GAB Decision 528
Docket No. 83-174
April 9, 1984
Area IX Oakland-Macomb PSRO;
Ford, Cecilia Sparks; Settle, Norval Teitz, Alexander
The Area IX Oakland-Macomb PSRO (appellant, PSRO) appealed a
determination by the Health Care Financing Administration (HCFA, Agency)
upholding an audit recommendation /1/ that the PSRO refund the
employer's share of a FICA refund resulting from a retroactive change in
the tax exempt status of the PSRO. The employer's share of the refund,
amounting to $59,682 ($48,658 plus accrued interest of $11,024), had
been disbursed by the PSRO to its employees, in addition to the
employees' share which is not in question. The basis for the
determination by HCFA was that the employer's share of the refund was
returnable to the Agency as a refund of taxes or an applicable credit.
Based on the written record, and the transcript of a telephone
conference and oral argument, we affirm.
Background
Appellant is a Professional Standards Review Organization (PSRO)
which performs certain utilization review functions pertaining to
Medicare expenditures in hospitals in two Michigan counties. It is
entirely federally funded, as are PSROs generally. When the PSRO began
operations in 1978 it assumed, based on IRS rulings and HCFA advice,
that it was required to pay FICA taxes on its employees and it did so
for several years.
Subsequently the IRS reconsidered its position, based on litigation
with other PSROs, and issued a ruling that PSROs were entitled to an
exempt status under section 501(c)(3) of the Internal Revenue Code. /2/
Certain employees of the PSRO then (2) inquired of the IRS about the
return of their FICA payments, and were apparently advised that any
application had to be made by the employer. The employees then
contacted the employer who then began taking steps to apply for the
refund.
The PSRO obtained the consent of all of its then current employees
for the refund request. The appellant stated at the oral argument that
in order to obtain the employees' consent, the PSRO promised them orally
that each one would receive the full amount of the refund pertaining to
that particular employee, both the employer's and employee's share.
Transcript (Tr.), p. 31. The PSRO then filed the necessary papers,
together with statements as to the joinder of all consenting employees,
and received a refund in September 1982 of the shares of both the
employees and the employer. The employer's and the employees' shares
were lumped together in the refund, although there were 14 separate
checks for each of the quarters involved.
In August 1982 the PSRO engaged a CPA firm to audit the PSRO's grants
for the fiscal year ending September 30, 1982. These auditors stated
that they were "uncertain" as to that portion of the refund which
represented employer FICA taxes paid and refunded in the grant period.
(Appellant's Exhibit H, Highlights of Audit Results, p. 2) Under
"Findings and Recommendations" the auditors stated that they had "not
been able to determine whether this amount is properly payable to past
and present employees." (Id., p. 16) The "Highlights" section
stated
that "(The) final determination as to the allowability of costs will be
made by the Department of Health and Human Services." (Id., p. 2)
The CPA audit is dated October 18, 1982. According to a handwritten
memorandum in the record, a representative of the audit firm spoke to a
Grants Management Specialist in HCFA on October 20, 1982 and was told in
effect that only the employees' share of the FICA refund could be
disbursed to them. (HCFA's appeal file, Exhibit 3)
Two days later representatives of the PSRO telephoned the same HCFA
employee and discussed disbursement of the employees' share of the
refund. A few days later appellant's attorney spoke to the Team Leader
of this employee, who had by then left government service. These
various conversations are the subject of conflicting affidavits by the
parties involved. In any event, the PSRO did distribute the employer's
share of the refund to the employees. However, the employees were
required to agree to indemnify the PSRO if the distribution was later
found to be improper.
Consistent with the limited guidance provided by the PSRO's Grant
Officer, the Board of Directors of the (3) PSRO determined to distribute
the funds to the employees. This was done, however, upon an express
written understanding with each employee that the monies were subject to
a final determination pursuant to the audit process and subject to being
returned to the PSRO should the payments ultimately be disallowed.
Affidavit of appellant's attorney, P4, attached to appellant's reply
brief.
Applicable Provisions.
The Agency determination letter relied on a provision in Office of
Management and Budget (OMB) Circular A-122, "Cost Principles for
Nonprofit Organizations," June 27, 1980 (A-122), as the basis for
requiring return of the employer's FICA contributions. /3/ This letter
cited "Applicable Credits," paragraph 5; it actually quoted only the
last sentence of the section, but stated that this was only part of the
paragraph. The entire paragraph (Attachment A, A.5.a.) is as follows:
The term applicable credits refers to those receipts, or reduction of
expenditures which operate to offset or reduce expense items that are
allocable to awards as direct or indirect costs. Typical examples of
such transactions are: purchase discounts, rebates or allowances,
recoveries or indemnities on losses, insurance refunds, and adjustments
of overpayments or erroneous charges. To the extent that such credits
accruing or received by the organization relate to allowable cost they
shall be credited to the Government either as a cost reduction or cash
refund as appropriate.
