                                            ALESSIO AZZARI, INC., PETITIONER v. COMMISSIONER                                      OF
                                                     INTERNAL REVENUE, RESPONDENT
                                                        Docket No. 27532–08L.                Filed February 24, 2011.

                                                  P’s business experienced financial difficulties and cashflow
                                               problems, and P fell behind on its Federal employment tax
                                               deposits. P later received financing from a lender which made
                                               loans secured by an interest in P’s accounts receivable. The
                                               lender’s financing helped P remain current with its tax
                                               deposits for six consecutive quarters. During that time, R filed
                                               a notice of Federal tax lien (NFTL) for the tax P still owed.
                                               P’s lender refused to extend any more credit to P because of
                                               the NFTL unless R agreed to subordinate the NFTL to the
                                               lender’s security interest. P requested that R subordinate the
                                               NFTL and grant it an installment agreement to satisfy its tax
                                               liabilities. Because the lender’s security interest antedated the
                                               NFTL, R determined that the lender’s security interest
                                               already had priority in P’s accounts receivable and that it was
                                               unnecessary to subordinate the NFTL. In part on account of
                                               its inability to borrow against its accounts receivable because
                                               of the NFTL, P again fell behind on its employment tax
                                               deposits, and R therefore refused to consider P’s proposed
                                               installment agreement. Held: It was an abuse of discretion for
                                               R to refuse to consider P’s request to subordinate the NFTL
                                               on the basis of R’s erroneous conclusion of law that the
                                               lender’s security interest already had priority over the NFTL
                                               in P’s accounts receivable. Held, further, it was an abuse of
                                               discretion for R to deny P’s request for an installment agree-

                                      178




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                                      (178)               ALESSIO AZZARI, INC. v. COMMISSIONER                                       179


                                               ment on the basis of P’s failure to stay current on its tax
                                               deposits where R’s abuse of discretion in refusing to consider
                                               subordination of the NFTL to P’s lender’s security interest
                                               contributed to P’s falling behind on its tax deposits and where
                                               R did not allow P the opportunity to become current again.

                                           Barry A. Furman, for petitioner.
                                           James H. Harris, Jr., for respondent.

                                                                                  OPINION

                                        WELLS, Judge: This case is before the Court on respond-
                                      ent’s motion for summary judgment and petitioner’s cross-
                                      motion for summary judgment pursuant to Rule 121. 1 We
                                      must decide whether respondent’s settlement officer abused
                                      his discretion in denying petitioner’s request to subordinate
                                      or withdraw a notice of Federal tax lien (NFTL), or in denying
                                      petitioner’s request for an installment agreement.

                                                                               Background
                                         The record consists of the parties’ pleadings; their respec-
                                      tive cross-motions for summary judgment; various responses,
                                      declarations, and memoranda in support of or opposition to
                                      the motions; and the administrative record from the collec-
                                      tion due process hearing.
                                         Petitioner is a New Jersey corporation with its principal
                                      place of business in Mickleton, New Jersey. Petitioner’s busi-
                                      ness relates to the homebuilding industry.
                                         For the quarters ending September 30 and December 31,
                                      2005, petitioner did not timely file its employer’s quarterly
                                      tax returns. Petitioner timely filed its employer’s quarterly
                                      tax returns for the quarters ending March 31, June 30, Sep-
                                      tember 30, and December 31, 2006. Respondent assessed the
                                      tax shown on the return for each period, but petitioner did
                                      not fully pay its liabilities. Petitioner’s unpaid employment
                                      tax liabilities total $1,100,622 for the quarters ending Sep-
                                      tember 30 and December 31, 2005, and March 31, June 30,
                                      September 30, and December 31, 2006 (collectively, the
                                      periods in issue).
                                         On or about November 6, 2007, respondent mailed peti-
                                      tioner a Final Notice—Notice of Intent to Levy and Notice of
                                        1 Unless otherwise indicated, section references are to the Internal Revenue Code of 1986

                                      (Code), as amended, and Rule references are to the Tax Court Rules of Practice and Procedure.




