B-152008, SEP. 10, 1963

B-152008: Sep 10, 1963

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WHITE: REFERENCE IS MADE TO YOUR LETTER DATED JULY 8. THE ASSIGNMENT OF THE LEASE WAS DULY PERFECTED UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940. WHICH LETTER WAS RECEIVED BY THE DEPARTMENT ON JANUARY 16. WHICH LETTER WAS APPARENTLY NOT RECEIVED UNTIL MAY 20. DISCLOSED THAT GLENEX CONSTRUCTION CORPORATION WAS INDEBTED TO THE INTERNAL REVENUE SERVICE FOR NONPAYMENT OF WITHHOLDING TAXES FOR THE FOURTH QUARTER OF 1962 IN THE AMOUNT OF $20. YOU CONTEND THAT THE BANK HAS A BETTER RIGHT TO THE RENTALS WHICH HAVE ACCRUED UNDER THE LEASE THAN THE INTERNAL REVENUE SERVICE BECAUSE: "ON JANUARY 15. NO FEDERAL LIEN HAD BEEN FILED OF RECORD IN ANY OFFICE IN WHICH IT WAS REQUIRED TO BE FILED. WAS NOT REQUIRED TO FILE A REPORT AND REMIT THE WITHHOLDING TAXES UNTIL THE 31ST DAY OF JANUARY.

B-152008, SEP. 10, 1963

TO WILLIAM R. WHITE:

REFERENCE IS MADE TO YOUR LETTER DATED JULY 8, 1963, REGARDING THE DISPOSITION OF RENTS OWING BY THE UNITED STATES GOVERNMENT AS LESSEE OF POST OFFICE PREMISES LOCATED ON GRAND AVENUE, BALDWIN, TOWN OF HEMPSTEAD, NASSAU COUNTY, NEW YORK. YOUR LETTER STATES THAT YOU REPRESENT THE EMIGRANT INDUSTRIAL SAVINGS BANK WHICH, ON JANUARY 15, 1963, ACQUIRED A MORTGAGE ON THE PREMISES, TOGETHER WITH THE LEASE AS COLLATERAL SECURITY IN THE EVENT OF THE DEFAULT OF THE LESSOR MORTGAGOR, BY ASSIGNMENT FROM THE FRANKLIN NATIONAL BANK. THE ASSIGNMENT OF THE LEASE WAS DULY PERFECTED UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940, 54 STAT. 1029, 31 U.S.C. 203, BY LETTER DATED JANUARY 15, 1963, FROM THE EMIGRANT INDUSTRIAL SAVINGS BANK TO THE POST OFFICE DEPARTMENT, WHICH LETTER WAS RECEIVED BY THE DEPARTMENT ON JANUARY 16, 1963, AND ACKNOWLEDGED BY LETTER DATED FEBRUARY 13, 1963.

BY REGISTERED LETTER DATED MAY 17, 1963, WHICH LETTER WAS APPARENTLY NOT RECEIVED UNTIL MAY 20, 1963, THE BANK NOTIFIED THE POST OFFICE THAT THE MORTGAGOR-LESSOR HAD DEFAULTED ON PAYMENT OF INSTALLMENTS OF PRINCIPAL AND INTEREST DUE FOR THE MONTHS OF APRIL AND MAY, AND REQUESTED THAT HENCEFORTH THE RENTS BE PAID TO IT IN ACCORDANCE WITH THE TERMS OF THE ASSIGNMENT. THE POST OFFICE DEPARTMENT ANNOUNCED ITS INTENTION TO HONOR THIS REQUEST BY LETTER DATED JUNE 5, 1963, ADDRESSED TO THE MORTGAGOR- LESSOR, THE GLENEX CONSTRUCTION CORPORATION OF VALLEY STREAM, NEW YORK.

THE POST OFFICE DEPARTMENT HAD BEEN SERVED WITH A NOTICE OF LEVY ON MAY 28, 1963, WHICH NOTICE, DATED MAY 27, 1963, DISCLOSED THAT GLENEX CONSTRUCTION CORPORATION WAS INDEBTED TO THE INTERNAL REVENUE SERVICE FOR NONPAYMENT OF WITHHOLDING TAXES FOR THE FOURTH QUARTER OF 1962 IN THE AMOUNT OF $20,916.58 (INCLUDING PENALTIES TO THAT DATE), ASSESSED ON FEBRUARY 12, 1963; FOR NONPAYMENT OF WITHHOLDING TAXES FOR THE FIRST QUARTER OF 1963 IN THE AMOUNT OF $11,328.56, ASSESSED ON MAY 6, 1963; AND FOR FAILURE TO PAY FEDERAL UNEMPLOYMENT TAXES FOR THE YEAR 1962 IN THE AMOUNT OF $1,794.62, ASSESSED ON MARCH 8, 1963. THE POST OFFICE DEPARTMENT CHANGED ITS POSITION BY LETTER TO THE BANK DATED JULY 3, 1963, AND ANNOUNCED THAT THE BANK WOULD BE ADVISED LATER AS TO WHAT DISPOSITION WOULD BE MADE OF THE MONEYS BEING WITHHELD UNDER THE LEASE.

