On September 30, 2016, and effective as of the same day, the Department of Defense, the General Services Administration and the National Aeronautics and Space Administration adopted as 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 contracts with any corporation having:
- a delinquent Federal tax liability when administrative remedies and appeals have been exhausted, or
- a felony conviction under any Federal law in the preceding 24 months (regardless of appeal rights),
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.
As explained in the preamble of the interim rule, when an offeror provides an affirmative response in paragraph (b)(1) or (2) to the representation, the contracting officer is required to request additional information from the offeror and notify the agency official responsible for initiating debarment or suspension action. The contracting officer shall not make an award to the corporation unless an agency suspending or debarring official has considered suspension or debarment of the corporation and determined that this further action is not necessary to protect the interests of the Government. The new certification requirements are found in FAR 52.209-11, 52.209-12 and 52.212-3.
Comments on the Interim Rule and Other Considerations
The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (the Councils) reviewed the comments submitted after the issuance of the interim rule. Notwithstanding these comments and concerns, no changes were made to the rule before it was made final. Some of the notable comments highlight areas of concern relating to this final rule:
- Was there a need for a rule? – Commenters argued that the rule overlapped with existing causes for debarment. The Councils explained that the rule was 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, which were not identical to existing laws and regulations.
- Should "corporation" be defined? – One commenter expressed concern over the use of "corporation" and the failure to better define it. Specifically, since the term "corporation" could encompass C corporations, S corporations and limited liability corporations, whereupon tax liability under the latter two types of corporations (S corporations and LLCs) falls at the individual rather than the corporate level, and thus, if a single shareholder fails to pay taxes, it could impact the corporation and unfairly all shareholders. The same concern applied if a shareholder or member of the entity were convicted of a federal felony.
Finally, this commenter raised questions over the application of the rule to joint ventures and teams. In particular, can a corporation avoid disclosure of a felony conviction if it becomes a member of a joint venture? Further, 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?
Despite these concerns, no changes were made. The final rule explained that the FAR has been operating without a formal definition of "corporation" for years and a corporation is a legal entity that is separate and distinct from the entities that own, manage, or control it. Moreover, neither section 744 nor section 745 defined "corporation" or limited the mandate in any manner. With respect to joint ventures and teaming arrangements, the Councils explained that the application of the rule will depend upon the legal structure and arrangement between the two parties. Nevertheless, the Councils would not create an explicit exclusion or exemption to the application to joint ventures or teaming arrangements.
- Why the disparate treatment between the finality of tax violations versus federal felonies? – 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 recommended that the rule should require disclosure of convictions only after all judicial remedies have been exhausted. Despite these concerns, the Councils rejected the recommendation and made no change. The Councils based their position on the statutory requirements of sections 744 and 745.
- Should there be a requisite review standard by SDOs? – One respondent raised concern over the lack of a required response time from suspension and debarment officials (SDOs). The Councils did not make a change because sections 744 and 745 did not require SDOs to issue a determination within a specified time.
In addition to the above questions and concerns, the FAR Council and the Administrator for Federal Procurement Policy also considered whether the final rule would be applicable to contracts that did not exceed the simplified acquisition threshold or commercial item contracts (including contracts for commercially available off-the-shelf (COTS) contracts). The FAR Council and the Administrator for Federal Procurement Policy determined that it would not be in the best interest of the federal government to exempt the application of the rule to acquisitions with an estimated value not greater than the simplified acquisition threshold (currently $150,000) or contracts for the acquisition of commercial items (including COTS items). Accordingly, the final rule applies equally to these and other types of contracts.
While the final rule leaves a number of questions and concerns open to interpretation and dispute, the primary takeaway for federal contractors is the need to plan ahead and address this mandatory ineligibility in advance of a federal felony conviction and/or final tax liability determination. For example, contractors should more carefully choose a corporate structure in joint ventures and other arrangements that considers the tax liability impacts.
In working with the law, it is particularly important to understand the clear intent: to get information related to felony criminal behavior and unpaid tax liability in front of the SDOs. These officials have always had the ability to suspend or debar on these bases, but an explicit certification requirement creates a mechanism to move that information to the SDO more quickly than before. Contractors should consider this underlying goal in determining, for example, what organizations among its network would be covered by the certification, and whether the corporation should provide the information to the SDO in advance of the certification.
Indeed, if planned, it is possible for contractors to have a present responsibility determination made by an SDO (particularly for a tax liability issue) at the time of or shortly after the triggering event. This would help minimize the impact on the contractor's ability to win new work.
On the other hand, with regard to felony criminal activity, it could be difficult running the defense in a federal criminal proceeding, while, at the same time, meeting with and advocating to an SDO as to the contractor's present responsibility. Although it may be advisable, given the circumstances, to alert the relevant SDO of criminal charges (well ahead of a criminal conviction), these parallel proceedings present a host of issues that will no doubt become more prevalent in the months and years to come as this new representation is rolled out.