B-95362, SEPTEMBER 11, 1950, 30 COMP. GEN. 98

B-95362: Sep 11, 1950

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WHERE SUMS TO BECOME DUE UNDER A CONTRACT WITH THE UNITED STATES WERE ASSIGNED BY THE CONTRACTOR IN CONFORMITY WITH THE ASSIGNMENT OF CLAIMS ACT OF 1940 AND THE WRITTEN NOTICE OF ASSIGNMENT WAS RECEIVED BY THE GOVERNMENT PRIOR TO THE TIME THE CONTRACTOR BECAME INDEBTED TO THE UNITED STATES FOR UNPAID FEDERAL TAXES. 1950: REFERENCE IS MADE TO A LETTER DATED MAY 12. TAX LIABILITY OF THE CONTRACTOR ACCRUING SUBSEQUENT TO THE RECEIPT BY THE GOVERNMENT OF NOTICE OF THE ASSIGNMENT BUT ARISING INCIDENT TO THE PERFORMANCE OF THE CONTRACT IN QUESTION? (2) IF THE ANSWER TO QUESTION (1) IS IN THE AFFIRMATIVE. MAY PENALTIES AND INTEREST ON SUCH TAXES ALSO BE SET OFF? (3) IF THE ANSWER TO QUESTION (2) IS IN THE AFFIRMATIVE.

B-95362, SEPTEMBER 11, 1950, 30 COMP. GEN. 98

ASSIGNMENT OF CONTRACT PAYMENTS - RIGHT OF SET-OFF AGAINST CONTRACTOR FOR TAXES DUE U.S. WHERE SUMS TO BECOME DUE UNDER A CONTRACT WITH THE UNITED STATES WERE ASSIGNED BY THE CONTRACTOR IN CONFORMITY WITH THE ASSIGNMENT OF CLAIMS ACT OF 1940 AND THE WRITTEN NOTICE OF ASSIGNMENT WAS RECEIVED BY THE GOVERNMENT PRIOR TO THE TIME THE CONTRACTOR BECAME INDEBTED TO THE UNITED STATES FOR UNPAID FEDERAL TAXES, INCLUDING PENALTIES AND INTEREST, ON ACCOUNT OF WAGES PAID FOR THE PERFORMANCE OF WORK UNDER THE ASSIGNED CONTRACT, SUCH TAX INDEBTEDNESS MAY NOT BE REGARDED AS HAVING ARISEN INDEPENDENTLY OF THE CONTRACT AND, THEREFORE, MAY BE SET OFF AGAINST THE BALANCE DUE UNDER THE CONTRACT AS OF THE DATE PAYMENT THEREOF BECAME DUE.

COMPTROLLER GENERAL WARREN TO THE SECRETARY OF THE INTERIOR, SEPTEMBER 11, 1950:

REFERENCE IS MADE TO A LETTER DATED MAY 12, 1950, FROM THE ACTING SECRETARY OF THE INTERIOR REQUESTING A DECISION IN CONNECTION WITH CONTRACT NO. IBP-5253 ON THE FOLLOWING THREE QUESTIONS:

(1) MAY THE GOVERNMENT SET OFF, AGAINST AN AMOUNT OTHERWISE DUE THE ASSIGNEE UNDER SAID CONTRACT, TAX LIABILITY OF THE CONTRACTOR ACCRUING SUBSEQUENT TO THE RECEIPT BY THE GOVERNMENT OF NOTICE OF THE ASSIGNMENT BUT ARISING INCIDENT TO THE PERFORMANCE OF THE CONTRACT IN QUESTION?

(2) IF THE ANSWER TO QUESTION (1) IS IN THE AFFIRMATIVE, MAY PENALTIES AND INTEREST ON SUCH TAXES ALSO BE SET OFF?

(3) IF THE ANSWER TO QUESTION (2) IS IN THE AFFIRMATIVE, ARE THE PENALTIES AND INTEREST TO BE SET OFF AS OF THE DATE OF FINAL ACCEPTANCE OF THE CONTRACT WORK, OR SOME SIMILAR PERTINENT DATE?

IT IS STATED IN THE LETTER OF MAY 12, 1950, THAT A BALANCE OF $14,724.76 REMAINS DUE UNDER THE CONTRACT MENTIONED, WHICH HAS BEEN COMPLETED BY THE CONTRACTING FIRM OF DENISON AND STONE. AN ASSIGNMENT OF ALL AMOUNTS PAYABLE UNDER THE CONTRACT WAS MADE BY DENISON AND STONE TO THE UNITED STATES NATIONAL BANK OF PORTLAND ( OREGON), LADD AND BUSH -- SALEM BRANCH, IN CONFORMITY WITH THE ASSIGNMENT OF CLAIMS ACT OF 1940, 54 STAT. 1029, NOTICE OF WHICH WAS RECEIVED BY THE CONTRACTING OFFICER OF THE BONNEVILLE POWER ADMINISTRATION, THE CONTRACTING AGENCY, ON SEPTEMBER 8, 1947, AND THE ASSIGNEE BANK HAS REQUESTED PAYMENT OF THE $14,724.76 BALANCE DUE.

