In re Priority Between a Federal Tax Lien and an Assignment Under a Government Contract

Decision Date08 June 1981
Docket NumberB-201164
PartiesMATTER OF: Priority between a Federal Tax Lien and an Assignment under a Government Contract
CourtComptroller General of the United States
DIGEST

1. Assignment of claim to proceeds under Federal Government contract must be recognized by contracting agency and all other Federal Government components including Internal Revenue Service, if assignee complied with filing and other requirements of Assignment of Claims Act, 31 U.S.C. § 203, even though assignee failed to perfect assignment under Uniform Commercial Code and similar State provisions.

2. Where IRS (or other Federal entity) has claim against contractor-assignor which arose before assignment was completed under Assignment of Claims Act, amount of Federal claim may be set-off against amounts otherwise due to assignee, assuming absence of no set-off clause in the contract. Assignee stands in shoes of assignor. Government's right to set off tax debts of assignor that were in existence, even if not yet mature, prior to date on which assignment became effective are not extinguished by assignment, although actual set-off cannot be made until tax debt matures.

3. If Government contract contains a "no set-off" clause Government cannot set-off tax debt of assignor under any circumstances.

DECISION

The former Administrator of General Services requested a decision on whether a Federal tax lien or an assignment of a Government contract pursuant to the Assignment of Claims Act (31 U.S.C. § 203 (1976)) has greater priority.

The Administrator's request arose as a result of a disagreement between the Administration (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 his rights under the contract. Specifically, on December 8, 1977 the contractor, PAL Industries Inc., assigned all of the proceeds due under a contract with GSA to the First Pennsylvania Bank. The bank notified GSA of the assignment on February 3, 1978, and otherwise complied with the requirements of 31 U.S.C. § 203, the Assignment of Claims Act of 1940, as amended. However, the bank did not file a financing statement with the appropriate State office in Pennsylvania. Pennsylvania law, modeled on the Uniform Commercial Code, requires that such a statement must be filed in order to protect an assignee's interest in accounts or contract rights. Pa. Stat. Ann. Tit. 12A, S 9-302(1) (Purdon 1970).

On January 10 and February 14, 1979 (after tax assessments were made against the contractor), IRS filed notices of tax lien for taxes owed by the contractor for three tax periods ending in 1978 and one tax period ending in December 1976. Although IRS sent GSA a notification of levy on the unpaid contract proceeds in February 1979, GSA paid the balance of the monies due on the contract to the assignee on October 2, 1979. GSA based its decision that the assignment took precedence over the levy on the fact that the assignment had been completed prior to the date of the first tax assessment.

It is the view of IRS that its tax lien had priority over the assignment and that GSA acted improperly in making any further payments to the assignee after being notified of the tax lien against the contractor-assignor. Although IRS is no longer asserting a claim against GSA in this specific situation, it anticipates that this issue will arise again. Both GSA and IRS are interested in having this issue resolved. Accordingly, in addition to addressing the specific facts of this case, our decision will also consider the priority of liens question under several different factual situations.

The IRS position may be summarized as follows. An assignment which is not perfected under local law at the time the IRS files a notice of Federal tax lien does not have priority over the Federal tax lien. The assignment falls within the definition of a security interest under Internal Revenue Code (I.R.C.) § 6323(h)(1), as an "interest in property acquired by contract for the purpose of securing payment or performance of an obligation * * *." Lien priority between a security interest and a Federal tax lien is determined by comparing the time the security interest arose with the date that the notice of Federal tax lien was filed. I.R.C. § 6323(a). A security interest is deemed to be in existence and is valid against the Federal tax lien only if the security interest is protected under local law against subsequent judgment lien creditors. I.R.C. S 6323(h)(1)(A). As previously noted, under Pennsylvania law, modeled on the Uniform Commercial Code, a financing statement must be filed in order to protect an assignee's interest in accounts or contract rights. The First Pennsylvania Bank did not file a financing statement and thus its security interest was not perfected. An unperfected security interest is subordinate to the rights of a person who becomes a lien creditor without knowledge of a security interest and before it is perfected. Pa. Stat. Ann. Tit. 12A § 9-301 (Purdon 1970). Failure to file a financing statement thus results in a security interest being subordinated to a Federal tax lien. Sams v. Redevelopment Authority, 435 Pa. 524, 261 A.2d 566 (1970).

