B-157386, SEP. 17, 1965

B-157386: Sep 17, 1965

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IT APPEARS THAT THE PROPRIETY OF CERTIFYING THE VOUCHER IS QUESTIONED BY YOU. BECAUSE PAYMENT IS PROPOSED ON THE BASIS OF A CONTRACT RELEASE SIGNED BY THE SURETY. THE SURETY COMPANY CLAIMS THAT IT IS ENTITLED TO RECEIVE THE AMOUNT OF THE FINAL PAYMENT BECAUSE IT HAS SUSTAINED A LOSS OF $26. IS INDEBTED TO THE UNITED STATES FOR AN UNPAID WITHHOLDING AND FICA TAX FOR THE FOURTH QUARTER OF 1962. THE ONLY QUESTION FOR CONSIDERATION IS WHETHER THE CONTRACTOR'S REPORTED TAX INDEBTEDNESS MAY BE SET OFF AGAINST THE FINAL PAYMENT DUE UNDER THE CONTRACT IN VIEW OF THE CLAIM ASSERTED BY THE SURETY COMPANY. WHERE THE COURT HELD THAT THE GOVERNMENT'S RIGHT TO COLLECT THE CONTRACTOR'S TAX DEBT BY SETOFF AGAINST THE CONTRACT FUND IS SUPERIOR TO THE SURETY'S RIGHT THERETO BY SUBROGATION.

B-157386, SEP. 17, 1965

TO MR. LOUIS E. HOLMES, AUTHORIZED CERTIFYING OFFICER, OFFICE OF MANAGEMENT SERVICES, FEDERAL AVIATION AGENCY:

BY LETTER DATED JULY 30, 1965, THE CHIEF, ACCOUNTING PROGRAMS DIVISION, OFFICE OF MANAGEMENT SERVICES, FORWARDED YOUR LETTER OF JULY 20, 1965, WITH ENCLOSURES, REQUESTING OUR DECISION AS TO THE PROPRIETY OF CERTIFYING A VOUCHER FOR PAYMENT IN FAVOR OF THE ADVANCE ELECTRIC COMPANY, FORT WORTH, TEXAS, IN CARE OF THE GLOBE INDEMNITY COMPANY, IN THE AMOUNT OF $3,715.70, REPRESENTING THE FINAL PROGRESS PAYMENT DUE UNDER CONTRACT NO. FA2-2623.

UNDER THE CONTRACT, THE ADVANCE ELECTRIC COMPANY COMPLETED CONSTRUCTION OF CERTAIN FACILITIES AT TRI-CITIES AIRPORT, BRISTOL, TENNESSEE, FOR THE TOTAL CONSIDERATION OF $108,472.45. IT APPEARS THAT THE PROPRIETY OF CERTIFYING THE VOUCHER IS QUESTIONED BY YOU, NOT BECAUSE OF ANY DOUBT AS TO THE ENTITLEMENT OF THE PAYEE AS TO THE AMOUNT INVOLVED, BUT BECAUSE PAYMENT IS PROPOSED ON THE BASIS OF A CONTRACT RELEASE SIGNED BY THE SURETY, THE GLOBE INDEMNITY COMPANY, RATHER THAN BY AN AUTHORIZED OFFICIAL OF THE CONTRACTOR. YOU STATE THAT MR. D. K. BEENE, THE OWNER OF THE ADVANCE ELECTRIC COMPANY, HAS DECLINED TO FURNISH A CONTRACT RELEASE STATEMENT AND A FINAL ESTIMATE OF CONTRACT COST AS REQUIRED BY ARTICLE 7 OF THE CONTRACT. YOU REQUEST ADVICE AS TO WHETHER FINAL PAYMENT CAN BE MADE ON THE BASIS OF THE CONTRACT RELEASE EXECUTED BY THE SURETY AND, IF SO, SHOULD IT BE MADE TO THE CONTRACTOR OR TO THE SURETY. THE SURETY COMPANY CLAIMS THAT IT IS ENTITLED TO RECEIVE THE AMOUNT OF THE FINAL PAYMENT BECAUSE IT HAS SUSTAINED A LOSS OF $26,303.29 BECAUSE OF PAYMENTS MADE TO MATERIALMEN AND SUBCONTRACTORS UNDER THE CONTRACT. THE RECORD INDICATES THAT DELBERT KIMZIE BEENE, D.B.A. ADVANCE ELECTRIC COMPANY, IN CAUSE NO. 2643, HAS BEEN ADJUDGED A BANKRUPT BY THE DISTRICT COURT OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF TEXAS, FORT WORTH DIVISION. CONNECTION WITH ITS CLAIM, THE SURELY COMPANY SUBMITTED AN AFFIDAVIT DATED AUGUST 8, 1963, EXECUTED BY THE SUCCESSOR TRUSTEE IN BANKRUPTCY, WHEREIN HE DISCLAIMS ANY INTEREST IN THE CONTRACT.