IT APPEARS THAT THE FIRM OF DENISON AND STONE HAS FEDERAL TAX LIABILITY IN EXCESS OF $49,000, OF WHICH $15,770.38 REPRESENTS FEDERAL INSURANCE CONTRIBUTIONS TAX, WITHHOLDING TAX, AND FEDERAL UNEMPLOYMENT TAX, PLUS PENALTIES AND INTEREST THEREON, WHICH AROSE IN CONNECTION WITH WAGES PAID UNDER CONTRACT NO. IBP-5253 DURING 1947 AND 1948, AND THE COLLECTOR OF INTERNAL REVENUE AT PORTLAND, OREGON, HAS DEMANDED THAT THE CONTRACT BALANCE BE SET OFF AGAINST THE TAX LIABILITY OF $15,770.38 WHICH AROSE INCIDENT TO PERFORMANCE OF SAID CONTRACT.

YOUR DOUBT AS TO THE PROPRIETY OF EFFECTING THE SET-OFF REQUESTED APPEARS TO BE BASED ON A DECISION OF THIS OFFICE (29 COMP. GEN. 40), WHICH IS STATED IN THE LETTER OF MAY 12, 1950, TO BE AUTHORITY FOR THE PROPOSITION THAT THE GOVERNMENT MAY NOT SET OFF RIGHTS ACQUIRED UNDER INDEPENDENT TRANSACTIONS SUBSEQUENT TO THE DATE OF RECEIPT OF NOTICE OF A VALID ASSIGNMENT. THE DECISION CITED INVOLVED THE GOVERNMENT'S RIGHT TO SET OFF AMOUNTS DUE UNDER AN ASSIGNED CONTRACT IN EXTINGUISHMENT OF UNPAID TAXES AND OTHER LIABILITIES WHICH HAD BEEN INCURRED BY THE CONTRACTOR PRIOR TO THE TIME THE ASSIGNMENT UNDER THE CONTRACT HAD BEEN PERFECTED BY GIVING THE REQUIRED NOTICE THEREOF TO THE GOVERNMENT.

THE PRESENT QUESTIONS, THEREFORE, WERE NOT INVOLVED NOR SPECIFICALLY DECIDED IN THAT DECISION. THE GENERAL RULE STATED IN 20 COMP. GEN. 458 IS THAT A DEBTOR CANNOT SET OFF RIGHTS ACQUIRED UNDER OTHER TRANSACTIONS SUBSEQUENT TO THE DATE OF RECEIPT OF NOTICE OF A VALID ASSIGNMENT. SEE, ALSO, 29 COMP. GEN. 40. IN THE INSTANT CASE THE ASSIGNMENT INVOLVED IS STATED TO HAVE BEEN PERFECTED ON SEPTEMBER 8, 1947, AND THAT PART OF THE CONTRACTOR'S TAX LIABILITY AGAINST WHICH SET OFF IS REQUESTED ACCRUED THEREAFTER. HOWEVER, SUCH LIABILITY REPRESENTS TAXES WHICH BECAME DUE ON ACCOUNT OF WAGES PAID FOR THE PERFORMANCE OF WORK UNDER THE ASSIGNED CONTRACT. THE QUESTION INVOLVED, THEREFORE, IS WHETHER THE DEBT SHOULD BE HELD TO HAVE ARISEN UNDER A TRANSACTION OTHER THAN THE CONTRACT, THEREBY PRECLUDING THE SET OFF OF ASSIGNED CONTRACT PAYMENTS IN SATISFACTION OF SUCH TAX LIABILITY BY REASON OF THE GENERAL RULE HEREINABOVE STATED.

THE SITUATION INVOLVED IS NOT DISSIMILAR TO THAT WHICH WAS CONSIDERED IN DECISION B-72929, DATED MAY 18, 1950. IN THAT CASE AN ASSIGNMENT TO A BANK OF PAYMENTS DUE UNDER A TIME AND MATERIAL CONTRACT WITH THE NAVY DEPARTMENT WAS MADE BY THE CONTRACTOR UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940. IN ACCORDANCE WITH THE PROVISIONS OF THAT ACT THE CONTRACT CONTAINED A PROVISION THAT THE AMOUNTS ASSIGNED SHOULD NOT BE SUBJECT TO REDUCTION OR SET-OFF ON ACCOUNT OF ANY INDEBTEDNESS OF THE CONTRACTOR TO THE UNITED STATES ARISING INDEPENDENTLY OF THE CONTRACT. REQUEST WAS MADE OF THE COGNIZANT DEPUTY COLLECTOR OF INTERNAL REVENUE FOR THE COLLECTION OF CERTAIN TAX LIABILITY OF THE CONTRACTOR BY SET-OFF FROM AMOUNTS DUE UNDER THE CONTRACT. THE TAX LIABILITY INVOLVED, AS IN THE INSTANT CASE, REPRESENTED UNPAID WITHHOLDING AND FEDERAL UNEMPLOYMENT TAXES, AND FEDERAL INSURANCE CONTRIBUTIONS WHICH BECAME DUE, SUBSEQUENT TO THE ASSIGNMENT, ON ACCOUNT OF WAGES PAID UNDER THE CONTRACT.