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                                      180                136 UNITED STATES TAX COURT REPORTS                                         (178)


                                      Your Right to a Hearing (notice of intent to levy), informing
                                      petitioner that respondent intended to levy to collect peti-
                                      tioner’s unpaid employment tax liabilities. Petitioner did not
                                      request a hearing or otherwise dispute the notice of intent to
                                      levy. Respondent subsequently filed an NFTL with respect to
                                      petitioner’s unpaid quarterly employment tax liabilities for
                                      the periods in issue. 2
                                         Respondent notified petitioner on November 27, 2007, of
                                      the NFTL filing. On or about January 2, 2008, petitioner
                                      timely submitted Form 12153, Request for a Collection Due
                                      Process or Equivalent Hearing. Petitioner checked the boxes
                                      on Form 12153 requesting that an installment agreement be
                                      considered as a collection alternative and that the lien be
                                      withdrawn. In the attached explanation, petitioner stated
                                      that the lien made it more difficult for petitioner to satisfy
                                      its tax liabilities by making it impossible to sell its accounts
                                      receivable to a factor.
                                         On January 25, 2008, and before receiving any reply from
                                      respondent, petitioner submitted a written request to
                                      respondent asking that the NFTL be subordinated to a line of
                                      credit from Penn Business Credit, LLC (Penn Business
                                      Credit). Petitioner also asked that respondent agree to a pro-
                                      posed installment agreement attached to the letter. In a foot-
                                      note to petitioner’s request, petitioner explained that there
                                      had been a misunderstanding about the nature of the
                                      financing relationship with Penn Business Credit when it
                                      filed the Form 12153 and that petitioner’s counsel had not
                                      yet obtained the loan documents at that time. After exam-
                                      ining the documents, petitioner’s counsel ascertained that the
                                      financial relationship with Penn Business Credit was
                                      lending, not factoring, and that petitioner should be eligible
                                      to have the NFTL subordinated to the line of credit from Penn
                                      Business Credit. 3 Therefore, in its January 25, 2008, letter,
                                         2 The parties do not agree on the date when respondent filed the NFTL, which we find below

                                      is Nov. 26, 2007. See infra note 5.
                                         3 Factoring would have entailed the discounted sale of petitioner’s accounts receivable to Penn

                                      Business Credit. In a factoring transaction, the financing company purchases the accounts re-
                                      ceivable without recourse and acts as the principal in the debt collection process. See Downes
                                      & Goodman, Dictionary of Finance & Investment Terms (7th ed. 2006). Because factoring in-
                                      volves selling the accounts receivable rather than lending collateralized by the accounts receiv-
                                      able, the financing company is not a creditor and therefore possesses no lien of its own to which
                                      the tax lien may be subordinated. Accordingly, when petitioner believed that the relationship
                                      was factoring, it requested that the lien be withdrawn; but once it realized that the relationship
                                      was lending involving Penn Business Credit as a creditor, petitioner changed its request to ask
                                      that the lien be subordinated.




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                                      petitioner replaced its request in its Form 12153 that
                                      respondent withdraw the NFTL with a request that
                                      respondent subordinate the NFTL to Penn Business Credit’s
                                      security interest.
                                         In the January 25, 2008, letter, petitioner explained that
                                      it had fallen behind on its employment tax payments during
                                      the periods in issue, through the end of 2006, because of
                                      slowing demand in the market for new home construction
                                      and because many of petitioner’s major customers had
                                      become unable to timely pay their invoices or had entirely
                                      defaulted on their obligations. Petitioner also explained that
                                      the situation left it in a ‘‘cash crisis’’ without available funds
                                      to both pay its employment taxes and have the cash nec-
                                      essary to operate its business.
                                         During January 2007, as part of its effort to address the
                                      cash crisis, petitioner had entered into a financing agreement
                                      with Penn Business Credit (financing agreement). Under the
                                      terms of the financing agreement, Penn Business Credit
                                      extended credit to petitioner equal to the lesser of 50 percent
                                      of its qualifying accounts receivable 4 or $1 million. On Feb-
                                      ruary 2, 2007, Penn Business Credit filed with the State of
                                      New Jersey a financing statement to record its security
                                      interest under the financing agreement. The financing state-
                                      ment covered, among other things, ‘‘accounts’’, ‘‘accounts
                                      receivable’’, and ‘‘all other rights to the payment of money
                                      whether or not yet earned, for services rendered or goods
                                      sold, consigned, leased, or furnished’’ by petitioner.
                                         In its January 25, 2008, request, petitioner stated that the
                                      financing agreement with Penn Business Credit had enabled
                                      petitioner to begin paying its employment taxes even though
                                      its own customers continued to lag behind in their payments.
                                      Without the financing from Penn Business Credit, petitioner
                                      predicted that it would be unlikely to have sufficient
                                      cashflow to satisfy the terms of its proposed installment
                                      agreement. To support its contention, petitioner attached two
                                      cashflow projections prepared by its accountant.
                                         Petitioner also informed respondent in its January 25,
                                      2008, letter that Penn Business Credit had refused to make
                                      any loans to petitioner since learning of the NFTL. However,
                                        4 The financing agreement defines which accounts receivable qualify as part of the borrowing

