Board of Contract Appeals General Services Administration Washington, D.C. 20405 July 23, 1998 GSBCA 14276-RELO In the Matter of MARLENE SMILEY Marlene Smiley, Vancouver, WA, Claimant. Jay L. Gerst, Acting Deputy Director, Division of Finance, Fish and Wildlife Service, Arlington, VA, appearing for Department of the Interior. DANIELS, Board Judge (Chairman). In June 1993, the Fish and Wildlife Service transferred Marlene Smiley from Veradale, Washington, to Portland, Oregon. Ms. Smiley and her husband took up residence in Vancouver, Washington, across the Columbia River from Portland. The agency reimbursed Ms. Smiley for expenses she incurred in moving. It also paid her a relocation income tax (RIT) allowance to compensate for the higher income taxes she incurred as a result of having received the reimbursements, which are considered taxable income. RIT allowances are determined in accordance with detailed instructions and formulae prescribed in the Federal Travel Regulation (FTR), 41 CFR pt. 302-11 (1993). A marginal state income tax rate must be inserted into the formulae for the purpose of calculating the allowance to which an employee is entitled. Id. 302-11.8(e), (f). In determining the RIT allowance for Ms. Smiley, the Fish and Wildlife Service used the marginal income tax rate for the state of Washington. Ms. Smiley maintains that it should have used the rate for the state of Oregon instead. At the time relevant to this case, Washington had no state income tax. Nonresidents of Oregon who earned income from Oregon sources were required to pay Oregon state tax on that income. Ms. Smiley consequently had to pay taxes to Oregon, but not Washington, on salary she earned at her job in Portland, and reimbursements for relocation expenses resulting from her move to that position, during 1993. According to the FTR, in calculating a RIT allowance, an agency should use the appropriate marginal income tax rate "for the State where the employee is required to pay State income tax on moving expense reimbursements." 41 CFR 302-11.8(e)(2)(i).[foot #] 1 Because Ms. Smiley was required to pay income tax on her relocation expense reimbursements to Oregon, but not Washington, the agency should have used the appropriate Oregon marginal tax rate in calculating her RIT allowance. In March 1997, the Fish and Wildlife Service finally realized that it had been implementing the FTR incorrectly as to employees who lived in Washington, but had moved to take jobs in Oregon. The agency decided it would use the marginal tax rate for an employee's state of employment, not state of residence, in calculating RIT allowances. It refused to apply the new policy to employees who had moved before 1995, however. In response to questions raised by Ms. Smiley, the agency declined to modify this decision. The Fish and Wildlife's current posture is not correct. Application of a marginal tax rate for an employee's state of employment, rather than state of residence, happens to be right with regard to individuals who worked in Oregon and lived in Washington during 1993, but it is not always right. The reason that the Oregon rate, not the Washington rate, should be used is not that Ms. Smiley worked in Oregon, but that she paid taxes to that state on the reimbursements she received consequent to her move to that position. There is no provision in the FTR which permits an agency to deviate from the regulation in calculating a RIT allowance on the basis that the transfer in question occurred in any particular year. The Fish and Wildlife Service is concerned that if, as a result of using the Oregon tax rate, it would have to pay Ms. Smiley a larger RIT allowance than the one it previously paid, she may have to file amended federal and state tax returns for years long past, and that could prove logistically troublesome. If any such problems result, they will be the claimant's ----------- FOOTNOTE BEGINS --------- [foot #] 1 If the employee incurs state income tax liability on moving expense reimbursements in more than one state, the FTR's rules become more complex. If the states tax different portions of the reimbursement, the average of the state marginal tax rates must be used. If the states tax the same portion of the reimbursement, but one state allows an adjustment or credit for income taxes paid to another state, the highest of the applicable state marginal tax rates must be used. If the states tax the same portion of the reimbursement, but more than one state does not allow an adjustment or credit for income taxes paid to another state, the sum of the applicable rates is used. 41 CFR 302-11.8(e)(2)(iv). We do not have to concern ourselves with these complexities in this case, since Ms. Smiley had to pay state income tax to only one state. ----------- FOOTNOTE ENDS ----------- responsibility, not the agency's. The possibility that these difficulties may occur is not justification for the agency's failing to follow the law. See George E. Lingle, GSBCA 13946-TRAV, 97-2 BCA 29,292. _________________________ STEPHEN M. DANIELS Board Judge