Child Opportunity Program, Inc.

Child Opportunity Program, Inc. (COP) appealed a determination by the Administration for Children and Families (ACF) disallowing $1,483,771 in costs charged to COP's Head Start grant. The disallowance covered costs claimed by COP during its Grant Years (GYs) 14 through 17, the period November 1, 1992 through June 30, 1996. The disallowance encompassed nine separate items of costs claimed by COP.

For the majority of the costs represented by the disallowance, costs claimed by COP were disallowed by ACF on the basis that COP failed to produce documentation to support that the asserted expenditures were allowable under and allocable to the Head Start program. The requirement to document costs is a fundamental principle of grants management, and the burden to demonstrate the allowability and allocability of costs claimed in a grant program rests with the grantee. Lac Courte Oreilles Tribe, DAB No. 1132, at 5, n.4 (1990). Grantees are required to maintain a system for keeping auditable records and a system for annual audits. See 45 C.F.R. �� 74.50 - 74.53.

For the reasons discussed below, we, in regard to the first eight items of the disallowance, sustain $563,729 of the disallowance, reverse $315,596 of the disallowance, and remand the issue of the GY 15 bus purchase ($87,000) for further action. For the ninth item, GY 16 in-kind contributions, we direct ACF to recalculate the amount disallowed based on our findings.

Background

COP was terminated from the Head Start program on June 6, 1996, due to noncompliance with Head Start requirements in a number of areas, including the financial management of its grants. COP initially appealed the termination, but eventually withdrew its appeal. ACF subsequently notified COP that, based upon a Procedures Review by an independent auditor as well as an ACF investigation, it was disallowing a total of $1,483,771 for allegedly unallowable costs that had been charged to COP's Head Start grant. The disallowance notification listed nine separate items or areas in which amounts were being disallowed.

COP appealed to the Board and requested an evidentiary hearing.⁽¹⁾ After the parties had submitted their briefs and appeal files, the Board held a telephone conference to discuss COP's hearing request. The Board subsequently issued an extensive preliminary analysis of the issues in an Order to Show Cause, which directed the parties to supply additional argument and information in specified areas. After a review of the parties' responses to the Order, and their replies to each other's submissions, we have determined that a hearing is not necessary because there is no issue for which any oral testimony would change our analysis. COP did not identify any items in dispute where testimony could substitute for required documentation. Thus, no additional information is needed for the Board to resolve the issues presented by this appeal and the case is ripe for decision.

Below we examine each of the nine separate areas in which ACF disallowed costs claimed by COP.

I. Undocumented reported costs.

In its notification of disallowance ACF determined that COP had failed to document $297,632 in GY 16 unliquidated obligations reported on its December 5, 1995 SF-269, a standard form Financial Status Report. In reaching this determination, ACF noted that COP had disavowed the original SF-269 as estimated, rather than actual, unliquidated obligations and submitted its Exhibit A-8, in which COP listed new cost categories and provided documentation to support the same amount of unliquidated obligations as reported on the earlier SF-269. ACF stated that COP's Exhibit A-8 lacked credibility due to COP's admission that the original SF-269 was inaccurate and that the exhibit was created after-the-fact to justify the admittedly inaccurate earlier report. ACF questioned the radical change in the cost classifications, particularly with regard to "Food Costs" and "Accrued Personnel Costs." ACF concluded that "COP overspent its Head Start grant by at least the amount of the undocumented, unliquidated obligations, which it carried over and paid for from succeeding grant years." May 30, 1997 notification of disallowance at 3.

In its brief, COP stated that its former Chief Accountant acknowledged that the SF-269 he submitted in December 1995 included only estimates of the cost categories and line-item amounts relative to unliquidated obligations. COP maintained, however, that the bottom line total relative to unliquidated obligations was correctly reported on the SF-269. COP asserted that ACF's refusal to consider the documentation COP submitted in its Exhibit A-8 and ACF's reasoning for its disallowance regarding this issue were vague and intentionally designed to prevent COP from being able to successfully rebut ACF's finding. COP then produced documentation, set forth in Exhibit A-8, Supplement 1, which purportedly addressed all the $297,632 disallowed under this item.

While we do not question COP's position that the original SF-269 submitted by COP was only an estimate and did not accurately identify the unliquidated obligations COP actually incurred, the regulations are, nevertheless, explicit in setting forth the requirements for financial reporting by a grantee. See 45 C.F.R. � 74.52. The SF-269 form is a financial report that a grantee has the obligation to complete accurately. It is understandable, therefore, why ACF expressed concerns about the drastic revision in the categories between COP's original SF-269 and the revised version. ACF, however, has not pointed to any regulation or policy that would preclude a grantee from amending a previously submitted SF-269 or that would bar a grantee from revising its budget categories if this action is supported by appropriate accounting records.

The Board's preliminary review of the check numbers and the material in COP Exhibit A-8, Supplement 1, conducted prior to the teleconference, suggested that this material represented liquidation of obligations that had been incurred during GY 16, but with the checks actually written within three months after the end of the program year.

The Board's process is a de novo review of the underlying issues in an appeal. Therefore, irrespective of what categories of costs might have appeared on the original SF-269 for GY 16, COP presented documentation sufficient to support its position that the expenditures in question were unliquidated obligations for allowable costs incurred in GY 16. Accordingly, the Board's Order stated that ACF should rebut COP's positions, as documented by its Exhibit A-8, Supplement 1, either with expert testimony or other analyses of COP's expenditures.

In response to the Order, ACF stated that it was unable to obtain a complete set of the working papers of the independent auditor who conducted the program review audit of COP, but was able to submit the auditor's working papers concerning COP's personnel costs, including payroll and fringe benefits. ACF Ex. 34. These personnel costs constituted approximately $229,000 of the alleged unliquidated obligations. ACF argued that the workpapers show that the auditor had in fact reviewed COP's documentation concerning accrued personnel costs and concluded that COP had not accrued the payroll and fringe benefits costs as GY 16 obligations. Therefore, ACF contended, these costs should be disallowed.

ACF also specifically challenged documentation submitted by COP for three items presented as unliquidated obligations:

o $3,758 in travel and registration fees for COP employees to attend a Head Start conference held December 2-5, 1995. COP Ex. A-8, Supp. 1, tabs 10 - 14. ACF argued that since GY 16 ended on October 31, 1995, these costs could not be attributed to GY 16. ACF submitted section 3.04 of the ACF Discretionary Grants Administration Manual (DGAM), ACF Ex. 35, which states that the obligation of grant funds, in regards to travel, occurs when the travel is taken. At 5. Thus, ACF maintained that these travel costs were not an allowable obligation for GY 16, and therefore cannot be claimed as unliquidated obligations for GY 16.

o a check for $2,225 issued on August 10, 1995, which COP admitted should not have been included as an unliquidated obligation. COP Ex. A-8, Supp. 1, at 2.

o $540 paid to the Volunteers of America and listed as a donation. COP Ex. A-8, Supp. 1, tab 17. ACF referred to section 3.04 of the DGAM, at page 10, which states that charitable contributions are not an allowable cost. Thus, according to ACF, the donation to Volunteers of America cannot be an allowable unliquidated obligation.

