This сase arose from a dispute over the allowable costs in a cost-reimbursement contract between the United States and Information Systems and Networks Corporation (“ISN”), a Maryland S corporation. The United States Cоurt of Federal Claims granted summary judgment in favor of ISN. It held that, under 48 C.F.R. § 31.205-41, the state income tax payments made by ISN’s sole shareholder resulting from dividends received from ISN were allowable costs in the cost-reimbursement contract. Becаuse the Court of Federal Claims improperly interpreted 48 C.F.R. § 31.205-41, we reverse and remand.
I
ISN is a Maryland corporation with one sole shareholder, Roma Malkani. ISN provides services to the United States through cost-reimbursement contracts. Under these contracts, the United States reimburses ISN for allowable costs incurred during performance of the contract. *1175 See 48 C.F.R. § 16.301-1 (2004). Each year ISN negotiates with - the United States to determine ISN’s allowable costs for that year. See 48 C.F.R. § 52.216-7(d)(2)(ii) (2004). A cost is allowable only when the cost complies with all of the following requirements:
(1) Reasonableness.
(2) Allocability.
(3) Standards promulgated by the CAS Board, if applicable, otherwise, generally accepted accounting principles and prаctices appropriate to the circumstances.
(4) Terms of the contract.
(5) Any limitations set forth in this sub-part.
48 C.F.R. § 31.202-2 (2004). As provided by the last of these requirements, allowable costs must conform to any of the specific limitations set forth in 48 C.F.R. §§ 31.201-205. Many of these limitations are enumerated in 48 C.F.R. § 31.205 аnd include rules for determining the allowability of forty-seven different types of costs. This case turns on the allowability of certain tax-related costs. Taxes are discussed in 48 C.F.R. § 31.205-41. That subsection states that some but not all taxes paid by an еntity are allowable. See 48 C.F.R. § 31.205-41 (2004).
ISN elected to be a subchapter S corporation pursuant to 26 U.S.C..§ 1362(a). In a traditional subchapter C corporation, there is what is known as double taxation. A corporation pays incomе tax on its corporate income. And, when the corporation distributes income to its shareholders, those shareholders also pay income tax on those dividends. In contrast, an S corporation is only subject to single taxation. The corporation does not pay income tax on the income it generates. Rather, only the shareholders of the S corporation pay income tax on their corporate dividends. As discussed by the Court of Federal Claims,
“S corporations” as they are known, are small businesses, closely held by no more than 75 shareholders, 26 U.S.C. § 1361(b)(1)(A), and often held by a sole shareholder. S corporation status is a tax election designed to make the decision of small businesses to incorporate “tax neutral;” i.e., a business will incur the same tax liability on its income whether the owners of the business incorporate or not. Subchapter S accomplishes this by eliminating the “doublе taxation” that usually befalls normal corporate income.
Info. Sys. & Networks Corp. v. United States,
As part of its proposal for reimbursement under its contract with the United States, ISN submitted proposals for reimbursement for costs associated with Ms. Malkani’s state income tax payments. The Defense Council Audit Agency (the “DCAA”) denied all of ISN’s relevant claims for allowable costs for Ms. Malka-ni’s state income tax payments. The DCAA found that, bеcause ISN was an S corporation and not subject to state income taxes, the state income taxes paid by Ms. Malkani were not allowable costs for ISN. On April 16, 1998, the Contracting Officer issued a final decision denying ISN’s claims.
*1176 On August 18, 1998, ISN filеd suit in the Court of Federal Claims. ISN alleged that it had reimbursed Ms. Malkani for her state income tax and ISN asked the Court of Federal Claims to declare those reimbursements to be allowable costs under the cost-reimbursement contract. The court issued its decision on liability on November 30, 2000. The Court of Federal Claims granted ISN’s motion for summary judgment and held that state income tax payments made by ISN’s sole shareholder of an S corporation were allowable costs. As allowable costs, ISN was to receive reimbursement for them. As a result, on July 7, 2004, the Court of Federal Claims issued its decision on damages and it held that $1,133,176 that had been paid for state income taxes by Ms. Malkani were allowable costs and should be included in the compensation for the cost-reimbursement contract. . Info. Sys. & Networks Corp. v. United States, No. 98-663C (Ct.Fed.Cl. July 21, 2004). .
