B-135474, JUNE 5, 1958, 37 COMP. GEN. 817

B-135474: Jun 5, 1958

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FOR SECURITY FOR PERIODIC LOANS WHICH HAD BEEN FULLY REPAID TO THE BANK AT THE TIME SEVERAL TAX LIENS WERE OUTSTANDING AGAINST THE CONTRACTOR HAS NO EFFECT ON THE PRIORITY OF THE TAX LIENS FOR SATISFACTION FROM AMOUNTS DUE UNDER THE CONTRACT OVER THE BANK'S RIGHT TO RECEIVE THE AMOUNTS AS ASSIGNEE ON BEHALF OF THE CONTRACTOR AND A LOAN FOR THE REMAINDER OF THE CONTRACT BALANCE MADE BY THE BANK AFTER THE TAX LIENS ATTACHED AND WITH NOTICE OF THE TAX DEBTS DOES NOT MAKE THE BANK A PURCHASER OF THE CONTRACT BALANCE WITHIN THE EXEMPTION OF SECTION 6323 OF THE INTERNAL REVENUE CODE TO PRECLUDE SET-OFF OF THE TAX DEBTS FROM THE CONTRACT BALANCE. AN AMOUNT DUE TO A CONTRACTOR WHO IS INDEBTED TO THE GOVERNMENT FOR VARIOUS FEDERAL TAXES IS CONSIDERED PROPERTY OR A RIGHT TO PROPERTY TO WHICH A TAX LIEN ATTACHES.

B-135474, JUNE 5, 1958, 37 COMP. GEN. 817

CONTRACTS - ASSIGNMENTS - TAX DEBTS - LOANS SUBSEQUENT TO TAX LEVY THE ASSIGNMENT OF A CONTRACT, WHICH DID NOT CONTAIN A "NO SET-OFF" CLAUSE, TO A BANK PURSUANT TO THE ASSIGNMENT OF CLAIMS ACT OF 1940, 41 U.S.C. 15, FOR SECURITY FOR PERIODIC LOANS WHICH HAD BEEN FULLY REPAID TO THE BANK AT THE TIME SEVERAL TAX LIENS WERE OUTSTANDING AGAINST THE CONTRACTOR HAS NO EFFECT ON THE PRIORITY OF THE TAX LIENS FOR SATISFACTION FROM AMOUNTS DUE UNDER THE CONTRACT OVER THE BANK'S RIGHT TO RECEIVE THE AMOUNTS AS ASSIGNEE ON BEHALF OF THE CONTRACTOR AND A LOAN FOR THE REMAINDER OF THE CONTRACT BALANCE MADE BY THE BANK AFTER THE TAX LIENS ATTACHED AND WITH NOTICE OF THE TAX DEBTS DOES NOT MAKE THE BANK A PURCHASER OF THE CONTRACT BALANCE WITHIN THE EXEMPTION OF SECTION 6323 OF THE INTERNAL REVENUE CODE TO PRECLUDE SET-OFF OF THE TAX DEBTS FROM THE CONTRACT BALANCE. AN AMOUNT DUE TO A CONTRACTOR WHO IS INDEBTED TO THE GOVERNMENT FOR VARIOUS FEDERAL TAXES IS CONSIDERED PROPERTY OR A RIGHT TO PROPERTY TO WHICH A TAX LIEN ATTACHES, UNDER SECTION 6321 OF THE INTERNAL REVENUE CODE.

TO J. E. PERRY, DEPARTMENT OF THE INTERIOR, JUNE 5, 1958:

REFERENCE IS MADE TO YOUR LETTER OF MARCH 6, 1958, REQUESTING TO BE ADVISED WHETHER YOU MAY PROPERLY CERTIFY FOR PAYMENT A VOUCHER TRANSMITTED WITH YOUR LETTER. THE VOUCHER, IN THE AMOUNT OF $10,440.64, IS DRAWN IN FAVOR OF THE SEATTLE-FIRST NATIONAL BANK, ASSIGNEE UNDER CONTRACT NO. 14- 03-001-12276 BETWEEN BPA AND MR. F. H. JARNAGIN, AND REPRESENTS THE FINAL PAYMENT DUE UNDER THAT CONTRACT.