The IRS states that the only question remaining which could affect its analysis of the relative priority between a Federal tax lien and an assignment under Government contract is whether the provisions of 31 U.S.C. § 203 (1976)[1] remove assignments of claims under Federal contracts from the application of the Uniform Commercial Code (UCC).

Implicit in the IRS position is the assumption that the contract in question did not contain what is generally referred to as a "no set-off clause". In this connection, 31 U.S.C § 203 reads in pertinent part as follows:

"Any contract of the Department of Defense, the General Services Administration, the Atomic Energy Commission, or any other department or agency of the United States designated by the President, * * * may, in time of war or national emergency proclaimed by the President (including the national emergency proclaimed December 16, 1950) * * * provide or be amended without consideration to provide that payments to be made to the assignee of any monies due or to become due under such contract shall not be subject to reduction or set-off and if such provision or one to the same general effect has been at any time heretofore or is hereafter included or inserted in any such contract, payments to be made thereafter to an assignee of any monies due or to become due under such contract, whether during or after such war or emergency, shall not be subject to reduction or set-off for any liability of any nature of the assignor to the United States or any department or agency thereof which arises independently of such contract, or hereafter for any liability of the assignor on account of * * * (4) taxes, social security contributions, or the withholding or non with holding of taxes or social security contributions, whether arising from or independently of such contract."

Having obtained a copy of the PAL Industries contract with GSA, we have determined that such a no set-off clause was included in the contract with the proviso (mirroring the statutory language) that the clause only applies if the contract is entered into in time of war or national emergency as defined in 31 U.S.C. § 203. Although the National Emergencies Act (Public Law No. 94-412, approved September 14, 1976, 90 Stat. 1255, 50 U.S.C. § 1601 et seq.) terminated (two years thereafter) the national emergency then in effect, section 502 of the Act (50 U.S.C. § 1651) specifically provided that it did not apply to any of the powers and authorities conferred under 31 U.S.C. § 203 and 41 U.S.C. § 15. Accordingly, it is clear that the no set-off clause was a binding provision in the contract between PAL Industries and GSA.

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. For example, in 37 Comp.Gen. 318 (1957) we said that the no set-off provision of the Assignment of Claims Act, when part of a contract, "expressly nullifies the effect of section 6321 of the Internal Revenue Code of 1954* * *.

Apparently IRS was unaware of the presence of the no set-off clause when it contested GSA's refusal to recognize the validity of the IRS tax lien, and is willing to concede that set-off is not permissible when such a clause is included in a contract. Therefore, although GSA's decision in this case to pay the balance of the contract proceeds to the assignee was correct, we must still consider the legal merits of the IRS position whenever a no set-off clause is not included in a contract.

As indicated above, the essence of the IRS position (assuming the absence of a no set-off clause) is that, since the assignment of the claim on a Government contract under 31 U.S.C. § 203 gives the assignee no more than a "security interest" in the assignor's rights under the contract, the assignment, until recorded and perfected under State law, will be subordinate to the claim of any other party that becomes a lien creditor, including the IRS, once it files a notice of Federal tax lien. For the reasons set forth hereafter, we disagree with the IRS position.

First we think that the provisions of the UCC with respect to the perfecting of an assignment are preempted by the provisions of the -4 B-201164 Assignment of Claims Act as far as recognition by the Federal Government is concerned. The Assignment of Claims Act sets forth the filing and notice requirements that must be complied with by the assignee in order to complete a valid...

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