TITLE: B-305402, National Aeronautics and Space Administration--Retention of Demutualization Compensation, January 3, 2006
BNUMBER: B-305402
DATE: January 3, 2006
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B-305402, National Aeronautics and Space Administration--Retention of Demutualization Compensation, January 3, 2006

   Decision

   Matter of: National Aeronautics and Space Administration--Retention of
   Demutualization Compensation

   File: B-305402

   Date:  January 3, 2006

   DIGEST

   1. The National Aeronautics and Space Administration may not retain
   proceeds from the sale of demutualization compensation received from its
   contractor, California Institute of Technology (Caltech). Caltech had
   received demutualization compensation in the form of stock from Prudential
   Life Insurance Company on policies held for the benefit of employees who
   operated a NASA laboratory pursuant to a long-standing contract between
   NASA and Caltech. The proceeds do not qualify as a repayment to NASA, and
   NASA has no authority to retain and credit to its appropriation proceeds
   from the sale of the compensation. Accordingly, NASA must deposit them
   into the Treasury as miscellaneous receipts under 31 U.S.C. sect. 3302(b).

   2. After NASA determined that proceeds from the sale of demutualization
   compensation were public moneys, NASA should have ensured that such
   proceeds were deposited in the United States Treasury the day following
   receipt of those proceeds. Directing Caltech officials to deposit proceeds
   in an interest-bearing money market account violated 31 U.S.C. sect.
   3302(c)(1) and Treasury Regulation, 31 C.F.R. sect. 206.5(a)(1).

   DECISION

   This responds to a request for a legal decision regarding the appropriate
   treatment of demutualization compensation that National Aeronautics and
   Space Administration (NASA) received from its contractor, California
   Institute of Technology (Caltech). Caltech had received the
   demutualization compensation in the form of stock as a policyholder of
   Prudential Life Insurance Company (Prudential) policies that Caltech held
   for its employees operating the Jet Propulsion Laboratory (JPL) for NASA.
   NASA and Caltech agree that, under NASA's contract with Caltech, the
   demutualization compensation belongs to the U.S. government. NASA asked
   whether the proceeds from this demutualization compensation, approximately
   $17,300,000, must be deposited in the Treasury as miscellaneous receipts,
   pursuant to 31 U.S.C. sect. 3302(b), or may be retained by NASA and
   credited to its appropriation. For the reasons stated below, we conclude
   that NASA must deposit the proceeds from the demutualization compensation
   in the Treasury as miscellaneous receipts.

   BACKGROUND

   NASA has a longstanding contract with Caltech for operation of JPL in
   Pasadena, California. Letter to David M. Walker, Comptroller General, from
   John G. Mannix, Deputy General Counsel, NASA, April 27, 2005 (April
   Letter). Until 1993, Caltech provided JPL employees with a defined benefit
   plan funded by a group annuity policy with Prudential. Under the contract
   between NASA and Caltech, NASA reimbursed Caltech for the costs associated
   with JPL employees' retirement plans. Caltech terminated the defined
   benefit plan in 1993. Under the termination plan, some beneficiaries
   elected to received accrued benefits through annuitized payments. To
   ensure that payments were made, Caltech continued to hold policies with
   Prudential.

   In December 2000, Prudential reorganized from a mutual life insurance
   company to a stock life insurance company owned by shareholders. Under
   this reorganization, the Prudential policyholders, including Caltech,
   received demutualization compensation in the form of stock in exchange for
   their ownership interests in Prudential. Prudential issued 453,520 shares
   of stock to Caltech. Caltech notified NASA of the compensation and
   complied with NASA's instruction to liquidate the stock and pay the
   proceeds from the liquidation to the government. NASA noted that the
   contract with Caltech requires that

   "[T]he contractor shall pay to the Government any refunds, rebates,
   credits, or other amounts (including interest, if any) accruing to or
   received by the Contractor or any assignee under this contract, to the
   extent that those amounts are properly allocable to costs for which the
   Contractor has been reimbursed by the Government."

