The Federal Acquisition Regulation (“FAR”) Council (the Department of Defense (“DoD”), General Services Administration (“GSA”), and National Aeronautics and Space Administration (“NASA”)), recently finalized a rule that imposes significant restrictions on federal agencies in contracting with corporations that have federal tax liability or a recent federal felony conviction.  The final rule implements requirements created by the Consolidated and Further Continuing Appropriations Act of 2015, Pub. L. 113-235 (the “CFCAA”) and imposed by a December 4, 2015 interim FAR rule, which we wrote about previously.

The rule applies broadly to all DoD, GSA, and NASA procurements, and requires contractors to report any unpaid federal tax liabilities and to represent whether they have been convicted of a felony criminal violation within the previous twenty-four months.  In addition, for certain contracts in excess of $5 million, contractors must also certify that they:  (1) have filed all federal tax returns in the past three years; (2) have not been convicted of a criminal offense under the Internal Revenue Code; and (3) do not have any outstanding, unsatisfied federal tax assessments.  The rule imposes new requirements on procuring agencies as well: if a corporation discloses any tax delinquencies or felony convictions, the agency may only contract with it after first determining that suspension or debarment of the corporation is not necessary to protect the government’s interests.

The final rule adopts the interim one without change.  Public comments on the interim rule highlight some of the challenges the final rule will inevitably present for contractors.  For example:

  • The Expansive Definition of “Corporation”— In response to public questions about its applicability, the FAR Council explained that the rule applies to “[a]ny corporation, including pass-through entities such as the S corporation and the LLC” as well as joint ventures and other teaming arrangements under certain circumstances.
  • Applicability to Corporate Employees’ Felony Criminal Violations—The rule applies not only to corporations’ felony criminal violations, but also to those of its directors, officers, and other employees pursuant to the doctrine of respondeat superior. In addressing public comments on this topic, the FAR Council emphasized that “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.”
  • No Exceptions For Criminal Convictions Pending Appeal—Public comments on the rule noted the discrepancy between the reporting requirements for tax liabilities and felony criminal violations. Specifically, while contractors are not required to report outstanding tax liabilities that are being challenged or may still be challenged through judicial or administrative proceedings, the reporting requirement for felony violations does not contain a similar exception for criminal violations that are pending appeal.  The FAR Council refused to adopt such an exception to the felony disclosure requirement.
  • Lack of Set Time Frame for Suspension/Debarment Determinations—The rule does not impose a time frame in which the agency must make its determination regarding the necessity of suspension or debarment; public comments expressed concern that the lack of such a time requirement could significantly slow the procurement process. But the FAR Council refused to adopt a proposed five-business-day rule after which the determination would default to no suspension or debarment, emphasizing that the suspending or debarring official must make a “positive determination” that suspension or debarment is not necessary.

The FAR Council claims that the rule “imposes a minimal burden (just a representation or, in limited instances, a certification)” on contractors.  While ostensibly correct, the rule’s broad applicability—in terms of both the types of entities to which it applies and the various types of liabilities and convictions that must be reported—will require contractors to be vigilant and careful in making those representations and certifications.  And given the requirements imposed upon contracting agencies in the face of the reporting of tax liabilities and/or felony convictions, it remains to be seen what impact the rule will have on the efficiency of the procurement process.