IT WAS HELD IN THAT CASE THAT THE REQUESTED SET-OFF MIGHT BE MADE, THE DECISION STATING, IN PERTINENT PART, AS FOLLOWS:

* * * THE CONTENTION IS MADE THAT BECAUSE THE CONTRACTOR'S OBLIGATIONS AS TO WITHHOLDING TAXES AND THE GOVERNMENT'S RIGHTS IN ENFORCING SUCH OBLIGATIONS ARE DETERMINABLE SOLELY BY REFERENCE TO THE TAX STATUTES, ANY SUCH OBLIGATIONS AND INDEBTEDNESS DERIVING THEREFROM MUST ARISE INDEPENDENTLY OF THE CONTRACT INVOLVED. THIS CONTENTION APPEARS TO OVERLOOK THE FACT THAT NO OBLIGATIONS UNDER THE PERTINENT TAX STATUTES CAN ARISE UNTIL WAGES ARE PAID, AND THE SPECIFIC OBLIGATIONS HERE INVOLVED DID NOT ARISE UNTIL WAGES WERE PAID FOR THE PERFORMANCE OF SERVICE UNDER THE INSTANT CONTRACT. THUS, THE PRESENT INDEBTEDNESS OWES ITS VERY EXISTENCE TO THE PERFORMANCE OF WORK UNDER THE ASSIGNED CONTRACT, AND BUT FOR THAT CONTRACT SUCH DEBT WOULD NEVER HAVE ARISEN.

OBVIOUSLY, IT WAS KNOWN TO THE CONTRACTOR WHEN HE EXECUTED THE CONTRACT, AND TO YOU WHEN YOU OBTAINED THE ASSIGNMENT THEREUNDER, THAT WAGES WOULD HAVE TO BE PAID FOR LABOR TO PERFORM THE CONTRACT. BOTH YOU AND THE CONTRACTOR KNEW THAT A PART OF THOSE WAGES WAS REQUIRED BY LAW TO BE PAID TO THE COLLECTOR OF INTERNAL REVENUE, AND THAT UNTIL SUCH PART OF THE WAGES WAS SO PAID THE AMOUNT THEREOF WOULD BE OWED BY THE CONTRACTOR TO THE GOVERNMENT. * * * IN OTHER WORDS, THE CONTRACT COULD NOT BE PERFORMED UNLESS THE VERY DEBT NOW IS QUESTION AROSE. IT SEEMS MORE THAN CLEAR THAT ANY INDEBTEDNESS WHICH NECESSARILY AND INESCAPABLY MUST BE INCURRED IN THE PERFORMANCE OF A CONTRACT CANNOT REASONABLY BE SAID TO ARISE "INDEPENDENTLY" OF SUCH CONTRACT.

THE REASONS STATED IN THAT DECISION FOR THE HOLDING THAT THE TAX LIABILITY INVOLVED DID NOT ARISE INDEPENDENTLY OF THE CONTRACT WOULD APPEAR TO APPLY WITH EQUAL FORCE TO THE INSTANT CASE. ACCORDINGLY, YOU ARE ADVISED THAT THE ANSWER TO THE FIRST QUESTION PRESENTED IS IN THE AFFIRMATIVE.

WITH RESPECT TO THE SECOND AND THIRD QUESTIONS PRESENTED, IT IS MY VIEW THAT THE PENALTIES AND INTEREST INVOLVED FALL WITHIN THE SAME CATEGORY AS THE UNPAID TAXES THEMSELVES SO FAR AS CONCERNS THE GOVERNMENT'S RIGHT OF SET-OFF. HOWEVER, FROM AND AFTER THE DATE UPON WHICH THE UNPAID BALANCE OF $14,724.76 BECAME DUE UNDER THE CONTRACT, PRESUMABLY THE DATE OF FINAL ACCEPTANCE OF THE CONTRACT WORK, FUNDS WERE IN THE HANDS OF THE UNITED STATES WHICH COULD BE APPLIED AGAINST THE CONTRACTOR'S TAX LIABILITY. INASMUCH AS SET-OFF IS ESSENTIALLY AN EQUITABLE REMEDY BASED UPON THE PRINCIPLE THAT NATURAL JUSTICE REQUIRES THE SIMULTANEOUS ADJUSTMENTS BETWEEN PARTIES OF THEIR MUTUAL DEBTS, YOU ARE ADVISED THAT THE CONTRACT BALANCE SHOULD BE SET OFF AS OF THE DATE IT BECAME DUE.