Paragraph A.5.b. reads as follows:
In some instances, the amounts received from the Federal Government
to finance organizational activities or service operations should be (4)
treated as applicable credits. Specifically, the concept of netting
such credit items against related expenditures should be applied by the
organization in determining the rates or amount to be charged to Federal
awards for services rendered whenever the facilities or other resources
used in providing such services have been financed directly, in whole or
in part, by Federal funds.
HCFA also relied before the Board on P46.b., Attachment B, of A-122,
entitled "Taxes," set out below.
The grants to the PSRO all state specifically that they are subject
to the terms and conditions of 45 CFR Part 74; those beginning in 1981
state that they are subject also to A-122. HCFA Exhibit 5. The refund
was received in 1982; its distribution would therefore be subject to
the specific provisions in A-122 pertaining to refund of taxes then in
effect. See, also, n. 3 above.
Analysis
I. The returned employer's FICA payments are a refund of a tax; the
FICA payments are a tax as well as a fringe benefit.
In its acknowledgment of the appeal the Board asked appellant to
address the question of whether Attachment B, P46.b., entitled "Taxes,"
of Circular A-122, dated June 27, 1980, was applicable to the dispute,
and if so, should control the outcome. The cited paragraph reads as
follows:
Any refund of taxes, and any payment to the organization of interest
thereon, which were allowed as award costs, will be credited either as a
cost reduction, or cash refund, as appropriate, to the Government.
Appellant replied that the cited provision did not apply because the
employee FICA contributions were treated as a fringe benefit and not a
tax for purposes of A-122. Appellant cited certain provisions of A-122
which listed employer contributions for Social Security as allowable
"fringe benefits."
HCFA did not dispute that employer FICA payments constituted a fringe
benefit to the employees; it contended that the payments were also a
tax. Appellant claimed that fringe benefits and a tax were mutually
exclusive and in any event, the FICA payments by the PSRO were not a tax
because it was not obligated to pay them.
(5) The PSRO was correct in its contention that an allowable tax is
one which a grantee is required to pay. See, A-122, Attachment B, P46.
a.; 45 CFR Part 74, Appendix F, G.41.(a) (1980).
However, the PSRO was incorrect in its contention that it was not
required to pay FICA on its employees because it was held to be
retroactively exempt from such payments, unless it chose voluntarily to
pay them. This loses sight of the fact that at the time the PSRO paid
FICA it was required to do so; the opinion of the PSRO was that in the
state of the law at the time there was no choice. Payment of FICA
continued to be required, not only until the IRS position changed, but
until the PSRO specifically requested its exemption. During oral
argument appellant admitted that at the time the PSRO made the FICA
payment it was required to do so, and the payment was not then
voluntary. Tr., p. 22. The fact that upon later specific application
the PSRO was able to obtain a refund of all the FICA payments did not
change their involuntary nature as a tax when made. /4/
Appellant has cited no authority for its contention that the FICA
payments made by an employer cannot be both a tax and a fringe benefit.
We see no reason why they cannot be both. The Social Security payment
by an employer is a benefit to the employee, since he, or a dependent of
his, may some day collect benefits from Social Security. The same is
true of unemployment insurance and workmen's compensation payments. But
they are still taxes, since unless and until exempted from payment, the
employer must pay its share. Since the FICA payments are taxes, a
refund of such payments must be credited to the federal government under
A-122.
II. Applicable credits.
Even if the return of the FICA employer payments was not a refund of
a tax, it should still be returned to HCFA as an "applicable credit."
Paragraph A.5 of Attachment A of A-122 states:
The term applicable credits refers to those receipts, or reduction of
expenditures which operate to offset or reduce expense items that are
allocable to awards. . . . Typical examples of such transactions are:
(6) purchase discounts, rebates or allowances . . . insurance refunds
and adjustments of overpayments or erroneous charges. . . .
Tax refunds are not specifically mentioned here but clearly a refund
of a tax is in the same category as an insurance refund. The section
states that the items listed are "typical examples." Obviously there
are
other similar items which are not listed; a tax refund fits in such a
class.