ACF did not offer any specific arguments as to why the remaining $62,105 in alleged unliquidated obligations should not be allowed.⁽²⁾ ACF did further argue, however, that COP failed to present any records to indicate that its accounting system tracked expenditures to each program year's grant, with the result that it was not unreasonable to conclude that COP liquidated the obligations cited in its Exhibit A-8, Supplement 1, from subsequent grant year funds or from non-Head Start funds.

ACF's response to the Board's Order, save for the three specific items it challenged as unliquidated obligations, is not persuasive. In its Order, the Board informed ACF that the documentation proffered by COP regarding the asserted unliquidated obligations appeared sufficient to support COP's position; the Board then gave ACF an opportunity to address the preliminary analysis. Instead of addressing the newly submitted documentation, however, ACF relied again on the auditor's workpapers which, as the Board noted in its Order, were prepared in response to COP's original SF-269 for GY 16, which COP has now disavowed. ACF did not indicate that it had its auditors examine, as the Board directed in its Order, the documentation in light of the revised SF-269. Consequently, the documentation submitted by COP, contained in Exhibit A-8, Supplement 1, to support its amended SF-269, which we found to support COP's position on the unliquidated obligations, has not been refuted by ACF. We have no basis to question the validity of this documentation, and we accordingly accept it as establishing the existence of GY 16 unliquidated obligations.

Furthermore, as for the Board's inquiry to ACF whether all of COP's GY 16 funds were disbursed so that the checks submitted in COP's Exhibit A-8, Supplement 1, might have been paid from sources other than GY 16 funds, ACF has only offered a statement from COP that it spent more on Head Start expenditures than it received in Head Start grant funds, with funds received from other sources applied to costs associated with the operation of COP's Head Start program. This is clearly not sufficient to establish that the undocumented reported costs were not in fact GY 16 unliquidated obligations.

We agree with ACF on the three items specifically refuted -- the travel expenses, the August 10, 1995 check, and the donation to Volunteers of America -- and accordingly sustain the disallowance of $6,523 for these items based on the rationale stated by ACF. We reverse, however, the remainder of the disallowance for undocumented costs in the amount of $291,109 on the basis of the documentation contained in COP's Exhibit A-8, Supplement 1.

II. Bus funding expended for other purposes.

This item concerns bus purchases that were authorized in GYs 14 and 15 but not actually accomplished until GY 16. ACF determined that COP did not have the funds that had been expressly authorized in GYs 14 and 15 for bus purchases available in GY 16 when COP paid for the buses. Specifically, ACF had authorized, on August 11, 1993, COP to purchase four 20-passenger buses for the budgeted amount of $116,000 using funds from GY 14 (which ended on October 31, 1993); COP, however, did not actually pay for the buses until November 10, 1994 in GY 16. Similarly, ACF found that it had authorized COP to use $87,000 of GY 15 funds for the purchase of three buses, but that COP did not pay for the buses until January 30, 1995 in GY 16.

ACF declared that records show that --

COP reported that all of its GY 14 and 15 cash funds were disbursed as of December 31, 1993 and December 31, 1994, which preceded the purchase dates of the buses. Thus, COP did not have any GY 14 and 15 funds available on the dates that it purchased the buses in question. Therefore, it used Head Start funds from a subsequent grant year to purchase the buses and the GY 14 and 15 funds that ACF had expressly authorized for the purchase of the buses was inappropriately spent for a purpose other than that for which it was authorized.

May 30, 1997 notification of disallowance at 4.

COP insisted that there were three undisputed facts concerning the bus purchases: 1) COP had authorization to purchase the buses; 2) the buses were purchased for the sole use of the Head Start program; and 3) the relevant buses have all been returned to ACF for continued use in the Head Start program by the grantee that succeeded COP. COP maintained that ACF's disallowance of $203,000 for the bus purchases was a surreptitious attempt to obtain a double recovery, in that ACF is seeking to hold COP responsible for the amount of the bus purchases while COP has turned the buses over to the successor Head Start grantee.

ACF responded that the reason for the disallowance of this item was that COP expended the funding expressly authorized by ACF for the purchase of the buses in GYs 14 and 15 for other purposes. For example, regarding the four 20-passenger buses, ACF stated that it did not take the disallowance because COP purchased the buses at a later date due to delays caused by the manufacturer of the buses, but rather because COP could not show that it actually used the GY 14 funding that ACF had expressly authorized to be used for the bus purchases when COP finally consummated the sale. ACF argued that COP cannot shift the cost of the buses to funding from another grant year, citing Office of Management and Budget (OMB) Circular A-122:

Any cost allocable to a particular award or other cost objective under these principles may not be shifted to other Federal awards to overcome funding deficiencies, or to avoid restrictions imposed by law or by the terms of the law.

General Principles, A.4.(b).⁽³⁾

ACF maintained that the disallowance was taken because ACF gave specific funding amendments to COP for specific amounts of money for a certain time period for the purchase of the buses, but COP has not been able to show that it used that specific money to purchase those buses. Rather, based on the records available to ACF, ACF contended that COP purchased the buses using funding from a later period of time. ACF declared that it did not take a disallowance from that later period of time in which the buses were actually purchased using funds that had not been authorized; ACF took the disallowance for the amount of money that was specifically authorized for the purchase of the buses because COP could not show it had been used to purchase the buses.

The record shows that COP obligated and expended GY 16 funds for the buses. The question presented is whether having expended GY 16 funds for the buses, COP is obliged to return the GYs 14 and 15 funds ACF found had been awarded for the bus purchases, but not used for the purpose awarded. The record shows that COP had expended all its GYs 14 and 15 funding. See COP Ex. A-1 and ACF Ex. 3. Because ACF did not disallow the GY 16 funds actually expended for the buses, the facts described as undisputed by COP are an insufficient basis upon which to reverse the disallowance.

Furthermore, since all GYs 14 and 15 funds were expended, our record review supports ACF's assertion that COP used GYs 14 and 15 funds allegedly designated for buses for other expenditures in those years. However, this does not necessarily mean that the disallowance for this item must be sustained. Under the OHDS DGAM, unless grant funds are subject to specific limitations as to use, a grantee may make revisions between and among the object class categories within the total direct costs of the project, provided that the funds are used for allowable costs of the project. DGAM, Ch. 1, � L.3. In Community Action Council for Lexington-Fayette, Inc., DAB No. 1258 (1991), the Board remanded a disallowance to the Office of Human Development Services, ACF's predecessor organization, on the grounds that the terms and conditions of a grant award of supplemental funds did not effectively condition the funds so that the grantee was limited to the purchase of buses only.

