B-134029, NOVEMBER 12, 1957, 37 COMP. GEN. 318

B-134029: Nov 12, 1957

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WHICH CONTAINED A "NO SET-OFF" CLAUSE AND WHICH WAS SUBSEQUENTLY ASSIGNED TO A BANK FOR A LOAN. 1957: REFERENCE IS MADE TO YOUR LETTER OF SEPTEMBER 12. THE VOUCHER IS IN THE AMOUNT OF $26. THE CONTRACT WAS ENTERED INTO ON OCTOBER 4. OVER TWO YEARS BEFORE THE CONTRACT WAS EXECUTED. THERE IS A BALANCE OF $26. YOU STATE FURTHER THAT YOU HAVE BEEN UNABLE TO RESOLVE WITH THE INTERNAL REVENUE SERVICE THE QUESTION WHETHER THE COMMISSION SHOULD HONOR THE TAX LEVY IN VIEW OF THE ASSIGNMENT TO THE BANK UNDER A CONTRACT CONTAINING A "NO SET-OFF" PROVISION. IS THAT UNDER THE PROVISIONS OF SECTION 6321 OF THE INTERNAL REVENUE CODE OF 1954. REFERENCE IS MADE BY THE INTERNAL REVENUE SERVICE TO THE CASE OF UNITED STATES V.

B-134029, NOVEMBER 12, 1957, 37 COMP. GEN. 318

CONTRACTS - ASSIGNMENTS - TAX DEBTS ACCRUING PRIOR TO EXECUTION OF GOVERNMENT CONTRACT - INTERNAL REVENUE SERVICE V. ASSIGNOR'S RIGHTS A CONTRACTOR'S TAX DEBT WHICH ACCRUED PRIOR TO THE EXECUTION OF A GOVERNMENT CONTRACT, WHICH CONTAINED A "NO SET-OFF" CLAUSE AND WHICH WAS SUBSEQUENTLY ASSIGNED TO A BANK FOR A LOAN, DOES NOT BECOME A LIEN ON THE AMOUNTS DUE ON THE CONTRACT UNDER THE NO SET-OFF PROVISIONS OF THE ASSIGNMENT OF CLAIMS ACT OF 1940, 31 U.S.C. 203, WHICH NOT ONLY NULLIFY THE TAX LIEN PROVISIONS IN 26 U.S.C. 6321, BUT ALSO OPERATE TO REDUCE THE GOVERNMENT'S COMMON-LAW RIGHT OF SET-OFF AGAINST THE ASSIGNEE, AND, THEREFORE, CONTRACT PAYMENTS MAY BE MADE TO THE BANK IN AN AMOUNT NOT TO EXCEED THE AMOUNT OWED BY THE CONTRACTOR AND ANY BALANCE SHOULD BE PAID TO THE INTERNAL REVENUE SERVICE FOR REDUCTION OF THE TAX DEBT.

TO C. R. MCNEELY, UNITED STATES ATOMIC ENERGY COMMISSION, NOVEMBER 12, 1957:

REFERENCE IS MADE TO YOUR LETTER OF SEPTEMBER 12, 1957, REQUESTING A DECISION WHETHER YOU MAY PROPERLY CERTIFY A VOUCHER FOR PAYMENT TO THE BANK OF LAS VEGAS, NEVADA. THE VOUCHER IS IN THE AMOUNT OF $26,509.58 REPRESENTING A PAYMENT DUE UNDER CONTRACT NO. AT (29-2/-486 BETWEEN MR. H. W. POLK OF LAS VEGAS AND THE COMMISSION.