The last sentence of the paragraph provides the result of such a
refund:
To the effect that such credits accruing or received by the
organization relate to allowable cost they shall be credited to the
Government either as a cost reduction or as a cash refund as
appropriate.
Since the employer's FICA payments relate to "allowable cost" the
credit received by the organization when the payments were refunded
belongs to the federal government.
III. Any agreement between appellant and its employees does not bind
HCFA.
The PSRO argued that it was contractually bound to repay the
employer's share of the FICA refunds to the employees who opted out of
Social Security.
A. An express oral contract.
Originally the PSRO's contention was based on a claimed express oral
contract with the employees who opted out of Social Security to return
the entire FICA refund, both the employees' and the employer's share.
There is no concrete evidence of such an agreement. In its opening
brief appellant refers to an "understanding" by the employees who
granted written authorization to the PSRO to request a refund of prior
FICA contributions "that the proceeds would be applied to their
benefit." Appellant's brief, p. 3.
In its reply brief appellant refers to "the subsequent
representations made by Appellant to its employees that they would be
the beneficiaries of the full refund." Reply brief, p. 3. Appellant
goes on to say that "the original employer-employee agreement is
buttressed by a specific promise to provide the full benefit available
in return for the employees' consent to withdraw from the Social
Security program." Id., p. 4.
(7) In oral argument appellant expanded on this contention:
In order to obtain this consent . . . the PSRO informed the employees
that if they did provide the consent, the entire amount of the refund
attributable to them would be returned to them. . . . Now, that is the
representation that was made to them. It was an oral representation,
but there's no dispute that it was, in fact, made.
Tr., p. 12.
It thus appears that all we have in the record to show an express
oral agreement between the PSRO and the consenting employees to return
the full refund to them is the statement of counsel in briefs and in
oral argument. The statement by counsel that a particular fact is
undisputed does not make it so. However, based on our analysis below
the result would be the same whether there was such an oral agreement or
not.
B. An agreement based upon employment.
In its opening brief appellant made an argument that the PSRO "was
obligated to provide the fringe benefit as part of agreed upon
employment compensation." Appellant's brief, heading B, p. 10. This was
based upon the written organizational policy to pay Social Security on
behalf of employees. The PSRO argued that since all employees were
informed that Social Security payments would be made on their behalf,
the PSRO was contractually bound to make the contributions on behalf of
employees as part of the employer-employee agreement. Id., p. 11.
Appellant then leaps to the conclusion that "if the PSRO had not paid
the employee (sic) contributions to the employees they would have been
able to assert breach of contract against the PSRO." Id.
We fail to see where this conclusion follows from what came before.
The employer, if contractually bound to make contributions on behalf of
the employees to Social Security, did make them for several years. The
employer stopped making the contributions because the majority of the
employees asked the employer to do so by opting out of Social Security.
It hardly follows that therefore the employer was contractually
obligated to return these contributions, made wholly from federal funds,
to the employees.
At oral argument appellant expanded on the binding contractual
obligation argument as being based upon local (Michigan) law. The PSRO
relied upon Toussant v. Blue Cross, 292 N.W. 2d 880, 892 (8) (Michigan
1980). In that case Michigan followed the modern trend that a provision
of an employment contract that an employee would not be discharged
except for cause is legally enforceable although the contract is not for
a definite term, and further, that the contractual obligation may arise
based on the employee's expectations based upon the employer's policy
statements.
We fail to see where this case has any bearing here, even if its
holding pertaining to discharge without cause could be extended to
Social Security payments. If there were a conflict between state and
federal law, the federal law would control under the Supremacy clause of
the Constitution since the grant involved here states that it is subject
to federal requirements (Circular A-122 and 45 CFR Part 74). However,
there appears to be no conflict because any contractual obligation by
the employer to pay into Social Security was modified and in fact
terminated by the request to opt out initiated by the employees. An
agreement to pay into Social Security for employees with federal funds
is not the same as an agreement to return those funds to the employees.
We do not doubt that the employees expected to receive the entire
refund. Such an expectation hardly creates an enforceable right if
there is federal law that requires the employer's share to be repaid to
the federal government. And even if there were an enforceable right,
based upon a promise by the PSRO to the employees, it could not be
binding upon the federal government which was not a party to any such
agreement. It is theoretically possible that the PSRO could be required
to repay the employer's share of the refund to HCFA and still be bound
to pay the same amount to the employees, if it had a binding legal
agreement to do so with them.