YOU CONTEND THAT THE BANK HAS A BETTER RIGHT TO THE RENTALS WHICH HAVE ACCRUED UNDER THE LEASE THAN THE INTERNAL REVENUE SERVICE BECAUSE:

"ON JANUARY 15, 1963, AT THE TIME THE BANK ACQUIRED THE MORTGAGE BY ASSIGNMENT AND NOTIFIED THE POST OFFICE DEPARTMENT OF ITS ASSIGNMENT OF LEASE, NO FEDERAL LIEN HAD BEEN FILED OF RECORD IN ANY OFFICE IN WHICH IT WAS REQUIRED TO BE FILED, NOR HAD THE ASSESSMENT OVER BEEN MADE.'

FURTHERMORE YOU ARGUE THAT:

"AT THE TIME OF THE ASSIGNMENT, GLENEX CONSTRUCTION CORP. WAS NOT REQUIRED TO FILE A REPORT AND REMIT THE WITHHOLDING TAXES UNTIL THE 31ST DAY OF JANUARY, 1963, AND IT IS THE CONTENTION OF THIS OFFICE THAT THE ASSIGNMENT OF LEASE TAKES PRECEDENCE OVER CLAIMS WHICH HAD NOT MATURED, OR IF MATURED WERE NOT ACTIONABLE.'

THE RIGHTS OF THE GOVERNMENT IN THE INSTANT SITUATION MAY BE VIEWED IN TWO WAYS. FIRSTLY, THE INTERNAL REVENUE SERVICE MIGHT ATTEMPT TO ASSERT A LIEN FOR UNPAID TAXES UPON THE ACCRUED RENTALS UNDER THE INTERNAL REVENUE CODE, 26 U.S.C. 6321, 6322. SECONDLY, THE UNITED STATES GOVERNMENT MAY EXERCISE THE COMMON LAW RIGHT OF ANY DEBTOR TO SET OFF AMOUNTS DUE FROM IT TO A CLAIMANT TOWARD THE EXTINGUISHMENT OF THAT CLAIMANT'S INDEBTEDNESS TO THE GOVERNMENT.

IF THIS MATTER WERE TO BE DISPOSED OF SOLEY WITH REFERENCE TO THE FIRST THEORY OF THE GOVERNMENT'S POSITION, THE BANK MIGHT WELL PREVAIL, SINCE AS BETWEEN TWO CONFLICTING LIENS UPON THE SAME PROPERTY THE FIRST IN TIME IS FIRST IN RIGHT, AND THE ASSIGNMENT WAS PERFECTED ON JANUARY 16, 1963, WHEREAS THE TAX LIEN DOES NOT ARISE UNTIL THE TIME AT WHICH THE ASSESSMENT IS MADE BY 26 U.S.C. 6322 AND THE EARLIEST ASSESSMENT IN THIS CASE WAS NOT EFFECTED UNTIL FEBRUARY 12, 1963.

BUT THE RIGHTS OF THE GOVERNMENT HERE MAY BE DETERMINED UNDER THE SECOND THEORY, THAT IS, BY THE RULES REGARDING THE GOVERNMENT'S RIGHT OF SET-OFF AT COMMON LAW. AN ASSIGNMENT OF ACCOUNTS RECEIVABLE FROM THE UNITED STATES CAN BE LAWFULLY ACCOMPLISHED ONLY THROUGH COMPLIANCE WITH THE ANTI- ASSIGNMENT STATUTE AS MODIFIED BY THE ASSIGNMENT OF CLAIMS ACT OF 1940, 31 U.S.C. 203, 41 U.S.C. 15. THE POST OFFICE IS NOT ONE OF THE AGENCIES AUTHORIZED BY STATUTE TO INSERT SO-CALLED ,NO SET-OFF" CLAUSES IN CONTRACTS. THE RIGHTS OF AN ASSIGNEE OF A CONTRACT NOT CONTAINING A "NO SET-OFF" CLAUSE ARE GOVERNED BY THE COMMON LAW. 37 COMP. GEN. 318. SUCH ASSIGNEE, EVEN IF HE WERE A PURCHASER FOR VALUE AND WITHOUT NOTICE, COULD HAVE NO GREATER RIGHTS AGAINST THE OBLIGER THAN HIS ASSIGNOR HAS AND IS SAID TO BE SUBJECT TO THE EQUITIES BETWEEN THE PARTIES TO THE ORIGINAL CONTRACT. WILLISTON ON CONTRACTS, SEC. 432. RESTATEMENT OF THE LAW, CONTRACTS SEC. 167. CORBIN ON CONTRACTS SEC. 892. THE OBLIGATION TO THE UNITED STATES OF AN EMPLOYER WHO HAS FAILED TO WITHHOLD FROM THE PAY OF HIS EMPLOYEES OR WHO HAS WITHHELD BUT FAILED TO REMIT TO THE GOVERNMENT, FEDERAL INCOME AND UNEMPLOYMENT TAXES AND SOCIAL SECURITY CONTRIBUTIONS, ARISES INDEPENDENTLY OF THE CONTRACT UNDER WHICH THE PAY WAS EARNED. CENTRAL BANK V. UNITED STATES, 345 U.S. 639. BUT AN OBLIGOR'S RIGHT OF SET-OFF AGAINST AN ASSIGNEE IS NOT LIMITED AT COMMON LAW TO CLAIMS WHICH ARISE AS PART OF THE TRANSACTION BETWEEN THE PARTIES TO THE ORIGINAL CONTRACT. RESTATEMENT OF THE LAW, CONTRACTS SEC. 167.