                                      base. Considerations include the solvency of the debtors, the finality of the sale, the terms of
                                      the account, and other factors that might affect the collectibility of the account.




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                                      182                136 UNITED STATES TAX COURT REPORTS                                         (178)


                                      petitioner asserted that Penn Business Credit would resume
                                      making loans to petitioner under its financing agreement if
                                      respondent would subordinate his lien to Penn Business
                                      Credit’s security interest. Petitioner attached documentation
                                      from Penn Business Credit affirming that the lender would,
                                      indeed, resume making loans to petitioner if respondent
                                      subordinated the NFTL. In a footnote at the end of the letter,
                                      petitioner’s counsel wrote:
                                      As a protective measure, because the need for subordination at this time
                                      is critical, the undersigned intends to send on the behalf of * * * [peti-
                                      tioner] a letter to * * * [respondent’s] District Director applying for a Cer-
                                      tificate of Subordination of Federal Tax Lien. Such letter is intended to
                                      complement and not supersede this letter. [Emphasis added.]

                                         For almost 4 months, respondent’s office did not reply to
                                      petitioner’s request. On May 12, 2008, respondent mailed to
                                      petitioner’s counsel a letter informing him that the case had
                                      been forwarded to respondent’s Philadelphia Office of
                                      Appeals. On May 20, 2008, respondent’s Appeals Office con-
                                      firmed its receipt of petitioner’s request for a collection due
                                      process hearing and scheduled a telephone conference at 11
                                      a.m. on June 17, 2008. On June 12, 2008, petitioner’s counsel
                                      contacted respondent’s settlement officer Darryl K. Lee (Mr.
                                      Lee) and requested a face-to-face conference hearing in
                                      respondent’s Philadelphia Office of Appeals and a minimum
                                      1-week extension to prepare documents requested by Mr.
                                      Lee.
                                         Petitioner complied with Mr. Lee’s document requests and
                                      also submitted a revised collection alternative with two
                                      cashflow projections, one with the accounts receivable
                                      financing from Penn Business Credit and one without. Peti-
                                      tioner explained that it had experienced a greater loss in rev-
                                      enue and higher fuel costs than anticipated and stated that
                                      it would be unable to satisfy the terms of its original pro-
                                      posed installment agreement.
                                         Petitioner’s counsel met with Mr. Lee in person on June
                                      26, 2008. At the meeting, petitioner’s counsel again
                                      requested that the lien be subordinated to Penn Business
                                      Credit’s security interest. Mr. Lee told petitioner that the
                                      lien could not be subordinated because it did not have pri-
                                      ority over Penn Business Credit’s security interest since the
                                      NFTL had been filed later than the security agreement with




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                                      (178)               ALESSIO AZZARI, INC. v. COMMISSIONER                                       183