It is not clear from the record that there actually was such a
binding agreement. But even if there were, it was modified by the
agreement of the parties, when the distribution of the refunds was done
"upon an express written understanding with each employee that the
monies were subject . . . to being returned to the PSRO should the
payments ultimately be disallowed." Gassel Affidavit, appellant's
Exhibit P.
Appellant argues that the modification may not be binding on the
employees for lack of consideration. Tr., p. 45. It seems that there
was consideration for the modification. The PSRO, having received
advice that the payment to the employees of the employer's share of the
refund was at least of doubtful validity, whatever way the various
affidavits are read, had a choice. It could go ahead and pay the
employees, or it could hold the money in escrow pending final
determination of the issue. Instead, it chose a (9) middle course of
paying the money and taking back a written promise to repay if it was
eventually found the money did not belong to the employees.
Without going into a detailed study of consideration in the law of
contracts, it seems that the employees, in return for their promise to
repay if required, got the use of the money immediately. Appellant's
attorney said this was "perhaps" consideration. Tr., p. 45.
But all this is beside the point. If the PSRO was legally obligated
to return the employer's share of the FICA refund to HCFA, based on the
terms of the grant and applicable federal regulations, it makes no
difference what contract the PSRO entered into with its employees,
whether it was binding, or whether it was effectively modified. As
pointed out above, theoretically the PSRO may have to pay back the
refund to HCFA and still be unable to get the money back from the
employees.
IV. Good faith is not a material issue.
The "good faith" defense crept into this case like the proverbial
nose of the camel under the tent. In its opening brief appellant argued
that "this charitable organization should not be penalized by forcing it
to return funds. . . ." Appellant's brief, p. 16. The argument
continues:
Thus, we have a situation in which the PSRO has made a reasonable
disbursement of funds, in goods faith. . . . Taking all these factors
into account, therefore, HCFA should be estopped from penalizing the
PSRO for following what the IRS' instructions said it must do. . . .
Id., p. 17.
Appellant added in a footnote (n. 14) that the PSRO was "a charitable
organization without reserves other than its federal grant."
In its response HCFA chose to reply specifically to appellant's good
faith argument. HCFA claimed that the PSRO did not act in good faith
because it ignored HCFA's advice not to disburse the funds to the
employees; the PSRO relied on its own interpretations of the IRS
regulations without seeking an IRS ruling; and the PSRO disbursed the
funds rather than placing them in escrow. HCFA brief, pp. 6, 20-21.
(10) In addition, HCFA suggested that the PSRO "certainly can go back
to the employees and request that they return the money that was
improperly paid to them, whether they are present or former PSRO
employees." Id., p. 21.
When appellant filed its reply brief, it revealed for the first time
that the PSRO had a written agreement with the employees that "the
monies were subject to a final determination pursuant to the audit
process" and were "subject to being returned to the PSRO should the
payments ultimately be disallowed." Gassel Affidavit, Exhibit P. /5/
The affidavit also disputed HCFA's contention that the PSRO had been
told not to distribute the employer's share of the refund to the
employees.
HCFA objected to the introduction of the Gassel affidavit into the
record, primarily because the issue of "good faith by the PSRO was
irrelevant to the resolution of the case." In the telephone conference
on February 6, 1984, the Board denied the motion to strike the
affidavit. Subsequently the Board permitted the parties to offer
affidavits on the conversations between representatives of HCFA and the
PSRO pertaining to disbursement of the refunds. The Board indicated
that the evidence might be of slight weight, but the parties had
themselves developed the good faith issue so evidence on it would be
admitted.
The Board now finds that the good faith or bad faith of the PSRO is
not material to deciding this case. The PSRO admitted that "the issues
of the cost principles are critical and central." Telephone conference
February 6, 1984; Tr., p. 8. The Board originally thought there was a
serious estoppel question in this case, based on appellant's statement
in its opening brief that "HCFA should be estopped from penalizing the
PSRO for following what the IRS' instructions said it must do."
Appellant's brief, p. 17. However, in the February 6 telephone
conference appellant specifically disclaimed any reliance on an estoppel
defense. Tr., telephone conference, pp. 9-10.
