Federal Acquisition Regulation; Prohibition on Contracting With Corporations With Delinquent Taxes or a Felony Conviction, 67728-67731 [2016-23194]

Agencies

• DEPARTMENT OF DEFENSE
• General Services Administration
• National Aeronautics and Space Administration

[Federal Register Volume 81, Number 190 (Friday, September 30, 2016)]
[Rules and Regulations]
[Pages 67728-67731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-23194]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 1, 4, 9, 12, and 52

[FAC 2005-91; FAR Case 2015-011; Item I; Docket No. 2015-0011, Sequence 
No. 1]
RIN 9000-AN05


Federal Acquisition Regulation; Prohibition on Contracting With 
Corporations With Delinquent Taxes or a Felony Conviction

AGENCY: Department of Defense (DoD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Final rule.

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SUMMARY: DoD, GSA, and NASA have adopted as final, without changes, an 
interim rule amending the Federal Acquisition Regulation (FAR) to 
implement sections of the Consolidated and Further Continuing 
Appropriations Act, 2015, to prohibit 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 has made a determination that this further action is 
not necessary to protect the interests of the Government.

DATES: Effective: September 30, 2016.

FOR FURTHER INFORMATION CONTACT: Ms. Cecelia L. Davis, Procurement 
Analyst, at 202-219-0202 for clarification of content. For information 
pertaining to status or publication schedules, contact the Regulatory 
Secretariat Division at 202-501-4755. Please cite FAC 2005-91, FAR Case 
2015-011.

SUPPLEMENTARY INFORMATION: 

I. Background

    DoD, GSA, and NASA published an interim rule in the Federal 
Register at 80 FR 75903 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. Three respondents submitted comments on the interim 
rule.

II. Discussion and Analysis

    The Civilian Agency Acquisition Council and the Defense Acquisition 
Regulations Council (the Councils) reviewed the public comments in the 
development of the final rule. A discussion of the comments are 
provided as follows:

A. Summary of Public Comments

    There were no changes made in the final rule as a result of the 
three public comments.

B. Analysis of Public Comments

1. Need for the Rule
    Comment: Two respondents expressed support for the interim rule. 
According to the respondents, this rule will facilitate more rigorous 
scrutiny of companies with a recent Federal conviction or unpaid 
Federal taxes and will help ensure that Federal contractors conduct 
themselves with the highest degree of integrity and honesty.
    Response: Noted.
    Comment: The other respondent said the rule is unnecessary, given 
the existing statutory and regulatory framework. This respondent noted 
that tax and criminal statutes already include penalties for tax 
delinquency and felony conviction, such as the Internal Revenue Code 
(title 26) and the Criminal Code (title 18). Furthermore, the 
respondent noted that the FAR already includes Federal tax delinquency 
and criminal malfeasance as causes for debarment. The respondent stated 
that agencies already reliably utilize suspension and debarment 
processes.
    Response: This rule is necessary to implement the requirements of 
sections 744 and 745 of Division E, title VIII of the Consolidated and 
Further Continuing Resolution Appropriations Act, 2015, as well as 
section 523 of Division B, title V of the same act (affects Commerce, 
Justice, NASA, and some related agencies). These appropriations act 
restrictions, although having some overlap with existing laws, have 
specific provisions that are not identical to existing laws and 
regulations, and must be implemented in order to avoid misuse of 
appropriated funds.
2. Meaning of ``Corporation''
    Comment: One respondent requested clarification as to what entities 
are and are not corporations for the purposes of this rule. The 
respondent stated that the term ``corporation'' could encompass C 
corporations, S corporations, and limited liability corporations 
(LLCs), among others. The respondent is concerned that if the rule 
applies to LLCs and S corporations, through which tax liability falls 
at the individual rather than the corporate level, that failure of one 
shareholder to pay taxes could adversely affect all shareholders. 
Likewise, the respondent is concerned how the rule would be applied if 
a shareholder or member of the entity is convicted of a felony.
    The respondent is also concerned about how this rule applies to a 
joint venture and teaming. First, can a corporation avoid disclosure of 
a felony conviction if it becomes a member of a joint venture? Second, 
if the joint venture is a corporate entity, are the underlying entities 
that make up the joint venture required to disclose tax delinquencies 
and felonies?
    Response: No change is made. The term ``corporation'' is used 
throughout the FAR without definition. If a term is used in the FAR 
without definition, then it has the standard dictionary definition. A 
corporation is a legal entity that is separate and distinct from the 
entities that own, manage, or control it. It is organized and 
incorporated under the jurisdictional authority of a governmental body, 
such as a State or the District of Columbia. The law does not specify 
any particular type of

