The final Federal Acquisition Regulation (FAR) rule Prohibition on Contracting With Corporations With Delinquent Taxes or a Felony Conviction issued on September 30 adopts without change the earlier interim rule issued last December.

This rule prohibits the federal government from entering into a contract with any corporation having a delinquent federal tax liability or a felony conviction under any federal law, unless the agency has considered suspension or debarment of the corporation and the agency has made a determination that suspension or debarment is not necessary to protect the interests of the government. The result is that contracting officers must include FAR clauses and contractors must execute expanded representations regarding tax delinquencies and felonies. The rule was effective on September 30, the date of its publication.

The representations and certifications expand the requirements for reporting tax delinquencies and felonies. Key points:

  • The contracting officer is to insert FAR 52.209–11, Representation by Corporations Regarding Delinquent Tax Liability or a Felony Conviction under any Federal Law, in all solicitations.
  • In addition, for agencies receiving funds subject to section 523 of Division B of the Consolidated and Further Continuing Appropriations Act, 2015 (Pub. L. 113–235) and similar provisions in subsequent appropriations acts, the contracting officer is to insert FAR 52.209–12, Certification Regarding Tax Matters in solicitations for which the resultant contract (including options) may have a value greater than $5 million. This requirement applies to several agencies including the Department of Commerce, Department of Justice, and the National Aeronautics and Space Administration.
  • Finally, the contracting officer is to insert FAR 52.212–3 Offeror Representations and Certifications—Commercial Items, which requires a representation regarding delinquent tax liability or a felony conviction under any federal law, in solicitations for commercial items.

Interim Rule

The interim rule was published on December 4, 2015, to implement sections 744 and 745 of Division E of the Consolidated and Further Continuing Appropriations Act, 2015 (Pub. L. 113–235) and section 523 of Division B of the same act. Steptoe’s advisory on the interim rule – Federal Contractor Tax Delinquencies and Felony Convictions Addressed in New Interim Rule Regarding Debarment and Suspension,” analyzed the issues raised by the interim rule.

There were only three comments on the interim rule and no changes were made to the final rule as a result of the comments. The comments requested clarification as to what entities are corporations for the purposes of this rule. This request focused on application of the rule to limited liability companies (LLCs) and S corporations because tax liability falls at the individual level rather than at the corporate level for these entities, and failure of one shareholder to pay taxes could adversely affect all shareholders. A similar concern was raised regarding the conviction of a felony by a single shareholder or member. Further, a question was raised as to joint venture or teaming arrangement members.

No clarification was offered and no change was made in the final rule because the term ‘‘corporation’’ is used throughout the FAR without definition. If a term is used in the FAR without definition, that term has its standard dictionary definition, which in this case is that a corporation is a legal entity that is separate and distinct from the entities that own, manage, or control it.

Joint ventures and other team arrangements are temporary business arrangements where two or more parties agree to work together to achieve a specific task or objective, which could be to pursue a new contract. A joint venture or other team arrangement is not necessarily a corporation. That determination depends upon the legal structure and arrangement chosen for the temporary relationship. The Federal Register announcement said that if the offeror or contractor is uncertain as to its legal status as a corporation, the offeror or contractor needs to consult with its legal counsel to determine whether it is a corporation subject to the rule.

Broad Applicability

The Federal Register announcement also noted the determination not to exempt contracts for the acquisition of commercial items (including commercially available off-the-shelf items) or acquisitions in amounts not greater than the simplified acquisition threshold (other than the certification requirement) from the requirements of this rule. As noted in the Federal Register announcement, the determination was made that this rule imposes a minimal burden (just a representation or, in limited instances, a certification), in contrast to the benefit of avoiding awarding contracts to corporations that have delinquent unpaid taxes, or felony convictions for violations of federal law.

Addresses a Topic of Concern

According to FAR 9.104-1, General Standards, a responsible prospective contractor is a contractor that meets certain specific criteria, including having adequate financial resources and a satisfactory record of integrity and business ethics. FAR 9.104-5, Procedures, had required notification to the agency’s suspension and debarment office of federal tax delinquencies exceeding $3,000, but the FAR, until now, did not specifically require contracting officers to take into account contractor tax debts when determining the prospective contractor’s responsibility. As noted in our previous advisory, there has been considerable debate over the years on whether additional action was required to address the issue of government contractors who have a tax delinquency or are convicted felons, and the final rule now resolves that issue by imposing the additional requirements noted above.