THE CONTRACT WAS ENTERED INTO ON OCTOBER 4, 1956, AND CONTAINED A CLAUSE PERMITTING THE ASSIGNMENT OF MONEYS DUE OR TO BECOME DUE THEREUNDER TO A BANK OR OTHER FINANCING INSTITUTION PURSUANT TO THE PROVISIONS OF THE ASSIGNMENT OF CLAIMS ACT OF 1940, 31 U.S.C. 203. THE ASSIGNMENT CLAUSE FURTHER PROVIDED THAT PAYMENTS TO AN ASSIGNEE UNDER THE CONTRACT SHOULD NOT BE SUBJECT TO REDUCTION OR SET-OFF TO THE EXTENT PROVIDED IN THE ASSIGNMENT OF CLAIMS ACT, AS AMENDED. ON OCTOBER 26, 1956, THE CONTRACTOR ASSIGNED ALL CONTRACT MONEYS DUE OR TO BECOME DUE TO THE BANK OF LAS VEGAS FOR THE PURPOSE OF SECURING FINANCING FROM THE BANK.

OVER TWO YEARS BEFORE THE CONTRACT WAS EXECUTED, A NOTICE OF FEDERAL TAX LIEN AGAINST THE CONTRACTOR HAD BEEN FILED IN THE COUNTY RECORDER'S OFFICE IN CLARK COUNTY, NEVADA, IN THE AMOUNT OF $48,003.62. ON APRIL 3, 1957, THE INTERNAL REVENUE SERVICE SERVED A NOTICE OF LEVY ON THE ALBUQUERQUE OPERATIONS OFFICE OF THE COMMISSION INDICATING THAT THE CONTRACTOR OWED $68,346.74 IN UNPAID TAXES. THERE IS A BALANCE OF $26,509.58 OWING UNDER THE CONTRACT, AND YOUR LETTER STATES THAT AS OF APRIL 17, 1957, THE ASSIGNEE BANK HAD MADE ADVANCES OF $11,562.42 TO THE CONTRACTOR AGAINST THAT BALANCE. YOU STATE FURTHER THAT YOU HAVE BEEN UNABLE TO RESOLVE WITH THE INTERNAL REVENUE SERVICE THE QUESTION WHETHER THE COMMISSION SHOULD HONOR THE TAX LEVY IN VIEW OF THE ASSIGNMENT TO THE BANK UNDER A CONTRACT CONTAINING A "NO SET-OFF" PROVISION.

THE POSITION OF THE INTERNAL REVENUE SERVICE, AS INDICATED BY COPIES OF CORRESPONDENCE FORWARDED WITH YOUR LETTER, IS THAT UNDER THE PROVISIONS OF SECTION 6321 OF THE INTERNAL REVENUE CODE OF 1954, 26 U.S.C. 6321, A FEDERAL TAX LIEN HAD ARISEN BEFORE THE TIME OF THE CONTRACT AGAINST ALL PROPERTY AND RIGHTS TO PROPERTY OWNED BY THE CONTRACTOR. SINCE, UNDER THE HOLDING IN UNITED STATES V. GLASS CITY BANK, 326 U.S. 265, SUCH TAX LIEN ATTACHED TO THE AFTER-ACQUIRED PROPERTY OF THE CONTRACTOR, IT ATTACHED TO HIS RIGHTS UNDER THE CONTRACT WITH THE COMMISSION, AND HE THEREFORE HAD NO RIGHT, TITLE OR INTEREST IN MONEYS DUE OR TO BECOME DUE UNDER THE CONTRACT WHICH HE COULD ASSIGN TO THE BANK OF LAS VEGAS, TO THE EXTENT OF THE TAX LIEN. REFERENCE IS MADE BY THE INTERNAL REVENUE SERVICE TO THE CASE OF UNITED STATES V. CITY OF GREENVILLE, 118 F.2D 963, IN WHICH IT WAS STATED THAT AFTER FEDERAL TAX LIENS ATTACH, THE PROPERTY AFFECTED HAS IN A SENSE TWO OWNERS, THE TAXPAYER AND, TO THE EXTENT OF THE LIEN, THE UNITED STATES.