                                      Penn Business Credit. Mr. Lee suggested that the lien might
                                      be withdrawn if petitioner would pay $300,000 immediately
                                      and enter into an installment agreement to pay off the bal-
                                      ance of the liability within 10 years. At the time, Mr. Lee
                                      also warned that petitioner would have to stay current with
                                      its deposits for its Federal employment tax liabilities if it
                                      wanted to be eligible for an installment agreement.
                                         Petitioner fully paid its employment taxes throughout 2007
                                      and the first half of 2008 but began to fall behind on its
                                      deposits during the third quarter of 2008. By September 22,
                                      2008, petitioner had not made any Federal tax deposits for
                                      its third quarter employment taxes, and Mr. Lee called peti-
                                      tioner’s counsel to inform him that if these deposits were not
                                      made, petitioner would not be eligible to proceed with the
                                      installment agreement. Mr. Lee also stated his belief that
                                      petitioner’s proposed installment agreement was unrealistic
                                      given the current state of petitioner’s business and the
                                      housing market.
                                         After conferring with petitioner, petitioner’s counsel con-
                                      firmed that petitioner had not made any deposits for employ-
                                      ment taxes during the period ending September 30, 2008. In
                                      a letter to Mr. Lee dated September 26, 2008, petitioner’s
                                      counsel explained that the housing crisis had dramatically
                                      worsened during the third quarter of 2008. However, peti-
                                      tioner contested Mr. Lee’s assertion that it would be unable
                                      to meet its obligations under the installment agreement,
                                      explaining that it had recently taken steps to cut its costs
                                      and diversify its business. Since July 1, 2008, petitioner had
                                      laid off 45 employees, more than half of its workforce, and it
                                      had recently secured 10 contracts outside the homebuilding
                                      industry as well as a large housing contract. In the letter,
                                      petitioner again contended that it had been ‘‘severely hurt’’
                                      by its inability to borrow against accounts receivable since
                                      the filing of the NFTL. Petitioner also stated that it ‘‘is certain
                                      that it will make the late deposits on or before September 30,
                                      2008 and will keep current.’’
                                         On September 29, 2008, upon receipt of petitioner’s letter
                                      dated September 26, 2008, Mr. Lee called petitioner’s counsel
                                      and told him that even if petitioner made its deposits by Sep-
                                      tember 30, 2008, penalties would be assessed and he would
                                      not consider an installment agreement under those cir-
                                      cumstances. On October 9, 2008, respondent issued peti-




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                                      184                136 UNITED STATES TAX COURT REPORTS                                         (178)


                                      tioner a Notice of Determination Concerning Collection
                                      Action(s) Under Section 6320 and/or 6330 (the notice of
                                      determination). The notice of determination explained that
                                      petitioner’s request to have the lien withdrawn was being
                                      denied because respondent’s Appeals Office had determined
                                      on the basis of the amount due and petitioner’s compliance
                                      record that withdrawal would not facilitate collection. The
                                      Appeals Office rejected petitioner’s proposed installment
                                      agreement because petitioner had not remained current with
                                      its Federal tax deposits for the quarter ending September 30,
                                      2008. The notice of determination did not address petitioner’s
                                      request to subordinate the NFTL.

                                                                                Discussion
                                         Rule 121(a) allows a party to move ‘‘for a summary adju-
                                      dication in the moving party’s favor upon all or any part of
                                      the legal issues in controversy.’’ Rule 121(b) directs that a
                                      decision on such a motion shall be rendered ‘‘if the pleadings,
                                      answers to interrogatories, depositions, admissions, and any
                                      other acceptable materials, together with the affidavits, if
                                      any, show that there is no genuine issue as to any material
                                      fact and that a decision may be rendered as a matter of law.’’
                                      The moving party bears the burden of demonstrating that no
                                      genuine issue of material fact exists and that the moving
                                      party is entitled to judgment as a matter of law. Sundstrand
                                      Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d
                                      965 (7th Cir. 1994). Facts are viewed in the light most favor-
                                      able to the nonmoving party. Id.
                                         Where the underlying tax liability is not in issue, we
                                      review the determination of the Appeals Office for abuse of
                                      discretion. See Sego v. Commissioner, 114 T.C. 604, 610
                                      (2000). In reviewing for abuse of discretion, we review the
                                      reasoning underlying the settlement officer’s determination
                                      to decide whether it was arbitrary, capricious, or without
                                      sound basis in fact or law. See Murphy v. Commissioner, 125
                                      T.C. 301, 308 (2005), affd. 469 F.3d 27 (1st Cir. 2006). Peti-
                                      tioner does not dispute the underlying liabilities. Con-
                                      sequently, we review the determination of the Appeals Office
                                      for abuse of discretion.




