It may seem counterintuitive, but federal tax liens are generally not super liens that will prime a security interest perfected by a previously filed UCC financing statement. The general rule as to priorities among creditors in the commercial world, which is largely governed by state law, has long been “first in time, first in right.” Because of the supremacy of federal law, many bankers and other people (who might be expected to know better) assume that federal tax liens would take priority over state law liens regardless of when the latter arose or were perfected. But, in fact, federal law generally preserves the priorities embodied in state law and actually provides certain super-priorities in favor of state law liens. This article is intended to illustrate the interplay between security interests under the UCC on the one hand and federal tax liens on the other.

Tzvi Weisz, Associate, Herrick Feinstein
Tzvi Weisz, Associate, Herrick Feinstein

45-Day Period for Making Disbursements

The Internal Revenue Code provides that security interests arising from disbursements like loan advances made within 45 days after the filing of a Notice of Federal Tax Lien (NFTL) will prime the federal tax lien (the 45-Day Disbursement Rule).1 This important state law lien super-priority is, however, qualified in three respects. First, as with all the state law lien superpriorities discussed in this article, the state law lien must be fully perfected and senior to the lien of a judgment creditor at the time of the NFTL filing to be entitled to a
super-priority status against the federal tax lien. In addition, the benefit to the lender of the 45-day disbursement rule will only be available if the disbursement was made without the holder of the security interest having actual notice of the NFTL; and the security interest in question attaches only to property that the taxpayer owned when the NFTL was filed. This rule would not apply to a security interest in after-acquired property, newly arising accounts receivable or newly created or acquired inventory, for example.

Commercial Transaction Financing Agreements

The code provides a separate Commercial Transaction 45-Day Rule to cover disbursements that arise under a commercial transaction financing agreement, with respect to certain qualified property.2 Unlike the 45-Day Disbursement Rule, the Commercial Transaction 45-Day Rule provides priority to a secured party holding a perfected UCC security interest in a property acquired by the taxpayer after the filing of an NFTL, if the property were acquired by the taxpayer within the 45-day period following the filing of the NFTL.3

Like the 45-Day Disbursement Rule, the benefit of this rule is only available if the creditor does not have actual notice of the filing of the NFTL. Further, the Commercial Transaction 45-Day Rule only applies if the loan is made in the ordinary course of the lender’s trade or business, such as a bank. A loan that is incidental to a trade or business — for example, a manufacturer that finances the accounts receivable of one of its customers — is also considered to be made in the course of the lender’s trade or business.4

Additionally, to qualify as a commercial financing security agreement, the applicable loan must be made in exchange for the commercial financing security owned by the taxpayer.5 This term is limited to commercial paper, certain mortgages, inventory (including raw materials, goods in process and property for sale to customers) and accounts receivable.

The following example illustrates the rule’s application: A manufacturer entered into a written agreement with a commercial factor on September 1, 2016 to sell accounts receivable. On November 1, 2016, an NFTL was filed with respect to the manufacturer’s delinquent tax liability. On December 6, 2016, without actual notice of the filing of an NFTL, the commercial factor purchased all of the manufacturer’s November accounts receivable. The commercial factor’s security interest in the November accounts receivable will prime the previously filed NFTL.6

A commercial lender’s priority would also extend to identifiable proceeds received from the sale or other disposition of qualified property, whether or not the proceeds are received during or after the 45-day period. However, as with ordinary course sales of certain collateral under Article 9, the taxpayer/borrower’s commingling of proceeds with other cash will effectively burn the lender’s security interest vis-à-vis a federal tax lien. Moreover, the lender’s priority does not extend to “proceeds of proceeds” received after the 45-day period.7 Thus, there is a clear danger that a commercial lender who fails to act quickly following a default may find itself behind the IRS. In effect, the treasury regulations create a kind of “use it or lose it” dilemma. If, during this 45-day period, an accounts receivable or inventory lender fails to either exercise remedies on its collateral or obtain subordination from the IRS, it may allow the borrower to consume the last collateral for which the lender was actually senior under the Commercial Transactions 45-Day Rule.

