHI the allowable costs of the work performed,
including Washington State "business and occupation (B&O) taxes."  Id. 
The contract is a multiyear arrangement that the department obligated
against no-year funds appropriated in fiscal years 1997 through 2001.[3] 
Id.

   In 2001, FHI concluded that it might be eligible for a Washington State
tax credit and refund for B&O taxes that it paid to Washington State
during calendar years 1997 through 2001.  After researching the matter,
FHI asked the department for permission to apply for the credit and
refund.  The department agreed and FHI applied.  Eventually, the state
allowed the credit and, in May 2003, refunded $13,760,504 to FHI.  Of this
amount, $11,271,317 repaid the excess B&O taxes, and $2,489,187 was paid
as interest earned under state law while the excess taxes were held by the
state.  FHI notified the department when it received the refund and
credited the full amount of the refund to the department.[4] 

   The department credited the principal portion of the refund, representing
the excess B&O taxes paid, to the appropriation from which the department
originally reimbursed FHI for the B&O taxes.  Letter from Keith A. Klein
to Thomas H. Armstrong, Feb 9, 2004.  The department is holding the
balance of the refund, the interest earnings, in a "suspense account"
pending this decision.  Id. 

   FHI and the department agree that the federal government is entitled to
receive the proceeds of the entire Washington State tax refund, both
principal and interest.  FHI's contract requires the department to
reimburse FHI for costs incurred in the performance of its work at the
Hanford Reservation, including FHI's B&O tax payments to the state. 
Letter from Keith A. Klein to Thomas H. Armstrong, Feb 9, 2004.  However,
only actual and legitimate expenses may be reimbursed.  Id.  When
Washington State determined that FHI had overpaid its state tax
obligations, the excess amount that FHI had paid to the state was no
longer a legitimate, reimbursable expense under the contract.  As a
result, the state refund of the excess taxes was required to be paid over
to the federal government.  Cf., e.g., Northrop Aircraft, Inc. v. United
States, 127 F. Supp. 597 (Ct. Cl. 1955) (upholding Ba**105262, Dec. 26,
1951, concluding that the government was entitled to the refund of state
tax principal and interest).[5]  See also Ba**127463, Mar. 28,1957. 

   Citing Comptroller General case law, the department credited the principal
portion of the refund to the appropriation from which it was originally
paid.  The issue before us in this decision is whether the Department of
Energy may credit to its appropriations the interest component of the
refund that FHI obtained from Washington State, or whether that interest
must be deposited into the general fund of the U.S. Treasury as
"miscellaneous receipts."

   Generally, under 31 U.S.C. S 3302(b), known as the "Miscellaneous Receipts
Statute," agencies are required to deposit monies they receive for the use
of the United States into the general fund of the U.S. Treasury as
"miscellaneous receipts."  Section 3302(b) provides:

   "[A]n official or agent of the Government receiving money for the
Government from any source shall deposit the money in the Treasury as soon
as practicable without deduction for any charge or claim."

   Violation of the Miscellaneous Receipts Statute constitutes an illegal
augmentation of the agency's appropriation.  Ba**265734, Feb. 13, 1996. 
There are, however, two exceptions to this rule*referred to as statutory
and nonstatutory exceptions.  See generally 69 Comp. Gen. 260, 262
(1990). 

   The statutory exceptions are provisions of law that authorize an agency to
credit some or all of its receipts to a particular fund or appropriation
(instead of the general fund of the Treasury), or authorize the agency to
expend the receipts without depositing them.  See, e.g., Ba**241269,
Feb.A 28, 1991 (discussing provisions of the Economy Act, 31A U.S.C. SS
1535, 1536, and the Government Employees Training Act, 5A U.S.C. S 4104);
64A Comp. Gen. 366 (1985) (by its terms, 31 U.S.C. S 3718(d) allowed the
General Services Administration to pay debt collection contractors from
debt collection proceeds notwithstanding the Miscellaneous Receipts
Statute).  The department has not cited, and we are not aware of, any
statutory exceptions applicable here.

