Board of Contract Appeals General Services Administration Washington, D.C. 20405 _____________________ February 18, 2000 _____________________ GSBCA 15035-RELO In the Matter of CATHERINE S. CUNNINGHAM Catherine S. Cunningham, Frisco, CO, Claimant. Roland V. Erickson, Fiscal Accounting Manager, Western Area Power Administration, Department of Energy, Golden, CO, appearing for Department of Energy. HYATT, Board Judge. Claimant, Catherine S. Cunningham, raises a question concerning the relocation income tax (RIT) allowance. She has requested the Board's review of a determination by the Department of Energy (DOE) concerning the proper calculation of the RIT allowance paid in connection with her transfer from Loveland, Colorado to Golden, Colorado in 1996. Claimant's principal contention is that her RIT allowance was insufficient because, in calculating her marginal tax rate, the agency excluded income declared by her spouse from a subchapter S corporation. For the reasons stated, we conclude that the agency properly calculated her RIT allowance in accordance with the applicable regulations, but note that DOE is authorized to waive collection of any overpayments. Background The statutory and regulatory framework applicable to the computation and payment of allowances to relocated employees to offset increased taxes incurred as a result of the reimbursement of certain moving expenses is described in detail in Robert J. Dusek, GSBCA 14325-RELO, 98-1 BCA 29,440 (1997). In essence, when an employee is transferred, in the interest of the Government, from one permanent duty station to another, the agency reimburses the employee for many of the expenses incurred incident to the transfer. The amounts reimbursed are reported to the Internal Revenue Service (IRS) as income to the employee and must be included in the gross income reported by the employee when filing a tax return. To the extent reimbursed expenses are not deductible, the employee incurs an increased tax liability. See id. at 146,172-73. By law, agencies are to reimburse transferred employees for "substantially all" taxes incurred as a result of reimbursed moving expenses. 5 U.S.C. 5724b (Supp. III 1997). This statutory provision is implemented in the Federal Travel Regulation (FTR). The first step of the procedure for reimbursing employees for the tax impact of moving expenses is the calculation and payment of a withholding tax allowance (WTA) and the second step is calculation of the RIT allowance. The WTA offsets taxes withheld from reimbursed amounts as well as taxes withheld from the WTA itself. The formula for calculating the WTA is based upon a twenty-eight percent withholding rate. The WTA is paid in the year the expenses are reimbursed (year 1); the RIT allowance, which is intended to reimburse the employee for any added taxes not covered by the WTA, is determined the following year (year 2) based upon the combined marginal tax rates for years 1 and 2, the amount of taxable reimbursements made for moving expenses, and the amount of WTA paid in year 1. Dusek, 98-1 BCA at 146,172. Ms. Cunningham's claim is based on her disagreement with the way in which the agency calculated her RIT allowance using income reported on her 1997 tax return. Her concern is that while her declared income put her in a twenty-eight percent bracket, the RIT allowance was calculated based on a total tax rate of only fifteen percent. Thus, the RIT allowance calculated by DOE was insufficient to fully offset the WTA which had already been paid to her. The agency has determined that she was overpaid the amount of $549.80. Claimant explains that the higher tax bracket was a result of subchapter S income reported by her husband, who owns his own business. Ms. Cunningham's spouse declared some of his income as self-employment income and declared the remainder of his subchapter S income on line 17 of the IRS Form 1040. The latter amount was determined using IRS Form 1120S, Schedule K- 1.