Board of Contract Appeals General Services Administration Washington, D.C. 20405 ____________________________ March 19, 1998 ____________________________ GSBCA 14162-RELO In the Matter of JAN S. McNUTT Jan S. McNutt, New London, CT, Claimant. Nancy Q. Raum, Chief, Office of Civilian Personnel, United States Coast Guard, Department of Transportation, Washington, DC, appearing for Department of Transportation. DeGRAFF, Board Judge. An agency that reimbursed an employee for all of his moving expenses, without withholding anything from that amount for taxes due, did not comply with applicable federal regulations. As a result, the agency did not compensate the employee for his moving expenses and related taxes due, as required by federal statute. The agency should correct its error in a manner permitted by the regulations. Background When an agency transfers an employee from one duty station to another for permanent duty, the agency reimburses the employee for some of the moving expenses that the employee incurs. 5 U.S.C. 5724, 5724a, 5724c (1994). The agency reports the reimbursements to the Internal Revenue Service (IRS) as income to the employee, and when the employee files a tax return, the employee includes in gross income the entire amount that was reimbursed by the agency. Sometimes, including the reimbursed amount in gross income does not result in any increase in the amount of taxes paid by the employee because the moving expenses are deductible. Some reimbursed moving expenses, however, are not deductible, and including nondeductible expenses in gross income results in an increase in the amount of taxes paid by the employee. 41 CFR ch. 302-11 (1995). Agencies are directed by statute to reimburse employees for "substantially all" of the taxes they incur for reimbursed moving expenses. 5 U.S.C. 5724b. The Federal Travel Regulation (FTR) implements this statutory directive by establishing a two-step procedure that agencies use to reimburse employees for taxes that result from moving expense reimbursements. As discussed in the following paragraphs, the first step is to calculate and to pay a withholding tax allowance (WTA), and the second step is to calculate a relocation income tax (RIT) allowance. 41 CFR ch. 302-11. Usually, when an agency reimburses an employee for nondeductible moving expenses, the agency withholds federal taxes at a rate of 28% from the amount it reimburses the employee because the reimbursed amount is considered to be compensation to the employee.[foot #] 1 41 CFR 302-11.6(b)-(c), 302- 11.7(c). One purpose of paying a WTA is to offset the amount of federal income taxes withheld from the reimbursed amount. 41 CFR 302-11.7(a). When an agency pays a WTA, the agency withholds federal taxes from the amount of the WTA because the payment of a WTA is also considered to be compensation to the employee. 41 CFR 302-11.7(f). A second purpose of paying a WTA is to offset the amount of federal income taxes withheld from the WTA payment itself. 41 CFR 302-11.7(a). The agency uses a formula set out in the FTR to calculate the WTA in the year that the employee is reimbursed for moving expenses, which is referred to in the FTR as Year 1. 41 CFR 302-11.6(d)-(f); 302-11.7(d). The purpose of paying a RIT allowance is to reimburse the employee for the estimated added tax liability that was not reimbursed by payment of the WTA. 41 CFR 302-11.5(f). The procedures for calculating and paying the RIT allowance are contained in the FTR and are based upon assumptions developed by the General Services Administration (GSA) and the IRS. The procedures produce an estimate of an employee's added tax liability due to moving expenses. 41 CFR 302-11.8. The FTR refers to the year in which a claim for the RIT allowance is paid as Year 2. 41 CFR 302-11.5(f). The FTR contains a formula for calculating the RIT allowance by using an employee's combined marginal tax rates for Years 1 and 2, the amount of the taxable reimbursements made by the agency, and the WTA paid in Year 1. 41 CFR 302-11.8(f). The combined marginal tax rates, for purposes of the FTR, depend upon the amount of earned income that is reported on the employee's federal tax return in Year 1. 