   The nonstatutory exception concerns receipts that qualify as "refunds." 
We have long held that agencies may credit to their appropriations refunds
of amounts erroneously paid from their appropriations.  For example, in a
1926 decision, we held that "if the collection involves a refund or
repayment of moneys paid from an appropriation in excess of what was
actually due, such refund has been held to be properly for credit to the
appropriation originally charged."  5A Comp. Gen. 734, 736 (1926).  This
exception simply restores to the appropriation amounts that should not
have been paid from the appropriation. [6] 

   We have defined refunds in this context to include "refunds of advances,
collections for overpayments made, adjustments for previous amounts
disbursed, or recoveries of erroneous disbursements from appropriation or
fund accounts that are directly related to, and reductions of, previously
recorded payments from the accounts."  69A Comp. Gen. atA 262.  For
example, in B-281064, Feb. 14, 2000, the nonstatutory refunds exception
was applied to allow the Tennessee Valley Authority (TVA) to deposit into
its fund amounts recovered under the False Claims Act as reimbursement for
moneys erroneously disbursed from the TVA Fund, as well as an additional
sum equivalent to the investigative costs TVA paid from the TVA Fund as a
direct consequence of the false claim.[7]  See also Ba**257905, Dec. 26,
1995 ("Thus, in theory, the unobligated balance of the appropriation
account after the refund should be what it would have been had the amount
of the obligation covered by the refund not been improperly paid."). 

   This nonstatutory exception for refunds clearly applies to the principal
portion of the tax refund FHI obtained for the department*to restore the
affected appropriation to the state it would have been in but for the
erroneous reimbursement of taxes that FHI erroneously overpaid.  The
department, therefore, should credit the principal portion of the refunded
amount to the appropriation from which it originally made to payment to
FHI.  But for this exception, the department would have been required to
deposit the recovered principal amount into the Treasury as miscellaneous
receipts.[8]  

   The nonstatutory refund exception, however, does not allow the department
to retain the interest paid by the state.  Because the nonstatutory
exception operates simply and solely to restore to an appropriation
amounts that should not have been paid from the appropriation, crediting
an amount in excess of that paid from the appropriation would improperly
augment the appropriation.  For example, in 5A Comp. Gen. at 736 we noted
that an amount received as a refund or repayment may be credited to the
appropriation from which it was originally paid, "provided the crediting
of such moneys will not operate to augment the original amount
appropriated by the Congress for the purposes for which the appropriation
was made.  22 Comp. Dec. 314. See also 18 Comp. Dec. 430 and 22 [Comp.
Dec.] 297."  Here, the interest amount of the state tax refund exceeds the
amount paid from the department's appropriation and crediting it would
augment the original amounts appropriated by Congress in this regard.

   The purpose of interest is to compensate for the passage of time and the
loss of earnings resulting from the state's retention of money to which it
was not entitled.  Cf., e.g., Great Lakes Dredge & Dock Co. v. City of
Chicago, 260 F.3d 789, 796 (7th Cir. 2001) ("compensation for the time
value of money"); Carlisle Ventures, Inc. v. Banco Espanol de Credito,
S.A., 176 F.3d 601, 608 (2nd Cir. 1999) ("awarding interest as
compensation for the time value of * money"); R.L. Coolsaet Const. Co. v.
Local 150, Int'l Union of Operating Engineers, 177 F.3d 648, 661
(7thA Cir. 1999), citing P.A. Bergner & Co. v. Bank One, 140 F.3d 1111,
1123 (7th Cir. 1998) ("interest * is simply an ingredient of full
compensation that corrects . . . for the time value of money"); Motion
Picture Ass'n of Am.., Inc. v. Oman, 969 F.2d 1154, 1157 (D.C. Cir. 1992)
("interest compensates for the time value of money, and thus is often
necessary for full compensation"); In the Matter of Continental Ill.
Securities Litig., 962 F.2d 566, 571 (7th Cir. 1992) (the cost of delay in
receiving money to which one is entitled is the loss of the time value of
money, and interest is the standard form of compensation for that loss). 
All interest statutes share a common purpose--compensation for the loss of
the use of money over some period of time, in other words, a recognition
of the time value of money.  Thus, by definition, interest paid on a
principal amount is an amount in excess of the amount originally paid by
the agency.  Its retention in the agency's accounts and expenditure
without express statutory authority would augment the agency's
appropriations in violation of the Miscellaneous Receipts Statute.  Cf.,
e.g., 69 Comp. Gen. 260, 263 (but for the existence of express statutory
authority, FEMA's retention of interest on the principal amount refunded
to the agency would have violated the prohibition against augmentation of
appropriations). 

   The department argues that the interest component of the state refund
merely "restores the appropriated funds to an amount adjusted for net
present value."  Letter from Keith A. Klein to David M. Walker, Dec. 11,
2003.  We do not find the argument persuasive.  The Congress does not make
appropriations on a net present value basis; it appropriates specific
amounts, and only the appropriated amount is available for obligation and
expenditure.[9]  Simply put, had the department not previously reimbursed
FHI for the excess business and occupation taxes, its appropriation would
still contain only the unadjusted excess amount*it would not have earned
interest on that amount or been otherwise protected from the effects of
inflation. 

