B-157394, OCT. 5, 1965

B-157394, OCT. 5, 1965

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

REFERENCE IS MADE TO YOUR LETTER DATED JULY 21, 1965, REQUESTING OUR DECISION WHETHER FINAL PROGRESS PAYMENT NO. 25 IN THE AMOUNT OF $1,250 DUE UNDER CONTRACT NO. FA2-1578, FOR CONSTRUCTION OF CERTAIN FACILITIES AT ALBROOK FIELD, CANAL ZONE, REPUBLIC OF PANAMA, MAY BE MADE WITHOUT A SIGNED CONTRACT RELEASE AND IF PAYMENT MAY BE MADE WHETHER IT SHOULD BE MADE TO THE SURETY OR TO THE ASSIGNEE.

YOUR LETTER ADVISES THAT ALL MONEYS DUE UNDER THE CONTRACT HAVE BEEN PAID EXCEPT $1,250. THE SUBMITTED VOUCHER DISCLOSES AN AMOUNT OF $750 IS BEING WITHHELD FROM FINAL PAYMENT DUE OF $2,000, TO COVER PUNCHLIST ITEMS NOT COMPLETED BY THE CONTRACTOR. ENCLOSURE TO YOUR LETTER ADVISES THAT INAN EFFORT TO CLOSE THIS CONTRACT ACCOUNT AND TO MAKE FINAL PAYMENT, THE CONTRACTING OFFICER HAS MADE NUMEROUS ATTEMPTS TO OBTAIN THE EXECUTED CONTRACT RELEASE STATEMENT PREVIOUSLY SUBMITTED TO THE CONTRACTOR, W. B. UHLHORN CONSTRUCTION COMPANY, HARLINGEN, TEXAS. UPON RECEIPT OF ADVICE THAT MR. UHLHORN RESIDED IN NEW YORK CITY, HE WAS TRACED THROUGH THE TELEPHONE COMPANY ON OCTOBER 2, 1964, AND HE VERBALLY ADVISED THE CONTRACTING OFFICE TO FORWARD THE FINAL CONTRACT DOCUMENTS TO HIS CONTRACT ADDRESS IN HARLINGEN, TEXAS, AND THAT HE WOULD ARRANGE FOR FURTHER FORWARDING TO HIM IN NEW YORK. ON NOVEMBER 6, 1964, MR. UHLHORN WAS AGAIN CONTACTED IN NEW YORK CITY WHEREUPON HE ADVISED THAT THE FINAL CONTRACT DOCUMENTS WERE IN HIS POSSESSION AND THAT HE WOULD GIVEN THEM HIS IMMEDIATE ATTENTION. TO DATE OF SUBMISSION OF YOUR REQUEST FOR DECISION THE CONTRACTING OFFICER HAS BEEN UNABLE TO CONTACT MR. UHLHORN AND MAIL DIRECTED TO HIS ADDRESS IN HARLINGEN WAS RETURNED BY THE POSTMASTER MARKED UNCLAIMED WITH NO FORWARDING ADDRESS. BY LETTERS DATED SEPTEMBER 9 AND 11, 1964, THE SURETY, NATIONAL SURETY CORPORATION, DALLAS, TEXAS, HAS GONE ON RECORD AS CLAIMING ANY BALANCE REMAINING UNDER THIS CONTRACT, CITING AS AUTHORITY THEREFOR THE CASES OF PEARLMAN V. RELIANCE INSURANCE CO., 371 U.S. 132, AND NEWARK INSURANCE COMPANY V. UNITED STATES, 169 F.SUPP. 955. THE SURETY'S LETTER OF SEPTEMBER 9, 1964, CONTAINS THE STATEMENT THAT W. B. UHLHORN CONSTRUCTION COMPANY IS IN DEFAULT UNDER BONDS EXECUTED BY NATIONAL SURETY CORPORATION, WHICH IS ALLEGED TO MAKE ANY CONTRACT BALANCE PRESENTLY HELD UNDER CONTRACT FA2-1578, THE PROPERTY OF THE SURETY RATHER THAN THE PROPERTY OF AN ASSIGNEE BANK. LETTER OF SEPTEMBER 11, FROM SURETY'S ATTORNEYS, CLAIMS NATIONAL SURETY CORPORATION HOLDS A PRIOR ASSIGNMENT TO SAID FUNDS, ENCLOSING AS EVIDENCE THEREOF A COPY OF THE APPLICATION FOR THE CONTRACT BOND. YOUR LETTER STATES, IN EFFECT, THAT THE SURETY'S CLAIM IS BASED ON APPARENT DEFAULT ON PREVIOUS CONTRACTS FOR WHICH THIS SURETY WAS THE BONDING AGENT. THE FILE FURTHER DISCLOSES THAT THE ORIGINAL CONTRACT WAS ASSIGNED TO THE FIRST NATIONAL CITY BANK OF NEW YORK, BALBOA, CANAL ZONE, AND THERE HAS BEEN NO NOTICE OF CANCELLATION OR CHANGE TO THIS ASSIGNMENT. YOUR OFFICE HAS INFORMALLY REPORTED THAT THE ASSIGNMENT WAS DATED SEPTEMBER 29, 1960. FURTHER, THE CONTRACT DOES NOT CONTAIN A "NO SET-OFF" PROVISION. YOU CITE OUR DECISION AT 33 COMP. GEN. 608 AS APPEARING TO BE APPLICABLE TO THIS CASE AND REFER TO THE POSSIBILITY THAT A COURT OF COMPETENT JURISDICTION HAS MADE A RULING WHEREON A SPECIFIC DECISION MAY NOW BE BASED.