Stephen D. Brodie, Partner, Herrick Feinstein
Stephen D. Brodie, Partner, Herrick Feinstein

Obligatory Disbursement Agreements

Another true super-priority applies to agreements where the holder of a security interest is contractually obligated to make a payment to a third party that is not the taxpayer. For example, a letter of credit, pursuant to which a bank is required to pay money to a beneficiary upon presentation of specified documents, and where the bank’s customer has provided collateral to secure its reimbursement obligations to the bank. In this case, the 45-Day Disbursement Rule would not apply, and the bank would retain priority over the IRS in its collateral, even if an NFTL were filed long before a payment to the beneficiary under the letter of credit. Without this super-priority, it is unlikely that banks would issue letters of credit as freely as they do today.

However, this provision only applies if the holder of the security agreement enters into such agreements in the ordinary course of its trade or business. Actual knowledge of the NFTL at the time of a disbursement by the secured party will not vitiate the priority. The collateral may be any property held by the taxpayer at the time the NFTL is filed or acquired later, to the extent such after-acquired property is directly traceable to the obligatory disbursements. This accommodates a common practice in trade finance whereby the goods purchased with a commercial letter of credit serve as collateral to the issuer of the letter of credit.

Challenges for Lenders

Federal tax law goes to some lengths to respect the needs of commercial lenders engaged in secured transactions. Nevertheless, the balance struck between the rights of the Treasury and the smooth workings of commercial finance leaves lenders with a few obvious challenges.

The two 45-days rules suggest that lenders should search for filed NFTL’s on a regular basis. This may not be practical or necessary in many situations, but such searches are advisable when a borrower’s financial condition is a concern. Even if the 45-Day Disbursement Rule is not a problem because the lender is not inclined to lend “good money after bad,” the Commercial Transaction 45-Day Rule presents the lender with a “use it or lose it” dilemma with respect to exercising remedies and realizing on its collateral.

Another decision for lenders concerns the priority vis-à-vis the IRS of liens on proceeds of qualified property. If such proceeds are commingled with other assets of the borrower, they cease to be “identifiable” and lose their priority. Therefore, the establishment of a lockbox would appear to be advisable in the early stages of almost any workout where accounts, inventory or other “qualified property” (items other than fixed assets) are important parts of the lender’s collateral.

Finally, lenders need to be aware that the proper places to run searches for filed NFTL’s may not be in the same filing offices used for UCC financing statements or real property mortgages. State law determines the appropriate place to file within the state itself, and states are not uniform in this regard. Accordingly, before searching for NFTL’s, the relevant statute of each particular state should be reviewed.8 Moreover, the selection of the appropriate state for the filing of an NFTL will often not follow commercial law. Under the UCC, filings are generally required to be made in the state where the debtor is located and registered organizations such as limited liability companies, corporations and limited partnerships are deemed to be located in the state under whose laws the entity is organized. However, under the IRS code, the residence of the taxpayer determines where the NFTL must be filed, and the residence of a limited liability company, corporation or limited partnership is the state where the taxpayer’s principal executive office is located. In the case of many taxpayers (including most entities organized under Delaware law), this will not be the same as its state of organization.

Finally, if this divergence between filing requirements for UCC security interests and federal tax liens does not present enough of a challenge, commercial lenders also need to pay particular attention to taxpayers who may have moved their offices. Once a valid NFTL has been filed under applicable state law, the lien remains effective in the old location until the old lien expires, 10 years after the initial assessment by the IRS.9 Thus, if a principal executive office was relocated from one state to another or from one county to another within the same state, a secured party would have to perform a federal tax lien search in both the taxpayer’s old and new locations.


  1. 26 USC 6323(d)
  2. 26 USC § 6323(c)(2)
  3. Id. This limitation is not surprising, given that collateral securing disbursements made prior to the filing of a NFTL will not prime the federal tax lien with respect to after-acquired property, as discussed above.
  4. Treasury Regulations Section 301.6323(c)-1(b)(2)
  5. 26 USC § 6323(c)(2
  6. See example (4) in Treasury Regulation Section 301.6323(c)(1)(f)
  7. Treasury Regulations Section 301.6323(c)-1(d)
  8. The Revised Uniform Federal Tax Lien Registration Act (1966) has been adopted by many states, but not all.
  9. See Section 6323(f)(2)(B); Regulation Section 301.6323(g)-1(c)(1).