The Board's Order to Show Cause directed ACF to address the factors discussed in Lexington-Fayette and explain why the Board should conclude that the notices of grant award here were sufficient to place conditions limiting the funds in question only to buses. The Order stated that ACF needed to show that the language in the grant awards for those years was explicit in limiting the available funds to bus purchases, that the awards specifically advised the grantee that the planned funding level of its program was not increased, and that no other non-bus-related expenditures would be allowable.

In response to the Board's Order, ACF provided the supplemental grant award for $454,924 for GY 14, executed on August 11, 1993. ACF Ex. 36. The grant award breaks down the funds into several categories, with $116,000 in start-up funds for four 20-passenger buses. Id. The grant award specifically states that "start-up funds cannot be used for any other purpose without prior written approval from the Regional Office." Id. The supplemental grant award for $440,024 in GY 15 provided that start-up funds of $87,000 were authorized for three buses. ACF Ex. 37. ACF admitted that this grant award, however, did not contain the same limiting language that appeared in the previous year's supplemental award requiring prior written approval for using the funds for another purpose. ACF Response to Order at 6.

Thus, while there was an explicit prohibition on using the $116,000 in supplemental grant funds for GY 14 for anything other than bus purchases, there was no such restriction placed on COP in the GY 15 supplemental award. As such, under the holding in

Lexington-Fayette, the disallowance of $116,000 relating to GY 14 is sustained. The disallowance of $87,000 for GY 15 is remanded to ACF for consideration of documentation to be provided by COP to show that all the grant funds it received during that year's supplemental award were expended for purposes related to its Head Start program and otherwise properly charged to start-up funds.⁽⁴⁾ COP has asserted that its Exhibit C, attachments 6 and 7, establishes that the funds were so properly expended. Attachment 6 is a schedule reflecting Head Start expenditures for GYs 14 through 17; Attachment 7 is a schedule reflecting the totals for Head Start grant receipts and program expenditures for GYs 14 through 17. COP did not provide the documentation to support these schedules, although it did state that it would provide it to ACF at a mutually agreed upon time. COP Ex. C at 2. Should COP fail to provide the documentation within 30 days from the date of receipt of this decision, the disallowance for $87,000 for GY 15 will be sustained. Should COP provide the documentation within the 30 days, but ACF determines that the documentation is insufficient to show that all or part of the expenditures were allowable, COP will be able to appeal that adverse determination to the Board within 30 days of its receipt.

III. Unallowable rental costs.

ACF determined that the lease COP had with the Ideal Corporation (Ideal) for the property at 2500 Curtis Street was a less-than-arms-length transaction. COP used the Curtis Street building for both its Head Start program and a separate program, COP's Child Care. ACF alleged that Ideal was formed in 1992 for the sole purpose of owning and operating a facility for COP's Head Start program. ACF cited OMB Circular A-122, Attachment B, paragraph 42.c, as authority for disallowing this item. As applicable to the issue in dispute, paragraph 42.c provides that --

[r]ental costs under less-than-arms-length leases are allowable only up to the amount that would be allowed had the title to the property vested in the organization. For this purpose, a less-than-arms-length lease is one under which one party to the lease agreement is able to control or substantially influence the actions of the other. Such leases include, but are not limited to those between (I) divisions of an organization; (ii) organizations under common control through common officers, directors or members; and (iii) an organization and a director, trustee or officer or key employee of the organization or his immediate family either directly or through corporations, trusts, or similar arrangements in which they hold a controlling interest.

ACF pointed to the following facts to support its finding that the lease between COP and Ideal was a less-than-arms-length transaction:

o COP's Board Chairman was in a position to exert substantial influence over Ideal's actions;

o The principal reason for Ideal's existence was to acquire facilities for COP and that without COP Ideal had no independent economic viability;

o COP and Ideal coordinated the activities associated with the purchase of the 2500 Curtis Street property in a manner uncharacteristic of arms-length dealings;

o COP personnel performed functions for Ideal that would normally be performed by an organization's own personnel; and

o The rental payment for the 2500 Curtis Street property was based on Ideal's debt service plus an added amount for miscellaneous expenses.

ACF therefore found that rental costs under the lease between Ideal and COP were allowable only up to the amount that would have been allowed had title to the property been vested in COP, i.e., the amount that could be charged through a use allowance or depreciation. ACF accordingly disallowed $314,898 in rental costs for GYs 15 through 17, the difference between the rental costs claimed by COP and the allowable depreciation costs.

COP argued that COP and Ideal have been and continue to be separate and distinct legal entities. COP contended that no member of its Board of Directors was also a member of Ideal's Board of Directors or a member of Ideal's management staff. COP maintained that the only closely coordinated activity between COP and Ideal was the renovation of the Curtis Street building, a common practice in the commercial world where a single-use tenant exercises significant control in the renovation of the leased building. COP added that the lease with Ideal benefitted both COP and the federal Head Start program, in that COP's negotiations with Ideal resulted in rental charges that were less than the fair rental value for the property.

ACF supplied a number of exhibits (ACF Exhibits 8 - 28) which, according to ACF, demonstrated that COP had a less-than-arms-length relationship with Ideal.⁽⁵⁾

In examining the issue of less-than-arms-length relationships, the Board has taken the approach that the determination that a less-than-arms-length relationship existed does not necessarily depend on any one uncontroverted fact as establishing that one organization had the ability to control or substantially influence the other, but rather on whether the "totality of the overall relationship" between two organizations supported a finding of substantial influence. Enterprise for Progress in the Community, Inc., DAB No. 1558, at 7 (1996) (EPIC).

In past cases involving Head Start grantees and lessor organizations on the issue of possible less-than-arms-length transactions, the Board has looked at such items as the lessor's articles of incorporation, the minutes of the lessor organization's meetings of its Board of Directors, the coordination of activities between the organizations, the lessor's sources of income, and the use of the grantee's personnel to perform many of the lessor's functions for indicia of the independence of the lessor from the grantee.

Here, ACF has provided Ideal's Articles of Incorporation. ACF Ex. 8. The Articles list Ideal's purposes as:

(1) To assist and participate in the establishment and operation of a pre-school and supplementary education program in the Denver metropolitan area . . ..
(2) To encourage community participation and to train and assist volunteers and parents in the planning and administration of the program.
(3) To assist in supplying and administering supplemental services in health, education and social services for the participants in the program.
(4) To cooperate with other private agencies and local, state, and federal agencies in the administration and evaluation of the program.

COP, however, has not supplied the Board with any minutes of meetings of Ideal's Board or other documentation which might show Ideal's independence from COP, but rather has provided only its lease with Ideal for the Curtis Street property. COP Ex. A-7.