THE INTERNAL REVENUE SERVICE, UNITED STATES TREASURY DEPARTMENT, WASHINGTON, D. C; HAS ADVISED THIS OFFICE THAT W. B. UHLHORN, D.B.A. UHLHORN CONSTRUCTION COMPANY, IS INDEBTED TO THE UNITED STATES FOR UNPAID WITHHOLDING AND FICA TAXES FOR THE THIRD AND FOURTH QUARTERS OF 1960, IN THE AMOUNT OF $6,810.50, PLUS ACCRUED INTEREST COMPUTED TO AUGUST 10, 1965, FOR $475.13, AND AN UNPAID FUTA TAX FOR THE YEAR 1960, IN THE AMOUNT OF $1,625.85, PLUS ACCRUED INTEREST COMPUTED TO AUGUST 10, 1965, FOR $114.51, MAKING AN AGGREGATE TOTAL LIABILITY OF $9,025.99. WE ARE ALSO ADVISED THAT UHLHORN CONSTRUCTION COMPANY, INCORPORATED, IS INDEBTED FOR UNPAID WITHHOLDING AND FICA TAXES FOR THE THIRD AND FOURTH QUARTERS OF 1960, IN THE AMOUNT OF $5,639.62, PLUS ACCRUED INTEREST COMPUTED TO AUGUST 10, 1965, FOR $380.83, MAKING A TOTAL LIABILITY OF $6,020.45.

INSOFAR AS THE CLAIM OF THE SURETY IS CONCERNED THE COURTS AS WELL AS OUR OFFICE HAVE 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. SEE B-157386, SEPTEMBER 17, 1965, AND COURT CASES CITED THEREIN.

IN THE ABSENCE OF A "NO SET-OFF" CLAUSE, THE ASSIGNEE'S RIGHTS WOULD, OF COURSE, BE GOVERNED BY COMMON LAW. IN SUCH CASE, THE ASSIGNEE STANDS IN THE SHOES OF THE ASSIGNOR AND THE GOVERNMENT MAY SET OFF AGAINST THE ASSIGNEE ANY CLAIMS OF 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, 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 THERE CITED.