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                                      (178)               ALESSIO AZZARI, INC. v. COMMISSIONER                                       185


                                      I. Whether Respondent’s Appeals Office Abused Its Discretion
                                         by Denying Petitioner’s Request To Subordinate or
                                         Withdraw the NFTL
                                         Petitioner contends that the Appeals Office abused its
                                      discretion when it refused to consider the subordination of
                                      the NFTL to Penn Business Credit’s security interest.
                                         Section 6325(d)(2) allows the Commissioner to issue a cer-
                                      tificate of subordination to a Federal tax lien if:
                                      the Secretary believes that the amount realizable by the United States
                                      from the property to which the certificate relates, or from any other prop-
                                      erty subject to the lien, will ultimately be increased by reason of the
                                      issuance of such certificate and that the ultimate collection of the tax
                                      liability will be facilitated by such subordination * * *

                                      Internal Revenue Service (IRS) guidelines instruct:
                                      The Service must exercise good judgment in weighing the risks and
                                      deciding whether to subordinate the federal tax lien. The Service’s judg-
                                      ment is similar to the decision that an ordinarily prudent business person
                                      would make in deciding whether to subordinate his/her rights in a debtor’s
                                      property in order to secure additional long run benefits. [5 Collecting
                                      Process, Internal Revenue Manual (IRM), pt. 5.17.2.8.6(4) (Dec. 14, 2007).]

                                      In a collection due process hearing in which the taxpayer has
                                      requested that the Federal tax lien be subordinated, it is the
                                      task of the IRS Appeals Office to determine whether subordi-
                                      nation will ultimately facilitate collection of the tax liability.
                                         Mr. Lee did not reach the question of whether subordi-
                                      nating the Federal tax lien would facilitate collection because
                                      he determined that the Federal tax lien was already junior
                                      to the security interest held by Penn Business Credit. In
                                      determining the order of priority, Mr. Lee simply compared
                                      the dates on which the financing statements had been filed.
                                      Because Penn Business Credit’s financing statement had
                                      been filed on February 2, 2007, and the NFTL had not been
                                      filed until November 26, 2007, 5 Mr. Lee determined that
                                      Penn Business Credit already had a priority interest in peti-
                                      tioner’s accounts receivable and that it was not possible to
                                      subordinate the NFTL. Petitioner contends that Mr. Lee’s
                                        5 The NFTL shows that it was prepared and signed on Nov. 15, 2007, and petitioner contends

                                      that it was filed on that date; but respondent denies that was the date it was filed. However,
                                      respondent does not offer an alternative date for the filing. New Jersey State records provided
                                      by petitioner and included in the administrative record show that the NFTL was filed on Nov.
                                      26, 2007, and we therefore find Nov. 26, 2007, as the date of filing of the NFTL.




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                                      186                136 UNITED STATES TAX COURT REPORTS                                         (178)