There are several factors which indicate that Ideal and COP did not have an arms-length relationship. It appears that Ideal had no other purpose than to lease property to COP. COP has failed to point out any other activities performed by Ideal. The only recent cases where the Board has found an arms-length relationship existed between a Head Start grantee and a lessor organization have been Home Education Livelihood Program, Inc., DAB No. 1598 (1996), and East Missouri Action Agency, Inc., DAB No. 1656 (1998). A factor in both those cases that established the independence of the lessor organizations was that the lessors had sources of income other than their leases with the Head Start grantees.

Here COP argued that Ideal was independent because it had potential other sources of income in that Ideal could presumably have leased its buildings to tenants other than COP. That, however, was the situation in all the other cases involving Head Start grantee and lessor organizations where the Board found that a less-than-arms-length relationship existed. See, e.g., Salt Lake City Action Program, DAB No. 1261 (1992); EPIC; and P.R.I.D.E. in Logan County, Inc., DAB No. 1618 (1997). Actual, rather than potential, sources of income is a determinative factor in establishing the independence of a lessor organization.

Furthermore, from the issue concerning the allocation of space at 2500 Curtis Street discussed below, it is apparent that Ideal shared the address with COP, since Ideal's office was located there. The sharing of space indicates a lack of independence between the organizations.

As to COP's argument that its lease with Ideal benefitted both itself and the federal Head Start program because the rental charges were less than the fair market rental value for the property, as the Board held in EPIC, the reasonableness of the rental costs of the leased property is not a determinative factor under the cost principles of OMB Circular A-122. (In EPIC, the grantee had argued that the rent for the property was well below fair market value.) Instead, the ability of one entity to substantially influence the actions of another entity is the key factor in determining whether entities are acting at arms length.

COP has failed to provide us with any evidence that establishes that Ideal and COP were independent organizations that operated at arms length. Accordingly, we sustain the disallowance of $314,898 in rental costs.

IV. Improper allocation of common building and security system costs.

ACF determined that COP improperly allocated costs incurred for janitorial services, trash collection, electricity and a security system at its administrative building at 2500 Curtis Street. ACF's disallowance notification stated that a Procedures Review determined that the Head Start program occupied 60% of the facility, with the remaining space occupied by COP for its Child Care program and by the Ideal Corporation. ACF found that COP allocated 68.6% of the janitorial services and trash collection costs to its Head Start grant, when, based on the total square footage of the building, only 60% of the costs should have been allocated to the Head Start grant. Additionally, ACF found that COP allocated 100% of the electricity costs between January and May 1995 to the Head Start grant. ACF found that COP had improperly allocated $21,746 in common building costs (for janitorial services, trash collection, and electricity) to its Head Start grant in GYs 16 and 17. Furthermore, ACF found that COP had charged to the Head Start grant 100%, rather than 60%, of the $5,100 cost of upgrading the security system at 2500 Curtis Street; ACF disallowed $2,040 in GY 16 funds for the costs of the security system that should have been allocated to other COP programs.

COP asserted that, at the time of the renovation of the Curtis Street property in 1992, it hired an architect to measure and analyze the use allocation of floor space at the facility. According to COP, the architect determined that 68.6% of the facility was being used by the Head Start program, with 31.4% used by the Child Care program. COP stated that it had made several unsuccessful requests to ACF and the auditors for documentation on how the 60/40 ratio was determined and for documentary support regarding the square footage allegedly used by Ideal at the facility. COP stated that, in the absence of such documentation, it properly allocated the costs at the 68.6/31.4 ratio.

COP further disputed that it had charged 100% of its electricity costs to the Head Start grant during the period from January to May 1995. COP submitted Exhibit B-1 to support its claim that the Head Start grant was charged only 68.6% of the electricity costs.

COP admitted that, in regard to the security system, the whole cost of the system was improperly charged to the Head Start grant. COP contended, however, that the cost of the system should have been allocated at the 68.6/31.4 ratio, not the 60/40 ratio asserted by ACF, with the result that $1,601 rather than $2,040 of the cost should have been allocated to the Child Care program.

In its brief ACF explained how it arrived at the 60/40 ratio. ACF Br. at 18. Basically, that figure was based on the program review auditor's determination that the Head Start program occupied 60% of the facility, after allowing for space occupied by the Child Care program and by Ideal. ACF also supplied a memorandum from The Clayton Foundation, the interim grantee, which states that a COP Board Member concluded that the Head Start program occupied 58% of the building. ACF Ex. 30.

In its reply brief, COP argued that Ideal occupied only one room measuring 8' x 16', or less than 1% of the facility. COP further contended that The Clayton Foundation, upon assuming the operation of the Head Start program, decided to utilize less space (60%) than was used by COP in prior grant years. COP maintained that ACF's disallowance of the allocated building costs was based, therefore, on after-the-fact recalculation of space occupied by The Clayton Foundation, rather than the space occupied by COP.

The Board's Order to Show Cause noted that COP had not supplied any documentation concerning its assertion that in 1992 an architect determined that COP was using 68.6% of the facility's space for its Head Start program, and that COP had not provided any helpful information, such as floor plans, on how the space was divided between COP's programs, as well as between COP and the Ideal Corporation.

In response to the Board's Order, COP admitted that it was unable to locate contemporaneous documentation to prove what measurements and calculations were originally made to establish the 68.6%/31.4% allocation. Instead, COP provided scaled floor plans for the facility (COP Ex. F-4) and a recent analysis by an outside company (McDermott Planning and Design) of space utilization at the facility (COP Ex. G-4). According to the McDermott analysis, the square footage of the facility at 2500 Curtis Street was 50,456 sq. ft., divided as follows:

-- Ideal 104.77 sq. ft.
-- Head Start program 21,126.64 sq. ft.
-- Child Care program 12,534.51 sq. ft.
-- Executive Director's office 1,643.32 sq. ft.
-- Fiscal Office 1,325.50 sq. ft.
-- shared space 6,112.01 sq. ft.
-- common areas (corridors, lobby, stairwells, etc.) the remaining square footage (7,609.37 sq. ft.)

COP Ex. G-4, at 2. COP asserted that the Executive Director's office, the Fiscal Office, and the shared space should be allocated between the Head Start and Child Care programs on a 90/10 ratio,⁽⁶⁾ with the result that 29,299.28 sq. ft. of the exclusive and shared space in the facility (68.4%) should be allocated to the Head Start program, with the remaining common areas divided on this same 68.4/31.6 allocation.

ACF responded that even if the McDermott figures were correct, COP nevertheless put too high a figure on the percentage of space occupied by the Head Start program. ACF argued that the total square footage occupied by Head Start, Child Care, and Ideal was 33,765.92 sq. ft., with 21,126.64 sq. ft. occupied by the Head Start program, or 62%.