THE APPLICABLE REGULATIONS PROVIDE WITH RESPECT TO BOTH THE FEDERAL INSURANCE CONTRIBUTIONS ACT TAX AND WITHHOLDING TAX ON INCOME (WHICH ARE AMONG THE PERTINENT UNPAID TAXES HERE INVOLVED) THAT THE EMPLOYER SHALL COLLECT SUCH TAXES BY DEDUCTION FROM WAGES AS AND WHEN PAID. SEE SECTIONS 31.3102-1/A) AND 31.3402/A/-1/B), FEDERAL TAX REGULATIONS (FTR) (1960). THESE REGULATIONS FURTHER PROVIDE THAT THE EMPLOYER IS LIABLE FOR SUCH TAXES WITH RESPECT TO ALL WAGES PAID BY HIM TO EMPLOYEES WHETHER OR NOT DEDUCTIONS ARE ACTUALLY MADE FROM THE WAGES. SEE SECTIONS 31.3102-1/C) AND 31.3403-1, FTR. FURTHER, ANY SUCH TAXES COLLECTED BY THE EMPLOYER CONSTITUTE SPECIAL FUNDS IN TRUST FOR THE UNITED STATES. SEE SECTIONS 31.3102-1/C) AND 31.3402/A/-1/F), FTR.

IF THE ASSIGNMENT OF THE MONEYS DUE UNDER THIS CONTRACT HAD NOT BEEN MADE IT IS CLEAR THAT THE CONTRACTOR'S MATURED TAX DEBTS COULD PROPERLY BE SET OFF AGAINST CONTRACT PAYMENTS DUE. THE QUESTION THEN BECOMES WHETHER THE ASSIGNMENT AFFECTS, AND TO WHAT EXTENT, THIS COMMON LAW RIGHT OF SETOFF.

OUR DECISION OF MAY 29, 1958, 37 COMP. GEN. 808, HELD THAT WHERE A CONTRACT HAS BEEN ASSIGNED, DEBTS, ALTHOUGH NOT MATURED, OWED THE UNITED STATES BY THE ASSIGNOR BEFORE NOTICE OF THE ASSIGNMENT WAS EFFECTED, MAY AT THE TIME THEY MATURE BE SET OFF AGAINST OBLIGATIONS OWED BY THE GOVERNMENT TO THE ASSIGNOR. 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 OF THE TAXES WITHHELD NEED NOT BE MADE UNTIL LATER. DURING THE INTERIM BETWEEN WITHHOLDING AND PAYMENT, THE EMPLOYER HOLDS THE AMOUNT INVOLVED AS CONSTRUCTIVE TRUSTEE FOR THE GOVERNMENT. SEE THE ABOVE TAX REGULATIONS. 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. 37 COMP. GEN. 808. COMPARE 37 COMP. GEN. 318. 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., SUPRA.

ACCORDINGLY, IN THE PRESENT CASE ALL OF THE TAXES ACCRUING TO THE GOVERNMENT PRIOR TO THE PAY PERIOD COMMENCING AFTER SEPTEMBER 29, 1960, ARE FOR COLLECTION BY SETOFF FROM THE CONTRACT FUNDS. IN VIEW OF THE RELATIVELY MINOR AMOUNT OF THE SUBMITTED VOUCHER IT APPEARS THAT THE ENTIRE AMOUNT REMAINING DUE UNDER THE CONTRACT WILL BE ABSORBED BY THE TAX LIABILITY.

THE AMOUNT SET OFF SHOULD BE DEPOSITED INTO 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 R. L. PHINNEY, DISTRICT DIRECTOR OF INTERNAL REVENUE, AUSTIN, TEXAS (INDEBTEDNESS OF W. B. UHLHORN, D.B.A. UHLHORN CONSTRUCTION COMPANY). YOUR SECOND QUESTION IS ANSWERED ACCORDINGLY. IN VIEW OF THE DISPOSITION TO BE MADE OF THE CONTRACT FUNDS YOUR FIRST QUESTION REQUIRES NO ANSWER AT THIS TIME.