Question of Priority Concerning Federal Tax Lien and Assignment of Government Contract

A decision was requested on whether a Federal tax lien or an assignment of a Government contract pursuant to the Assignment of Claims Act of 1940 has greater priority. The request arose as a result of a disagreement between the General Services Administraton (GSA) and the Internal Revenue Service (IRS) over the relative priority of a Federal tax lien against a Government contractor and the claim of the bank to which the contractor had assigned its rights under the contract. The contractor assigned all of the proceeds due under a contract with GSA to a bank which notified GSA of the assignment and otherwise complied with the requirements of the Act. However, the bank did not file financing statements as required by State law in accordance with the Uniform Commercial Code (UCC). Subsequently, IRS filed notices of tax lien for taxes owed by the contractor and notified GSA of the levy. However, GSA paid the balance of the monies due on the contract to the assignee. It believed that the assignment took precedence over the levy because it was completed prior to the date of the first tax assessment. IRS believed that its tax lien had priority over the assignment. A no set-off clause was included in the contract. It is well settled that the presence of a no set-off clause in a contract prohibits IRS or any other Government agency from making any claim to the monies due the assignee under the contract. GAO held that the provisions of UCC regarding the perfecting of an assignment are preempted by the provisions of the Act as far as recognition by the Federal Government is concerned. The assignment of claims to proceeds under a Federal contract must be recognized by the contracting agency and all other Federal components, if the assignee complied with the filing requirements of the Act even though it failed to perfect the assignment under UCC and similar State provisions. Where a Federal entity has a claim against a contractor-assignee which arose before the assignment was completed under the Act, the amount of the Federal claim may be set-off against amounts otherwise due to the assignee in the absence of a no set-off clause in the contract. The Government's right to set-off an assignor's tax debts existing before the effective date of an assignment are not extinguished by assignment; actual set-off cannot be made until the tax debt matures. Prior decisions inconsistent with the conclusions in this decision shall be modified accordingly.