Surety asserts, however, that its rights to the retainages are superior to defendant's right of offset, citing, inter alia, Pearlman v. Reliance Ins. Co., 371 U.S. 132, 83 S.Ct. 232, 9 L.Ed.2d 190 (1962). Surety makes the same argument that we rejected in Barrett v. United States, 367 F.2d 834, 177 Ct.Cl. ___ (1966). As we stated in that decision, the claim of the surety is subordinate and inferior to the right of the United States to set off the amount of taxes owed it by the contractor against the contract retainages in the hands of the Government. Defendant's motion for summary judgment on the right to offset the taxes is granted.

In Hanover Insurance Company v. United States, supra, it was expressly held that a federal district court had jurisdiction of a surety's action against the United States based upon the surety's paying the contractor's debts to materialmen under Section 1346. In support of its contention that the surety is subrogated only to the rights of the materialmen and not to those of the contractor, defendant cites Barrett v. United States, 367 F.2d 834, 837, 177 Ct.Cl. 380, and United States v. Munsey Trust Co., 332 U.S. 234, 241, 67 S.Ct. 1599, 1602, 91 L.Ed. 2022, to the effect that "nothing is more clear than that laborers and materialmen do not have enforceable rights against the United States for their compensation." This reasoning is countered, however, by the recent holding in Pearlman v. Reliance Insurance Co., supra, to the following effect:

95, the amount plaintiff seeks in this suit. It should be noted at the outset that plaintiff does not ask us to overrule our decision in Barrett v. United States, 367 F.2d 834, 177 Ct.Cl. 380 (1966). The dispute over contract retainages in Barrett was between a Miller Act payment bond surety, which had paid the claims of laborers and materialmen against their contractor, and the United States, which had set off against the retainages an amount for tax deficiencies assessed against the contractor.

The remedy of the laborer or mechanic is on the contractor's payment bond. Barrett v. United States, 177 Ct.Cl. 380, 367 F.2d 834 (Ct.Cl. 1966); United Pacific Insurance Company v. United States, 162 Ct.Cl. 361, 319 F.2d 893 (Ct.Cl. 1963); United States For the Use of Brown Brothers Grading Co. v. F. D. Rich Co., 285 F. Supp. 572 (D.C.S.Car., 1968); United States For the Use of B's Company v. Cleveland Electric Co. of South Carolina, 373 F.2d 585 (4th Cir., 1967). Plaintiff's contention, that if the suit under the Davis-Bacon Act is not brought on the bond it may be brought in a state court, is without merit.

The inability of the Government to set-off taxes owing to it against the retainages when the surety was proceeding under its performance bond was announced by Trinity Universal Insurance Company v. United States, 382 F.2d 317 (5th Cir. 1967), cert. denied, 390 U.S. 906, 88 S.Ct. 820, 19 L.Ed.2d 873 (1967), and followed in Security Insurance Company of Hartford v. United States, 428 F.2d 838, 192 Ct.Cl. 754 (1970); United Pacific Insurance Company v. United States, 320 F. Supp. 450 (D.Or. 1970); Aetna Casualty and Surety Company v. United States, 435 F.2d 1082 (5th Cir. 1970), and United States v. United States Fidelity GuarantyCompany, 328 F. Supp. 69 (E.D. Wash. 1971), affirmed, 477 F.2d 567 (9th Cir. 1973). The opposite result when the surety is proceeding under its payment bond was reached in United Pacific Insurance Company v. United States, 319 F. Supp. 893, 162 Ct.Cl. 361 (1963); Barrett v. United States, 367 F.2d 834, 177 Ct.Cl. 380 (1966); Royal Indemnity Company v. United States, 371 F.2d 462, 178 Ct.Cl. 46 (1967), cert. denied, 389 U.S. 833, 88 S.Ct. 33, 19 L.Ed.2d 93 (1967); Security Insurance Company of Hartford v. United States, supra; North Denver Bank v. United States, supra; United States Fidelity Guaranty Company v. United States, supra; Fireman's Fund Insurance Company v. United States, 362 F. Supp. 842 (D.Kan. 1973), and Great American Insurance Company v. United States, supra. And whether or not the surety can recover from the Government any payments it has made to the contractor or its assignee depends upon whether it has notified the Government as to its principal failure to pay claims, whether the payments are final or only of the progress variety, and whether or not the contract was completed at the time the payments were made.

