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When Bell Helicopter officials announced last month that they were selling the company's interest in the BA609 civil tilt-rotor aircraft program, it meant giving up on a $600 million to $700 million investment.

And one that was half paid for by U.S. taxpayers.

For more than a decade, the Defense Department paid 50 cents of every dollar that Bell spent on development of what was intended to be a business aircraft. The charges, agreed to in advance by the government, were included in Bell's contracts for building the V-22 Osprey and military helicopters.

As a practical matter, taxpayers paid Bell and Boeing Co. upward of $15 billion to develop the V-22 before it was approved for military use and full production.

The taxpayers then paid Bell roughly $300 million or more to subsidize development of the civil aircraft using V-22 technology, according to documents obtained by the Star-Telegram through a Freedom of Information Act request.

Now the BA609 and any future profits from its sales will belong to Italian helicopter manufacturer AgustaWestland, which is buying out Bell's ownership stake in the program. Terms of the sale, which was announced at the Paris Air Show in June, were not disclosed.

AgustaWestland had been Bell's partner on the BA609 since 1998 and previously invested hundreds of millions of its own funds in the project.

Bell's practice of passing on commercial-aircraft development costs to taxpayers is apparently legal and sheds light on a little-known area of U.S. defense policy.

Federal law allows defense contractors to charge a portion of what are termed "independent research and development" (IR&D) costs as an expense to defense contracts. It's a post-World War II policy designed to encourage private industry to develop new technology and products independent of any defense project or other government contract.

This cost-sharing arrangement, essentially a subsidy to the private sector, is justified as a way of stimulating technological and manufacturing innovation that can then be used for defense purposes. It's also viewed as helping keep the defense industry financially healthy and enabling it to generate additional business, which in turn should result in lower costs on defense programs.

Exactly how much money Bell spent on the BA609 and how much it billed to taxpayers aren't clear. The documents obtained by the Star-Telegram show that by April 2001, Bell had spent $450 million on development of the aircraft, 50 percent of which was billed to defense contracts as IR&D charges.

By 2002, according to interviews with former Bell executives and employees, the company had decided that the aircraft had little chance of commercial success. Spending was drastically reduced to $20 million to $25 million a year, perhaps less in recent years, and Bell stopped charging BA609 expenses to IR&D after 2009.

Federal acquisition regulations clearly allow the government to be charged for a portion of the work on commercial programs even if it's not applicable to any specific defense technology or system, said Richard Loeb, adjunct professor of government contract law at the University of Baltimore Law School.

"The question isn't so much the legality of these kinds of things. They're legal. It's the policy behind it," Loeb said.

But one critic says that, at least in the case of the BA609, the practice isn't necessarily right.

"There's a strong argument that Bell Helicopter is the beneficiary of corporate welfare at the taxpayers' expense," said Nick Schwellenbach, director of investigations for the Project on Government Oversight in Washington. Bell "should repay the government for all the expenses ... used to solely develop this commercial aircraft."

A Bell official argues, however, that the Defense Department has and will continue to benefit from its financial investment in the BA609.

"The advancement of tilt-rotor technology continues to be an item of interest to the U.S. government," said Robert Hastings, Bell's senior vice president of communications. "Tilt-rotor technology which was advanced during the development of the 609 is benefiting both ongoing and future tilt-rotor programs such as the V-22 and the next generation of military tilt-rotors."

The Army is studying future rotorcraft options to replace existing helicopters, Hastings said, and Bell plans to propose a new tilt-rotor aircraft that would include improvements derived from the BA609 program.

Murky billing process

The costs that can be billed to government work are negotiated by defense contractors with their local Defense Contract Management Agency offices. The agency, which is usually based in the company's offices, oversees the company's work, financial controls and accounting of expenses billed to the government.

It's a murky process. Defense contractors push to get more of their costs included.

"Companies have a great deal of leeway coming up with cost accounting practices that meet federal standards," said Paul Khoury, a government contracts lawyer with the Wiley Rein law firm in Washington, D.C.

