______________________________ December 4, 1997 ______________________________ GSBCA 14325-RELO In the Matter of ROBERT J. DUSEK Robert J. Dusek, Homestead, FL, Claimant. C. Bruce Sheaffer, National Park Service, Department of the Interior, Washington, DC, appearing for Department of the Interior. DeGRAFF, Board Judge. The Federal Travel Regulation permits agencies to take into account only earned income when determining the amount of a relocation income tax allowance due to an employee. Agencies have the authority to waive the repayment of debts due from employees, under certain circumstances. 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. Generally, including the reimbursed amount in gross income does not result in any increase in the amount of taxes paid by the employee because most 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 (1996). 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 from the amount it reimburses the employee because the reimbursed amount is considered to be compensation to the employee. 41 CFR 302-11.6(b)-(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 formula is based upon a withholding rate of 28%. 41 CFR 302- 11.7(d).[foot #] 1 The purpose of paying a RIT allowance is to reimburse the employee for any 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 FTR explains that the procedures are "not to be adjusted to accommodate an employee's unique circumstance" which may differ from the circumstances assumed by GSA and the IRS when they developed the procedures for calculating and paying a RIT allowance. 41 CFR 302-11.8(b)(2). The procedures produce an estimate of an employee's added tax liability due to moving expense reimbursements, and are not designed to reimburse an employee for precisely the amount of the employee's added tax liability. 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, which are established by the FTR, depend upon the amount of earned income that will be reported on the employee's federal tax return in Year 1. For purposes of the RIT allowance, earned income includes only gross compensation reported as income on IRS Forms W-2 and the net earnings for ----------- FOOTNOTE BEGINS --------- [foot #] 1 The 1996 bound Code of Federal Regulations states that the withholding rate is 20%. The correct figure is 28%. 62 Fed. Reg. 10,708-09 (1997). ----------- FOOTNOTE ENDS ----------- self-employment shown on Schedule SE of IRS Form 1040. The FTR formula for calculating the RIT allowance does not allow agencies to take into account unearned income, such as interest and dividends, when determining an employee s combined marginal tax rate. 41 CFR 302-11.5(h); 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). All of this background brings us to the present claim. Robert J. Dusek reported for duty at the Department of the Interior (Interior) on October 28, 1995. During 1996, Interior reimbursed Mr. Dusek for his moving expenses and paid him a WTA of $2,387.28, calculated according to the FTR formula that is based upon a withholding rate of 28%. Based upon the amount of Mr. Dusek s earned income in 1996, the FTR required Interior to use a combined marginal tax rate of 15% in order to calculate Mr. Dusek's RIT allowance. Applying the FTR formula for calculating a RIT allowance using a 15% combined marginal tax rate, Interior determined that it paid Mr. Dusek an excessive amount of WTA and that Mr. Dusek owes $1,300.09. Interior believes that it is unfair to ask Mr. Dusek to repay $1,300.09 because Mr. Dusek actually paid taxes on his income, including the amounts he received from Interior for his moving expenses, at a combined marginal tax rate of 28%, and not at the 15% rate that was used to calculate his RIT allowance. In Interior s view, applying the FTR formula to calculate the amount of Mr. Dusek's RIT allowance does not reimburse Mr. Dusek for substantially all of the taxes he incurred for his moving expenses. In order to avoid what it views as an unfair result in Mr. Dusek s case, Interior asks whether it may take Mr. Dusek's unearned income for 1996 into account when calculating his RIT allowance. If Interior could do so, the FTR would establish a marginal tax rate greater than 15% to use when calculating Mr. Dusek's RIT allowance, and Interior would owe Mr. Dusek $5.52. We consider Interior's question pursuant to the authority conferred by 31 U.S.C. 3529. Discussion Interior may not take Mr. Dusek s unearned income into account when calculating his RIT allowance, because the FTR is very clear that only earned income will be taken into account when determining the proper amount of a RIT allowance, and the FTR s procedures are not to be adjusted in order to accommodate an employee's unique circumstances. We cannot ignore the provisions of the FTR in order to permit Interior to achieve the result that it wants in this case. There is a way for Interior to arrive at what it has decided is a fair result. If Interior does not want to collect the $1,300.09 that Mr. Dusek owes, it does not have to do so. Interior may exercise its authority to waive repayment of the $1,300.09 if it concludes that collection would be against equity and good conscience and not in the best interests of the United States, and if there is no indication of fraud, misrepresentation, fault, or lack of good faith on the part of Mr. Dusek. 5 U.S.C. 5584(a)(2)(A); Gerald A. Sherman, GSBCA 13791-TRAV, slip op. at 4 n.3 (Sept. 30, 1997). ______________________________ MARTHA H. DeGRAFF Board Judge