HCFA argued that the PSRO's disbursement of the refund "was not in
good faith because HCFA directed it not to disburse those funds." HCFA
brief, p. 20. An examination of the affidavits and counter-affidavits
makes this a disputed question, whether HCFA was that (11) direct and
unequivocal in its instructions. However, taking all the evidence as
considered most favorably to the PSRO, it was certainly not advised that
it was all right to go ahead and disburse the employer's refund to the
employees. The most can be read out of the record favoring the PSRO is
that it was told that the whole matter was doubtful. Mr. Gassel's
affidavit and that of Messrs. Wolford, Russell, and Koerber, agree that
in the original PSRO contact with Beverly Gillette of HCFA she informed
them in substance that there was a Cost Advisory Service opinion (HCFA
Exhibit 4) which was against refunding the employer's share to the
employees. The appellant's affidavits state that Ms. Gillette
categorized the opinion as advisory only, and HCFA staff tended to
disagree with it. Her affidavit states flatly that she "repeated HCFA's
position that the employer's share could not be disbursed to the
employees" and stated that she "had a formal opinion supporting HCFA's
position."
It is not necessary to decide this disputed question of fact since it
cannot affect the result in this case. As appellant conceded in the
February 6 telephone conference, there would be an estoppel issue only
if HCFA advised the PSRO to disburse the funds, and they did so in
reliance on this advice, even though the cost principles were contrary
to this advice. See Tr., telephone conference, p. 9.
The best that the PSRO can make of Ms. Gillette's advice, and that
the her Team Leader Mr. Lozosky, is in Mr. Gassel's words, that neither
would approve or disapprove the distribution of the monies to the
employees. Gassel Affidavit, PP2, 3.
Based on the advice from Ms. Gillette and Mr. Lozosky, the PSRO
Director decided to distribute the funds to the employees, conditioning
the refund upon the express written agreement by each employee "to
return the money to the PSRO to the extent the payments were ultimately
disallowed." Affidavit of Messrs. Wolford, Russell, and Koerber, P6.
The most that can be said for this action by the PSRO, on its
affidavits, is that it did not act in "bad faith," since no one told
them flatly not to give the employees the money. Whether it was "good
faith" to pay the money to the employees after HCFA would neither
approve or disapprove such a distribution may be an open question. But
it does not matter here. There is no estoppel claim; the PSRO's
liability for repaying the refund depends on legal principles and not on
whether it was acting in good faith or thought it was.
(12) V. Other arguments of appellant.
Appellant in its briefs and in oral argument made several contentions
other than those discussed above. We do not believe that they require
any extended discussion.
A. Binding IRS interpretation.
In its opening brief appellant argued that the controlling IRS
interpretation required the employer's refund to be paid to the
employees. Appellant's brief, heading C, p. 11. As part of this
contention appellant cited several court decisions holding that a
federal agency charged with authority to administer federal statutes has
the power to make binding interpretations of those statutes. Id., pp.
11-12. Even though IRS was not a party to this case, appellant
contended that "its interpretation of the statute (pertaining to FICA
refunds) must apply uniformly to all affected parties, including HHS."
Id., p. 13.
The controlling IRS interpretation upon which the PSRO based this
argument was mainly the Form 941c used by employers in requesting
refunds of FICA payments. This form aggregates the employer and
employee contributions and the amount of the refund request is the total
of both.
The appellant relies on the certification required to be signed by
the PSRO in requesting the refund:
I certify that all FICA tax that was overcollected has been repaid to
employees or that all affected employees have given their written
consent to the allowance of this credit or refund. For claims for any
overcollection in earlier years, I have also obtained from each employee
a written statement that that employee has not claimed and will not
claim refund or credit of the amount of such overcollection.
See appellant's brief, pp. 12-13.
Appellant interprets this provision to mean that the employer is
required "to certify that he has repaid the full amount of the FICA
contribution to the employees--without distinguishing between the
employer and employee shares--or that he has obtained their consent to
opt-out of Social Security, and to make that payment in the future."
Id., p. 13.
(13) There is no basis from a reading of the form to interpret it to
require the employer's share of the refund to be paid to the employees.
HCFA points out in its brief, with several citations, that
"overcollection" can refer only to the employees' share. HCFA brief,
pp. 10-13. The purpose of the certification appears to be to insure
that after an employer pays over the employees' share of the refund to
them, an employee cannot then try to claim the same refund from the IRS.
Significantly, the PSRO cites no IRS opinions or court cases which
support its interpretation. HCFA, in its extensive analysis of this
issue (HCFA brief, pp. 10-17), cites an IRS General Counsel Memorandum,
No. 38859 issued in 1982 prior to the PSRO distribution. This states
that the employer's liability to repay the employer's share of the
refund of FICA taxes to the federal agency that initially granted it the
money used to pay the FICA taxes is "a non-tax obligation over which the
IRS has no authority." Id., p. 17.