The accounting practices have to be consistent, fully disclosed and approved by the agency branch and, in some cases, even higher-ups in the Pentagon.

The government and defense contractors have gone to court many times to sort out what expenses can and cannot be included in bills on defense contracts.

A federal appeals court ruling last year tilted the field slightly more in favor of industry.

The government had objected when ATK Thiokol billed the U.S. for additional development costs it incurred to modify rocket engines it was selling to a Japanese conglomerate. The buyer had refused to pay the additional costs. Since it was a development expense, the court ruled, ATK was within the law when it included the additional costs as IR&D expenses on defense contracts.

What is charged to the government and how much can vary widely. Boeing, Bell's partner in the V-22 and originally also on the 609, did not charge any of its expenses on the civil aircraft program to defense contracts, according to a government document.

Sikorsky Aircraft Co., one of Bell's major competitors, has said publicly that it is not charging the government for any expenses incurred on development of its new X2 high-speed helicopter. Sikorsky has also said it will build two prototype military aircraft entirely with its own funds.

Bell, according to several former company officials interviewed for this report, takes a very broad view of what costs it can pass on to the government.

Based on DCMA documents, the agency has had little disagreement with Bell. The company passes along many development costs associated with its commercial helicopters, even though much of that work is done by a Bell subsidiary in Canada.

Bell defends charges

Former Bell CEO Mike Redenbaugh, who took over the company in 2003 long after the billing procedures were in place, defended charging the government for IR&D costs on nondefense programs.

"I've always had the philosophy the U.S. government gets a lot of benefit, so it's OK if there's some government funding," he said.

In addition to the IR&D charges, Bell and other defense contractors are also allowed to pass on a portion of other costs stemming from nonmilitary and purely commercial programs. Bell, for instance, accounts for a marketing pool -- the costs of trying to sell its products to other government agencies, businesses and even foreign countries. The U.S. government allows about 40 percent of those costs to be charged to defense contracts.

There is no requirement for companies to reimburse the government or share when they sell a product that was developed with IR&D funding, according to written DCMA responses to questions from the Star-Telegram: "The U.S. government benefits from IR&D programs in a variety of ways. Direct compensation is not one of them. The benefits normally take the form of technology advancement and ongoing strengthening and viability of the country's industrial base."

Yet the government has already gone after Bell once for a share of money it derived from the BA609.

In 1997, Boeing backed out of the program. A year later Bell, under pressure to generate cash for Textron, its corporate parent, negotiated a joint venture with what was then Agusta Aerospace.

Agusta agreed to pay $100 million cash and provide $200 million in engineering and other work to join Bell as a partner on the BA609 and two commercial helicopters.

The $100 million cash payment, according to documents and interviews, went directly into Textron's coffers and did not benefit Bell.

Upon reviewing the transaction, DCMA and the Defense Contract Audit Agency took the position that the U.S. government was entitled to the $100 million. Agusta, the government argued, was paying for a share of aircraft technology paid for by U.S. taxpayers.

Bell and Textron fought the government claim for six years, arguing that Agusta was only paying for the right to be a partner in future business.

Bell officials took their case as high as senior military and Pentagon procurement officials. The BA609 expenses were eating into funds the Pentagon had budgeted for the V-22 and military helicopters.

At the same time, Bell officials were trying to sell the BA609 to the Defense Department, the Coast Guard and other government agencies.

Bell leaders hoped to find a government buyer after concluding that there wasn't a market in the commercial world for a $15 million-plus aircraft, double the original estimates.

Bell agreed to settle with the government in December 2004 by applying credits of $42 million against defense contract charges. DCMA, in its response to the Star-Telegram, said it had closely monitored the contracts to make sure the government received the credits.

AgustaWestland officials, who have paid far more than Bell in recent years to keep the BA609 program alive, say they'll happily try to capitalize on the investments made by Bell and U.S. taxpayers.

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"Bell Helicopter is an American rotorcraft manufacturer headquartered in Hurst, Texas, near Fort Worth. A division of Textron, Bell manufactures military helicopter and tiltrotor products in and around Fort Worth, as well as in Amarillo, Texas."
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