BUT FOR THE "NO SET-OFF" PROVISIONS OF THE ASSIGNMENT OF CLAIMS ACT, AS AMENDED, WE WOULD PERHAPS AGREE WITH THE POSITION OF THE INTERNAL REVENUE SERVICE. WE THINK IT IS CLEAR, HOWEVER, THAT THAT PART OF THE ACT EXPRESSLY NULLIFIES THE EFFECT OF SECTION 6321 OF THE INTERNAL REVENUE CODE OF 1954, TITLE 26, IN THE PRESENT CASE. THE ASSIGNMENT OF CLAIMS ACT, AS AMENDED, PROVIDES AS FOLLOWS CONCERNING SET-OFF:

ANY CONTRACT OF THE DEPARTMENT OF DEFENSE, THE GENERAL SERVICES ADMINISTRATION, THE ATOMIC ENERGY COMMISSION * * * MAY * * * PROVIDE * * * THAT PAYMENTS TO BE MADE TO THE ASSIGNEE OF ANY MONEYS DUE OR TO BECOME DUE UNDER SUCH CONTRACT SHALL NOT BE SUBJECT TO REDUCTION OR SET-OFF, AND IF SUCH PROVISION OR ONE TO THE SAME GENERAL EFFECT * * * IS HEREAFTER INCLUDED OR INSERTED IN ANY SUCH CONTRACT, PAYMENTS TO BE MADE THEREAFTER TO AN ASSIGNEE OF ANY MONEYS DUE OR TO BECOME DUE UNDER SUCH CONTRACT * * * SHALL NOT BE SUBJECT TO REDUCTION OR SET-OFF * * * FOR ANY LIABILITY OF THE ASSIGNOR ON ACCOUNT OF * * * TAXES, SOCIAL SECURITY CONTRIBUTIONS, OR THE WITHHOLDING OR NONWITHHOLDING OF TAXES OR SOCIAL SECURITY CONTRIBUTIONS, WHETHER ARISING FROM OR INDEPENDENTLY OF SUCH CONTRACT.

OTHER PROVISIONS OF THE ASSIGNMENT OF CLAIMS ACT PERMIT THE ASSIGNMENT OF MONEYS DUE UNDER A GOVERNMENT CONTRACT WHICH THERETOFORE WAS PROHIBITED. IF THE ACT HAD PERMITTED ONLY THIS, WITHOUT THE "NO SET-OFF" PROVISION, AN ASSIGNEE'S RIGHTS WOULD BE GOVERNED BY COMMON LAW. INDEED, THIS IS THE SITUATION WHERE THE CONTRACT DOES NOT INCLUDE A NO SET-OFF PROVISION. SUCH CASE, THE ASSIGNEE STANDS IN THE SHOES OF THE ASSIGNOR AND THE GOVERNMENT AGAINST THE ASSIGNOR WHICH HAD MATURED PRIOR TO THE ASSIGNMENT. SOUTH SIDE BANK AND TRUST CO. V. UNITED STATES, 221 F.2D 813. HOWEVER, UNDER THE COMMON LAW APPLICABLE TO ASSIGNMENTS, DEBTS OF THE ASSIGNOR WHICH MATURE AFTER AN ASSIGNMENT IS MADE MAY NOT BE SET OFF AGAINST PAYMENTS OTHERWISE DUE THE ASSIGNEE. 20 COMP. GEN. 458, 459, AND CASES CITED THERE.

THESE PRINCIPLES ARE APPLICABLE TO A FEDERAL TAX INDEBTEDNESS OWED BY A GOVERNMENT CONTRACTOR, APART FROM ANY LIEN WHICH MAY EXIST. WHERE THE CONTRACT DOES NOT CONTAIN A NO SET-OFF PROVISION IT MAY WELL BE THAT THE LIEN CREATED BY SECTION 6321 OF THE 1954 INTERNAL REVENUE CODE WOULD PREVENT THE EFFECTIVE ASSIGNMENT OF MONEYS THEREAFTER BECOMING DUE THE TAXPAYER UNDER A GOVERNMENT CONTRACT. IF THE ASSIGNMENT OF THE CONTRACT PROCEEDS WAS MADE BEFORE THE TAX BECAME DUE, THERE WOULD BE NO PROPERTY OR RIGHT TO PROPERTY OWNED BY THE TAXPAYER TO WHICH THE LIEN COULD ATTACH, AT LEAST TO THE EXTENT OF THE ASSIGNEE'S ENTITLEMENT TO SUCH PROCEEDS.

