B-156370, APR. 1, 1965

B-156370, APR. 1, 1965

TO COMMANDANT, U.S. COAST GUARD:

BY FIRST INDORSEMENT OF MARCH 19, 1965 (REFERENCE FP-5,4600, MARCH 18, 1965), THERE WAS FORWARDED THE REQUEST OF MR. I. C. SCHULER, AUTHORIZED CERTIFYING OFFICER, FOR OUR DECISION AS TO WHETHER CERTAIN FUNDS DUE UNDER A CONTRACT WITH BROOKLYN MARINE, INCORPORATED, MAY PROPERLY BE USED AS OFFSET AGAINST THE CONTRACTOR'S INDEBTEDNESS TO THE UNITED STATES INTERNAL REVENUE SERVICE. THE CIRCUMSTANCES GIVING RISE TO DOUBT IN THE MATTER MAY BE SUMMARIZED AS FOLLOWS:

CONTRACT T03CG-3422 WAS ENTERED INTO BY THE COAST GUARD AND BROOKLYN MARINE ON APRIL 20, 1964. THE MONIES DUE UNDER THE CONTRACT WERE ASSIGNED IN FAVOR OF COSMOPOLITAN EQUITIES CORPORATION, AND ON MAY 25, 1964, THE CONTRACTING OFFICER RECEIVED COPIES OF THE ASSIGNMENT AND NOTICE THEREOF DATED MAY 21, 1964. THE RECORD SHOWS THAT THE ASSIGNMENT COMPLIED WITH THE ASSIGNMENT OF CLAIMS STATUTES AND THAT THE "NO SETOFF" PROVISIONS OF THESE STATUTES WERE NOT APPLICABLE. 31 U.S.C. 203, 41 U.S.C. 15. PERFORMANCE OF THE CONTRACT WAS COMPLETED ON JUNE 20, 1964.

ON AUGUST 18, 1964, THE INTERNAL REVENUE SERVICE SERVED A NOTICE OF LEVY DATED AUGUST 17, 1964, ON THE COAST GUARD SETTING FORTH THAT UNPAID WITHHOLDING AND UNEMPLOYMENT TAXES PLUS STATUTORY ADDITIONS WERE THEN DUE AND OWING TO THE UNITED STATES FROM BROOKLYN MARINE IN THE FOLLOWING AMOUNTS:

CHART

ASSESSMENT

PERIOD TYPE OF TAX DATE (*) AMOUNT

------ ----------- ---------- ------ 4TH QTR. 1963 WITHHOLDING

8/12/64 $ 8,850.80 1ST QTR. 1964 DO. DO. 6,698.20 2ND QTR. 1964 DO. DO. 6,753.50

1963 FUTA DO. 605.15

TOTAL DUE $22,907.65

(*) NOTICE OF LIEN FILED WITH REGISTER, KINGS COUNTY, NEW YORK, ON AUGUST 18, 1964.

BY LETTER OF OCTOBER 5, 1964, BROOKLYN MARINE REQUESTED THE COAST GUARD TO REMIT TO THE INTERNAL REVENUE SERVICE OUT OF MONIES DUE UNDER ITS CONTRACT AN AMOUNT SUFFICIENT TO COVER THE TAX DEBT. CONCERNING THE ASSIGNMENT, BROOKLYN MARINE STATED THAT IT HAD ENTERED SUIT AGAINST THE ASSIGNEE TO VOID THE ASSIGNMENT AND OTHER AGREEMENTS BETWEEN IT AND THE ASSIGNEE. ON OCTOBER 26, 1964, THE COAST GUARD MAILED A CHECK IN THE ABOVE AMOUNT TO THE INTERNAL REVENUE SERVICE WITH THE REQUEST THAT IT BE HELD IN SUSPENSE PENDING APPROVAL OF THE SETOFF BY THIS OFFICE.

AS THE ASSIGNMENT OF MONIES PAYABLE UNDER THE CONTRACT WAS MADE AND NOTICE THEREOF GIVEN TO THE COAST GUARD PRIOR TO ASSESSMENT OF AND NOTICE OF LIEN FOR TAXES OWED BY THE CONTRACTOR, QUESTION ARISES AS TO WHETHER AMOUNTS DUE UNDER THE CONTRACT MAY BE APPLIED AGAINST THE TAX DEBT OR WHETHER SUCH AMOUNTS MUST BE PAID OVER TO THE ASSIGNEE.

THE MATTER IS SOMEWHAT CONFUSED BY INTRODUCTION OF THE TAX LIEN ASPECTS OF THE SITUATION. SECTION 6321, 6322, AND 6333 OF TITLE 26, U.S.C. ESTABLISH THE SYSTEM UNDER WHICH THE FEDERAL TAXING AUTHORITIES ACQUIRE LIENS AGAINST PROPERTY OF TAX DEBTORS FOR TAXES DUE. THIS TAX LIEN SYSTEM IS GENERALLY DESIGNED FOR THE PURPOSE OF DESIGNATING WHERE THE TAX DEBT STANDS IN THE ORDER OF PRIORITY FOR DISTRIBUTION OF THE DEBTORS' ASSETS. BUT THE RIGHTS OF THE GOVERNMENT IN THE INSTANT SITUATION ARE NOT DEPENDENT UPON EXERCISE OF ANY LIEN PRIVILEGES. THE RIGHTS OF THE GOVERNMENT HERE ARE DETERMINABLE FROM THE RIGHTS AND OBLIGATIONS ARISING OUT OF THE CONTRACT AND ITS ASSIGNMENT. INDEED, IF THE ASSIGNMENT OPERATES TO TRANSFER EQUITY IN THE FUNDS INVOLVED TO THE ASSIGNEE, A LIEN AGAINST THE FUNDS FOR A DEBT OWED BY THE ASSIGNOR COULD NOT AFFECT THE ASSIGNEE'S EQUITABLE RIGHT THERETO; AND IF THE FUNDS EQUITABLY ARE THOSE OF THE ASSIGNOR, THERE IS NO NEED FOR THE GOVERNMENT TO ASSERT A LIEN FOR THE PURPOSE OF EFFECTING A SETOFF AGAINST THEM.