[foot #] 1 DOE, relying on the FTR's formula, determined that the amount reported on line 17 did not qualify as "earned income" for RIT allowance purposes because it was not reported on a W-2 form or as self-employment income. Ms. Cunningham argues that subchapter S corporation income should be ----------- FOOTNOTE BEGINS --------- [foot #] 1 Schedule K-1 is entitled "Shareholder's Share of Income, Credits, Deductions, Etc." The income from subchapter S corporations is reflected on this schedule and entered on line 17 of the IRS Form 1040. Line 17 is labeled ""Rental real estate, royalties, partnerships, S corporations, trusts, etc." In contrast, self-employment income is shown on schedule SE of Form 1040. Schedule SE is for the purpose of calculating the self- employment tax, which is based on net earnings from self- employment as shown on that schedule. The IRS does not consider self-employment income and S corporation income to be interchangeable. IRS, Instructions for Form 1120S: U.S. Income __________________________________________ Tax Return for an S Corporation (1997). _______________________________ ----------- FOOTNOTE ENDS ----------- treated as earned income for purposes of calculating the RIT allowance regardless of how it is reported for income tax purposes. Claimant's accountant has provided a statement to the effect that Mr. Cunningham's subchapter S corporation is a non- passive activity, which means that its income is not derived from investments. The accountant further states that this subchapter S income would be considered earned income for such purposes as calculating the earned income credit. Claimant thus contends that her spouse's income should be treated as earned income for the RIT allowance calculation as well and that she should not be required to repay a portion of her WTA to DOE. Discussion The direction to reimburse employees for "substantially all" of the taxes incurred for reimbursed moving expenses does not mean that employees will be reimbursed for every dollar of tax liability incurred as the result of having received relocation benefits and allowances. Jeffrey P. Nielsen, GSBCA 15069-RELO (Jan. 6, 2000); Herman S. Ransom, GSBCA 15151-RELO (Dec. 28, 1999); Sol Gilman, GSBCA 14938-RELO, 99-2 BCA 30,506; John F. Stinson, GSBCA 14625-RELO, 99-1 BCA 30,246; William A. Lewis, GSBCA 14367-RELO, 98-1 BCA 29,532. The FTR states as follows: The prescribed procedures, which yield an estimate of an employee's additional tax liability due to moving expense reimbursements, are to be used uniformly. They are not to be adjusted to accommodate an employee's unique circumstance which may differ from the assumed circumstances stated in paragraph (b)(1) of this section. 41 CFR 302-11.8(b)(2) (1997). With regard to the RIT allowance, the regulations state that only earned income, which is defined very specifically to be gross compensation reported on Internal Revenue Service Form W-2 or amounts reported as self-employment income on Schedule SE of Form 1040, may be used in calculating the marginal tax rate. Id. at 302-11.5(h). Since most of Ms. Cunningham's spouse's subchapter S earnings were reported not as self-employment income, but instead as a distribution to a shareholder, they were not included in the calculation of the RIT allowance. The agency properly determined the RIT allowance in accordance with the FTR provisions. The purpose of the regulations is to provide agencies with a bright-line, uniform, and reasonably straight-forward, methodology for reimbursing employees for added taxes attributable to reimbursed moving expenses. The limitation on what may be included in earned income for purposes of deriving a marginal tax rate requirement achieves this intent and relieves agencies from making complicated judgment calls in unusual situations such as this one. Although we understand that in this particular case the income from the subchapter S corporation is non-passive in nature, it was the taxpayer's decision to allocate corporate earnings by attributing a small amount to self-employment income and the remainder to shareholder's income from a subchapter S corporation. The agency cannot disregard the clear instructions in the FTR, which has the force and effect of law. Murray Lumpkin, GSBCA 14513-TRAV, 98-2 BCA 30,042. A legal opinion provided by DOE counsel states that in this case, because the subchapter S earnings are non-passive and reflect payments for services, it would be reasonable either to include the income in the RIT allowance formula or alternatively for the agency to waive repayment of the debt. The Board cannot find that the RIT allowance calculation should be altered in this case. We note, however, that the agency has the authority and discretion to waive collection of the overpayment in this case. 5 U.S.C. 5584(a)(2)(A). As we recognized in Dusek, the agency is not required to collect the amount owed by the claimant if it believes that collection would not be equitable and in the best interest of the United States. 98-1 BCA at 146,173. ____________________________ CATHERINE B. HYATT Board Judge