This issue was in effect removed from the case when appellant
conceded during oral argument that it was not the IRS regulations which
govern this case. Tr., p. 53. Even if they did, an examination of all
the authorities cited offers no support for appellant's contention that
any IRS interpretation requires that the employer's share must be paid
to the employees.
B. Reasonableness.
Appellant uses the reasonableness argument in different ways in this
case. It argues that it was reasonable to pay over the refund to the
employees because HCFA did not tell the PSRO not to do so. This is part
of the good faith argument with which we have already dealt.
As part of this argument, the PSRO also stated that it was settled
Board law that "the reasonableness of a fringe benefit expenditure is
important in determining its allowability." Appellant's brief, p. 14.
Here again we have a non-issue. HCFA does not claim that the amount of
the FICA tax when paid was not reasonable, nor that it was not
allowable. However, saying this does not automatically make it
reasonable to pay the refund when obtained to the employees. That
depends on what federal regulations and guidelines require.
C. The conduit theory.
Appellant argues that in fact it never had the refund, that it acted
only as a conduit from the IRS to the employees. Therefore, the
argument proceeds, the provisions of A-122 should not apply (14) because
they relate to receipts "by the organization." Appellant's brief,
pp.
16-17; reply brief, pp. 2-3.
The trouble with this argument is that it is based upon the
assumption that the refund of the employer's share belonged to the
employees. The FICA refund was of FICA taxes paid by both the employees
and the employer. No one disputes the right of the employees to the
return of their contributions. Whether they are entitled to the
employer's share as well is the question to be decided by the Board. If
the employer's share is payable to HCFA then clearly the PSRO is not a
mere conduit for the funds.
D. Interest of HCFA.
Appellant argued that there was no "legitimate interest which HCFA is
seeking to protect by its position in this case." Reply brief, p. 6.
HCFA did not expend any additional funds, argued the PSRO; in fact,
withdrawal from Social Security resulted in the reduction of future
Social Security payments.
Actually, this "gain" was for a limited period only, since it was
agreed that beginning with 1984 all PSROs must pay FICA. Apart from
that, HCFA's legitimate interest is that of a government agency seeking
to recover funds it claims belong to it under the law. The fact that
the FICA payments originally were allowable costs does not mean that
HCFA can allow the employees to keep the refunds if they are not
entitled to them.
At the hearing the Board made reference to the suggestion of Beverly
Gillette that while the employer's share could presumably not be
returned to the employees, the employer's share could be used "to offset
future payment into a retirement fund." HCFA Exhibit 3. The parties
were asked to advise the Board if there was a private retirement fund in
effect at the time, and, if so, whether a possible settlement could be
made by paying the employer's refund into it.
It appeared that such a solution was impractical, if not impossible.
Only nine of the original thirty-five employees who received the
employees' refund are still employed by the PSRO. In any event, to
attempt such a contribution would result in the PSRO exceeding federal
guidelines on percentage of salary which may constitute fringe benefits.
Letter Abrams to Teitz, March 23, 1984.
(15) CONCLUSION
Since the refund of the employer's FICA payments is a refund of a
tax, and in any event an applicable credit, the determination that it
should be paid to HCFA is sustained. /1/ Audit No. 05-35144 on Grant
No. 97-P-99510/5 for the period October 1, 1981 through
September 30, 1982. /2/ The Internal Revenue ruling meant that
the PSROs were to be considered exempt from payment of FICA taxes from
the date of incorporation, and on proper application all FICA paid in on
those employees who opted out of Social Security would be refunded,
within the statutory period for claiming refunds. /3/ Appellant
contended that the contested liability dated back to 1979, and A-122 was
not then in effect. Appellant's brief, p. 8, n. 5. HCFA pointed out
correctly that the refund occurred in 1982, and by its own terms A-122
would apply. In any event, the cost principles in effect prior to A-122
were the same as far as net costs only being allowable. See, HCFA
brief, p. 7, n. 5. /4/ Following the PSRO's argument to its
logical conclusion would result in all the PSRO's FICA payments being
disallowed, since P46.a. of Circular A-122 provides that taxes are not
an allowable cost where an organization pays taxes for which an
exemption is available. HCFA brief, p. 9, n. 8. /5/ Appellant
later minimized the value of any such agreement. In addition to the
contention that the employees' promises to return the funds were without
consideration and therefore invalid (discussed above), appellant
stressed the impracticality of collecting from former employees.
NOVEMBER 14, 1984