[Army Request for Advance Decision]

An advance decision was requested as to who should receive the final payments under an Army construction contract. The contractor had executed payment and performance bonds with a surety and assigned all payments under the contract to a bank. Meanwhile, the Internal Revenue Service (IRS) served a notice of levy on the Army demanding an offsetting payment of the contractor's unpaid taxes. The surety informed the Army that it had received claims from the contractor's unpaid creditors and that it was entitled to have the Army apply any remaining funds against those claims. Finally, the bank maintained that its assignment was still in effect and that the contractor's indebtedness exceeded the amount remaining due under the contract. GAO found that the IRS claim had priority because, although a surety may have a right to contract funds retained by the government, the government may satisfy by setoff any tax claim it may have against the contractor. If, as in this case, the contract contains a no-setoff clause, and other requirements of the Assignment of Claims Act have been satisfied, payments are made to the assignee without reduction or setoff of the liability for taxes. If the bank had priority over the surety, the bank would be entitled to the funds since its claim would not be subject to setoff by IRS. However, if the surety had priority over the bank, IRS would be entitled to the funds. The bank would be entitled to the protection of the no-setoff clause only if it could establish that it was otherwise entitled to the funds. In this case, it could not do this because the surety maintained its claim. Therefore, GAO held that IRS could properly exercise its right to offset any remaining contract payments against the contractor's tax liability.