   April Letter at 2. In accordance with NASA's instructions, Caltech placed
   the proceeds in an interest-bearing account until NASA could determine
   whether NASA could retain the proceeds from the liquidation or whether
   such proceeds must be deposited in miscellaneous receipts. April Letter at
   2, n.1. The amount of proceeds from the sale of the stock is approximately
   $17,300,000.

   DISCUSSION

   An agency, with two exceptions, must deposit moneys received for the
   government from any source into the general fund of the Treasury as
   miscellaneous receipts. 31 U.S.C. sect. 3302(b). The two exceptions to
   this rule are: (1) where an agency has specific authority to retain money
   it collects, and (2) where moneys received qualify as a repayment to an
   appropriation. See B-281064, Feb. 14, 2000. NASA informed us that it has
   no applicable authority to retain money it collects from Caltech or other
   sources, April Letter at 3, and our research confirms this assertion.
   Accordingly, for NASA to retain the proceeds from the sale of the
   Prudential stock as a credit to its appropriation, the demutualization
   compensation that Caltech received and liquidated must qualify as a
   repayment to NASA's appropriation.

   Repayments of appropriations fall into two general
   categories--reimbursements and refunds. Reimbursements are amounts
   collected from outside sources for commodities or services furnished,
   which by law may be credited directly to the appropriations. See 65 Comp.
   Gen. 666, 671 (1986). The demutualization compensation does not represent
   a collection of funds for a commodity or service provided by NASA. The
   only remaining way for NASA to retain the funds and credit its own
   appropriation is for the demutualization compensation to be characterized
   as a refund.

   Refunds represent repayments for excess payments that are to be credited
   to the appropriation from which the excess payments were made. 65 Comp.
   Gen. 600, 602 (1986). Refunds have been defined as "amounts collected from
   outside sources for payments made in error, overpayments, or adjustments
   for previous amounts dispersed." Id. (citing Treasury Department-GAO Joint
   Regulation No. 1, reprinted as Appendix B to Title 7 of GAO's Policy and
   Procedures Manual for Guidance of Federal Agencies, available at
   www.gao.gov/special.pubs/ppm.html). See also OMB Circular A-11,
   Preparation, Submission, and Execution of the Budget (June 2005) at 20.10
   ("Refunds are the repayments of excess payments. The amounts are directly
   related to previous obligations incurred and outlays made against the
   appropriation.") A key component in determining whether a repayment is a
   refund is whether the payment represents an "excess of what is actually
   due." 5 Comp.  Gen. 734, 736 (1926). See also 69 Comp. Gen. 260 (1990)
   (recoveries under the False Claims Act were refunds to the extent that
   recovery was for reimbursement for erroneous payments); 33 Comp. Gen. 176
   (1953) (recovery from a renegotiated contract price was a refund of an
   omitted overpayment made under the original contract price); B-139348, May
   12, 1959 (refund of overcharge of public utility should be credited to
   appropriation from which original charge was paid).

   The proceeds from the liquidation of the demutualization compensation that
   Caltech paid to NASA do not represent a repayment of funds that were in
   "excess of what was actually due;" that is, the proceeds do not reflect a
   repayment from Caltech of an amount that NASA had previously overpaid
   Caltech. At the time NASA paid allocable costs of the defined benefit
   retirement plan, the amounts were correct. Prudential issued the
   demutualization compensation to Caltech in exchange for ownership rights
   that Caltech had maintained as a policyholder of Prudential policies.[1]
   Prudential's issuance of the stock in the reorganization of its company
   from a policyholder-owned company to a stock life insurance company
   reflected a change in the form of ownership. When Caltech liquidated the
   stock divesting its ownership in Prudential, the stock and Caltech's
   ownership in Prudential had grown to $17.3 million. This amount represents
   not only the value of the ownership in Prudential held by Caltech after
   the termination of the defined benefit plan in 1993 but also the
   investment in those policies between 1993 and the date Caltech liquidated
   the demutualization compensation stock.

