GAB Decision 025
June 30, 1976 The Regents of the University of California (Campus
Computing Network at UCLA); Audit Control No. 40004-09; Docket No.
75-3 DeGeorge, Francis; Malone, Thomas Mason, Malcolm
This is an appeal from a determination of the Regional Director,
Region IX, dated January 10, 1975, concerning proposed recharge rates
for the Computer Center at University of California at Los Angeles.
These rates provide the basis for allocating to individual federally
supported research agreements the costs of a central computer system.
Cf. University of California at San Diego, Docket No. 23, Decision No.
13.
The case turns on an interpretation of the documents and the
applicable grant rules which are essentially those of OMB Circular No.
A-21, FMC Circular 73-8 and the HEW Guide for Colleges and Universities
and 45 CFR Part 74, primarily Sec.C.5 and J.37 of A-21 and corresponding
provisions of the other documents cited.
On June 5, 1956, the University and the International Business
Machines Corporation (IBM) established under joint sponsorship the
Western Data Processing Center (WDPC). IBM paid half the cost of the
building housing WDPC or $400,000, whichever was less, over a ten year
period.The agreement ran for 10 years from completion of the building in
July 1958 or until July 1968. IBM installed certain computer equipment
at no charge and made it available for four hours a day for the
exclusive use of the University and four hours a day for exclusive use
of other participating colleges and universities, retaining eight hours
a day for IBM's exclusive use. IBM also agreed to reimburse the
University for about half of the operating costs. This was a cooperative
arrangement in which the partners shared the costs and both received
benefits.
In April 1967 by mutual agreement the WDPC agreement due to expire in
1968 was cancelled. The computing facility in the School of Engineering
and WDPC merged to form the present Campus Computing Network (CCN). As
part of the 1967 agreement, IBM ceased active participation in the
operation and management of computing services at the University and
ceased paying the share of costs of operation.
On June 23 1967, IBM proposed to provide to the University an
equipment use grant of equipment superior to that supplied to WDPC in
the form (Plan A) of supplying free use of a System 360/Model 75 at no
charge continuing until a Model 91 is installed and ready for use or
until March 31, 1972, whichever occurs first. After installation of the
Model 91, IBM proposed to provide the University with the opportunity to
share equally with IBM the use of the Model 91 until March 31, 1972.
Alternatively (Plan B), IBM proposed to provide the University with a
credit to the Monthly Availability Charge in the amount of $74,624. on
the Model 75 System "or any other IBM leased equipment which the
University chooses to install," effective April 1, 1967 and continuing
until March 31, 1972. On June 30, 1967 the University elected Plan B.
The monthly credit was equal to the then-current monthly availability
charge of the Model 75 configuration initially contemplated, net of the
usual educational discount.
The present dispute involves the character of this monthly credit.
For the entire period involved, the credit comes to $3,358,153. Based on
the average annual Federal use, estimated by the Regional Office at 42
percent and by the University at 31 percent, the effect of this disputed
amount on the recharge rate comes to over a million dollars a year.
IBM offered the University a choice between (1) a straight donation
of the use of the Model 75 at no charge and (2) a credit of the full
then-current Monthly Availability charge for the Model 75 net of
educational discount. The University chose to purchase the equipment,
receiving a credit against the cost. Although there are some
differences between the two transactions, in essence they are
substantially the same and no clear argument has been offered to justify
different treatment.
The essential question at issue is whether we have, on the one hand,
two separate transactions, namely, an acquisition of equipment (rental
of the Model 75 followed by purchase of the Model 91) and a separate
donation of approximately $75,000 a month, or on the other hand, two
inter-related transactions namely, acquisition of the equipment and a
credit of approximately $75,000 a month, which must be set off against
each other in determining the true allowable cost of the equipment.
The Regional Office treated the transaction as governed, at least by
extension, by the rules applicable to costs supported in part by a
federal government grant.We do not accept that view, but do accept the
Regional Office's more general analysis of the transaction as involving
an applicable credit.
The Regional Office view that the transactions are interrelated and
reflect an applicable credit is confirmed by the words in which the
entire proposal was expressed, namely, "IBM will provide to University
at its Los Angeles Computing Center an equipment use grant" and again by
the words in which Plan B was expressed, namely, "IBM will provide
University with a credit to the Monthly Availability Charge in the
amount of $74,624 on the Model 75 system or any other IBM leased
equipment which the University chooses to install." The donation is
clearly tied to the acquisition of the equipment and clearly
characterized as a credit. Although the terms of the agreement confirm
that the transaction is properly treated as an applicable credit, the
result would not be avoided had the agreement been phrased differently
since it is the substance of the relationship that counts.
This is further confirmed by the University's initial bookkeeping
entries which it now repudiates as incorrect. These recognized the
equipment use credit as a reduction of computer center costs. The
University submits in support an affidavit which, however, has no
factual content, but merely expresses an opinion on the ultimate issue
in dispute. We are not bound to accept and do not accept the
affidavit's characterizations of the bookkeeping showing a credit as
"erroneous."
It is further confirmed by the terms of a proposal to the National
Science Foundation for a grant which described the transaction as
involving "a rental credit of $74,624 per month from IBM towards support
of IBM computing equipment on campus." The University's brief seeks to
neutralize this expression as referring merely to an accounting
procedure. The same proposal states that the "rental-credit support. .
. results in a reduction of computer costs."
The acquisition of the Model 91 was contemplated from the beginning
since IBM's proposal expressly stated (Plan A) that the Model 75 was to
be provided at no charge "until such time as IBM System 360/Model 91 is
installed and ready for use or until March 31, 1972, whichever event
first occurs. . . when an IBM 360/Model 91 is installed . . . IBM will,
at its own expense, remove the Model 75. . ." The University chose Plan
B which was not explicitly tied to the purchase of the Model 91, but it
proceeded to purchase it and IBM continued to provide the monthly
credit.
The University's effort to translate the transaction into one
involving cash payments by IBM to the University for unrestricted use
and wholly independent of the acquisition of computer equipment out of
which it arose and to which it was expressly tied is ingenious but not
convincing. The University points out that the term "applicable credit"
does not have a rigorously precise definition. That is so, but a
rigorously precise definition is neither practical nor necessary. The
term is reasonably clear and reasonably includes the present
transaction. The University has not sustained the burden of persuading
us that the transaction can realistically be split into two independent
parts as it seeks to do.
The appeal is well prepared, fully documented and elaborately argued.
The Regional Director's response is persuasive. No material facts
appear to be in dispute.
CONCLUSION
The appeal is rejected on the ground that the transaction involved an
applicable credit against the rental of the Model 75 the against the
purchase price of the Model 91.
It remains necessary for further negotiations to take place
concerning certain costs and certain possible duplications which the
University asserts and the Regional Office concedes must be considered
(Regional Office Response to Appeal pages 19-20 and Response to Order to
Show Cause). No stay of this decision is required pendng such
negotiations.
OCTOBER 04, 1983