                                      determination was an error of law 6 and that the Federal tax
                                      lien does have priority over Penn Business Credit’s security
                                      interest in after-acquired accounts receivable.
                                         In a priority dispute involving a Federal tax lien, the
                                      Supreme Court has held that questions of whether a prop-
                                      erty interest exists and the nature of that interest are State
                                      law issues, but Federal law governs the question of priority
                                      between conflicting interests. Aquilino v. United States, 363
                                      U.S. 509, 513–514 (1960). Before the Federal Tax Lien Act
                                      of 1966, Pub. L. 89–719, 80 Stat. 1125, the Code did not con-
                                      tain any rules for resolving priority contests between Federal
                                      tax liens and liens arising under State law. United States v.
                                      Kimbell Foods, Inc., 440 U.S. 715, 720 n.6 (1979). Therefore,
                                      before 1966 the Supreme Court determined the relative pri-
                                      ority of a rival lien as against a Federal tax lien by applying
                                      the common law principle of ‘‘ ‘first in time is first in right’ ’’.
                                      Bremen Bank & Trust Co. v. United States, 131 F.3d 1259,
                                      1263 (8th Cir. 1997) (quoting State Bank of Fraser v. United
                                      States, 861 F.2d 954, 963 (6th Cir. 1988)); see, e.g., United
                                      States v. City of New Britain, 347 U.S. 81, 85 (1954). A com-
                                      peting lien was considered in existence for ‘‘first in time’’ pur-
                                      poses only when it had been perfected; that is, when ‘‘the
                                      identity of the lienor, the property subject to the lien, and the
                                      amount of the lien are established.’’ United States v. City of
                                      New Britain, supra at 84. The latter rule is known as the
                                      ‘‘choateness’’ doctrine. United States v. Kimbell Foods, Inc.,
                                      supra at 721 n.8.
                                         The ‘‘first in time’’ and choateness tests were modified by
                                      the Federal Tax Lien Act of 1966, which ‘‘recognized the pri-
                                      ority of many state claims over federal tax liens.’’ United
                                      States v. Kimbell Foods, Inc., supra at 738. Congress enacted
                                      the Federal Tax Lien Act of 1966 to ‘‘ ‘[improve] the status
                                      of private secured creditors’ and prevent impairment of
                                      commercial financing by ‘[modernizing] . . . the relationship
                                      of Federal tax liens to the interests of other creditors.’ ’’ Id.
                                      (quoting S. Rept. 1708, 89th Cong., 2d Sess. 1–2 (1966)
                                      (alterations in original)).
                                         Among other changes, the legislation modified the priority
                                      rule for commercial transaction financing agreements by
                                       6 An error of law by the Appeals Office may be an abuse of discretion. See Swanson v. Com-

                                      missioner, 121 T.C. 111, 119 (2003).




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                                      adding a 45-day safe-harbor period, codified at section
                                      6323(c). 7 Bremen Bank & Trust Co. v. United States, supra
                                      at 1263. Under the ‘‘first in time’’ and choateness tests, a
                                      creditor would have priority over the Federal tax lien only if
                                      its interest was filed first and was choate at the time the
                                      NFTL was filed. United States v. Equitable Life Assurance
                                      Socy., 384 U.S. 323, 327–328 (1966). In relevant part, section
                                      6323(c) modifies the result under the first in time and
                                      choateness tests by providing that a Federal tax lien will not
                                      have priority against a ‘‘security interest’’ in ‘‘qualified prop-
                                      erty’’ arising from a loan made to a taxpayer within 45 days
                                      after the NFTL filing and before the lender acquires actual
                                      knowledge of the NFTL. The ‘‘qualified property’’ must be cov-
                                      ered by a written agreement constituting a ‘‘commercial
                                      transactions financing agreement’’ that was entered into
                                      before the NFTL filing date. Under the statute, ‘‘qualified
                                      property’’ is limited to ‘‘commercial financing security’’
                                      acquired by the taxpayer within 45 days of the NFTL filing,
                                           7 The   following is the full text of the relevant portion of sec. 6323:
                                           SEC. 6323(c). PROTECTION      FOR   CERTAIN COMMERCIAL TRANSACTIONS FINANCING AGREEMENTS,
                                      ETC.
                                             (1) IN GENERAL.—To the extent provided in this subsection, even though notice of a lien im-
                                           posed by section 6321 has been filed, such lien shall not be valid with respect to a security
                                           interest which came into existence after tax lien filing but which—
                                                (A) is in qualified property covered by the terms of a written agreement entered into be-
                                             fore tax lien filing and constituting—
                                                  (i) a commercial transactions financing agreement,
                                                  (ii) a real property construction or improvement financing agreement, or
                                                  (iii) an obligatory disbursement agreement, and
                                                (B) is protected under local law against a judgment lien arising, as of the time of tax lien
                                             filing, out of an unsecured obligation.
                                             (2) COMMERCIAL TRANSACTIONS FINANCING AGREEMENT.—For purposes of this subsection—
                                                (A) DEFINITION.—The term ‘‘commercial transactions financing agreement’’ means an
                                             agreement (entered into by a person in the course of his trade or business)—
                                                  (i) to make loans to the taxpayer to be secured by commercial financing security ac-
                                                quired by the taxpayer in the ordinary course of his trade or business, or
                                                  (ii) to purchase commercial financing security (other than inventory) acquired by the
                                                taxpayer in the ordinary course of his trade or business;
                                             but such an agreement shall be treated as coming within the term only to the extent that
                                             such loan or purchase is 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.
                                                (B) LIMITATION ON QUALIFIED PROPERTY.—The term ‘‘qualified property’’, when used with
                                             respect to a commercial transactions financing agreement, includes only commercial financ-
                                             ing security acquired by the taxpayer before the 46th day after the date of tax lien filing.
                                                (C) COMMERCIAL FINANCING SECURITY DEFINED.—The term ‘‘commercial financing secu-
                                             rity’’ means (i) paper of a kind ordinarily arising in commercial transactions, (ii) accounts
                                             receivable, (iii) mortgages on real property, and (iv) inventory.
                                                (D) PURCHASER TREATED AS ACQUIRING SECURITY INTEREST.—A person who satisfies sub-
                                             paragraph (A) by reason of clause (ii) thereof shall be treated as having acquired a security
                                             interest in commercial financing security.




