Pub. 7 2016 Issue 1

www.wvbankers.org 12 West Virginia Banker W hen it comes to determining “who’s on first” among competing lien holders, the “first to file” rule typically governs. While this general rule also applies when federal tax liens are involved, 1 there are two important exceptions (sometimes known as the “45 day rules”) which commercial lenders should be keenly aware of to avoid being trumped by a federal tax lien. The first exception pertains to future advances, and the second exception pertains to after-ac- quired collateral. Future Advances The Federal Tax Lien Act (the Act) 2 pro- vides that a federal tax lien takes priority over future advances made pursuant to a lender’s perfected security interest, unless such advances were made within 45 days after the federal tax lien was filed, and the lender lacked knowledge of the tax lien at the time of the disbursement. 3 Thus, a federal tax lien can prime future advances made more than 45 days after such a tax lien is filed. Likewise, a federal tax lien can prime all future advances made by lenders who knew of such tax lien at the time of the disbursement. A simple example illustrates the havoc a federal tax lien can cause to a lender’s perfected lien interest. Suppose on April 1, 2015, Lender perfects a security interest in personal property covering future advances to Borrower, and on April 15, 2015, the IRS files a tax lien against Borrower. If Lender makes an advance after June 1, 2015, the IRS could trump Lender with respect to that advance since the advance was made beyond 45 days of the IRS lien being filed. This holds true even if Lender had no knowledge of the federal tax lien at the time the advance was made (and if Lender had knowledge of the IRS lien when the advance was made, the IRS could trump Lender immediately after the IRS lien was filed). For this reason, it is critical that lenders check for federal tax liens prior to making future advances on secured loans in order to avoid the risk of being trumped by the federal government. After-Acquired Collateral Under the Act, a lender’s perfected security interest in after-acquired collateral is superior to a federal tax lien only if the collateral is ac- quired within 45 days after the lien is filed and the collateral constitutes “qualified property.” 4 Qualified property includes negotiable instru- ments, accounts receivable, mortgages on real property, and inventory. 5 Qualified property does not include goods such as equipment or farm products. Therefore, a federal tax lien can prime a perfected security interest in non- The Importance of Monitoring Federal Tax Liens By David M. Thomas and Paige K. Vagnetti, Dinsmore & Shohl LLP