41 CFR 302-11.8(d), (e). If the agency calculates a RIT allowance using the FTR formula and the result is a positive dollar amount, the agency will pay that amount to the employee. If the agency calculates a RIT allowance using the FTR formula and the result is a negative dollar amount, this means that the agency paid an excessive amount of WTA, and the employee has to repay that excess WTA to the agency. 41 CFR 302-11.7(e); 302-11.8(f). The claimant, Jan S. McNutt, is an employee of the United States Coast Guard (USCG). In June 1995, Mr. McNutt transferred from an overseas post to New London, Connecticut, and the USCG agreed to reimburse Mr. McNutt for his temporary quarters subsistence expenses (TQSE). In August 1995, Mr. McNutt filed a claim for TQSE in the amount of $5,820.10, and the agency agreed that he was entitled to be reimbursed that amount. According to the FTR, the USCG should have withheld 28% from the $5,820.10 that it paid to Mr. McNutt ($1,629.63), which would have resulted in Mr. McNutt receiving a payment of $4,190.47 ($5,820.10 - $1,629.63) for his TQSE.[foot #] 2 The USCG should have then calculated Mr. McNutt s WTA according to the formula set out in the FTR (.3889 x $5,820.10 = $2,263.44), withheld 28% of that amount ($2,263.44 x 28% = $633.76), and paid Mr. McNutt $ 1,629.68 ($2,263.44 - $633.76). Mr. McNutt s Form W-2 would have shown income of $8,083.54 ($5,820.10 + $2,263.44), from which $2,263.39 ($1,629.63 + $633.76) had been withheld. The net payment to Mr. ----------- FOOTNOTE BEGINS --------- [foot #] 1 The withholding rate for supplemental wages was raised from 20% to 28% in 1995. 62 Fed. Reg. 10,708 (1997). [foot #] 2 In all of these calculations, per the FTR, we have ignored amounts withheld for FICA and Medicare. 41 CFR 302-11.7(a). ----------- FOOTNOTE ENDS ----------- McNutt would have been $5,820.15 ($4,190.47 + $1,629.68), which would have fully compensated him for his TQSE, and the agency would have withheld appropriate amounts for taxes so that, when Mr. McNutt filed his tax return, he would not have been required to pay any taxes on his TQSE reimbursement from his own funds. The USCG did not reimburse Mr. McNutt for his TQSE in accordance with the regulations. It did not withhold any taxes from the payment that it made to him and did not pay any WTA. Instead, the USCG paid Mr. McNutt the entire $5,820.10 on September 26, 1995, and listed that amount as "PCS-Taxable" on his statement of earnings and leave for the pay period ended September 30, 1995. The $5,820.10 was included on Mr. McNutt s 1995 Form W-2 and he paid taxes on this amount. Thus, Mr. McNutt was reimbursed for his TQSE, but not for any taxes that he incurred as a result of being reimbursed for the TQSE. In December 1995, Mr. McNutt submitted a claim for additional TQSE in the amount of $5,317.99, plus $700 for miscellaneous expenses, for a total of $6,017.99. In early 1996, the USCG paid Mr. McNutt $6,017.99. The FTR required the USCG to give Mr. McNutt a Form 4782, Employee Moving Expense Information, to show the amount of moving expense reimbursements and WTAs that he received during the year. 41 CFR 302-11.7(g). The Form 4782 that the USCG provided to Mr. McNutt shows that he received $6,017.99 in 1996, which is consistent with payment of no WTA. On Mr. McNutt s statement of earnings and leave for the pay period ended January 20, 1996, the USCG listed "PCS-Taxable" as $8,358.31. This is approximately the amount that the USCG would have paid Mr. McNutt if it had calculated Mr. McNutt s WTA according to the formula set out in the FTR (.3889 x $6,017.99 = $2,340.39), added that amount to the amount it reimbursed him for TQSE and miscellaneous expenses ($2,340.39 + $6,017.99 = $8,358.38), and not withheld any taxes due on the WTA amount. Mr. McNutt provided us with a handwritten worksheet, presumably prepared by someone in the USCG, which suggests that this is how the agency made its calculation of the amount listed on Mr. McNutt s statement of earnings and leave. Based upon the information we have available, we do not see that the USCG ever paid Mr. McNutt either $8,358.31 or a WTA