B-157886, NOV. 12, 1965

B-157886, NOV. 12, 1965

TO THE SECRETARY OF THE INTERIOR:

BY LETTER DATED OCTOBER 19, 1965, THE DEPUTY ASSISTANT SECRETARY OF THE INTERIOR HAS REQUESTED OUR DECISION REGARDING THE DISPOSITION OF THE BALANCE OF $9,102 DUE UNDER CONTRACT NO. 14-20-015Q-760, DATED MAY 22, 1964. THE CONTRACT, AWARDED BY THE BUREAU OF INDIAN AFFAIRS (THE BUREAU) TO FIDELITY BUILDERS, INCORPORATED, PHOENIX, ARIZONA, FOR THE CONSTRUCTION OF A HEALTH STATION AT LAVEEN, ARIZONA, WAS COMPLETED ON FEBRUARY 18, 1965. CLAIMS FOR THE FINAL PAYMENT HAVE BEEN PRESENTED BY THE FIRST NATIONAL BANK OF ARIZONA, PHOENIX, AS ASSIGNEE, AND BY THE DISTRICT DIRECTOR, INTERNAL REVENUE SERVICE (IRS), PHOENIX.

PARAGRAPH 8 (A), GENERAL PROVISIONS (CONSTRUCTION CONTRACT), STANDARD FORM 23-A, INCORPORATED IN THE CONTRACT, READS AS FOLLOWS:

"8. ASSIGNMENT OF CLAIMS

(A) PURSUANT TO THE PROVISIONS OF THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED (31 U.S.C. 203, 41 U.S.C. 15), IF THIS CONTRACT PROVIDES FOR PAYMENTS AGGREGATING $1,000 OR MORE, CLAIMS FOR MONEYS DUE OR TO BECOME DUE THE CONTRACTOR FROM THE GOVERNMENT UNDER THIS CONTRACT MAY BE ASSIGNED TO A BANK, TRUST COMPANY, OR OTHER FINANCING INSTITUTION, INCLUDING ANY FEDERAL LENDING AGENCY, AND MAY THEREAFTER BE FURTHER ASSIGNED AND REASSIGNED TO ANY SUCH INSTITUTION. ANY SUCH ASSIGNMENT OR REASSIGNMENT SHALL COVER ALL AMOUNTS PAYABLE UNDER THIS CONTRACT AND NOT ALREADY PAID, AND SHALL NOT BE MADE TO MORE THAN ONE PARTY, EXCEPT THAT ANY SUCH ASSIGNMENT OR REASSIGNMENT MAY BE MADE TO ONE PARTY AS AGENT OR TRUSTEE FOR TWO OR MORE PARTIES PARTICIPATING IN SUCH FINANCING. UNLESS OTHERWISE PROVIDED IN THIS CONTRACT, PAYMENTS TO AN ASSIGNEE OF ANY MONEYS DUE OR TO BECOME DUE UNDER THIS CONTRACT SHALL NOT, TO THE EXTENT PROVIDED IN SAID ACT, AS AMENDED, BE SUBJECT TO REDUCTION OR SETOFF. (THE PRECEDING SENTENCE APPLIES ONLY IF THIS CONTRACT IS MADE IN TIME OF WAR OR NATIONAL EMERGENCY AS DEFINED IN SAID ACT AND IS WITH THE DEPARTMENT OF DEFENSE, THE GENERAL SERVICES ADMINISTRATION, THE ATOMIC ENERGY COMMISSION, THE NATIONAL AERONAUTICS AND SPACE ADMINISTRATION, THE FEDERAL AVIATION AGENCY, OR ANY OTHER DEPARTMENT OR AGENCY OF THE UNITED STATES DESIGNATED BY THE PRESIDENT PURSUANT TO CLAUSE 4 OF THE PROVISO OF SECTION 1 OF THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED BY THE ACT OF MAY 15, 1951, 65 STAT. 41.)"

ON FEBRUARY 17, THE BUREAU RECEIVED A NOTICE OF ASSIGNMENT SIGNED BY BOTH THE CONTRACTOR AND THE ASSIGNEE TOGETHER WITH A COPY OF AN ASSIGNMENT EXECUTED BY THE CONTRACTOR ASSIGNING TO THE BANK ALL MONEYS DUE OR TO BECOME DUE UNDER THE CONTRACT IN ACCORDANCE WITH THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED. ON FEBRUARY 23, THE CONTRACTING OFFICER SIGNED AN ACKNOWLEDGMENT OF THE NOTICE AND ASSIGNMENT.

ON MARCH 18, IRS SERVED ON THE CONTRACTING OFFICER A NOTICE OF LEVY DATED MARCH 15, ISSUED BY THE DISTRICT DIRECTOR, PHOENIX, ATTACHING THE MONEYS DUE UNDER THE CONTRACT PURSUANT TO 26 U.S.C. 6331 (A), IN SATISFACTION OF THE CONTRACTOR'S INDEBTEDNESS TO THE UNITED STATES IN THE TOTAL AMOUNT OF $17,321.97, REPRESENTING EMPLOYEES WITHHOLDING TAXES AND INSURANCE CONTRIBUTIONS FOR THE SECOND, THIRD, AND FOURTH QUARTERS OF THE CALENDAR YEAR 1964 PLUS INTEREST. ON MARCH 25, THE TAX LIEN WAS PUBLICLY RECORDED WITH THE PROPER ARIZONA STATE OFFICIAL PURSUANT TO 26 U.S.C. 6323. THE TAX DEBT WAS SUBSEQUENTLY REDUCED TO $8,294.83, THE AMOUNT CLAIMED AS OF AUGUST 23 BY IRS.