We accept the floor plans contained in the McDermott analysis as the most persuasive evidence on how the property at 2500 Curtis Street was occupied. ACF has pointed only to a review auditor's unsupported determination and a memorandum from the interim grantee to support its position that the Head Start program occupied 60% of the facility. This evidence is not nearly as persuasive as the floor plan and the McDermott analysis. Moreover, in arriving at a 62% allocation figure in its assessment of the McDermott analysis, ACF neglected to properly credit the Head Start program with its share of the offices and shared space of the facility by failing to use the 90/10 ratio ACF itself had adopted for shared staff.

While the result from the McDermott analysis that the Head Start program occupied 68.4% of the facility is slightly below the 68.6% allocation originally claimed by COP, we find the difference of 0.2% between the figures so inconsequential as to not merit further examination. Accordingly, we reverse the disallowance of $21,746 in common building costs in GYs 16 and 17. Furthermore, we reduce the amount of the disallowance for the security system from $2,040 to $1,601 to reflect the 68.6/31.4 allocation ratio.

V. Improper allocation of administrative salary costs.

ACF determined that COP improperly charged a disproportionate share of its salaried administrative staff to COP's GY 16 Head Start grant. COP was composed of two divisions, Head Start and Child Care. ACF found that COP charged 100% of its Fiscal staff, Human Resources staff, and Support Service staff to its Head Start grant. Because COP lacked a methodology for allocating costs among its programs, ACF elected to apply a 90/10 allocation of cost ratio (Head Start to Child Care) based on representations by COP officials that this ratio approximates the time spent by COP staff on Head Start and Child Care matters, respectively. Using this 90/10 ratio, ACF determined that COP improperly charged $35,753 in GY 16 Child Care administrative costs to its Head Start grant.

COP admitted that in GY 16 it allocated 100% of the administrative salaries of its Fiscal staff, Human Resources staff, and Support Service staff to the Head Start program, but maintained that it used a similar allocation in the seven preceding grant years and that ACF awarded all those grants with that allocation. COP reasoned that since its allocation of those administrative salaries in GY 16 was consistent with its award in the prior grant years, the costs for those salaries should be allowable. COP further asserted that if it had maintained an indirect cost accounting system for administrative salaries, a portion of the salaries of its Fiscal Officer and receptionist would have been charged to the Head Start grant; instead, COP absorbed these additional administrative salary costs which were not mentioned in the grant.

COP further maintained that, in order to avoid a double recovery to ACF should the disallowance for this item be sustained, COP should be entitled to an offset in the amount of $21,338 for three employees -- Robert Ward, its Executive Director, and a receptionist -- as reflected in its Exhibit B-3, Supplement 1.

ACF disputed the logic of COP's argument that since COP had allocated 100% of the administrative salaries in question in prior years to the Head Start program, it should be allowed to continue to do so for GY 16. ACF contended that COP had misrepresented in the prior years' (as well as the current year's) budgets that the administrative staff in question were spending 100% of their time on Head Start program matters, when, in fact, some of the employees' time was devoted to COP's Child Care program. ACF referred to OMB Circular A-122, Attachment A, which requires that a grantee allocate costs to each program in accordance with the relative benefits received by each program.

COP's arguments on this issue are not persuasive. To support COP's argument that costs related to other grantee officials were allocable to Head Start but not charged to the Head Start grant would require documentary evidence, which COP admittedly lacks. Furthermore, if COP declared on the application that its administrative personnel would devote all their time to the Head Start program, when, in fact, that personnel worked on other COP projects, the application form contained misleading information. The cost principles of OMB Circular A-122 clearly establish that Head Start funds cannot be used to pay for non-Head Start activities. Even if there had been no prior misrepresentation, the fact that an agency may have paid a grantee's claims in the past does not constitute approval of the costs as allowable and does not preclude the agency from enforcing grant requirements at a later time. See New Jersey Dept. of Human Resources, DAB. No 1549, at 16 (1995). Since COP has not produced any contemporaneous records which would document that the amounts charged for administrative salaries benefitted the Head Start program, there is no basis for accepting COP's arguments.

Accordingly, we sustain the disallowance of $35,753 in administrative costs improperly charged to the Head Start grant.

VI. Improper allocation of insurance costs.

ACF determined that COP improperly allocated to its GY 16 Head Start grant the total cost of insurance coverage for vehicles that should have been allocated between COP's Head Start program and its Child Care program. ACF disallowed a total of $6,777 under this item. COP conceded that it did improperly allocate $4,475 of insurance payments for one vehicle that should have been charged to its Child Care program. The parties are disputing the remaining $2,302, which was for insurance for two vehicles. ACF maintained that the Child Care program used three vehicles, with COP contending that the Child Care program used only one vehicle. There is no dispute that the $2,305 in question was allocable to the two vehicles whose use was questioned.

COP supplied an affidavit from the Director of the Child Care program, Lelia Batiste. COP Ex. F-6. Ms. Batiste stated that of the 25 vehicles used by COP for which insurance payments were allocated to the Head Start grant, only one vehicle, a 1988 Ford van, was used by the Child Care program. � 6.

In its brief on this issue, ACF cited its Exhibits 31 and 32 as support for its position that COP was using three vehicles for its Child Care program. Exhibit 31 is a letter from COP to ACF detailing vehicles COP has transferred to The Clayton Foundation, with a paragraph on the second page referring to a bus not transferred to The Clayton Foundation which COP was using for Child Care transportation. Exhibit 32 is a file memo apparently written by an ACF employee detailing a conversation with COP's attorney. In that conversation, COP's attorney allegedly inquired whether COP could retain two Ford Club Wagons which are being used for Child Care. In response to Ms. Batiste's affidavit, ACF also referred to a "Support Services Vehicle List" for COP, which lists one mini-bus being used for the Child Care program. ACF Ex. 40. ACF further questioned the basis of Ms. Batiste's personal knowledge that only one vehicle was being used by the Child Care program.

We accept the affidavit of Ms. Batiste as evidence that COP was using only one vehicle for its Child Care program. Ms. Batiste's position as Director of the Child Care program is sufficient to answer ACF's concerns about her personal knowledge of the number of vehicles used by the program. The three exhibits supplied by ACF, on the other hand, do not establish conclusively that COP was using three vehicles for its Child Care program consistently and on a full-time basis during the period at issue. Exhibit 31 refers to only one vehicle being used by COP for the Child Care program. Exhibit 32 is an internal ACF document that adds no probative value to this issue as it is merely an ACF employee's summary of a conversation. As such, this exhibit is nothing more than hearsay; as such, it is not sufficient to overcome evidence from more direct sources. Moreover, the "Support Services Vehicle List," offered by ACF to rebut Ms. Batiste's affidavit, while stating that a mini-bus was being used by the Child Care program, still lists only one vehicle being used for the Child Care program. Thus, there is nothing in the record to contradict Ms. Batiste's affidavit that the Child Care program was using only one of COP's vehicles.

Accordingly, with COP's acknowledgment that it did improperly allocate $4,475 of insurance payments that should have been charged to the Child Care program, we reverse the remainder of the disallowance in the amount of $2,302.