ON MAY 1, 1956, PRIOR TO THE TIME ANY PAYMENTS WERE MADE UNDER THE CONTRACT, MR. JARNAGIN ASSIGNED ALL AMOUNTS DUE OR TO BECOME DUE THEREUNDER TO THE BANK. THE ASSIGNMENT WAS MADE IN ACCORDANCE WITH THE PROVISIONS OF THE ASSIGNMENT OF CLAIMS ACT OF 1940, 41 U.S.C. 15. THE "NO SET-OFF" PROVISIONS OF THE ACT ARE NOT APPLICABLE TO THE CONTRACT. THEREAFTER, MR. JARNAGIN BECAME INDEBTED TO THE UNITED STATES FOR VARIOUS TAXES TOTALING OVER $10,000 WHICH WERE ASSESSED ON OCTOBER 31, 1956, DECEMBER 21, 1956, JANUARY 31, 1957, AND FEBRUARY 15, 1957. THE INTERNAL REVENUE SERVICE SERVED NOTICES OF LEVY ON THE BONNEVILLE POWER ADMINISTRATION DATED DECEMBER 3, 1956, AND FEBRUARY 20, 1957, COVERING THESE TAXES.

THE CONTRACTOR, MR. JARNAGIN, BORROWED MONEY FROM THE ASSIGNEE BANK AT ABOUT WEEKLY INTERVALS ON INDIVIDUAL DEMAND NOTES, WHICH APPEAR TO HAVE BEEN REPAID OUT OF MONTHLY PROGRESS CONTRACT PAYMENTS MADE TO THE ASSIGNEE BANK BY BPA. PRIOR TO THE NOTICE OF SERVICE OF THE FIRST LEVY ON THE BONNEVILLE POWER ADMINISTRATION, THE BANK HAD LOANED MR. JARNAGIN A TOTAL OF $159,050, OF WHICH ALL BUT $5,500 APPEARS TO HAVE BEEN REPAID. THEREAFTER, ON DECEMBER 14, 1956, THE BANK LOANED AN ADDITIONAL $7,159.39. THE SEVENTH CONTRACT PAYMENT OF $19,879.78 WAS MADE TO THE BANK ON FEBRUARY 7, 1957, UNDER A TENTATIVE UNDERSTANDING WITH THE INTERNAL REVENUE SERVICE AND APPEARS TO HAVE BEEN USED TO REPAY THE $12,659.39 THEN OWED THE BANK BY THE CONTRACTOR, LEAVING AN EXCESS OF $7,220.39 WHICH PRESUMABLY WAS TURNED OVER TO THE CONTRACTOR BY THE BANK.

BY LETTERS DATED FEBRUARY 14 AND 15, 1957, THE BONNEVILLE POWER ADMINISTRATION SUGGESTED TO THE CONTRACTOR AND THE INTERNAL REVENUE SERVICE THAT ATTEMPTS BE MADE TO OBTAIN A RELEASE OF THE ASSIGNMENT FROM THE BANK. AT THIS TIME THE CONTRACTOR OWED NOTHING TO THE BANK. FEBRUARY 20, 1957, THE BANK MADE ITS FINAL LOAN TO THE CONTRACTOR IN THE AMOUNT OF $10,440.64, THE EXACT REMAINDER DUE UNDER THE CONTRACT. LETTER OF THE SAME DATE, THE BANK ADVISED BPA THAT IT WAS RELYING UPON ITS ASSIGNMENT AS SECURITY FOR THE LOAN AND REQUESTED PAYMENT OF THE FINAL CONTRACT BALANCE. IT DOES NOT APPEAR THAT THE BANK WAS OBLIGATED UNDER ITS AGREEMENT WITH THE CONTRACTOR TO MAKE THIS LOAN, WHICH REMAINS UNPAID.

