[Request for Decision Concerning Disposition of Withheld Funds]

A Coast Guard contracting officer requested a decision from GAO concerning the disposition of an amount withheld from a contractor for labor standards violations and liquidated damages assessed under the Contract Work Hours and Safety Standards Act (CWHSSA). The Internal Revenue Service (IRS) filed a notice of levy for taxes owed by the contractor. Three subcontractors also filed notice of claims for work performed that were not for settlement by the government, but rather were for consideration by the payment bond surety. The payment bond surety indicated that it settled two of the three claims and recently received the third. The payment bond surety claims the contract balance; it also stated that the contractor has filed for bankruptcy. The lending institution also claims the contract balance. The amount withheld for labor standards violations and liquidated damages assessed under the CWHSSA has first priority. Therefore, the amount withheld to adjust employee compensation should be remitted for disbursement; the amount in liquidated damages for violations should be deposited in the account. The balance then remaining should be remitted to the IRS in partial settlement of the amount owed in back taxes, since the tax levy has priority over the claim of the payment bond surety. The contract had a "no setoff" clause which gave the assignee priority over IRS if the contract was validly and properly assigned to an eligible assignee. Both GAO and the courts take the position that, for a lending institution to become an assignee, it has to be shown that the monies the institution advanced to the contractor were actually used in, or made available for, the performance of the contract. However, the security agreement between the contractor and assignee was in the nature of a blanket agreement with no reference to any specific contract. Since the agreement predated the present contract by 4 years, GAO concluded that the loan was not used, or available for use, by the contractor in performing the present contract. Accordingly, the assignee was not protected against a setoff by the IRS.