IT IS CLEAR THAT THE NO SET-OFF PROVISION OF THE ACT OPERATED TO REDUCE THE GOVERNMENT'S COMMON LAW RIGHT OF SET-OFF AGAINST AN ASSIGNEE. AS WAS STATED IN CENTRAL BANK AND UNITED STATES, 345 U.S. 639, 643:

* * * THE ACT AUTHORIZED THE WAR AND NAVY DEPARTMENTS TO LIMIT THE GOVERNMENT'S PREVIOUS RIGHTS OF SET-OFF. * * *

THE ASSIGNMENT OF CLAIMS ACT OF 1940 WAS EVIDENTLY DESIGNED TO ASSIST IN THE NATIONAL DEFENSE PROGRAM THROUGH FACILITATING THE FINANCING OF DEFENSE CONTRACTS BY LIMITING THE GOVERNMENT'S POWER TO REDUCE PROPERLY ASSIGNED PAYMENTS. BORROWERS WERE NOT TO BE PENALIZED IN SECURITY BECAUSE ONE CONTRACTING PARTY WAS THE GOVERNMENT. CONTRACTORS MIGHT WELL HAVE OBLIGATIONS TO THE UNITED STATES NOT IMPOSED BY THE CONTRACT FROM WHICH THE PAYMENTS FLOWED, AS FOR EXAMPLE THE CONTRACTOR'S INCOME TAX FOR PRIOR EARNINGS UNDER THE CONTRACT. THE TAXES HERE INVOLVED ARE ANOTHER GOOD ILLUSTRATION OF THE DANGERS TO LENDERS.

WHILE NO MENTION IS MADE IN THE CENTRAL BANK CASE OF TAX DEBTS WHICH MIGHT HAVE ACCRUED PRIOR TO THE MAKING OF A GOVERNMENT CONTRACT, AND AS TO WHICH A TAX LIEN MIGHT HAVE ARISEN, IT IS PLAIN THAT SUCH DEBTS WOULD POSE AN EVEN GREATER DANGER TO PROSPECTIVE LENDERS THAN TAX DEBTS ARISING DURING THE COURSE OF PERFORMANCE OF THE CONTRACT. WE THINK THE FOLLOWING LANGUAGE FROM THE OPINION IN THAT CASE APPLIES WITH EQUAL WEIGHT TO PRE- EXISTING TAX DEBTS:

FINALLY, IT IS URGED THAT THE ACT SHOULD BE CONSTRUED SO AS TO PROTECT THE UNITED STATES. THE SHORT ANSWER TO THIS IS THAT THE ACT SHOULD BE CONSTRUED SO AS TO CARRY OUT THE PURPOSE OF CONGRESS TO ENCOURAGE THE PRIVATE FINANCING OF GOVERNMENT CONTRACTS. TO GRANT THE GOVERNMENT ITS SOUGHT-FOR RIGHTS OF SET-OFF UNDER THE CIRCUMSTANCES OF THIS CASE, WOULD BE TO DEFEAT THE PURPOSE OF CONGRESS. IT WOULD REQUIRE THE ASSIGNEE TO POLICE THE ASSIGNOR'S ACCOUNTING AND PAYMENT SYSTEM. IT WOULD INCREASE THE RISK TO THE ASSIGNEE, THE DIFFICULTY OF THE ASSIGNOR IN FINANCING THE PERFORMANCE, AND THE ULTIMATE COST TO THE GOVERNMENT.