   The fact that the moneys NASA received are related to the terminated
   retirement plans the costs for which NASA had earlier reimbursed Caltech
   does not make the proceeds a refund that may be credited to NASA's
   appropriation. NASA has provided us with no evidence to suggest that the
   payments it had made to reimburse Caltech's costs of JPL employees'
   retirement plans were made in error, subject to some readjustment in
   amount due, or an excessive payment on what was due. Further, there is no
   indication that Prudential issued demutualization compensation to Caltech
   to repay Caltech for overpayments that Caltech may have made to
   Prudential. Indeed, the demutualization compensation in question was
   issued to provide holders of Prudential policies a similar ownership stake
   in the company after it reorganized.

   As the demutualization compensation cannot be properly characterized as a
   refund, the proceeds from the sale of the demutualization compensation
   that NASA ordered Caltech to pay to the government must be deposited in
   the general fund of the Treasury as miscellaneous receipts, in accordance
   with 31 U.S.C. sect. 3302(b).

   We note that your April letter states that NASA officials directed Caltech
   to place the proceeds of the liquidated demutualization compensation in an
   interest-bearing money market account while determining whether such
   proceeds should be credited to NASA's appropriation or deposited in the
   Treasury as miscellaneous receipts. See April Letter at 2, n.1. Pursuant
   to federal law, a person having custody of public money "shall deposit the
   money without delay in the Treasury . . . [such money] shall be deposited
   not later than the third day after the custodian receives the money."
   31 U.S.C. sect. 3302(c)(1). Furthermore, Treasury regulations[2] require
   agencies to make same-day deposits, or in cases where same-day deposits
   are not cost-effective or practical, an agency must deposit public moneys
   the next day. 31 C.F.R. sect. 206.5(a)(1). The deposit timing requirements
   apply whether an agency deposits money in an appropriation account or as
   miscellaneous receipts. See 10 Comp. Gen. 382, 383 (1931) (statutory
   deposit requirements apply to receipts and credits for all accounts in the
   Treasury, including appropriation accounts, revolving funds, trusts, or
   the general fund). See also B-72105, Nov. 7, 1963. NASA should not have
   directed Caltech officials to deposit public money in a money market
   account. Once NASA determined that proceeds were received for the
   government, it should have ensured that such proceeds were deposited in an
   account in the Treasury by the following day to comply with Treasury
   regulations and statutory requirements of 31 U.S.C. sect. 3302(c). While
   we understand that NASA was unclear as to what account it should have
   deposited the proceeds, such dilemma is not sufficient to delay the time
   of deposit of public moneys in the United States Treasury.

   CONCLUSION

   The demutualization compensation that resulted from Prudential's corporate
   reorganization represented a change in the form of Caltech's ownership
   interest from a policyholder to a shareholder. The liquidated proceeds
   from the sale of the stock received represented a divestiture in ownership
   rights in Prudential. Because NASA has no authority to retain and credit
   demutualization compensation and the compensation was not a repayment of a
   prior expense incurred by NASA, NASA must deposit the proceeds from the
   liquidation of the demutualization compensation into the Treasury as
   miscellaneous receipts.

   We also find that NASA's direction that proceeds of the demutualization
   compensation be deposited in a money-market account violated 31 U.S.C.
   sect. 3302(c) and applicable Treasury regulations. To comply with timing
   rules established by statute and regulation, NASA was required to deposit
   the proceeds in the account the day after receiving such proceeds.
   Directing that such moneys be deposited in a money market account while
   determining what account the proceeds should be deposited is a violation
   of 31 U.S.C. sect. 3302(c) and 31 C.F.R. sect. 206.5(a)(1).

   /signed/

   Anthony H. Gamboa

   General Counsel

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

   [1] As a policyholder of a mutual insurance company, Caltech was eligible
   to receive surplus distributions prior to 2000. In a telephone
   conversation with NASA officials, we asked whether Caltech had ever
   received such distributions and whether Caltech had paid those
   distributions to NASA. The NASA officials told us that NASA had not
   received funds from a surplus distribution nor were officials aware that
   Caltech had ever received distribution from Prudential.

   [2] Under 31 U.S.C. sect. 3302(c)(2), Congress authorized the Secretary of
   the Treasury to adopt regulations prescribing that a person in possession
   of public moneys deposit money in the Treasury during a period of time
   that is greater or lesser than the period of time specified by statute.