B-169266, JUL. 16, 1970

B-169266: Jul 16, 1970

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INSURANCE COMPANY THAT INCURRED LIABILITY UNDER PAYMENT BOND FOR CONTRACTOR WHO WAS IN DEFAULT IS NOT ENTITLED TO PRIORITY AGAINST AMOUNT DUE UNDER CONTRACT WHEN UNPAID TAXES ARE OWED BY THE CONTRACTOR TO THE GOVERNMENT UNTIL GOVT'S COMMON LAW RIGHT OF SET OFF IS NULLIFIED BY JUDICIAL DETERMINATION. THE FEDERAL TAX LIEN ACT OF 1966 WILL NOT BE RECONIZED AS GIVING SURETY PRIORITY OVER LIEN FOR UNPAID TAXES. THESE FUNDS WERE ALSO CLAIMED BY THE INTERNAL REVENUE SERVICE FOR UNPAID TAXES OWED BY THE CONTRACTOR. YOU HAVE REQUESTED RECONSIDERATION OF THAT SETTLEMENT ON THE BASIS OF THE FEDERAL TAX LIEN ACT OF 1966. WE HAVE REVIEWED YOUR ARTICLE ON THE FEDERAL TAX LIEN ACT OF 1966 AS WELL AS THE PROVISIONS OF THE STATUTE ITSELF.

B-169266, JUL. 16, 1970

CONTRACTS -- PAYMENTS -- DEFAULT -- TAX LIEN V SURETY DECISION ON BEHALF OF AETNA INSURANCE COMPANY SUSTAINING SETTLEMENT SETTING OFF AMOUNTS DUE UNDER GSA WITH ALLIED ELECTRIC COMPANY TO SATISFY DEFAULTED CONTRACTOR'S TAX DEBT. INSURANCE COMPANY THAT INCURRED LIABILITY UNDER PAYMENT BOND FOR CONTRACTOR WHO WAS IN DEFAULT IS NOT ENTITLED TO PRIORITY AGAINST AMOUNT DUE UNDER CONTRACT WHEN UNPAID TAXES ARE OWED BY THE CONTRACTOR TO THE GOVERNMENT UNTIL GOVT'S COMMON LAW RIGHT OF SET OFF IS NULLIFIED BY JUDICIAL DETERMINATION, THE FEDERAL TAX LIEN ACT OF 1966 WILL NOT BE RECONIZED AS GIVING SURETY PRIORITY OVER LIEN FOR UNPAID TAXES.

TO MR. EDWARD GALLAGHER:

THIS CONCERNS YOUR LETTER OF MARCH 5, 1970, ON BEHALF OF AETNA INSURANCE COMPANY OF HARTFORD, CONNECTICUT, IN REGARD TO CONTRACT NO. GS-03B-14292 BETWEEN ALLIED ELECTRIC COMPANY AND THE GENERAL SERVICES ADMINISTRATION.

YOUR CLIENT, AETNA, HAVING INCURRED LIABILITY UNDER THE PAYMENT BOND FOR THE CONTRACT MADE A CLAIM AS THE SURETY TO THE UNPAID CONTRACT BALANCE OF $9,526.95 AFTER THE DEFAULT BY ALLIED ELECTRIC. THESE FUNDS WERE ALSO CLAIMED BY THE INTERNAL REVENUE SERVICE FOR UNPAID TAXES OWED BY THE CONTRACTOR, BY NOTICE OF LEVY DATED APRIL 19, 1968, AS AMENDED ON MAY 3, 1968. OUR OFFICE BY CERTIFICATE OF SETTLEMENT DATED OCTOBER 28, 1969, SET OFF THE REMAINING CONTRACT BALANCE AGAINST THE UNPAID TAXES. YOU HAVE REQUESTED RECONSIDERATION OF THAT SETTLEMENT ON THE BASIS OF THE FEDERAL TAX LIEN ACT OF 1966, PUBLIC LAW 89-719, NOVEMBER 2, 1966. YOU BELIEVE THAT REVISION TO THE INTERNAL REVENUE CODE, PARTICULARLY 26 U.S.C. 6323(C)(4)(C), GIVES THE SURETY PRIORITY OVER THE GOVERNMENT'S LIEN FOR UNPAID TAXES.

WE HAVE REVIEWED YOUR ARTICLE ON THE FEDERAL TAX LIEN ACT OF 1966 AS WELL AS THE PROVISIONS OF THE STATUTE ITSELF. WE AGREE THAT ON ITS FACE THE STATUTE COULD BE INTERPRETED TO GIVE THE SURETY PRIORITY OVER THE GOVERNMENT'S LIEN FOR TAXES. HOWEVER, IN OUR REVIEW OF THE LEGISLATIVE HISTORY LEADING TO THE ENACTMENT OF THAT STATUTE, WE NOTE THE STATEMENT SUBMITTED BY THE ASSISTANT SECRETARY OF THE TREASURY AS FOLLOWS:

"FINALLY, NOTHING IN THIS BILL IS INTENDED TO REVERSE U. S. V MUNSEY TRUST CO. (1947), 332 U.S. 234, WHICH HELD THAT THE UNITED STATES MAY SET OFF AMOUNTS DUE IT FOR TAXES AGAINST AMOUNTS OWNED BY THE UNITED STATES TO THE TAXPAYER UNDER A CONTRACT." SEE HEARINGS ON PRIORITY OF FEDERAL TAX LIENS AND LEVIES BEFORE COMMITTEE ON WAYS AND MEANS, HOUSE OF REPRESENTATIVES, 89TH CONGRESS, 2ND SESSION, ON H.R. 11256 AND H.R. 11290, PG.48. THE GOVERNMENT'S RIGHT OF SET-OFF UNDER THE MUNSEY TRUST RULE WAS ALSO RECOGNIZED IN THE REPORT SUBMITTED BY THE AMERICAN BAR ASSOCIATION. SEE PAGES 97 AND 98 OF THE HEARINGS. THE CONTINUED EXISTENCE OF THAT RIGHT HAS ALSO BEEN RECOGNIZED BY OTHER COMMENTATORS ON THE FEDERAL TAX LIEN ACT OF 1966. SEE PLUMB AND WRIGHT, FEDERAL TAX LIENS, PAGE 208, AND "GOVERNMENT CONTRACTS: THE FEDERAL TAX LIEN ACT OF 1966 AND THE SURETY'S PRIORITY TO RETAINAGES", 1968, DUKE LAW JOURNAL 406, 410. THEREFORE, WE DO NOT BELIEVE THE FEDERAL TAX LIEN ACT OF 1966 WAS INTENDED TO GIVE THE SURETY PRIORITY IN GOVERNMENT CONTRACTS WHERE THE UNITED STATES HAS THE COMMON LAW RIGHT OF SET-OFF.

IN ANY EVENT UNTIL THE QUESTION HAS BEEN JUDICIALLY RESOLVED TO THE CONTRARY, THIS OFFICE SHALL CONTINUE TO FOLLOW THE RULE ENUNCIATED IN STANDARD ACCIDENT INSURANCE COMPANY V UNITED STATES, 97 F. SUPP. 829 (1951).

ACCORDINGLY, THE CERTIFICATE OF SETTLEMENT DATED OCTOBER 28, 1969, IS SUSTAINED.