In re Reconsideration of 60 Comp.Gen. 510 (1981) Involving Set-off Authority of Government, B-201164

Decision Date29 September 1983
Docket NumberB-201164
Citation62 Comp.Gen. 683
PartiesMATTER OF: Reconsideration of 60 Comp.Gen. 510 (1981) Involving Set-off Authority of Government When Contract Contains a "NO Set-off Clause"
CourtComptroller General of the United States


1. When Contract Contains a "NO Set-off Clause" Under the Assignment of Claims Act, now codified at 31 U.S.C. S 3727, a lender is not protected against set-off by the presence of a no set-off clause in the assigned contract unless the assignment was made to secure the assignee's loan to the assignor and only if the proceeds of the loan were used or were available for use by the assignor in performing the contract that was assigned. To the extent that our holdings in 49 Comp. Geri. 44 (19671, 36 Comp.Gen. 19 (1956), and other cases cited herein are not consistent with this decision they will no longer be followed. 60 Comp.Gen. 510 (1981) is clarified.

2. When a contract containing a no set-off clause is validly assigned under the Assignment of Claims Act, now codified at 31 U.S.C S 3727, to an eligible assignee who substantially complies with the statutory filing and notice requirements, the Internal Revenue Service cannot set off the contractor's tax debt against the contract proceeds due the assignee, even if the tax debt was fully mature prior to the date on which the contracting agency had received notice of the assignment. B-158451, March 3, 1966, and B-195460, October 18, 1979, are modified accordingly. 60 Comp.Gen. 510 (1931) is clarified.

This decision is in response to a request from the internal revenue service (irs) for us to reconsider and modify our holding in 60 Comp.Gen. 510 (1981) concerning the set-off authority of the irs when a government contract containing a "no set-off clause" is assigned.

In that decision we considered 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 in accordance with the provisions of the assignment of claims act, formerly 31 U.S.C. 203, now codified at 31 U.S.C. 3727. The bulk of that decision dealt with the situation that existed when the contract involved did not contain a no -set-off clause. We held that in the absence of a no-set-off provision, a claim by the irs or other federal entity that arose before the assignment became effective could be set off against the amount otherwise payable to the assignee under the assigned contract. The irs is not asking us to reconsider that portion of our decision.

However our decision in that case also addressed the matter of priority when the government contract did contain a no-set-off clause. In this respect we said the following:

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 claims to the monies due the assignee under the contract.

Similarly one of the digests in the decision states that:

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

The irs is now requesting us to reconsider our holding regarding the priority question when a no-set-off clause is contained in an assigned contract, particularly as that holding would apply to the facts of a specific case described in the irs request (which is discussed at greater length below). Specifically the irs requests us to adopt the position that our holding concerning the protection afforded assignees by the no set-off clause should be narrowed so that it only applies (1) if the assignee files a proper notice of assignment that satisfies the statutory requirements prior to the irs tax levy or request for set-off and (2) if the proceeds of the loan secured by the assignment were used or at least were available for use by the assignor in the performance of the assigned contract.

For the reasons set forth hereafter, we agree with the irs' second point that the no-set-off clause does not prohibit set-off when the underlying loan is not used or available for use by the assignee in performing the assigned contract.[1] however, we do not concur with irs' first contention that notwithstanding the presence of a no set-off clause, set- off is permissible if the irs tax claim arises before the assignee notifies the contracting agency of the assignment.[2]

The specific case that appears to have prompted the irs to request us to reconsider our earlier decision was summarized as follows in the irs letter and accompanying attachments. In July 1973, ward la france trucking corporation (ward la france) entered into a defense contract with the United States army. The contract contained the standard no set-off clause authorized by 31 U.S.C. 203 (now codified at 31 U.S.C 3727) and section 7-103.8 of the armed services procurement regulation. Subsequently, on August 3, 1978, ward la france assigned the contract to marine midland bank (marine) "in order to secure new operating capital loans." At the time of the assignment, ward la france had already completed performance of the assigned contract. Moreover, irs states that the "loans secured by the assignment were not used in ward la france's performance of the subject defence contract." The irs further states that it "levied on the contract proceeds prior to the filing of the notice of the assignment with the defense contract disbursing officer and the army contracting officer."[3]

In order to facilitate payment of the uncontested monies due under the assigned contract and to preserve the rights of the parties pending litigation, an escrow agreement dated August 24, 1981, was entered into between marine and the irs. The agreement preserved the set-off claims, tax liens, or other statutory claims of the government and also the contractual and statutory claim of marine in the $625, 000 escrow fund. Also note that paragraph 7 of the escrow agreement specifically provides that if the parties are unable to reach a satisfactory agreement as to the disposition of the escrow account "then the respective rights of the parties to such account shall be submitted to a federal court of competent jurisdiction, for adjudication as to the relative priority status and validity of all competing setoffs, liens, and claims."

As explained at greater length hereafter, it is our view that since marine's loan to ward la france was made after ward la france had already completed performance on the contract, marine was not protected against set-off by the presence of the no-set-off clause in the assigned contract.

The matter at issue here turns on the proper interpretation and application of a provision, contained in certain federal contracts, that is commonly referred to as a "no set-off clause." In this respect 31 U.S.C. 3727[4] reads as follows:

(d) during a war or national emergency proclaimed by the president or declared by law and ended by proclamation of law, a contract with the department of defense, the general services administration, the department of energy (when carrying out duties and powers formerly carried out by the atomic energy commission, or other agency the president designates May provide, or May be changed without consideration to provide, that a future payment under the contract to an assignee is not subject to reduction or setoff. A payment subsequently due under the contract (even after the war or emergency is ended) shall be paid to the assignee without a reduction of setoff for liability of the assignor--
(1) to the government independent of the contract; or
(2) because of renegotiation, fine, penalty (except an amount that May be collected or withheld under, or because the assignor does not comply with, the contract), taxes, social security contributions, or withholding or failing to withhold taxes or social security contributions, arising from, or independent of, the contract.

As stated above, in 60 Comp.Gen. 510 we said that the presence of a no- set-off clause in a contract prohibits the government from setting off the assignor's tax debts against the monies due the assignee under the assigned contract. While that statement and the related digest May have been somewhat broader than was necessary (or perhaps advisable), we believe that when read and considered in the context of the entire decision, our intended meaning should not be unclear. That is, in making that broad statement, we assumed that the contract involved was validly and properly assigned to an eligible assignee in accordance with all of the statutory requirements contained in the assignment of claims act. For example, in digest 1 of the decision we said the following:

Assignment of claim to proceeds under federal government contract must be recognized by contracting agency and all other federal government components including * * * irs, if assignee complied with filing and other requirements of assignment of claims act * * *.

Since the validity of the assignment under the assignment of claims act was not at issue in 60 Comp.Gen. 510, that decision did not address the statutory requirements that must be satisfied in order for an assignment to be deemed valid.

Clearly, we would agree that if a contract is assigned improperly or if the assignor or assignee does not fulfill all the statutory requirements, the assignment would be invalid and would not be recognized by our office. In that case, the presence of a no set-off clause in the assigned contract would not provide the assignee with any protection against set- off by the government. See 58 Comp.Gen. 619 (1979); 55 id. 155 (1975); 54 id. 137 (1954); 49 id. 44 (1969); b-171063, February 16, 1971; and cases cited in the decisions.

The irs' second contention (which we have considered first since it is dispositive...

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