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                                      and ‘‘commercial financing security’’ includes accounts receiv-
                                      able. Sec. 6323(c)(2)(B), (C)(ii). The regulations define an
                                      ‘‘account receivable’’ as ‘‘any right to payment for goods sold
                                      or leased or for services rendered which is not evidenced by
                                      an instrument or chattel paper.’’ Sec. 301.6323(c)–1(c)(2)(ii),
                                      Proced. & Admin. Regs.
                                         A ‘‘security interest’’ is defined by section 6323(h)(1), which
                                      provides:
                                      SECURITY INTEREST.—The term ‘‘security interest’’ means any interest in
                                      property acquired by contract for the purpose of securing payment or
                                      performance of an obligation or indemnifying against loss or liability. A
                                      security interest exists at any time (A) if, at such time, the property is in
                                      existence and the interest has become protected under local law against a
                                      subsequent judgment lien arising out of an unsecured obligation, and (B)
                                      to the extent that, at such time, the holder has parted with money or
                                      money’s worth.

                                      The regulations provide that, for purposes of the statute, an
                                      account receivable is ‘‘in existence’’ when and to the extent
                                      that ‘‘a right to payment is earned by performance.’’ Sec.
                                      301.6323(h)–1(a)(1), Proced. & Admin. Regs.
                                         Courts construing section 6323(c) have repeatedly held
                                      that if an account receivable is acquired more than 45 days
                                      after the NFTL is filed, the lender’s security interest in the
                                      account receivable will not have priority over the tax lien
                                      even though the agreement conferring the security interest
                                      antedates the NFTL filing. See, e.g., Am. Inv. Fin. v. United
                                      States, 476 F.3d 810 (10th Cir. 2006); Shawnee State Bank
                                      v. United States, 735 F.2d 308 (8th Cir. 1984); Texas Oil &
                                      Gas Corp. v. United States, 466 F.2d 1040 (5th Cir. 1972);
                                      Penetryn Intl., Inc. v. United States, 391 F. Supp. 729 (D.N.J.
                                      1975); Distrib. Prods., Inc. v. Albert Enourato & Co., 34 AFTR
                                      2d 5690, 74–2 USTC par. 9697 (D.N.J. 1974); Contl. Fin., Inc.
                                      v. Cambridge Lee Metal Co., 265 A.2d 536 (N.J. 1970).
                                         The manner in which section 6323(c) assigns priority with
                                      regard to accounts receivable is illustrated by examples in
                                      the regulations:
                                        Example (1). (i) On June 1, 1970, a tax is assessed against M, a tool
                                      manufacturer, with respect to his delinquent tax liability. On June 15,
                                      1970, M enters into a written financing agreement with X, a bank. The
                                      agreement provides that, in consideration of such sums as X may advance
                                      to M, X is to have a security interest in all of M’s presently owned and
                                      subsequently acquired commercial paper, accounts receivable, and inven-