VII. Unauthorized settlement payment.

ACF determined that COP used Head Start funds to pay its former Executive Director a departure package of $47,000 in March 1996. ACF asserted that the departure package of $47,000 was made as a settlement of a Title VII claim filed by the Executive Director against COP for alleged sex and age discrimination. ACF stated that the settlement costs incurred by COP were not allowable under the Head Start Act or its regulations, as Head Start grantees are required to abide by nondiscriminatory practices. 45 C.F.R. Part 80. ACF further cited the provision in paragraph 2 of Attachment A to OMB Circular A-122, that for a cost to be allowable, it must "be reasonable for the performance of the award and be allocable thereto under these principles." ACF concluded that the settlement cost of $47,000 did not benefit the Head Start program or its objectives, and accordingly disallowed the $47,000.

COP asserted that its former Executive Director, Mitzi Barnes, worked almost exclusively with the Head Start program from 1969 to 1996, accruing over 1350 hours of uncompensated vacation time. COP maintained that its personnel policy, Exhibit B-5, provided that an employee was entitled, upon departure from COP, to payment for all accrued but unpaid vacation time. According to COP, after being notified by the employee of her intention to file a Title VII claim, COP, in an attempt to reduce COP's and the federal government's potential liability exposure regarding the claim, negotiated a settlement to cover all the claims of the former Executive Director. COP paid $47,000 in full and final settlement of all claims asserted (including all compensation and accrued vacation time). COP maintained that this amount was roughly equivalent to the amount the employee was due for accrued but unpaid vacation time.

COP submitted an affidavit from Ms. Barnes, in which she made the following statements:

o In August 1995, she notified COP of her intention to pursue claims for constructive discharge and wrongful termination, as well as civil rights claims under Title VII of the Civil Rights Act of 1964 and the Age Discrimination in Employment Act. � 5.
o She believed that she had accrued an estimated 1350 hours of vacation leave from 1969 to 1996, but had no records to support this. � 7.
o Although COP disputed the extent of her vacation hours, it agreed to pay her $47,000 in vacation pay in exchange for her agreement to leave COP and to release all her claims; she rejected this offer because it was insufficient consideration for the emotional distress and personal injury, the claims that had started the entire negotiation. � 9.
o She ultimately agreed to release all of her claims for the amount COP initially offered. � 10.

COP Ex. F-7.

COP stated that the $47,000 payment was charged as an administrative cost. COP acknowledged that, applying the 90/10 allocation methodology advanced by ACF in the administrative salary cost issue above, it is responsible for an amount equal to 10% of the payment ($4,700), but asserted that the remaining amount of the payment was appropriately charged to the Head Start grant as an administrative cost.

The allowability of this item depends on the purpose of the $47,000 payment. If the payment were for the settlement of a Title VII claim or to prevent a Title VII claim from being filed, then clearly under the regulations and the provisions of OMB Circular A-122, the payment could not be paid with Head Start funds as discriminatory actions are prohibited under the Head Start program. See 45 C.F.R. Part 80. The Board has held that settlement costs are an insurable risk for which, under applicable cost principles, a grantee would be expected to procure insurance; losses which could have been covered by insurance are unallowable. Community Action Commission of the Cincinnati Area, DAB No. 380 (1983). On the other hand, if the payment were explicitly for the employee's accrued vacation time, arguably the payment could qualify for Head Start funding. See Economic Opportunity Planning Association of Greater Toledo, Inc., DAB No. 591 (1984).

COP's Personnel Policies and Ms. Barnes' affidavit are insufficient to support a finding that the costs were allowable as payments for accrued vacation time. COP's Personnel Policies provide, "Accrued vacation will be paid out upon separation." COP Ex. B-5 section F. However, COP has admitted that it has no records of Ms. Barnes' accrued vacation prior to 1986.

The wording of the settlement agreement is the best evidence of the purpose of the agreement. The settlement agreement, dated September 28, 1995, specifically provides:

In consideration for the release and settlement of Barnes' claims for emotional distress and other tort-type injury damages provided in this Agreement, COP will pay Barnes the sum of $47,000 on March 29, 1996.

ACF Ex. 39, at 2.

While the settlement agreement does go on to state that the agreement encompasses all actual and potential claims by Ms. Barnes, including claims for compensation involving salary and vacation pay, it is evident from the plain wording of the agreement that its primary purpose was to settle claims arising out of tort actions rather than compensation claims. As such, Head Start funds could not be used to pay this expense, since the grantee could have obtained insurance.

We therefore find that the amount paid out by COP under the settlement agreement was not an allowable cost under the Head Start grant. Accordingly, we sustain the disallowance of $47,000 for this item.

VIII. Unreported income.

ACF determined that COP improperly withheld administrative fees of 15% in the amount of $37,479 from the total reimbursements received from Head Start collaborative programs in GYs 16 and 17. COP deposited these fees in its corporate account. ACF alleged that COP did not properly credit the fees to the Head Start program as program income, as required by 45 C.F.R. � 74.24, although the income in question was generated by a contract to provide Head Start services. ACF argued that the total dollar amount of reimbursement that COP received from the contracts falls within the category of Head Start program income because it was gross income earned by a grantee that was directly generated by a supported activity or earned as a result of the Head Start award. ACF contended that the functions associated with the contracts were included in the duties already performed by COP administrative staff and the costs associated with performing those functions were already included in the administrative costs which were 100% charged to the Head Start program.

COP explained that the collaborative program at issue is its "Special Needs" program, which involves three public school systems. COP contracted with these school systems to provide Head Start services to specific children with special needs. These children were placed in existing Head Start classrooms, and the schools participating in the program were charged a specific rate per special-needs child.

COP stated that its former Executive Director and Executive Secretary were responsible for administering the Special Needs program. COP detailed the activities of these individuals in regard to the Special Needs program and how COP accordingly retained 15 percent of the Special Needs fees for the administrative costs associated with operating the program. However, COP acknowledged that it did not have an indirect cost accounting system in place at the time, so that COP is now unable to produce any documentation supporting the administrative costs so as to ascertain that administrative costs were actually incurred by COP relative to the collaborative programs that were not reimbursed by Head Start.

COP has not denied that it was accountable to Head Start for program income earned from its Special Needs program. Since COP has not offered any documentation concerning the receipt of income from its Special Needs program and, in fact, has admitted that no documentation exists, the Board sustains the disallowance for this item. The regulations are explicit in requiring that program income be credited to the grant program. See 45 C.F.R. � 74.24. Since these receipts qualified as program income, the amount retained for administration represented an unallowable windfall to COP. COP produced no evidence that this income was applied to its Head Start program as required by the regulations.

Accordingly, we sustain the disallowance of $37,479 representing unreported income.

