A U.S. appeals court has overturned the decision that resulted in the June 1985 firing of Charles O. Starrett, former head of the Pentagon's Defense Contracting Audit Agency.

Starrett was fired and fined $1,000 a year ago for allegedly ordering the transfer of George Spanton, an auditor with the agency, in retaliation for Spanton's public charges that the agency had failed to respond to his reports of improper billing by Pratt & Whitney Corp., a Pentagon contractor.

The decision by the Merit Systems Protection Board was the first legal order that led to the dismissal of a federal official for retaliation against a whistle blower.

But the little-noticed decision by the 4th U.S. Circuit Court of Appeals last month states that Spanton was transferred in accordance with DCAA's policy of rotating auditors, and not in retaliation.

The general counsel of the Department of Defense is now preparing to offer Starrett another job with the Senior Executive Service ranking of six that he held at the time of his dismissal, or the alternative of retiring with a pension, according to Robert Gilliat, assistant general counsel for personnel and health policy at the Pentagon. Starrett, 53, said in an interview that if the retirement offer is good enough, "I would prefer to retire."

He is also entitled under the Back Pay Act to the salary he would have drawn since his last day of work on June 17, 1985, and to reimbursement of his legal fees and expenses in the case.

David H. Shapiro, Starrett's lawyer, said he is negotiating with the Merit Systems Protection Board over a claim of about $55,000 in fees. That would be paid, according to Bruce Moyer, legal assistant to the legislative counsel of the Merit Systems Protection Board, out of a fund set aside for paying legal judgments against the U.S. government.

The Pentagon, although it was not involved in bringing charges against Starrett, is liable for the difference between what Starrett would have earned had he remained in his job and what he has actually earned elsewhere since his last day at DCAA , Gilliat said.

Starrett said he did not know what that figure is, but said that since October 1985, he has worked for the accounting firm of Deloitte Haskins & Sells in Washington. His salary at DCAA was $72,300 a year.

Spanton charged that Pratt & Whitney employes had received unwarranted increases in wages and salaries, and also that Pratt & Whitney had claimed $1 million in entertainment expenses, part of which was used to entertain Air Force personnel. Spanton, a widely publicized whistle blower, made his charges to various news organizations.

The Merit Systems Protection Board, an independent judicial agency that hears the cases of federal employes who think they have been wronged by their superiors, handed down the original ruling against Starrett and two other officals of the DCAA, Paul Evans and Arlin Tueller. Evans and Tueller, who were demoted and fined, have appealed their cases in the 11th Circuit of the U.S. Court of Appeals. The cases are pending.

Shapiro, Starrett's lawyer, said he was delighted with the outcome of the case because it was decided on the original evidence -- letters by Starrett and testimony -- rather than on legal technicalities.

Spanton, who has since retired from DCAA, said in an interview from West Palm Beach, Fla., that he found the court's ruling disturbing. "If I couldn't win with all the evidence I had," he said, "then I don't see how the whistle blower system can work."

Lynn Collins, general counsel of the Merit Systems Protection Board, said it is too early to tell whether the reversed decision will discourage potential whistle blowers. He said this was an "isolated decision" without "precedential value."