[[Page 67729]]

corporation. The most common type of corporation in the U.S. is the 
subchapter C corporation--authorized under State law, and subject to 
tax under subchapter C of the Internal Revenue Code (IRC). Most 
publicly traded corporations are C corporations. The IRC and other 
governing statutes authorize specialized corporations including the 
subchapter S corporation (e.g., per the IRC and State laws), 
professional corporation (PC) (e.g., per State laws), and limited 
liability company (LLC) (e.g., per State laws).
    Section 744 applies to ``any corporation that has any unpaid 
Federal tax liability . . .'' Section 745 applies to ``any corporation 
that was convicted of a felony criminal violation under any Federal law 
. . .'' Any corporation, including pass-through entities such as the S 
corporation and the LLC, may have an unpaid Federal tax liability--
there are Federal tax liabilities other than corporate income tax 
liability. While the S corporation and LLC may not incur Federal income 
tax liabilities as pass-through entities, they may incur Federal 
employment tax liabilities under subtitle C of 26 U.S.C. for payroll 
tax withholdings, social security and Medicare taxes; as well as 
various Federal excise tax liabilities, e.g., under subtitle D of 26 
U.S.C. on communications and air transportation facilities and 
services, coal, medical devices, group health plans, and failure to 
maintain minimum essential health insurance coverage; and under 
subtitle E of 26 U.S.C. on alcohol and tobacco, machine guns, some 
other firearms, and structured settlement factoring transactions.
    The corporation is an artificial construct, a legally created 
entity that generally has the same rights and responsibilities as a 
natural person. Thus, the corporation is not automatically immune from 
being convicted of a felony criminal violation under any Federal law 
merely because it is an artificial entity. A corporation can commit 
crimes as it can be held criminally liable for the illegal act of its 
directors, officers, employees, agents, or shareholders under the legal 
doctrine of respondeat superior. A corporation cannot be jailed if 
convicted. Otherwise, it faces the same consequences as a natural 
person following conviction. Depending on the facts and circumstances, 
any corporation may be convicted of a felony criminal violation under 
any Federal law, separate and apart from any felony criminal conviction 
of any of its directors, officers, employees, agents, or shareholders. 
While the liabilities of the corporate entity are separate from the 
liabilities of its shareholders generally because they are separate 
legal entities, the shareholders may become liable for corporate 
liabilities under the legal doctrine of piercing the corporate veil. 
Under certain facts and circumstances, a court may pierce the corporate 
veil and ignore the legal separateness of the corporation and its 
shareholders, and hold the shareholders and other principals personally 
liable for what would otherwise be corporate liabilities.
    Joint ventures and other teaming arrangements are temporary 
business arrangements where two or more parties agree to work together 
to achieve a specific task or objective, e.g., usually a new project, 
business activity, or a contract. A joint venture or other teaming 
arrangement is not necessarily a corporation--it all depends upon the 
legal structure and arrangement chosen for the temporary relationship 
formed by the members of the teaming arrangement. FAR 9.601 defines two 
types of teaming arrangements: Two or more companies form a partnership 
or joint venture entity to act as a potential prime contractor--the 
joint venture teaming arrangement; or a potential prime contractor 
agrees with one or more companies to have them act as its 
subcontractors under a specified Government contract or acquisition 
program--the prime-subcontractor teaming arrangement. In either type of 
teaming arrangement, the parties to the arrangement may be existing or 
newly created entities, or a combination thereof. With respect to the 
prime-subcontractor teaming arrangement, the prime contractor is 
subject to the rule if it is a corporation. With respect to the joint 
venture teaming arrangement, the joint venture can take many legal 
forms, including as a C corporation, LLC, or partnership. If the prime 
contractor(s) in the joint venture teaming arrangement is a 
corporation, it is subject to the rule. Conversely, if the prime 
contractor(s) in the joint venture teaming arrangement is(are) not a 
corporation, it is not subject to the rule, i.e., the legal form of the 
joint venture teaming arrangement will determine whether the joint 
venture prime contractor(s) is(are) subject to the rule. See FAR 4.102 
for the signatories for the various prime contractor entity types. If 
the signatory for the prime contractor is a corporation, it is subject 
to the rule.
    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 
sections 744 and 745.
3. Finality of Felony Criminal Conviction
    Comment: One respondent noted that the rule requires contractors to 
report assessed, unpaid Federal tax liability only when all judicial 
and administrative remedies have been exhausted or have lapsed. The 
respondent noted, however, that the rule requires a contractor to 
disclose conviction of a felony criminal violation under any Federal 
law within the preceding 24 months, but does not provide any 
consideration as to whether the contractor has appealed the decision 
and such an appeal is pending. The respondent recommends that the rule 
should require disclosure of convictions only after all judicial 
remedies have been exhausted.
    Response: No change is made. The disclosure requirements of this 
rule are based on the statutory requirements of section 744 and 745. 
Section 745 applies to ``any corporation that was convicted of a felony 
criminal violation under any Federal law within the preceding 24 
months.'' Unlike section 744 which requires the exhaustion of all 
judicial and administrative remedies for any unpaid Federal tax 
liability, the plain text of section 745 does not require the 
exhaustion of all judicial and administrative remedies for a felony 
criminal violation conviction before it is applicable.
4. Response Time for Debarring Official
    Comment: One respondent is concerned that the lack of requirement 
for a reasonable response time for a debarring official to make a 
decision under this rule will likely delay the procurement process. The 
respondent recommends that the debarment official should be required to 
make a determination within five business days of receiving the inquiry 
from a contracting officer. According to the respondent, after the five 
days expires, the determination should automatically default to no 
suspension or debarment.
    Response: No change is made. Sections 744 and 745 do not require 
the suspending or debarring official to issue a determination to 
suspend or debar a corporation in accordance with the normal suspension 
and debarment process (see FAR subpart 9.4). If statutory text similar 
to the text of these sections is in an appropriations act, the funds 
appropriated by such an act are prohibited from being used to award to 
a corporation that has delinquent Federal taxes or has been convicted 
of a Federal felony unless the suspending or debarring official makes a 
positive determination that suspension or