IX. Unallowable in-kind match for GY 16.

A recipient of federal funds under the Head Start program is required to provide 20% of the total approved costs of the program. 42 U.S.C. � 9835(b); 45 C.F.R. � 1301.20. ACF found that COP did not meet the required 20% match for its Head Start grant because a major portion of the matching funds COP reported improperly included free or donated rent from Ideal at the Curtis Street building. ACF stated that because COP overcharged its Head Start grant for rent at 2500 Curtis Street, due to its alleged less-than-arms-length lease with Ideal, COP could not claim its free or donated rent at that address as a matching in-kind contribution.

ACF further determined that $608,904 of COP's claimed in-kind contributions for GY 16 was undocumented and therefore could not be allowed as in-kind contributions. ACF stated that COP must return $517,446 in GY 16 funds pursuant to the following calculation made in the May 30, 1997 disallowance notification:

We detail ACF's calculation exactly as it appeared in the disallowance notification because, before we even begin to discuss the parties' arguments on the in-kind match for GY 16, we note that the disallowed amount for this item, $517,446, was premised on a number of factors, including an assumed disallowed amount of $501,503 for GY 16. We have already found in previous parts of this decision that this disallowance amount for GY 16 has been overstated, as we have reversed or reduced disallowances concerning GY 16 unliquidated obligations, building space allocation, and insurance costs. Therefore, the amount of the disallowance in the shortfall in the in-kind match for GY 16 in dispute needs to be recalculated, subject to any further findings we make below on the allowability of the in-kind matches proposed by COP.

COP objected to ACF's finding that $608,904 was being disallowed as in-kind match because of a lack of documentation. COP asserted that it had informed ACF in January 1997 that documentation regarding its in-kind contribution was available in COP's General Ledger, but, due to its voluminous nature, could not be copied and sent to ACF. COP stated that it has repeatedly requested ACF to schedule a mutually agreeable time and place to review COP's General Ledger to ascertain information relative to the in-kind contributions, but that ACF has refused to schedule an appointment to review the information in the General Ledger. COP offered Exhibit B-9 as a summary schedule of its in-kind contributions for GY 16.

COP alleged that it had two large boxes of documents supporting the in-kind contributions, representing over 90 percent of the disallowed costs of $608,904 under this item. According to COP, this documentation included bank statements, canceled checks, and ledgers reflecting entries regarding in-kind contributions, under such categories of contributions as cash contributions, in-kind services, and donated rent. COP asserted this documentation supported the summary schedule in its Exhibit B-9 and Exhibit B-9, Supplement 1.

As we stated at the beginning of this decision, it is the grantee's responsibility to document the costs claimed under a grant program such as Head Start. The Board's Order to Show Cause directed COP to produce the underlying documentation to support its claim on the in-kind contributions. In response to the Order, COP provided Exhibit C-9 which purportedly documented $543,372 in in-kind match for GY 16 consisting of 13 separate items. We have examined this documentation in light of the assertions made about them by COP and ACF, and have come to the following conclusions:

o $43,311 for in-kind contribution for space occupancy at the Curtis Street facility for the period of November 1994 through January 1995, based on the difference of the fair rental value of the space and the amount of rent charged to COP. We have already determined that the lease for the building at 2500 Curtis Street was a less-than-arms-length transaction, with the result that COP could charge its Head Start grant only a use allowance or depreciation for this property. In order to qualify as an in-kind contribution, the match must represent an allowable, allocable cost. Any amount reflecting rent over the allowable use or depreciation level is therefore ineligible as an in-kind match. Accordingly, we find that this item does not qualify as an allowable in-kind contribution.

o $6,210 for in-kind services rendered by COP's Board of Directors for January 1995, with the value of the contribution based on the level of skill and/or experience of each Board Member. COP supplied signed Voucher for Non-Federal Share Requirement In-Kind Contribution forms (vouchers) to support this item. COP Ex. C-9, Item 2. ACF responded that the vouchers

did not satisfy the requirement for documentation of volunteer services for in-kind contributions set forth in section 3.05.407A.4 of the DGAM, which states, "Documentation should include signatures of volunteers certifying the day of service, hours and rate of pay and service performed." ACF stated that COP's proffered vouchers did not indicate the specific dates of the board meetings, the time spent at the board meetings, or any basis for the dollar value put on the volunteer time. Contrary to ACF's arguments, we find that the vouchers contained in COP Exhibit C-9, Item 2, do, in fact, contain the required information. Accordingly, we accept the services of COP's Board of Directors as an allowable in-kind contribution.

o $7,418 for miscellaneous in-kind contributions, consisting of donated items of toys and clothing by various donors, made during December 1994. COP supplied vouchers and other miscellaneous documentation concerning these donated items. ACF responded that these donations do not qualify as in-kind contributions because the donations were Christmas toys intended for the personal benefit of Head Start children at their homes. ACF referred to section 3.05.407C of the DGAM, which bars clothing for the personal use of children as an allowable in-kind contribution, and likened toys to clothing. COP replied through its counsel that most, if not all, of the donated toys were used by Head Start children at COP's facility as part of the Head Start program. COP did not, however, provide affidavits from anyone with personal knowledge of the use of the toys. Moreover, the donated clothing was not of the type to be used in the classroom for play, as mentioned in the DGAM. We find that COP has not documented that the donated toys and clothing remained at the facility, and we conclude that the toys were, in all likelihood, given the time of year the donations were made, intended as personal gifts for the children. As such, these donations do not qualify as in-kind contributions.

o Four items involving non-federal cash receipts from COP collaborative programs: $47,121 from the Wraparound and Marrama programs; $115,597 from the Wraparound program; $46,587 from the Marrama program; and $96,052 from the Special Needs program. COP contended that these contributions were supported by entries in its cash receipt journal and deposit records. ACF responded that the "cash receipts" were undocumented and unallowable because they were not cash donations to COP's Head Start program, but rather reimbursement to the Head Start program for the costs of Head Start services provided to non-Head Start children. ACF referred to the explanation of these programs in the report of the independent auditor:

The Federal Head Start program received reimbursements through collaborative program agreements. COP provided Head Start services to the Denver public schools, Marrama, the Aurora Public School for special needs, the Mile High Child Care Center for McGlone, and the Jeffco School District for special needs. The COP billed these entities for the Head Start services provided. All money received by COP under these agreements should be regarded as Head Start reimbursements. These reimbursements were reviewed by COP and deposited into COP's corporate account. Usually on an annual basis these Federal Head Start reimbursements were transferred out of the corporate account into the Head Start account.

ACF Ex. 1, at 7. COP replied that ACF reliance on the independent auditor's findings was misplaced, in that ACF has submitted no documentation to support the independent auditor's characterization of the cash receipts from the collaborative programs as "reimbursements." We agree with the independent auditor that these cash receipts were not contributions or donations, but rather reimbursement for services COP had provided. COP's characterization of amounts received from these entities as donations is inconsistent with its own explanation of the relationship with the schools which it gave in its March 23, 1997 response to the auditor's report. There, COP stated that schools participating in the special needs program were charged a specified rate per child. At 4. The records supplied by COP reflect only that amounts of money were transferred to COP and not the purpose of the transfers. COP failed to provide any type of documentation from its partners in the collaborative programs that the payments were in fact contributions rather than reimbursement for services.