The United States filed this appeal on September 10, 2004. This court has jurisdiction to entertain this appeal pursuant to 28 U.S.C. § 1295(a)(3). ISN cross-aрpeals the Court of Federal Claims’ denial of ISN’s request for a money judgment as well as interest under the Contracts Dispute Act of 1978. See 41 U.S.C. § 601.
II
This court reviews grants of summary judgment by the Court of Federal Claims de novo.
Costain Coal, Inc. v. United States,
The Court of Federal Claims, concluded that state income taxes incurred by a shareholder of an S corporation are allowаble costs. The court reached this conclusion based on its interpretation of both subparts (a) and (b) of 48 C.F.R. § 31.205-41. Discussing which taxes are specifically not allowable, the Court of Federal Claims held that costs are not allowable for “[t]axes from which exemptions are available to the contractor directly .... The term exemption means freedom from taxation in whole or in part and includes a tax abatement or reduction resulting from mode of assessment', method of calculation, or otherwise.” 48 C.F.R. § 31.205-41(b) (2004);
see also Info. Sys. & Networks,
The language of the regulation makes it clear that the term exemption “means freedom from taxation in whole or in part.” 48 C.F.R. § 31.205-41(b) (2004). After stating that general standard, the regulation states that a tax exemption “includes a tax abatement or reduction.”
Id.
There is nothing that supports the Court of Federal Claims’ interpretation of the regulation wherein tax abatements and tax reductions reрresent the exhaustive list of exempt taxes. Tax abatements or tax reductions are not the only types of exempt taxes. Instead, they are only two examples. Furthermore, the Court of Federal Claims also held that “the stаte income taxes were required to be paid and were paid,” and therefore the costs claimed by ISN were allowable under 48 C.F.R. § 31.205-41(a).
Info. Sys. & Networks,
The Court of Federal Claims’ review of various state tax provisions relating to S corporation taxation does not change our view. In discussing those provisions, the court noted that “[i]nspection of the tax codes of the states involved in this case ... shows that the relationship between an S corporation and its shareholders is an important and intermingled one for state tax purposes.”
Info. Sys. & Networks,
Costs of fines and penalties resulting from violations of, or failure of the contractor to comply with, Federal, State, local, or foreign laws and regulations, are unallowable except when incurred as a result of compliance with specific terms and conditions of the contract or written instructions from the contracting officer.
48 C.F.R. § 31.205-15(a) (2004). The Court of Federal Claims’ reliance on state tax provisions that describe penalties for failure to have shareholders pay the proper state income tax does not establish that an S corporation shareholder’s state income tax payments should be an allowable cost to the corporation.
The plain language of 48 C.F.R. § 31.205-41(b) states that taxes from which the contracting entity is exempt are not allowable costs. This is the case here. ISN is free from taxation on Ms. Malkani’s income derived from ISN’s corporate dividends. Therefore, in its cost-reimburse *1178 ment contract, Ms. Malkani’s state income tax payments themselves cannot be an allowable cost for ISN.
Ill
For the reasons stated, the Court of Federal Claims improperly interpreted 48 C.F.R. § 31-205-41(b) too narrowly and it therefore improperly concluded that Ms. Malkani’s state income tax payments were allowablе costs. This court reverses the Court of Federal Claims’ grant of summary judgment in favor of ISN and remands the case to the Court of Federal Claims for further proceedings consistent with this opinion. As this court reverses the grant of summary judgment, ISN’s counterclaim for money damages and interest is rendered moot.
COSTS
No costs.
REVERSE AND REMAND