   The department also asks whether our decision in 69 Comp. Gen. 260 (1990)
might serve as precedent for allowing it to keep the interest in this
case.  That decision allowed the Federal Emergency Management
Administration (FEMA) to keep some extra amounts paid to the government as
compensation for lost interest on money owed to FEMA.  It is readily
distinguishable from the case at hand because FEMA, unlike the department,
had statutory authority to invest its appropriations and retain the
interest earned on those investments.  See 69 Comp. Gen. at 262-263. 
Thus, the result in 69A Comp. Gen. 260 represents the operation of a
specific statutory exception to the Miscellaneous Receipts Statute. 

   None of the circumstances of 69 Comp. Gen. 260 are present in the case now
before us.  There is no applicable statutory exception, and the department
is not authorized to hold and invest its appropriations outside of the
Treasury in order to accumulate earnings upon them.  Instead, Congress has
simply appropriated particular sums to the department to be used for
cleanup of the Hanford Reservation.  Once those funds have been properly
expended, Congress expects the department to seek additional
appropriations for that purpose.  Allowing the department to retain the
interest without proper legal authority would constitute an illegal
augmentation of the funds appropriated to the department, and would
violate the Miscellaneous Receipts Statute.  Cf., e.g., Ba**300248, Jan.
15, 2004 ("a congressional appropriation establishes a maximum authorized
program level, meaning that an agency cannot, absent statutory
authorization, operate beyond the level that can be paid for by its
appropriations [or] circumvent these limitations by augmenting its
appropriations from sources outside the [federal] government").

   ------------------------

   [1] Letter from Keith A. Klein to David M. Walker, Comptroller General,
Dec. 11, 2003.

   [2] Disposition of the principal amount is not at issue here.  It was
credited to the department's appropriations as the refund of an amount
that had previously been paid out.  Letter from Keith A. Klein to Thomas
H. Armstrong, Feb. 9, 2004.  Cf., generally, 69 Comp. Gen. 260 (1990). 

   [3] The department did not identify the appropriations it obligated. 
During the period from fiscal years 1997 through 2001, the department
received appropriations for both "Non-Defense Environmental Management"
and "Defense Environmental Restoration and Waste Management."  It appears
that the department used the appropriations for "Defense Environmental
Restoration and Waste Management."  See, e.g., Appendix To The Budget Of
the United States For Fiscal Year 2001, at 395 (2000). 

   [4] The record shows that FHI independently concluded that the work it had
performed (and the department had reimbursed) was eligible for a state tax
credit and refund.  FHI promptly notified the department, sought its
concurrence, obtained the refund, and promptly returned the full amount to
the government.  Letter from Keith A. Klein to Thomas H. Armstrong, Feb.
9, 2004. 

   [5] When the government is liable for such costs as a contractor incurs,

   "any reduction of a cost after reimbursement entitles the Government to a
refund. In such a situation equity demands, therefore, that when the
wrongdoer himself subsequently makes compensation and eliminates the cost,
the Government, which paid the cost, is entitled to a refund equivalent to
the amount given by the wrongdoer in restitution." 

   Northrop Aircraft, Inc., supra, 127 F. Supp. at 599.

   [6] See also 61 Comp. Gen. 537, 539 (1982); 23A Comp. Gen. 648, 649
(1944).

   [7] However, the refund exception did not extend so far as to allow TVA to
retain the double and treble damages recovered under the False Claims
Act.  The double and treble damages did not constitute the recovery of
amounts previously paid from the TVA Fund.  Section 3302(b) required these
extra amounts to be deposited into the Treasury as miscellaneous
receipts.  B-281064, Feb. 14, 2000.

   [8] In this case, the affected appropriation is a no-year appropriation. 
In those instances in which the payment being refunded was made from a
fiscal year appropriation, the agency must credit the refund to the fiscal
year originally charged, even if that appropriation has now expired.  See,
e.g., 23 Comp. Gen. 648, 649 (1944).  To the extent that the affected
appropriation has closed, the agency must deposit the refund into the
miscellaneous receipts of the Treasury.  31 U.S.C. S 1552(b).

   [9] See, e.g., 72 Comp. Gen. 164, 165 (1993) ("When Congress makes an
appropriation, it is establishing an authorized program level beyond which
an agency cannot operate.").