Although the formal mechanism by which the setoff in this case was accomplished was a levy directed from one agent of the government to another, the cases uniformly assume that the United States is to be treated as a single entity, and therefore may set off an account receivable in one department against an account payable in another. See Aetna Ins. Co. v. United States, 456 F.2d 773 (Ct.Cl. 1972); Barrett v. United States, 367 F.2d 834 (Ct.Cl. 1966). The government has the same right "which belongs to every creditor, to apply the unappropriated moneys of his debtor, in his hands, in extinguishment of the debts due to him."

The Government's right to set off funds in this manner has been established at least since the case of United States v. Munsey Trust Co., 332 U.S. 234, 67 S.Ct. 1599, 91 L.Ed. 2022 (1947), and has been consistently reaffirmed in recent years. See United Sand Gravel Contractors, Inc. v. United States, 624 F.2d 733, 736 (5th Cir. 1980); Blake Construction Co. v. United States, 585 F.2d 998, 1005, 218 Ct.Cl. 163 (1978); Aetna Insurance Co. v. United States, 456 F.2d 773, 775, 197 Ct.Cl. 713 (1972); Algonac Manufacturing Co. v. United States, 428 F.2d 1241, 1250, 192 Ct.Cl. 649 (1970); Barrett v. United States, 367 F.2d 834, 836, 177 Ct.Cl. 380 (1966). Furthermore, in light of the Supreme Court's decision in Munsey Trust, the Claims Court has routinely held that the Government's set off right is superior to a claim by a Miller Act surety under its payment bond to the same contract earnings.

Since the surety in this case paid only on its payment bond, it falls in the latter category, and must claim the retainage subject to the tax claim of the United States.Id. at 1383 (citing Trinity Universal Ins. Co. v. United States, 382 F.2d 317 (5th Cir. 1967), cert. denied, 390 U.S. 906, 88 S.Ct. 820, 19 L.Ed.2d 873 (1968); Barrett v. United States, 367 F.2d 834, 177 Ct.Cl. 380 (1966)); see also Aetna Insurance Company v. United States, 456 F.2d 773, 197 Ct.Cl. 713 (1972). The Fifth Circuit also recognizes that the right of the United States to setoff the unpaid taxes of a contractor from retained contract proceeds is superior to the surety's claim on the payment bond.

Id. at 1384. Similarly, in Barrett v. United States, 367 F.2d 834, 177 Ct.Cl. 380 (1966), the court, while holding that a claim against a Miller Act bond was inferior to the government's right to set off the amount of taxes owed by the prime contractor against contract retainages in the hands of the government, noted the "vital distinction between instances in which the United States is claimant to the funds in its possession and those situations in which the United States is an impartial stakeholder of funds confessedly owing to one of the contesting parties." Id. 367 F.2d at 837.

To support this conclusion, the First Circuit cited other decisions in which courts, despite the IRS' service of a notice of levy upon another government agency, did not transform a traditional set off into a levy. Id. (citing Aetna Ins. Co. v. United States, 456 F.2d 773, 773, 197 Ct.Cl. 713 (1972) (IRS serves notice of levy upon GSA but transfer treated as setoff); Barrett v. United States, 367 F.2d 834, 835, 177 Ct.Cl. 380 (1966) (IRS serves notice of levy on Public Health Service but transfer treated as set off)).         In further support of its conclusion that a transfer of funds between government agencies constitutes a setoff, no matter what it is called, the court directed its attention to the regulations pertinent to § 7426.