IF AN ASSIGNMENT OF THE MONIES DUE UNDER THE CONTRACT HAD NOT BEEN MADE IT IS CLEAR BEYOND DISPUTE THAT THE CONTRACTOR'S MATURED TAX DEBTS COULD PROPERLY BE SETOFF AGAINST ANY CONTRACT PAYMENTS DUE. DOES THE ASSIGNMENT AFFECT THIS COMMON LAW RIGHT OF SETOFF? THE CONTRACT RESERVED TO THE GOVERNMENT ITS COMMON LAW RIGHT OF SETOFF IN THE EVENT OF AN ASSIGNMENT. GENERAL PROVISIONS, PARAGRAPH 8. WHERE A CONTRACT HAS BEEN ASSIGNED, DEBTS, ALTHOUGH NOT MATURE, OWED THE UNITED STATES BY THE ASSIGNOR BEFORE NOTICE OF THE ASSIGNMENT WAS EFFECTED, MAY AT THE TIME THEY MATURE BE SETOFF 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 SALARY FOR TAX 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 ACTUAL PAYMENT TO THE GOVERNMENT NEED NOT BE MADE UNTIL LATER. DURING THE INTERIM BETWEEN WITHHOLDING AND PAYMENT, THE EMPLOYER HOLDS THE AMOUNTS INVOLVED AS CONSTRUCTIVE TRUSTEE FOR THE GOVERNMENT. MOREOVER, THE EMPLOYER IS LIABLE FOR SUCH TAXES WITH RESPECT TO ALL WAGES PAID BY HIM WHETHER OR NOT DEDUCTIONS ARE ACTUALLY MADE FROM WAGES. SEE FEDERAL TAX REGULATIONS (1960) 31.3102-1 (A), 1 (C); 31.3402 (A/-1 (B), 1 (F); 31.3403-1 CONCERNING WITHHOLDING TAXES AND 31.3301-2 CONCERNING UNEMPLOYMENT TAXES WHICH ARE DUE AT THE CLOSE OF THE CALENDAR YEAR. THUS A NOTICE OF ASSIGNMENT RECEIVED BY THE GOVERNMENT DOES NOT RENDER THE ASSIGNEE IMMUNE FROM SETOFF OF NEWLY ARISING WITHHOLDING TAX LIABILITIES OF THE ASSIGNOR UNTIL THE BEGINNING OF THE PAY PERIOD NEXT FOLLOWING THE PAY PERIOD OF THE PARTICULAR EMPLOYER DURING WHICH NOTICE OF THE ASSIGNMENT IS RECEIVED. NOR DOES LACK OF NOTICE TO THE ASSIGNEE OF THE EXISTING TAX LIABILITIES AT THE TIME HE ACCEPTED THE ASSIGNMENT SERVE TO ENHANCE THE ASSIGNEE'S EQUITY IN THE FUNDS INVOLVED. SOUTH SIDE BANK AND TRUST CO. V. UNITED STATES (1955) 221 F.2D. 813. OUR DECISION OF SEPTEMBER 11, 1964, B-154909, WHICH WAS REFERRED TO IN THE PAPERS ACCOMPANYING YOUR INDORSEMENT IS MODIFIED TO THE EXTENT OF ITS INCONSISTENCY WITH THIS OPINION.

ACCORDINGLY, IN THE INSTANT CASE ALL OF THE TAX DEBT FOR 1963 AND THE FIRST QUARTER OF 1964 TOTALLING $16,154.15, AND SO MUCH OF THE $6,753.50 RELATING TO THE SECOND QUARTER OF 1964 AS WAS WITHHELD PRIOR TO THE PAY PERIOD COMMENCING AFTER MAY 25, 1964, ARE CLEARLY AVAILABLE FOR SETOFF.

THE REMAINING PORTION OF WITHHOLDING TAXES APPLICABLE TO THE SECOND QUARTER OF 1964 WOULD ORDINARILY BE IMMUNE FROM SETOFF. HOWEVER, THE RECORD DOES NOT SHOW WHETHER THE ASSIGNEE IN THIS CASE WAS A PURCHASER FOR VALUE, AND THE ASSIGNOR HAS STATED THAT HE HAS BROUGHT AN ACTION TO DECLARE THE ASSIGNMENT VOID. UNDER THESE CIRCUMSTANCES, IN THE ABSENCE OF ANY CLAIM BY THE ASSIGNEE TO THE FUNDS INVOLVED, IN VIEW OF THE RELATIVELY MINOR AMOUNT, AND SINCE THERE WELL MAY HAVE ACCUMULATED FURTHER PENALTIES AND INTEREST WHICH ARE SUBJECT TO SETOFF, WE BELIEVE IT IS APPROPRIATE TO SETOFF THE ENTIRE AMOUNT SET FORTH ABOVE TO PROTECT THE GOVERNMENT'S INTERSTATE SUBJECT TO RECEIPT OF A PROPER CLAIM FROM THE ASSIGNEE. SEE 35 COMP. GEN. 104.