In International Development Solutions, LLC v. Secretary of State, the U.S. Court of Appeals for the Federal Circuit affirmed a decision denying a government contractor's request for tax reimbursement. The case centered on whether International Development Solutions, LLC (IDS) was entitled to recover over $36 million in tax payments made by its parent companies in Afghanistan during performance of a State Department contract.
In 2010, IDS entered into a contract with the U.S. Department of State under the Worldwide Protective Services (WPS) program to provide personal protection services in Afghanistan. Initially structured as a joint venture, IDS later became a wholly owned subsidiary of ACADEMI Training Center, Inc. (ATCI), which itself was ultimately controlled by Constellis Holdings LLC.
Despite IDS’s attempt to transfer the contract through a novation agreement, the State Department denied the request and required IDS to continue contract performance. IDS submitted all invoices and received payments directly throughout the life of the task orders.
Between 2017 and 2018, parent entities ACADEMI LLC and Constellis paid taxes to the Afghan Ministry of Finance related to revenue earned under the WPS contract. IDS then submitted three certified claims seeking reimbursement of these payments, asserting the tax liability was a cost of performance under the federal contract.
The contracting officer denied IDS’s claims. IDS appealed to the Civilian Board of Contract Appeals, which concluded that IDS had not proven it actually incurred the claimed tax costs. The Board emphasized that only contractors—not parent companies—can recover costs under the Contract Disputes Act.
On appeal, the Federal Circuit reviewed whether IDS had presented sufficient evidence to show that it, rather than its parent companies, had incurred the costs. IDS relied on bank records showing wire payments from ACADEMI LLC and Constellis and internal testimony asserting an informal financial structure among the entities.
The court upheld the Board’s determination that the payments were made by entities higher in the ownership chain, and that IDS had not demonstrated any legal obligation to reimburse them or that the costs were passed through as subcontractor expenses. The court emphasized that under Federal Acquisition Regulation (FAR) 31.201-2, allowable costs must be allocable, properly documented, and actually incurred by the contractor.
Because IDS failed to meet this burden, the Board's findings were supported by substantial evidence. The court also declined to address arguments about whether the tax payments met the five FAR criteria for allowability, noting that the failure to show IDS incurred the costs rendered that analysis unnecessary.
Navigating the requirements of cost allowability and contract claims under federal acquisition rules can be challenging. Our team at Whitcomb, Selinsky, PC helps government contractors resolve disputes, prepare claims, and ensure compliance with contracting regulations.