Overwhelming unknowns cause contractor to lose LCSA appeal | Whitcomb Selinsky, PC

Tax laws vary by government and country. Jurisdictions often impose different income-based levies on businesses than individuals. These tax systems vary widely and there are no general general rules. These variations create the possibility of double taxation (when the same income is taxed by different countries) and no taxation (when the income is not taxed by any country). Income tax systems can impose tax only on local income or on worldwide income.

Due to these variations, it is important for businesses working in a foreign country to understand the country’s tax assessments and penalties or to work with an international tax attorney. In the following case, International Development Solutions claimed that it suffered tax and penalty assessments while working in Afghanistan and therefore submitted claims to the Department of State for a tax refund.

International Development Solutions, LLC CBCA Protest LCSA 6400, 6401, 6700
Decision rendered on March 16, 2022


In September 2010, the Department of State awarded a security contract to International Development Solutions, LLC (IDS) for “Global Protection Services”. In August 2011 and March 2012, under Mission Orders 9 and 11 (SAQMMA12F1044 and SAQMMA11F2609), IDS provided security services in Afghanistan worth over $400 million.

On May 29, 2012, the Department of State was notified that Academi Training Center, Inc. had purchased IDS, becoming the sole owner of IDS. Prior to the sale, Academi Training Center, Inc. owned 49% of IDS. Due to the sale and sole ownership status, Academi Training Center, Inc. requested a novation, a new contract, the 2010 security contract and all associated task orders. On July 13, 2012, the Department of State denied the request because (1) IDS was not disbanded due to the purchase and (2) IDS had the necessary support and resources from Academy Training Center, Inc. to fulfill its contractual obligations under the 2010 Act. Contract. For nearly a decade after the novation was denied, IDS continued to accept payments, billed the State Department, and filed and pursued appeals to the Civil Contract Appeals Board (CBCA).

In 2017, the Afghan government issued tax notices and sanctions to ACADEMI LLC. Official tax assessments listed ACADEMI LLC as a taxpayer. In January, April, May, and July 2017, and July and September 2018, ACADEMI LLC and Constellis Holdings LLC each wired three tax payments to the Afghan Ministry of Finance.

In September and December 2018, and again in September 2019, IDS submitted petitions to the State Department seeking a tax refund of $36,714,278.18 for what it claimed was increased performance costs in 2017 Afghan tax assessments. In its claims, IDS described the 2017 and 2018 payments made by ACADEMI LLC and Constellis Holdings LLC as payments made by IDS. The State Department denied the claims, IDS appealed, and the CBCA consolidated the appeals to determine whether the tax payments made by ACADEMI LLC and Constellis Holdings LLC were actually costs incurred by IDS.

The calls

For a contractor to incur a cost, that contractor must incur a liability or expense. SUFI Network Services, Inc. c. United States, 785 F. 3d 585, 593 (Fed. Cir. 2015). Economic sacrifice by entities other than the government contracting entity may contribute to the performance of the contract or may be attributable to the contract, but unless the contractor incurs an economic sacrifice, such cost shall not be recognized. .

IDS proposed two reasons why the LCSA should consider tax and penalty amounts imposed on ACADEMI LLC and then paid by ACADEMI LLC and Constellis Holdings LLC as costs of IDS. IDS first argued for a transfer of 100% of company assets, including government contracts, resulting in the transfer of those contracts as of right without violating anti-assignment law, 41 USC §6305 et seq. A transfer of right includes corporate mergers, consolidations and reorganizations where the contract continues with the same entity but in a different form. Westinghouse Electric Co. c. United States, 56 Fed. Cl. 564, 569 (2003), aff’d97 F. App’x 931 (Fed. Cir. 2004).

IDS also claimed that Academi Training Center, Inc. was a sub-contractor of IDS. Relying on the CBCA and prior court decisions, IDS argued that it was common practice to recognize the existence of a subcontract following a failed novation.


The CBCA dismissed IDS’ first argument as irrelevant. The CBCA said IDS failed to demonstrate that the 2010 security contract was passed “as of right” to ACADEMI LLC. Academi Training Center, Inc. held an interest in IDS at the time of the contract. IDS has neither alleged nor shown that the contract was passed “as of right” at another level to ACADEMI LLC.

Additionally, the CBCA noted that in the performance of the contract, IDS continued to operate as IDS after the novation was denied, and the 2010 security contract was continued with the same entity (IDS), using the same social form. So the first argument of IDS failed.

Additionally, the CBCA dismissed IDS’ second argument as irrelevant and legally unfounded, stating that even though the parent company was IDS’ subcontractor, IDS failed to demonstrate legal obligation on the part of IDS to pay or indemnify Academi Training Center, Inc. for taxes. or penalties payable solely by the parent company ACADEMI LLC.

The CBCA found no out-of-pocket costs incurred by IDS. IDS failed to adequately demonstrate that it actually incurred costs related to Afghan tax assessments. ACADEMI LLC was the taxpayer listed on official Afghan government records, and ACADEMI LLC and Constellis Holdings LLC made the tax payments, not IDS. The CBCA rejected the group appeals.


IDS was part of a larger corporate structure. It is admitted that ACADEMI LLC was the parent company, under which was Academi Training Center, Inc., and under which was IDS. The other entity, Constellis Holdings LLC, was affiliated with ACADEMI LLC in some way, but it is unclear where Constellis Holdings LLC was in the corporate hierarchy. Regardless of the hierarchy of the companies involved, the CBCA could not determine why ACADEMI LLC and Constellis Holdings LLC settled the Afghan government assessments of taxes and penalties, nor could the taxes and penalties imposed be related. directly and solely to the IDS contract.

Further, IDS did not provide the CBCA with any information regarding the tax laws of Afghanistan or any information on corporate tax or penalty rates for the Afghan tax years in question. The CBCA did not know why Afghan officials issued tax notices and penalties to ACADEMI LLC, to begin with. Additionally, it was unclear whether corporate taxes in Afghanistan are (or were) always imposed only on the largest corporation in a conglomerate structure or whether the Afghan government might have had a legal basis to initiate collection. with subsidiaries or sub-subsidiaries of the holding company, such as IDS.

In this case, the overwhelming unknowns and lack of evidence caused the LCSA to dismiss the appeal. If IDS presented more information regarding Afghan tax laws and could prove that the assessment of taxes and penalties was directly related to the contract, the outcome might have been different.

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