Secured Lending

The commercial finance exception provides that an IRS super-priority lien will not be valid as against a security interest created by an accounts receivable financing agreement in the ordinary course of the taxpayers business, if the security interest was acquired before the 46th day after the filing of the lien.

Secured lenders have argued that the filing of a UCC-1 before the filing of the IRS lien, which perfected the security interest in receivables, constitutes the acquisition of a prior security interest and that it was the intent of Congress to exempt commercial financing agreements from the 1966 amendments to the IRS Code. Notwithstanding this exception, the courts still use the choateness doctrine to rule that accounts in which the lender claims a prior interest must nevertheless be in existence within the 45-day time window. Thus, any invoice generated after this time period, even though subject to a security agreement and a financing statement, will belong to the IRS.

The statutory purchase money security interest exception is applicable where a borrower purchases equipment financed by a secured lender before the expiration of the 45-day time window. It seems clear that this would not involve receivable financing, although several lenders have attempted to argue that assignment of specific invoices constitutes a purchase money security interest. All of them have failed.

Another important issue is the extent to which the super-priority IRS lien attaches to the borrower's bank account. Because the IRS lien attaches to the entire borrowers property, absent a perfected security interest, the IRS will have priority over the bank account. However, the amount in the borrower's checking account, if properly pledged to the lender and perfected before the expiration of the 45-day time window, should be considered choate, and not subject to the federal lien, and therefore should be a safe harbor for secured lenders.

Super-priority tax liens remain a powerful weapon in the hands of the IRS. However, secured lenders may protect themselves from application of the lien statute by following some of the guidelines set forth at the end of this article, by cooperating with the IRS and, if demanded, turning over (or at least interpleading) any disputed funds.

Indeed, the failure to turn over the funds in which the IRS claims an interest may subject the lender to severe sanctions, including a 50 percent penalty of the sums withheld.

The typical example would involve a borrower which has assigned its receivables to a secured lender, and the borrower has also obtained a loan from the SBA. The borrower defaults on its loan to the secured lender, and the secured lender files suit, seeking the appointment of a receiver to collect the receivables. Under the statute, an act of insolvency has occurred, and the SBA may intervene, remove to federal court, and seek an order compelling the receiver to pay the SBA any receivables generated after the appointment of the receiver.

Account Receivables