THE INTERNAL REVENUE SERVICE CONTENDS THAT THE UNITED STATES HAS A RIGHT OF SET-OFF, AND THAT THE FEDERAL TAX LIEN HAS PRIORITY OVER THE BANK'S CLAIM. IN SUPPORT OF THIS POSITION REFERENCE IS MADE TO THE CASES OF UNITED STATES V. BALL CONSTRUCTION CO., 355 U.S. 587; UNITED STATES V. SECURITY TRUST AND SAVINGS BANK, 340 U.S. 47; AND UNITED STATES V. CITY OF NEW BRITAIN, 347 U.S. 81.

THE TAX LIENS ARISE UNDER SECTIONS 6321 AND 6322 OF THE INTERNAL REVENUE CODE OF 1954 WHICH PROVIDE THAT THE AMOUNT OF ANY TAX DUE WHICH HAS NOT BEEN PAID AFTER DEMAND SHALL BE A LIEN, ARISING AT THE TIME THE ASSESSMENT IS MADE, UPON ALL PROPERTY AND RIGHTS TO PROPERTY BELONGING TO THE TAXPAYER. SECTION 6323 OF THE CODE PROVIDES THAT THE LIEN CREATED BY SECTION 6321 SHALL NOT ATTACH AS AGAINST A MORTGAGEE, PLEDGEE, PURCHASER, OR JUDGMENT CREDITOR UNTIL THE LIEN SHALL HAVE BEEN RECORDED IN THE MANNER PROVIDED BY THE SECTION. SO FAR AS IS DISCLOSED BY THE RECORD BEFORE US, NO TAX LIEN AGAINST THE CONTRACTOR WAS RECORDED PRIOR TO THE LAST LOAN MADE BY THE BANK. AS TO THE NECESSITY OF SUCH RECORDATION WHERE NO TANGIBLE PROPERTY IS INVOLVED, SEE UNITED STATES V. EILAND, 223 F.2D 118.

THE TAX LIENS AGAINST THE CONTRACTOR IN THE PRESENT CASE AROSE, BY VIRTUE OF THE TIME OF ASSESSMENT, IN THE FOLLOWING AMOUNTS ON THE DATES SPECIFIED:

$6,783.45 OCTOBER 31, 1956

181.84 DECEMBER 21, 1956

2,504.79 JANUARY 31, 1957

626.01 FEBRUARY 15, 1957

AS OF FEBRUARY 15, 1957, THEREFORE, THERE WERE TAX LIENS OUTSTANDING AGAINST ANY PROPERTY OR RIGHTS TO PROPERTY OWNED BY THE CONTRACTOR AGGREGATING $10,096.09. AT THAT TIME, ON THE BASIS OF OUR INFORMATION, ALL AMOUNTS THERETOFORE LOANED BY THE ASSIGNEE BANK TO THE CONTRACTOR HAD BEEN REPAID. THE CONTRACTOR ON FEBRUARY 15, 1957, HAD EARNED AND WAS ENTITLED TO PAYMENT OF $10,440.64 UNDER THE CONTRACT. THERE IS NO QUESTION THAT, BUT FOR THE ASSIGNMENT TO THE BANK, THE CONTRACTOR'S RIGHT TO RECEIVE THIS AMOUNT WAS PROPERTY OR A RIGHT TO PROPERTY TO WHICH THE TAX LIENS ATTACHED.

