In 2009, the Court of Federal Claims granted a contractor's motion for summary judgment in a segment closing case involving Cost Accounting Standard 413, concluding that the contractor had no remaining liability to the government following its transfer of pension asset surpluses to predecessor companies. [DIRECTV Group Inc. v. United States, Fed. Cl., No. 04-1414C, 10/14/09)]. In January 2012, the U.S. Court of Appeals for the Federal Circuit affirmed this decision. [The DIRECTV Group Inc. v. United States, Fed. Cir., No. 2010-5031, 1/26/12] (Attached below)

In General Electric Co. v. United States, the court examined a segment seller's CAS payment obligations when the seller retains a portion of the pension surplus, while also transferring to the segment buyer a pension asset surplus that far exceeds the pension liabilities transferred to the buyer as part of that same transaction. In these situations, the court said, the government may achieve significant pension cost savings from the seller's transferred pension asset surplus that exceed the government's share of the pension asset surplus retained by the seller. Furthermore, the government is not entitled to require that its share of the surplus pension assets following a segment closing be paid by the seller in cash when the government receives an equal or greater cost reduction from contracts with the buyer attributable to the seller's pension contributions to the transferred segment's pension plan.

The contractor made two segment closings as the seller in which there were pension asset surpluses attributable to various cost reimbursement contracts with the government. Pursuant to the rule in Teledyne Inc. v. United States, the government's share for both transfers was $273 million according to the courts. Based on the decision in GE, if the government obtained cost reductions from the segment purchasers due to the transferred pensions surplus in an amount that was greater than the amount the seller owed to the government, the seller did not owe the government any direct payment. The courts agreed with the contractor that the Federal Acquisition Regulation Credits clause (31.201-5) does not require double payment where the seller's segment closing payment obligation was satisfied by the cost reduction the government received under its contracts with the buyer due to the pension asset surplus transferred by the seller.

Finally, the courts held that because the government received the value of the segment closing obligation through a cost reduction from successor contractors, whether the government had an agreement in which it protected its interest in the pension asset surplus through a novation or other means was not relevant.

In the appeal, the court rejected the government's arguments that (1) the Claims Court improperly calculated segment closing adjustments and that (2) regulations prohibited the contractor from satisfying its liability for segment closing adjustments via cost reductions attributable to the segment buyers. The government said the segment closing adjustment should be based on assets retained by the contractor.

The appeals court agreed with the decision that CAS 413.50(c)(12) requires the segment closing adjustment to be based on the applicable assets and liabilities of the entire segment. The government also argued that various FAR provisions prohibited a seller from satisfying its liability for segment closing adjustments via cost reductions attributable to the pension assets transferred to successor contractors. The court rejected this argument as well. 

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Courtesy of:
Darrell Oyer & Company
Government Contract Specialists
PO Box 11484
Milwaukee, WI  53211
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