HOWEVER, THE INTERNAL REVENUE SERVICE HAS NOTIFIED US BY LETTER OF AUGUST 17, 1965, THAT D. K. BEENE, D.B.A. ADVANCE ELECTRIC COMPANY, IS INDEBTED TO THE UNITED STATES FOR AN UNPAID WITHHOLDING AND FICA TAX FOR THE FOURTH QUARTER OF 1962, IN THE AMOUNT OF $6,868.94, AND FOR UNPAID FUTA TAX FOR THE YEAR 1962, IN THE AMOUNT OF $2,519.25, MAKING AN AGGREGATE TOTAL LIABILITY OF $9,388.19. IN VIEW OF THIS REPORTED INDEBTEDNESS OF THE CONTRACTOR, THE QUESTION RELATING TO THE VALIDITY OF THE CONTRACT RELEASE NOW HAS BECOME ACADEMIC. HENCE, THE ONLY QUESTION FOR CONSIDERATION IS WHETHER THE CONTRACTOR'S REPORTED TAX INDEBTEDNESS MAY BE SET OFF AGAINST THE FINAL PAYMENT DUE UNDER THE CONTRACT IN VIEW OF THE CLAIM ASSERTED BY THE SURETY COMPANY.

IN THE CASE OF UNITED STATES, V. MUNSEY TRUST CO., 332 U.S. 234 (1947), THE SUPREME COURT OF THE UNITED STATES HELD THAT NOTWITHSTANDING THE CLAIM OF A SURETY ON A STATUTORY PAYMENT BOND, THE GOVERNMENT MAY SET OFF, AGAINST UNAPPROPRIATED PERCENTAGES OF PROGRESS PAYMENTS WITHHELD BY IT AND DUE THE CONTRACTOR ON THE CONSTRUCTION CONTRACT, A DEBT OWED TO IT BY THE CONTRACTOR AS A RESULT OF A SEPARATE AND UNRELATED TRANSACTION. WE ALSO INVITE YOUR ATTENTION TO THE CASE OF STANDARD ACCIDENT INSURANCE COMPANY V. UNITED STATES, 119 CT.CL. 749 (1951), WHERE THE COURT HELD THAT THE GOVERNMENT'S RIGHT TO COLLECT THE CONTRACTOR'S TAX DEBT BY SETOFF AGAINST THE CONTRACT FUND IS SUPERIOR TO THE SURETY'S RIGHT THERETO BY SUBROGATION. SEE, ALSO, UNITED STATES V. NATIONAL SURETY COMPANY, 254 U.S. 73 (1920). IN ADDITION, SEE 40 COMP. GEN. 85, 87, AND B-153802, APRIL 22, 1964.

ACCORDINGLY, THE TAX DEBT SHOULD BE CONSIDERED AS PROPERLY FOR SETOFF FROM THE AMOUNT DUE UNDER THE CONTRACT; CONSEQUENTLY, THE VOUCHER FOR $3,715.70 DRAWN IN FAVOR OF THE ADVANCE ELECTRIC COMPANY, WHICH WILL BE RETAINED IN THIS OFFICE, MAY NOT BE CERTIFIED FOR PAYMENT. IN LIEU THEREOF, A VOUCHER IN THE AMOUNT OF $3,715.70 SHOULD BE DRAWN IN FAVOR OF THE INTERNAL REVENUE SERVICE AND CERTIFIED FOR PAYMENT. A REFERENCE TO THIS DECISION SHOULD BE MADE ON THAT VOUCHER.

THE INTERNAL REVENUE SERVICE HAS ADVISED US THAT THE AMOUNT OF THE SETOFF SHOULD BE DEPOSITED IN THE TREASURY AS AN INTERNAL REVENUE COLLECTION (WITHHOLDING AND FICA TAX SYMBOL NO. 20-0101, AND FUTA TAX SYMBOL NO. 20- 0121) TO THE PERSONAL CREDIT OF ELLIS CAMPBELL, JR., DISTRICT DIRECTOR OF INTERNAL REVENUE, DALLAS, TEXAS (INDEBTEDNESS OF D. K. BEENE, D.B.A. ADVANCE ELECTRIC COMPANY).