[[Page 67730]]

debarment is not necessary to protect the interests of the Government.
5. Out of Scope
    Comment: Two respondents recommended that because this rule has a 
zero tolerance for tax delinquencies, the FAR Council should remove the 
$3,500 threshold for reporting of tax delinquencies at FAR 9.104-
5(a)(2) and paragraph (a)(1)(i)(D) of the provision at 52.209-5, 
Certification Regarding Responsibility Matters. The respondents also 
recommended expanding the certification provision at FAR 52.209-12 to 
include reporting of State and local tax delinquencies.
    Response: These recommendations are outside the scope of this rule, 
which is to implement sections 744 and 745 of division E and section 
523 of division B of the Consolidated and Further Continuing Resolution 
Appropriations Act, 2015. The certification at FAR 52.209-5(a)(1)(i)(D) 
with regard to delinquent Federal taxes was inserted in the FAR under 
FAR Case 2006-011 at the request of the Senate Permanent Subcommittee 
on Investigations. The certification in FAR 52.209-5 covers delinquent 
Federal taxes in excess of $3,500 within the past three years, is 
required in all solicitations when the contract value is expected to 
exceed the simplified acquisition threshold, and is used along with 
other factors in the determination of contractor responsibility. The 
representations in this final rule are based on an annual 
appropriations act funding restriction, and are required to be included 
in all solicitations when awards are made with such restricted 
appropriated funds. There is no de minimis amount of delinquent Federal 
taxes which does not need to be reported. These requirements are only 
in effect with respect to the affected appropriated funds when the 
funding restrictions are included in the specific annual appropriations 
act. The law does not restrict the award with appropriated funds to 
entities with regard to State and local tax delinquencies. Thus, there 
are no representations required as to the status of State and local tax 
delinquencies. 41 U.S.C. 1304, as implemented at FAR 1.107, prohibits 
the inclusion of non-statutory certifications unless justified in 
writing to the Administrator for Federal Procurement Policy.