THE QUESTION THEN ARISES AS TO THE EFFECT UPON THE PRIORITY OF THE TAX LIENS OF THE PRE-EXISTING ASSIGNMENT BY THE CONTRACTOR TO THE BANK OF ALL MONEYS TO BECOME DUE UNDER THE CONTRACT, AS WELL AS THE EFFECT OF THE LOAN OF $10,440.64 MADE BY THE BANK TO THE CONTRACTOR ON FEBRUARY 20, 1957. THIS LOAN WAS MADE BY THE BANK WITH KNOWLEDGE OF THE EXISTING TAX LIENS, AND WAS ASSERTEDLY MADE IN RELIANCE UPON THE ASSIGNMENT. IT SHOULD ALSO BE NOTED THAT THE BANK WAS UNDER NO OBLIGATION TO THE CONTRACTOR TO MAKE THE LOAN OF $10,440.64; THAT THE ASSIGNMENT OF THE CONTRACT PROCEEDS WAS AS SECURITY FOR THE PAYMENT OF ANY OBLIGATIONS OWED BY THE CONTRACTOR TO THE BANK; AND THAT IF THE CONTRACT BALANCE OF $10,440.64 HAD BEEN PAID TO THE ASSIGNEE BANK BEFORE THE LAST LOAN WAS MADE, THE BANK WOULD HAVE HELD SUCH PAYMENT IN TRUST FOR THE CONTRACTOR AND NOT AS ITS OWN MONEY. LEAVENWORTH STATE BANK V. WENATCHEE VALLEY FRUIT EXCHANGE, 204 P. 8, 118 WASH. 366.

UNDER THESE CIRCUMSTANCES, IT IS OUR OPINION THAT THE CONTRACT BALANCE OF $10,440.64 WAS SUBJECT TO THE TAX LIENS WHICH HAD ARISEN PRIOR TO FEBRUARY 20, 1957. SINCE THE CONTRACT DID NOT CONTAIN A "NO SET-OFF" CLAUSE, WE BELIEVE THAT ANY CLAIM THE BANK MIGHT HAVE TO SUCH BALANCE UNDER THE ASSIGNMENT WHERE, AS HERE, THE BANK HAD NO CLAIM IN ITS OWN RIGHT UNTIL AFTER THE LIENS HAD ATTACHED IS SUBJECT AND INFERIOR TO THE LIENS UNLESS THE BANK COMES WITHIN THE EXEMPTION OF SECTION 6323 OF THE INTERNAL REVENUE CODE OF 1954 AS A MORTGAGEE, PLEDGEE, OR PURCHASER OF THE REMAINING CONTRACT BALANCE.

UNDER OTHER CIRCUMSTANCES THIS QUESTION MIGHT NOT BE FREE FROM DOUBT. THE PRESENT CASE WE BELIEVE SECTION 6323 TO BE INAPPLICABLE. AS STATED, THERE WAS NO OBLIGATION ON THE PART OF THE BANK TO MAKE THE LOAN, IT WAS MADE WITH KNOWLEDGE OF THE OUTSTANDING TAX LIENS, AND IT WAS MADE AT A TIME WHEN THE BANK'S ONLY CLAIM TO THE CONTRACT BALANCE OTHERWISE WAS AS ASSIGNEE FOR COLLECTION ON BEHALF OF THE CONTRACTOR. ANY STATUS AS A PURCHASER WHICH THE BANK MIGHT CLAIM WAS CREATED BY IT WITH KNOWLEDGE OF THE FACT THAT THE PROPERTY PURCHASED WAS THEN SUBJECT TO THE TAX LIENS. CF. UNITED STATES V. CALDWELL, 74 F.1SUPP. 114.

YOU ARE THEREFORE ADVISED THAT THE VOUCHER IN FAVOR OF THE ASSIGNEE BANK PROPERLY MAY BE CERTIFIED FOR PAYMENT TO IT ONLY IN THE AMOUNT OF ANY CONTRACT BALANCE IN EXCESS OF TAX LIENS WHICH HAD ARISEN BY ASSESSMENT PRIOR TO THE DATE THE LOAN OF $10,440.64 WAS MADE BY THE BANK. THE BALANCE OF THE AMOUNT DUE SHOULD BE APPLIED AGAINST THE TAX LIENS.