DEBTS OWED BY THE ASSIGNOR TO THE GOVERNMENT WHICH ARISE AFTER PERFECTION OF THE ASSIGNMENT MAY NOT BE SET OFF AGAINST PAYMENTS DUE THE ASSIGNEE. 20 COMP. GEN. 458, 459. DEBTS OWED THE UNITED STATES BY THE ASSIGNOR WHICH EXISTED, WHETHER MATURED OR NOT, BEFORE NOTICE OF THE ASSIGNMENT WAS GIVEN THE OBLIGOR, MAY, AT THE TIME THEY MATURE, BE SET OFF AGAINST MATURE OBLIGATIONS OWED BY THE GOVERNMENT TO THE ASSIGNOR. 37 COMP. GEN. 808. AN EMPLOYER'S OBLIGATION TO PAY THE GOVERNMENT AMOUNTS WITHHELD FROM HIS EMPLOYEE'S SALARIES FOR TAX OR SOCIAL SECURITY PURPOSES COMES INTO EXISTENCE, IRRESPECTIVE OF ITS INCHOATE CHARACTER, AT THE TIME THE EMPLOYEE HAS COMPLETED EARNING THE SALARY TO WHICH THE OBLIGATION APPLIES, I.E., IN GENERAL, ON PAY DAY, EVEN THOUGH THE ACTUAL PAYMENT TO THE GOVERNMENT NEED NOT BE MADE UNTIL LATER. DURING THE INTERIM BETWEEN THE WITHHOLDING AND THE SATISFACTION OF THE LIABILITY TO THE GOVERNMENT, AN EMPLOYER HOLDS THE AMOUNTS INVOLVED AS A CONSTRUCTIVE TRUSTEE FOR THE GOVERNMENT. THUS A NOTICE OF ASSIGNMENT RECEIVED BY THE GOVERNMENT DOES NOT RENDER THE ASSIGNEE IMMUNE FROM SET-OFF OF NEWLY ARISING TAX OR SOCIAL SECURITY WITHHOLDING LIABILITIES OF THE ASSIGNOR UNTIL THE BEGINNING OF THE PAY PERIOD NEXT FOLLOWING THE PAY PERIOD OF THE PARTICULAR EMPLOYER DURING WHICH NOTICE OF ASSIGNMENT IS RECEIVED.

IN THIS CASE BOTH THE WITHHOLDING TAX OBLIGATION FOR THE FOURTH QUARTER OF 1962 AND THE FEDERAL UNEMPLOYMENT TAX OBLIGATION FOR THE YEAR 1962 WERE CLAIMS EXISTING, EVEN THOUGH NOT YET MATURE, AT THE TIME THE NOTICE OF ASSIGNMENT WAS RECEIVED BY THE POST OFFICE DEPARTMENT. THAT PART OF THE WITHHOLDING TAX LIABILITY FOR THE FIRST QUARTER OF 1963 WHICH CAME INTO BEING BY VIRTUE OF THE BEGINNING OF PAY PERIODS PRIOR TO JANUARY 16, 1963, IS LIKEWISE AVAILABLE TO THE GOVERNMENT FOR PURPOSES OF SET-OFF. THE BALANCE OF THE LAST MENTIONED TAX OBLIGATION MAY NOT BE SET OFF AGAINST THE BANK. COMPARE B-150865 DATED MARCH 20, 1963.

THE ASSIGNEE BANK MAY IN NO EVENT BE PAID AMOUNTS OWING BY THE GOVERNMENT TO THE ASSIGNOR WHICH EXCEED THE AMOUNT OF THE ASSIGNOR'S DEBT TO THE ASSIGNEE BANK, SO LONG AS THE ASSIGNOR REMAINS INDEBTED TO THE UNITED STATES. 37 COMP. GEN. 318; 37 COMP. GEN. 817.

THE MATTER IS BEING REFERRED BACK TO THE POST OFFICE DEPARTMENT FOR DISPOSITION IN ACCORDANCE WITH THIS DECISION.