dissenting.
I am compelled to dissent. Marquardt Company (Marquardt), in trying to avoid the consequences of a novation agreement, has been hoist by its own petard — with the help of the Armed Services Board of Contract Appeals (Board) and this court. Unfortunately, the majority’s holding will not decrease the cost of government contracts, but will foist upon the taxpayers of this country an increase in costs through payment of additional and unnecessary legal and accounting costs.
There is absolutely no difference in the economic realities of the transaction in this case and the transaction in Gould Defense Systems, Inc., ASBCA No. 24881, 83-2 BCA (CCH) ¶ 16,676. Yet in Gould the Board found that “the Government allows the step-up of tangible capital assets to fair value at the time of business acquisitions properly accounted for under the purchase method [of accounting], and accepts depreciation on a stepped-up value of the tangible capital assets as an allowable cost for Government contract pricing purposes.” Id. at 82,960.
The government contends that Gould is distinguishable from this case because in Gould the Board was faced with a true business combination that resulted from the merger of two corporations. Hence, the government argues, that in Gould the purchaser was properly allowed to record *1581as its costs on its books the fair market value of the assets it purchased and charge those costs against its government contracts. It should be noted that in Gould the Board concluded that this approach was consistent with the DAR and GAAP. Id. at 82,972-76.
Had ISC Electronics, Inc. (ISC):
(1) established a shell subsidiary called ISCM,
(2) funded it with $43,500,000 and 600,-000 shares of stock,
(3) caused ISCM to distribute the $43,-500,000 and 600,000 shares of stock to CCI Corporation (CCI) by approving a merger of Marquardt with ISCM (ISCM being the surviving corporation with its name changed in the merger to Marquardt)
the purchase method of accounting would have been available to Marquardt. The economic realities of my example are that ISC would have paid CCI $43,500,000 and 600,000 shares of stock for Marquardt, the exact same economic situation that occurred in this case and that occurred in Gould. For accounting, securities regulation, and now tax purposes, the three transactions are treated identically with a step-up in basis of the acquired assets. Under the majority’s opinion the formalities of setting up the shell corporation, followed by a merger with a change in name will have to be continued for the sole purpose of government contracting. Nothing is economically different except that the contractor will incur additional legal and accounting fees, for which I am certain the taxpayers will ultimately pay.
I would remand this case to the Board for determination of what rational basis, if any, exists in federal procurement law for distinguishing between purchases of stock, purchases of assets, and mergers when none exists for the purposes of GAAP, IRS, or SEC accounting. The substance of the transaction, not the form, should govern for all purposes, including the determination of costs incurred for contracts entered into both pre-acquisition and post-acquisition. Such is not the case here.