For a business that runs on a revolving line of credit, factoring or floor-plan financing, the filing of a federal tax lien notice is a cash flow emergency. The lender's first question is whether new advances will be secured or will fall behind the IRS. The answer is in IRC 6323(c) and (d), and it comes down to three things: a written agreement signed before the filing, the type of collateral, and the calendar.
The baseline problem
Under section 6323(a), a lender who perfects a security interest before the IRS files its notice comes first. But a security interest exists only "to the extent that" the holder has parted with money or money's worth, according to section 6323(h)(1). An advance made after the IRS files is a new extension of credit, so without a special rule, it would be behind the IRS. Collateral the business acquires after the filing raises the same problem.
IRM 5.17.2.6.6 describes sections 6323(c) and (d) as provisions that let certain claims "prime an earlier filed NFTL and act substantially in the same manner as superpriorities."
Three prerequisites for section 6323(c)
IRM 5.17.2.6.6 lists requirements that apply to every type of agreement in section 6323(c):
- The security interest is in "qualified property," which is defined differently for each type of agreement.
- There is a written agreement entered into before the tax lien filing.
- The security interest is protected under local law against a judgment lien arising, as of the time of the tax lien filing, out of an unsecured obligation. In practice, the lender's interest must already be perfected under state law.
A handshake line of credit, or a loan document signed the day after the IRS files, does not qualify.
Commercial transactions financing agreements (6323(c)(2))
This is the provision that covers ordinary working capital lending against receivables and inventory. A commercial transactions financing agreement is an agreement, made by a person in the course of its trade or business, either to make loans secured by "commercial financing security" the taxpayer acquires in the ordinary course of business, or to purchase commercial financing security other than inventory.
Section 6323(c)(2)(C) defines commercial financing security as:
- paper of a kind ordinarily arising in commercial transactions;
- accounts receivable;
- mortgages on real property; and
- inventory.
IRM 5.17.2.6.6.1 points out that general intangibles, such as patents or copyrights, are not included.
The two 45-day limits
The protection is limited in time in two ways:
- Advances: the loan or purchase is protected only if made "before the 46th day after the date of tax lien filing or (if earlier) before the lender or purchaser had actual notice or knowledge of such tax lien filing."
- Collateral: qualified property includes only commercial financing security "acquired by the taxpayer before the 46th day after the date of tax lien filing."
So the protected window closes on day 45 or when the lender learns of the filing, whichever comes first. Receivables generated and inventory acquired on day 50 are not qualified property under this subsection.
The manual's example
IRM 5.17.2.6.6.1 works through a case. A manufacturer gives a bank a perfected security interest in receivables and inventory in June. The IRS files a notice on July 5. On August 1, without knowledge of the notice, the bank lends $7,000; that advance has priority over the IRS. On August 2 the bank learns of the notice and lends $2,000 more; the IRS has priority over that advance because the bank had actual knowledge. On October 31 the bank lends $1,000; the IRS has priority because the bank knew and the 45 days had run.
What "actual notice" means for an organization
Section 6323(i)(1) says an organization has actual notice of a fact from the time it is brought to the attention of the individual conducting the transaction, and in any event from the time it would have been brought to that person's attention if the organization had exercised due diligence. Due diligence means reasonable routines for communicating significant information to the person conducting the transaction, and reasonable compliance with them. A bank cannot avoid knowledge by keeping its lien search department and its loan officers in separate silos.
Construction and improvement financing (6323(c)(3))
A real property construction or improvement financing agreement is an agreement to make cash disbursements to finance construction or improvement of real property, a contract to construct or improve real property, or the raising or harvesting of a farm crop or the raising of livestock. Qualified property is the real property being improved, the proceeds of the construction contract, or the crop or livestock, depending on the type. There is no 45-day limit in this subsection.
IRM 5.17.2 gives an example: a construction mortgage for $100,000 is agreed to and recorded in January, the IRS files a notice in February, and the lender disburses the $100,000 in June with actual knowledge of the notice. The lender's mortgage still primes the notice, because all the requirements of section 6323(c)(3) were met.
Obligatory disbursement agreements (6323(c)(4))
This covers agreements to make disbursements that are required because of the intervention of a third party's rights, with special rules for surety agreements. A surety that bonded a contractor's performance, for example, can be protected as to the contract proceeds and certain property used to perform the contract.
The general 45-day rule (6323(d))
Section 6323(d) is broader than (c)(2) and is not limited to commercial financing security. It protects a security interest arising from disbursements made before the 46th day after the filing, or earlier actual knowledge, if the security interest is in property that was already subject to the tax lien when the notice was filed, is covered by a written agreement entered into before the filing, and is protected under local law against a judgment lien as of the filing. It does not reach property acquired after the filing.
A quick timeline
| Day | What happens |
|---|---|
| Before day 0 | Written financing agreement signed; lender's security interest perfected under state law. |
| Day 0 | IRS files the Notice of Federal Tax Lien. |
| Days 1 to 45 | Qualifying advances, and qualifying receivables and inventory acquired in this window, keep priority, unless the lender gains actual notice or knowledge of the filing first. |
| Day 46 and later | New advances and newly acquired collateral fall behind the federal tax lien under these provisions. |
What this means for a business owner
- Know your loan documents. Loan agreements can contain clauses triggered by a lien filing; one of the IRS's own examples in IRM 5.12.2.4.3 involves a proposed loan agreement that would become void if a notice were filed. The 45-day rule protects the lender's advances; it does not oblige the lender to keep lending.
- Use the window. The 45 days are the period in which your lender can keep funding with priority. Use them to resolve the lien problem, not to hope it goes away.
- Talk to the IRS before the filing, if you can. IRM 5.12.2.4.3 allows deferral of a lien filing when documentation shows it would hamper collection, and its examples include businesses that factor receivables, operate on floor plans, or depend on revolving receivables financing. See when the IRS files a Notice of Federal Tax Lien.
- Ask about subordination. After a filing, a certificate of subordination under section 6325(d) can put a lender ahead of the IRS for a specific transaction if the government's position improves. IRM 5.12.10 has specific procedures for subordination to factoring agreements.
More on the operational side is in what a federal tax lien does to your business.
Forty-five days is not a grace period for the business. It is a grace period for the lender. Plan accordingly.