III. Applicability to Acquisitions Not Greater Than the Simplified 
Acquisition Threshold and Commercial Items (Including Commercially 
Available Off-the-Shelf (COTS) Items)

    The FAR Council and the Administrator for Federal Procurement 
Policy have determined that it would not be in the best interest of the 
Federal Government to exempt acquisitions with estimated value not 
greater than the simplified acquisition threshold and contracts for the 
acquisition of commercial items (including COTS items) from the 
application of these appropriations act restrictions.

IV. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). E.O. 
13563 emphasizes the importance of quantifying both costs and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility. 
This is not a significant regulatory action and, therefore, was not 
subject to review under Section 6(b) of E.O. 12866, Regulatory Planning 
and Review, dated September 30, 1993. This rule is not a major rule 
under 5 U.S.C. 804.

V. Regulatory Flexibility Act

    DoD, GSA, and NASA have prepared a Final Regulatory Flexibility 
Analysis (FRFA) consistent with the Regulatory Flexibility Act, 5 
U.S.C. 601, et seq. The FRFA is summarized as follows:

    This rule implements sections 744 and 745 of Division E of the 
Consolidated and Further Continuing Appropriations Act, 2015 (Pub. 
L. 113-235) (and similar provisions in subsequent appropriations 
acts) to prohibit using any of the funds made available under that 
or any other act to enter a contract with any corporation with any 
delinquent Federal tax liability or a felony conviction, unless the 
agency has considered suspension or debarment of the corporation and 
has made a determination that this further action is not necessary 
to protect the interests of the Government.
    The rule also implements 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). This section prohibits award of any contract in an amount 
greater than $5,000,000, unless the offeror affirmatively certifies 
that it has filed all Federal tax returns required during the three 
years preceding the certification; has not been convicted of a 
criminal offense under the Internal Revenue Code of 1986; and has 
not, more than 90 days prior to certification, been notified of any 
unpaid Federal tax assessment for which the liability remains 
unsatisfied, unless the assessment is the subject of an installment 
agreement or offer in compromise that has been approved by the 
Internal Revenue Service and is not in default, or the assessment is 
the subject of a non-frivolous administrative or judicial 
proceeding.
    DoD, GSA, and NASA published an interim rule in the Federal 
Register at 80 FR 75903 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. Three respondents submitted comments on 
the interim rule. No comments were received from the public relative 
to the initial regulatory flexibility analysis.
    Based on current data with regard to active registrants in the 
System for Award Management (SAM), the rule will apply to 
approximately 65,000 small business concerns, which are required to 
complete the annual representations and certifications at least once 
per year in order to keep their registration in SAM current.
    The information collection requirement imposed by this rule is 
minimal--a brief representation, and in some cases also a 
certification, each estimated to require an average of 6 minutes to 
complete.
    DoD, GSA, and NASA were unable to identify any significant 
alternatives that would reduce the impact on small businesses and 
still meet the objectives of the statute. However, other than the 
potential for not receiving award if the small entity is delinquent 
in payment of Federal taxes or has been convicted of a felony, there 
is no significant economic impact on small entities because the 
information collection burden imposed by the rule is minimal.

    Interested parties may obtain a copy of the FRFA from the 
Regulatory Secretariat. The Regulatory Secretariat has submitted a copy 
of the FRFA to the Chief Counsel for Advocacy of the Small Business 
Administration.

VI. Paperwork Reduction Act

    The Paperwork Reduction Act (44 U.S.C. Chapter 35) applies. The 
rule contains information collection requirements. OMB has cleared this 
information collection requirement under OMB Control Number 9000-0193, 
titled: Prohibition on Contracting with Corporations with Delinquent 
Taxes or a Felony Conviction.

List of Subjects in 48 CFR Parts 1, 4, 9, 12, and 52

    Government procurement.

    Dated: September 19, 2016.
William F. Clark,
Director, Office of Government-wide Acquisition Policy, Office of 
Acquisition Policy, Office of Government-wide Policy.

Interim Rule Adopted as Final Without Change

0
Accordingly, the interim rule amending 48 CFR parts 1, 4, 9, 12, and 
52, which published in the Federal Register at 80 FR 75903 on December 
4,

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2015, is adopted as a final rule without change.

[FR Doc. 2016-23194 Filed 9-29-16; 8:45 am]
 BILLING CODE 6820-EP-P