IT MUST ALSO BE REMEMBERED THAT THE AMENDMENT TO THE ASSIGNMENT OF CLAIMS ACT OF MAY 15, 1951, ENLARGED THE PREVIOUS NO SET-OFF PROVISION TO INCLUDE SPECIFICALLY WITHIN THE CATEGORY OF DEBTS WHICH COULD NOT BE SET OFF "* * * TAXES * * * WHETHER ARISING FROM OR INDEPENDENTLY OF SUCH CONTRACT.' CONNECTION WITH THIS EXEMPTION, THE PRESIDENT STATED IN APPROVING THE BILL:

* * * THERE IS REASON TO BELIEVE THAT THE PROVISIONS RELATING TO TAX CLAIMS AND SOCIAL SECURITY CONTRIBUTIONS PROVIDE A BROADER BASIS FOR EXEMPTIONS THAN IS NECESSARY OR SOUND. IT MAY WELL BE THAT INTERESTS OF THE UNITED STATES WITH RESPECT TO TAXES AND THOSE OF PERSONS COVERED BY THE SOCIAL SECURITY ACT WITH RESPECT TO CONTRIBUTIONS WITHHELD FROM THEIR PAY ARE SUBORDINATED UNNECESSARILY TO THE INTERESTS OF PRIVATE LENDING INSTITUTIONS.

I DO NOT BELIEVE THAT IT WAS THE INTENT OF CONGRESS TO BRING ABOUT SUCH A RESULT OR THAT THE COMPLETE EXEMPTIONS WHICH MAY BE MANDATORY UNDER THE BILL ARE NEEDED TO ACCOMPLISH ITS CENTRAL PURPOSE. THEREFORE, I AM ASKING THE SECRETARY OF THE TREASURY TO REVIEW THE EFFECTS OF THE LEGISLATION MOST CAREFULLY, AND IF HE FINDS IT NECESSARY, TO PRESENT TO THE CONGRESS APPROPRIATE RECOMMENDATIONS FOR ITS AMENDMENT.

NO SUCH LEGISLATION HAS BEEN SPONSORED BY THE TREASURY DEPARTMENT, AND SO FAR AS WE ARE INFORMED THE TREASURY DEPARTMENT HAS NOT TAKEN THE POSITION THAT A FEDERAL TAX LIEN PRECLUDES, PRO TANTO, THE EFFECTIVE ASSIGNMENT OF MONEYS BECOMING DUE UNDER A GOVERNMENT CONTRACT ENTERED INTO AFTER THE LIEN ATTACHES.

ON THE OTHER HAND, AND AS STATED IN THE DECISION AT 35 COMP. GEN. 104, AT 108, AN ASSIGNEE WHO TAKES AN ASSIGNMENT OF CONTRACT MONEYS AS SECURITY FOR A LOAN TO THE ASSIGNOR MUST ACCOUNT TO THE ASSIGNOR AS A CONSTRUCTIVE TRUSTEE FOR ALL PROCEEDS COLLECTED IN EXCESS OF THE ASSIGNOR'S INDEBTEDNESS TO THE ASSIGNEE. THE ASSIGNOR CONTRACTOR'S INTEREST IN SUCH EXCESS PROCEEDS APPEAR TO BE PROPERTY OR A RIGHT TO PROPERTY TO WHICH THE LIEN WOULD ATTACH. CF. IN RE DECKER'S ESTATE, 355 PENNA. 331, 49 A.2D 714, CERTIORARI DENIED, 331 U.S. 807; BROWN V. AMERICAN GAS COAL CO., 95 W.1VA. 658, 123 S.E. 412. FOR THIS REASON, AND FOR THE REASONS STATED IN 35 COMP. GEN. 104, WE BELIEVE THAT SUCH PORTION OF THE BALANCE DUE UNDER THE CONTRACT AS MAY BE IN EXCESS OF THE UNREPAID ADVANCES MADE BY THE BANK OF LAS VEGAS TO MR. POLK SHOULD BE PAID OVER TO THE INTERNAL REVENUE SERVICE.

THE VOUCHER, WHICH IS RETURNED HEREWITH, PROPERLY MAY BE CERTIFIED FOR PAYMENT TO THE BANK IN AN AMOUNT NOT TO EXCEED THE AMOUNT OWING TO THE BANK BY MR. POLK UNDER THE ASSIGNMENT.