Accordingly, we find that these items do not qualify as allowable in-kind contributions.

o $20,000 for in-kind services rendered by a dentist. The dentist submitted an affidavit in which he stated that he had been donating professional services in the form of free dental examinations and other dental services to children in COP's Head Start program for 20 years and that he signed a voucher each year for his donated services. COP Ex. C-9, Item 8. The dentist further stated that he had been informed by COP that the voucher he had signed for GY 16 could not be found, but that he estimated the value of the services he rendered from February 1995 through October 1995 was approximately $20,000. Id. These services included: dental screening of children; membership on COP's Health Advisory Board; instruction sessions to Head Start nurses; and review of proposed dental plans for COP employees. Id. ACF responded that no documentation was submitted supporting the dentist's claim as required by section 3.05.407A.4 of the DGAM. We find that the dentist's affidavit is an acceptable substitute for the lost voucher and sufficient documentation that the services claimed were in fact rendered. Accordingly, we accept the dentist's services as an allowable in-kind contribution.

o $11,269 of miscellaneous in-kind contributions received prior to January 31, 1995. While stating that these contributions are supported by journal entries in its General Ledger, COP admitted that it has not been able to locate any supporting documentation. Accordingly, we find that this item does not qualify as an allowable in-kind contribution.

o $31,714 for fund-raising expenditures made to raise non-federal funds for its Head Start program. COP admitted, however, that it had not been able to locate documentation to support this contribution. Accordingly, we find that this item does not qualify as an allowable in-kind contribution.

o $68,503 of miscellaneous in-kind contributions, consisting of volunteer services rendered prior to January 31, 1995. COP supplied vouchers to support this item. COP Ex. C-9, Item 11.

ACF responded that these volunteer services included fundraising expenditures, which are unallowable under Sections 3.05.403B and 3.04.406 of the DGAM. ACF reasoned that if fundraising costs cannot be charged to the Head Start program, an in-kind donation of fundraising costs cannot be an allowable in-kind donation. Furthermore, according to ACF, some of the documentation supplied by COP for this item was for services donated prior to GY 16, while other of the vouchers contain a blanket statement of "1994 inclusive," when GY 16 did not begin until November 1, 1994. ACF argued that any services rendered before November 1, 1994, cannot be claimed as matching for GY 16 because they are outside the grant year. We have examined all the documentation submitted by COP for this item and determined that $21,280 of the volunteer services is an allowable in-kind contribution. This amount is based on: 80 hours, at $125 per hour, spent on the organization and development of a record-keeping system by Norman F. Watt in December 1994; 80 hours, at $140 per hour, spent on the organization and development of a record-keeping system by Brendan M. Watt in December 1994; and four hours, at $20 per hour, for a COP Board meeting by Corrine King on January 12, 1995. All the other proposed volunteer services suffer from the deficiencies cited by ACF. The vouchers are either for fundraising activities, or for services rendered prior to the start of GY 16, or do not include enough information to establish conclusively that they were rendered within GY 16.

o $94,790 of in-kind contribution for occupancy of office space donated by Lowry Development, Inc., for the Head Start program at Lowry. COP submitted two separate appraisals for the rental value of the property for the period November 1994 through October 1995. COP Ex. C-9, Item 12. ACF responded that this contribution is unallowable because the donated space was federal space and an in-kind donation must be non-federal. ACF Ex. 44. COP did not provide any rebuttal to ACF's assertion that the donated space was federally owned. Accordingly, we find that this item does not qualify as an allowable in-kind contribution.

o $21,000 of in-kind contributions for space occupancy for five centers donated for the Head Start program. COP asserted that the fair market rental value of each of these centers was $350 a month, or $4,200 a year. COP admitted, however, that it had been unable to locate documentation relating to this alleged contribution. ACF responded that COP failed to provide any indication what entity made the donation or the amount of space donated, with the result that it cannot be determined what the value of the space was or whether it was a non-federal donation. ACF further argued that for four of the centers COP charged monthly rentals to the Head Start program. We find that COP has failed to provide adequate documentation in support of its claim for this item. Accordingly, we find that this item does not qualify as an allowable in-kind contribution.

In summary, we find that a total of $47,490 qualifies as in-kind contributions for GY 16. We direct ACF to recalculate the amount of the disallowance for this particular item based on our other findings in this decision relating to GY 16 and provide COP with this calculation within 30 days of receipt of this decision. If COP objects to how ACF determined the recalculated amount for in-kind contributions, COP may appeal that determination to the Board within 30 days from receipt of ACF's determination.

For the reasons discussed above, in regard to the first eight items of the disallowance, we sustain $563,729 of the disallowance, reverse $315,596 of the disallowance, and remand the issue of the GY 15 bus purchase ($87,000) for further consideration. For the ninth item, GY 16 in-kind contributions, we direct ACF to recalculate the amount disallowed based on our above findings.

1. In addition to requesting that the Board reverse ACF's disallowance, COP also requested that it be awarded attorneys' fees and costs incurred because of ACF's "litigious, vindictive and malice [sic] behavior" in pursuing the disallowance. COP Reply Br. at 16. Since we are upholding the majority of the disallowance, we see no basis for finding that ACF was "litigious" or "vindictive" in seeking to recover funds it believed were inappropriately claimed. Furthermore, COP has not cited any authority that would permit the Board to award such fees and costs.

2. This amount included food costs ($58,187), supplies ($54), and playground equipment ($3,864).

3. Regulations at 45 C.F.R. � 74.27(a) provide that non-profit organizations that receive Head Start funds are subject to the cost principles set forth in OMB Circular A-122.

4. The Procedures Review, upon which the disallowance was based, was "narrowly focused and examined only a limited period of time." ACF May 30, 1997 notice of disallowance. As such, it cannot be asserted that ACF has definitively found that all the grant funds expended by COP in GY 15 were related to its Head Start program. Therefore, the disallowance of $87,000 for GY 15 cannot be reversed at this time on the basis of our holding in Lexington-Fayette.

5. ACF also supplied a recent indictment for theft and forgery against a former COP board chairperson as support for its position that a less-than-arms-length relationship existed between COP and Ideal. ACF Ex. 38. As an indictment is only an allegation of illegal activity, and not proof thereof, this document has no probative value to the resolution of the issue whether Ideal and COP were separate entities for the purpose of the rental agreement. Accordingly, we have given no weight to the indictment in our consideration of this issue.

6. As discussed in the next section, ACF applied a 90/10 ratio to the time spent by COP staff on its Head Start and Child Care programs respectively.