Contractor’s Byzantine Corporate Structure Made It Impossible for CBCA to Determine Which Entity Incurred Costs

International Development Solutions, LLC v. United States, CBCA 6400, 6401, 6700

Companies often create layers of corporate entities to limit liability. In this case, however, the layers of entities resulted in the contractor incurring liability. The contractor tried to recover taxes paid by one of its affiliated entities. But in denying the appeal, the CBCA found that the contractor had not drawn any clear distinction between its affiliates, so the board could not tell which entity had actually incurred costs by paying the taxes.

Background

International Development Soluitions, LLC, (IDS) provided security services to the State Department in Afghanistan. While it was performing, IDS’s minority owner, a company called ACADEMI Training Center, became its sole owner. ACADEMI Traning requested a novation of IDS contract. The State Department denied the request, reasoning that the IDS entity still existed and had all the resources necessary to perform the contract. 

Later, two other companies that were affiliated with IDS, ACADEMI, LLC (which owned ACADEMI Traning) and Constellis Holdings, made tax payments to the government of Afghanistan. IDS submitted a claim to the State Department seeking reimbursement for the tax payments. IDS contended in its claim that it had made the payments. The agency denied the claim. IDS appealed to the CBCA.

Legal Analysis

• IDS’s Contract Were not Transferred to Other Entities by Operation of Law – IDS contended that the amounts paid by ACADEMI, LLC and Constellis Holdings were IDS”s costs. Citing COFC caselaw, IDS argued that the transfer of the 100% of the assets in a company also results in the transfer of that company’s contract. The board, however, found that argument irrelevant. Even assuming that the the purchaser of IDS had stepped into its shoes, the purchaser was ACADEMI Traning, not ACADEMI, LLC or Constellis. IDS had not shown that the State Department contract had passed up another level to ACADEMI LLC, ACADEMI Training’s owner.
• IDS Was Not Asserting a Pass-Through Claim– IDS alleged that ACADEMI Training was its nominal contractor and the claim for taxes was essentially a pass-through claim on behalf of ACADEMI Traning. The board rejected this argument reasoong that the pass-through theory did not apply, because ACADEMI Training had not paid the taxes. Again, the taxes had been paid by ACADEMI Training’s parent, ACADEMIC, LLC, and Constellis

IDS is represented by Todd M. Garland, Nora K. Brent, and Richard C. Johnson of Smith Pachter McWhorter PLC. The agency is represented by Randal W. Wax of the Department of State.