associated with his December 1995 claim. In February 1996, the USCG sent a letter to Mr. McNutt, stating that because he had received a WTA payment in 1995, he was required to file a claim for a RIT allowance in 1996. Mr. McNutt submitted a RIT allowance claim as directed by the USCG, even though he had not received a WTA payment in 1995. Apparently, the USCG reviewed Mr. McNutt s claim, calculated the amount that his WTA would have been if he had received a WTA, determined that Mr. McNutt s combined marginal tax rate was less than 28%, and concluded that it had paid an excessive amount of WTA. The USCG told Mr. McNutt that it had paid him an excessive amount of WTA, and demanded that he repay $941.70, even though he had not been paid any WTA in 1995. In July 1996, the USCG sent another letter to Mr. McNutt, stating that he owed $828.57, instead of $941.70. Later that year, the USCG apparently realized that it had made a mistake when it considered Mr. McNutt s August 1995 claim. In an attempt to correct the mistake, the agency prepared a revised Form W-2 for 1995 to show that it had withheld $1,629.63 more from Mr. McNutt s salary that year than his original Form W-2 had shown. Presumably, the agency determined that this was the correct amount of either Mr. McNutt s WTA or his RIT allowance, and thought that Mr. McNutt could collect this amount by filing an amended tax return for 1995 and receiving a refund of the $1,629.63 from the IRS. Mr. McNutt objected to this procedure because it is not permitted by the regulations and because he does not believe that it will result in a proper calculation of his RIT allowance. Mr. McNutt asks us to review the decision of the USCG concerning the WTA or RIT allowance associated with his August 1995 claim. Discussion When the USCG originally reviewed Mr. McNutt s August 1995 claim, it apparently believed that by not withholding any amount for taxes due, it would achieve the same result as if it followed the provisions of the FTR and properly calculated Mr. McNutt s WTA and RIT allowance. This is not correct. Although the USCG reimbursed Mr. McNutt everything he was owed for the TQSE that he claimed in August 1995, the USCG did not reimburse Mr. McNutt for any of the taxes that he had to pay as the result of being reimbursed for TQSE. The purpose of following the FTR is to ensure that employees are reimbursed for TQSE and for taxes paid on nondeductible moving expenses, as required by the statute. The USCG s actions led to a result that was contrary to both statute and regulation. The USCG has not pointed to any statute or regulation that would allow it to correct its mistake by revising Mr. McNutt s Form W-2 for 1995. Even if a revision were permitted, we cannot tell whether the USCG s revision of Mr. McNutt s Form W-2 would properly compensate him for the taxes he paid on his TQSE reimbursement. The USCG should follow the regulations in order to rectify this situation. The FTR explains how to calculate a RIT allowance in Year 2 when, as happened here, no WTA was paid in Year 1. 41 CFR 302-11.8(f)(2). The USCG should follow this regulation and determine the correct amount of the RIT allowance associated with Mr. McNutt s August 1995 claim. For this claim, 1995 was Year 1 and 1996 was Year 2, and calculations should be made accordingly. Although Mr. McNutt does not challenge the amount of the payment that the USCG made to him as the result of his December 1995 claim, the information presented to us suggests that this payment might not have correctly compensated Mr. McNutt for the taxes associated with that claim. We suggest that the USCG recalculate the amount of the RIT allowance associated with Mr. McNutt s December 1995 claim. For this claim, 1996 was Year 1 and 1997 was Year 2, and calculations should be made accordingly. If Mr. McNutt was paid a WTA in 1996 for his December 1995 claim, then the USCG should calculate his RIT allowance in accordance with 41 CFR 302-11.8(f)(1). If he was not paid a WTA, then the USCG should calculate his RIT allowance in accordance with 41 CFR 302-11.8(f)(2). The claim is granted. _______________________________ MARTHA H. DeGRAFF Board Judge