The Miller Act\--Performance Bonds

Legal Opinion: GHM-0018

Index: 3.210, 3.225

Subject: The Miller Act\--Performance Bonds

December 31, 1991

George M. Sellinger

Chief, Branch 1

Office of Chief Counsel

Internal Revenue Service

Room 3319

950 L\'Enfant Plaza South, SW

Washington, DC 20024

Re: The Miller Act (40 U.S.C. § 270a et seq.)

Dear Mr. Sellinger:

This responds to your letter of November 15, 1991

regarding certain tax indemnification provisions that the

Miller Act (40 U.S.C. § 270a et seq.) requires in

performance bonds that are furnished for federally funded

projects. In your letter you ask us to assess whether the

performance bonds used by HUD\'s office in Puerto Rico,

namely FHA Forms 2452 and 2452-EH, may be modified to

incorporate the Miller Act\'s tax indemnification provisions.

FHA Form 2452 is used in HUD\'s multifamily mortgage

insurance programs and FHA Form 2452-EH is used in HUD\'s

section 202 direct loan program for the elderly and

handicapped. Since the section 202 program is within the

jurisdiction of the Assistant General Counsel for Assisted

Housing, Michael Reardon, we have referred your letter to

him for response in connection with FHA Form 2452-EH. With

respect to FHA Form 2452, we have reviewed your request and

determined that the Miller Act does not apply to HUD\'s

multifamily mortgage insurance programs. This determination

is consistent with a prior opinion of our office, dated July

29, 1968, which although not concerned solely with the

Miller Act, takes the position that the Miller Act is not

applicable to projects insured pursuant to HUD\'s multifamily

mortgage insurance programs. (Attachment A). Therefore, we

do not believe it is necessary to modify FHA Form 2452 as

you suggest.

As you are aware, the Miller Act requires that before

the award of any contract exceeding \$25,000 in amount for

the construction, alteration, or repair of any public

building or public work of the United States, the contractor

must furnish both a performance bond and a payment bond to

the United States. The Miller Act further directs that the

performance bond must specifically provide coverage for

federal employment taxes that are collected, deducted, or

withheld from wages paid by the contractor in carrying out

2

the contract with respect to which the performance bond is

given.

In our review of your letter, and its accompanying

documentation and memoranda, we observed that your

recommendation to modify FHA Form 2452 is based upon two

assumptions. These assumptions, as set forth in the first

full paragraph on page 2 of the October 4, 1991 memorandum,

are: (1) the projects for which FHA Form 2452 is utilized

are federally funded; and (2) the Federal Housing

Administration (\"FHA\"), which administers HUD\'s housing

programs, requires bonds i.e., performance bonds furnished

in connection with the construction or rehabilitation of

projects obtained in favor of the United States. However,

with respect to HUD\'s multifamily mortgage insurance

programs, these assumptions are not correct.

To begin, HUD\'s multifamily mortgage insurance programs

do not involve the federal funding of projects. The FHA

provides federal mortgage and loan insurance for borrowers

in order to encourage investment by private lenders, and

thereby facilitate home ownership and the construction or

improvement of housing. Pursuant to its multifamily

mortgage insurance programs, the FHA insures mortgages and

loans made by mortgage lenders to developers and builders

who are constructing or rehabilitating apartments and other

multifamily housing projects. Although the mortgage

insurance is provided by the federal government, it is

supported by premiums paid by the borrowers. Accordingly,

the FHA does not appropriate or expend funds to construct or

rehabilitate the projects for which it has insured

mortgages. Each project is built or rehabilitated by a non-

FHA entity with non-FHA funds, and is encumbered by a

mortgage given by a non-FHA mortgagor to a non-FHA lender,

albeit mortgagors that are FHA-approved, but are not a part

of, or subsidiaries of FHA. Accordingly, the FHA is not

even a party to the construction contract. In addition,

payment by the FHA of a lender\'s insurance claim occurs only

if there is a default on the mortgage, and a resulting

assignment of the mortgage to FHA, or foreclosure on the

mortgage and conveyance of title to FHA. Only in the event

of a default can FHA become the holder of the mortgage or

acquire title to the project.

In connection with the foregoing, See Annotation,

What Constitutes \"Public Work\" Within Statute Relating to

Contractor\'s Bond, 48 ALR4th 1170, 1195 (1986), which

characterizes United States for the use of General Electric

Distributing Corporation v. Centerline Gardens, Inc.,

253 F.2d 133 (6th Cir. 1958) for the proposition that a

contract for the privately financed, but FHA insured,

construction of privately operated housing was not within

3

the terms of the Miller Act, notwithstanding that the

housing was intended at least in part for the use of

military personnel and their dependents. We would point out

that in the Centerline Gardens case, the degree of federal

involvement appears greater than that in the typical FHA

mortgage insurance transaction because the project was built

upon land leased from the United States, and the lease

agreement provided that all units of the project would be

made available to personnel designated by a Commanding

Officer of the military.

In addition, the FHA does not obtain a bond in favor of

the United States when it insures the mortgages of

multifamily housing projects. HUD Form 2452, the

performance bond utilized by the FHA in such transactions,

is not executed by the FHA. In fact, HUD Form 2452

designates only the mortgagor and mortgagee of the project

as joint obligees. This underscores the private nature of

the project, and stands in contrast to GSA Standard Form 25,

which contains the Miller Act tax indemnification

provisions, and binds the principal and surety directly to

the United States. FHA Form 2452 does state that any right

of action which either of the obligees might have under the

performance bond may be assigned to HUD. However, this is

only to provide for the above-described contingency of a

default and assignment of the mortgage to FHA, or a

foreclosure on the mortgage, and conveyance of title to FHA.

In the event of such a contingency, the FHA will need to

ensure completion of the project, so as to be able to sell

the project to an outside purchaser for a price sufficient

to minimize losses incurred in payment of the insurance

claim. It should be noted that a mortgagor has the option

of providing a completion assurance agreement secured by a

cash deposit in lieu of corporate surety bonds for payment

and performance. See 24 C.F.R. 207.19(c)(6).

In sum, the FHA multifamily mortgage insurance programs

are not programs that federally fund the construction or

rehabilitation of projects. Further, in connection with

these programs, the FHA does not demand that a performance

bond be issued in favor of the United States or that the

bonds be issued at all. Therefore, we do not believe that

the Miller Act performance and payment bond requirements are

applicable to such FHA transactions. Consequently, we do

not consider that it is necessary to modify FHA Form 2452 to

incorporate the Miller Act\'s tax indemnification provisions

regarding coverage for federal employment taxes.

Please contact Frances MacFarlane at (FTS) 458-4107

with any questions on this matter.

Very sincerely yours,

4

David R. Cooper

Assistant General Counsel,

Multifamily Mortgage Division

Attachment