Perfected security interest had priority over an FPLP levy without a filed tax lien notice

Plain-English summary

A federal contractor owed taxes, and the IRS used the Federal Payment Levy Program to levy a contract payment due from the Department of Defense. A third party held a perfected UCC-1 security interest, while the IRS had not filed a Notice of Federal Tax Lien. Chief Counsel considered whether the levy could receive the federal government's offset priority because one federal agency owed the payment and another sought to collect it. The advice concluded that a levy is not a setoff in this setting, so the normal priority rules under Section 6323 applied. Without a filed tax lien notice, the third party's perfected security interest had priority over the government's claim.

Ruling snapshot

• Question: Did an FPLP levy take priority over a perfected security interest when the IRS had not filed a Notice of Federal Tax Lien?
• Outcome: Advice given: no, the perfected security interest had priority.
• Key authorities: IRC §§ 6323 and 7426; Treas. Reg. § 301.7426-1(a)(1)(ii)

Full text (IRS public release)

ID:      CCA_2018052407243146
UILC:    6323.00-00

Number: 201825029
Release Date: 6/22/2018
From:
Sent: Thursday, May 24, 2018 7:24:33 AM
To:
Cc:
Bcc:
Subject: RE: Question about Lien / Levy Priority


You asked whether a levy conducted via the Federal Payment Levy Program (FPLP)
receives any sort of priority and primes an entity that holds a UCC-1 perfected security
interest. In the situation you described, a federal government contractor owes unpaid
taxes and the IRS levied on a federal contract disbursement due to the contractor from
the Department of Defense. You also stated that the IRS did not file a Notice of Federal
Tax Lien (NFTL) in this case. We explored whether the IRS could rely on offset priority
in this context because the debt was owed to one arm of the federal government and
the levied payments were payable from another arm of the federal government. We
have concluded that a levy is not a setoff in this context, and the normal priorities under
section 6323 apply. See Treas. Reg. § 301.7426-1(a)(1)(ii) (specifying that a suit for
wrongful levy may be brought when the IRS levies on a debt owed to the taxpayer by
another federal agency, but not if the IRS requests payment from another Federal
agency pursuant to a request for setoff). Here, the government used levy and not setoff
procedures, so the normal priorities under section 6323 apply. In this case, where the
government never filed an NFTL, the third party’s perfected security interest has priority
over the government’s claim. Please feel free to contact me if you have any
questions. Thank you.