IT IS THE POSITION OF THE ASSIGNEE THAT IT IS A "MORTGAGEE" AS CONTEMPLATED BY 26 U.S.C. 6323 (A), MAKING FEDERAL TAX LIENS INVALID AS AGAINST MORTGAGES AND CERTAIN OTHER PARTIES UNTIL PUBLICLY RECORDED, AND, THEREFORE, THE GOVERNMENT NOT HAVING PUBLICLY RECORDED ITS LIEN UNTIL AFTER THE ASSIGNMENT HAD BEEN EFFECTED AND PROPER NOTICE HAD BEEN GIVEN THE CONTRACTING OFFICER, THAT THE ASSIGNEE'S CLAIM IS SUPERIOR TO THE IRS LIEN.

THE ASSIGNEE'S ATTORNEYS CITE SEVERAL COURT CASES CONSTRUING THE FEDERAL TAX LIEN LAW IN 26 U.S.C. 6321-6323 AS APPLIED IN SITUATIONS IN WHICH THE UNITED STATES HAS ONLY ONE STATUS, THAT OF A CREDITOR, AND THE AMOUNTS CLAIMED ARE DUE FROM A NON-GOVERNMENT SOURCE. HOWEVER, SINCE THE GOVERNMENT HAS IN THE INSTANT CASE THE DUAL STATUS OF DEBTOR CREDITOR, THE AMOUNTS CLAIMED BEING DUE FROM THE GOVERNMENT, SUCH COURT CASES ARE NOT DETERMINATIVE OF THE QUESTION PRESENT IN THE CASE.

THE DEPARTMENT OF THE INTERIOR IS NOT ONE OF THE AGENCIES NAMED IN PARAGRAPH 8/B) OF THE GENERAL PROVISIONS OF THE CONTRACT QUOTED ABOVE TO WHICH THE "NO SET-OFF" PROVISIONS OF THE ASSIGNMENT OF CLAIMS ACT OF 1940, AS AMENDED, APPLY, NOR HAS IT BEEN BROUGHT WITHIN THE PURVIEW OF SUCH PROVISIONS THROUGH DESIGNATION BY THE PRESIDENT. THEREFORE, DETERMINING THE RIGHTS OF THE ASSIGNEE AND THE GOVERNMENT TO THE AMOUNT DUE UNDER THE CONTRACT THERE MUST BE CONSIDERED, IN ADDITION TO WHATEVER PROTECTION IS ACCORDED THE GOVERNMENT BY THE TAX LIEN PROVISIONS IN 26 U.S.C. 6321-6323, THE COMMON-LAW RIGHT OF THE GOVERNMENT AS A CREDITOR TO SET-OFF, FROM AMOUNTS OWED BY IT TO A DEBTOR, ANY DEBTS DUE FROM SUCH DEBTOR TO THE GOVERNMENT.

UNDER THE FEDERAL TAX REGULATIONS PUBLISHED IN TITLE 26 OF THE CODE OF FEDERAL REGULATIONS, THE TAX AND INSURANCE CONTRIBUTIONS IN QUESTION WERE REQUIRED TO BE COLLECTED AS AND WHEN THE CONTRACTOR PAID HIS EMPLOYEES THEIR WAGES (SECTIONS 31.3102-1 (A) AND 31.3402 (A/-1 (B) ); THE CONTRACTOR WAS LIABLE WHETHER OR NOT HE MADE THE DEDUCTIONS (SECTIONS 31- 3102-1 (C) AND 1.3403-1); AND THE TAXES AND INSURANCE CONTRIBUTIONS WITHHELD BY THE CONTRACTOR-EMPLOYER CONSTITUTED SPECIAL FUNDS IN TRUST FOR THE UNITED STATES (SECTIONS 31.3102-1 (C) AND 31.3402 (A/-1 (F) ). PURSUANT TO SUCH REGULATIONS, THE DEBT WAS DUE THE UNITED STATES BEFORE FEBRUARY 17, 1965, THE DATE THE UNITED STATES RECEIVED PROPER NOTICE OF THE ASSIGNMENT, AND, THEREFORE, WAS IN EXISTENCE BEFORE THE ASSIGNMENT WAS EFFECTIVE. FURTHERMORE, THE FACT THAT THE ASSIGNEE WAS NOT ON NOTICE OF THE DEBT WHEN IT ACCEPTED THE ASSIGNMENT DOES NOT DEFEAT THE GOVERNMENT'S COMMON-LAW RIGHT OF SET OFF. 37 COMP. GEN. 808; SOUTH SIDE BANK AND TRUST CO. V. UNITED STATES, 221 F.2D 13; UNITED STATES V. TRINITY UNIVERSAL INSURANCE CO., 249 F.2D 350.

IN THE CIRCUMSTANCES, WE MUST CONCLUDE THAT, NOTWITHSTANDING THE TAX LIENS IN QUESTION DID NOT ARISE UNDER 26 U.S.C. 6322 UNTIL THE ASSESSMENTS WERE MADE AND THAT THE PUBLIC RECORDING REQUIRED BY 26 U.S.C. 6323 (A) FOR THE ENFORCEMENT OF SUCH LIENS AGAINST MORTGAGEES AND CERTAIN OTHER PARTIES IN INTEREST WAS MADE AFTER THE ASSIGNMENT WAS EFFECTIVE, THE GOVERNMENT IS ENTITLED TO EXERCISE ITS COMMON-LAW RIGHT TO SET-OFF, FROM THE AMOUNTS DUE UNDER THE CONTRACT IN QUESTION, THE CONTRACTOR'S DEBT TO THE UNITED STATES. ACCORDINGLY, THERE SHOULD BE SET-OFF FROM THE BALANCE DUE UNDER THE CONTRACT THE AMOUNT CURRENTLY STATED BY IRS TO BE DUE THE UNITED STATES ON ACCOUNT ..END :