B-169264, JUN. 26, 1970

B-169264, JUN. 26, 1970

CONTRACTS--PAYMENTS--CONFLICTING CLAIMS SURETY V. INTERNAL REVENUE SERVICE AS BETWEEN TAX DEBT AND CLAIM OF CONTRACTOR'S PAYMENT SURETY, CONTRACTOR'S TAX DEBT SHOULD BE SET OFF AGAINST CONTRACT BALANCE. CASE IS DISTINGUISHABLE FROM TRINITY AND AETNA IN THAT LIABILITY THERE WAS INCURRED UNDER PERFORMANCE BOND BUT IN SUBJECT CASE, UNDER PAYMENT BOND, AND IS IN LINE WITH MUNSEY CASE, WHICH HELD GOVERNMENT'S RIGHT OF SET-OFF RESPECTING CONTRACT BALANCE IS SUPERIOR TO THAT OF SURETY ON PAYMENT BOND. MOREOVER, STANDARD APPLIED RULE IN MUNSEY TO PERFORMANCE BOND SURETY, AND WHERE THERE IS JUDICIAL CONFLICT, GAO WILL NOT FOLLOW RULE ADVERSE TO GOVERNMENT'S INTEREST. SEE CT. CASES CITED.

TO MR. ANDERSON:

FURTHER REFERENCE IS MADE TO YOUR LETTER OF MARCH 3, 1970, 09-00.11, REQUESTING OUR DECISION AS TO THE DISPOSITION TO BE MADE OF THE BALANCE DUE SHARPE CONSTRUCTION COMPANY, INCORPORATED, UNDER CONTRACT NO. DOT FH9- 2728, WHICH IS CLAIMED BY BOTH INTERNAL REVENUE SERVICE AND THE CONTRACTOR'S PAYMENT BOND SURETY.

THE SUBJECT CONTRACT, DATED MAY 1, 1968, WAS COMPLETED BY THE CONTRACTOR AND THE FINAL PAYMENT VOUCHER IN THE SUM OF $5,404.46, CONSISTING MAINLY OF CONTRACT RETAINAGES, WAS SIGNED ON DECEMBER 19, 1969. HOWEVER, AETNA CASUALTY AND SURETY COMPANY, SURETY ON THE CONTRACTOR'S PAYMENT AND PERFORMANCE BONDS, WAS REQUIRED TO MAKE EXPENDITURES UNDER THE PAYMENT BOND AND CLAIMS UNREIMBURSED PAYMENTS IN EXCESS OF $34,000, AND PENDING CLAIMS IN EXCESS OF $25,000, AS OF JANUARY 22, 1970. ON SEPTEMBER 11, 1969, THE INTERNAL REVENUE SERVICE (IRS) FILED A NOTICE OF LEVY IN THE AMOUNT OF $32,950 AGAINST THE CONTRACTOR.

YOUR DOUBT AS TO THE PROPRIETY OF EFFECTING THE SET-OFF REQUESTED BY IRS IS BASED ON THE DECISIONS IN TRINITY UNIVERSAL INSURANCE COMPANY V. UNITED STATES, 382 F. 2D 317 (1967), CERT. DENIED 390 U.S. 906 (1967), AND AETNA CASUALTY AND SURETY COMPANY V UNITED STATES, NO. 3-2449-B N.D. TEXAS, IN WHICH THE SURETIES WERE ACCORDED PRIORITY.

BOTH THE TRINITY AND AETNA CASES INVOLVED LIABILITY INCURRED UNDER A PERFORMANCE BOND. IN THE INSTANT CASE LIABILITY WAS INCURRED UNDER A PAYMENT BOND, NOT IN COMPLETION OF THE CONTRACT. THEREFORE, THE INSTANT CASE IS DISTINGUISHABLE ON THE FACTS FROM THE CITED CASES AND IS MORE IN LINE WITH THE FACTS THAT GAVE RISE TO THE SET-OFF EFFECTED IN UNITED STATES V. MUMSEY TRUST CO; 332 U.S. 234 (1947), IN WHICH THE COURT HELD THAT THE GOVERNMENT'S RIGHT OF SETOFF WITH RESPECT TO AN UNPAID CONTRACT BALANCE IS SUPERIOR TO THAT OF A SURETY WHOSE CLAIM IS BASED UPON PAYMENTS MADE TO LABORERS AND MATERIALMEN UNPAID BY THE CONTRACTOR. IN VIEW THEREOF, THE TAX DEBT SHOULD BE SET-OFF AGAINST THE CONTRACT BALANCE.

MOREOVER, IN STANDARD ACCIDENT INSURANCE COMPANY V. UNITED STATES, 119 CT. CL. 749 (1951), THE COURT APPLIED THE RATIONALE OF THE MUNSEY CASE TO A COMPLETING SURETY'S CLAIM UNDER A PERFORMANCE BOND. THE COURT IN THE TRINITY CASE RECOGNIZED THAT ITS DECISION WAS IN CONFLICT WITH THAT OF THE COURT OF CLAIMS IN THE STANDARD ACCIDENT INSURANCE COMPANY CASE. UNTIL SUCH TIME AS THERE IS A RESOLUTION OF THIS JUDICIAL CONFLICT, WE HAVE DETERMINED NOT TO FOLLOW THE RULE ADVERSE TO THE GOVERNMENT'S INTEREST. SEE B-163071, JULY 12, 1968.