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                                      tory (including inventory in the manufacturing stages and raw materials).
                                      On July 6, 1970, notice of the tax lien is filed in accordance with §
                                      301.6323(f)–1. On August 3, 1970, without actual notice or knowledge of
                                      the tax lien filing, X advances $10,000 to M. On August 5, 1970, M
                                      acquires additional inventory through the purchase of raw materials. On
                                      August 20, 1970, M has accounts receivable, arising from the sale of tools,
                                      amounting to $5,000. Under local law, X’s security interest arising by rea-
                                      son of the $10,000 advance on August 3, 1970, has priority, with respect
                                      to the raw materials and accounts receivable, over a judgment lien against
                                      M arising July 6, 1970 (the date of the tax lien filing) out of an unsecured
                                      obligation.
                                        (ii) Because the $10,000 advance was made before the 46th day after the
                                      tax lien filing, and the accounts receivable in the amount of $5,000 and
                                      the raw materials were acquired by M before such 46th day, X’s $10,000
                                      security interest in the accounts receivable and the inventory has priority
                                      over the tax lien. The priority of X’s security interest also extends to the
                                      proceeds, received on or after the 46th day after the tax lien filing, from
                                      the liquidation of the accounts receivable and inventory held by M on
                                      August 20, 1970, if X has a continuously perfected security interest in
                                      identifiable proceeds under local law. However, the priority of X’s security
                                      interest will not extend to other property acquired with such proceeds.
                                        Example (2). Assume the same facts as in example 1 except that on July
                                      15, 1970, X has actual knowledge of the tax lien filing. Because an agree-
                                      ment does not qualify as a commercial transactions financing agreement
                                      when a disbursement is made after tax lien filing with actual knowledge
                                      of the filing, X’s security interest will not have priority over the tax lien
                                      with respect to the $10,000 advance made on August 3, 1970.
                                        [Sec. 301.6323(c)–1(f), Proced. & Admin. Regs.]

                                         Petitioner and Penn Business Credit entered into the
                                      financing agreement in which Penn Business Credit agreed
                                      to make loans to petitioner that would be secured by peti-
                                      tioner’s then-existing accounts receivable. The arrangement
                                      under the financing agreement was structured like a
                                      revolving line of credit, allowing petitioner to pay off the loan
                                      or a portion thereof and then take out further loans when
                                      needed. When Penn Business Credit learned of the NFTL
                                      filing, it refused to make any more loans unless and until the
                                      Federal tax lien had been subordinated to Penn Business
                                      Credit’s security interest in petitioner’s accounts receivable
                                      under the financing agreement.
                                         The facts of the instant case are analogous to an example
                                      in the regulations:
                                      E, a manufacturer of electronic equipment, obtains financing from F, a
                                      lending institution, pursuant to a security agreement, with respect to
                                      which a financing statement was duly filed under the Uniform Commercial




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                                      Code on June 1, 1970. On April 15, 1971, F gains actual notice or knowl-
                                      edge that notice of a Federal tax lien had been filed against E on March
                                      31, 1971, and F refuses to make further advances unless its security
                                      interest is assured of priority over the Federal tax lien. Upon examination,
                                      the district director believes that ultimately the amount realizable from E’s
                                      property will be increased and the collection of the tax liability will be
                                      facilitated if the work in process can be completed and the equipment sold.
                                      In this case, the district director may, in his discretion, subordinate the tax
                                      lien to F’s security interest for the further advances required to complete
                                      the work. [Sec. 301.6325–1(d)(2)(ii), Example (3), Proced. & Admin. Regs.;
                                      emphasis added.]

                                      However, in petitioner’s case, even though Mr. Lee had the
                                      discretion, pursuant to the foregoing example, to subordinate
                                      the Government’s tax lien if it would be in the Government’s
                                      interest, Mr. Lee did not even consider subordination because
                                      he erroneously believed the NFTL did not have priority over
                                      petitioner’s accounts receivable.
                                         As a preliminary matter, we note that the property over
                                      which there is a disagreement about priority is accounts
                                      receivable and that Penn Business Credit’s financing agree-
                                      ment gave it a security interest in the property. In analyzing
                                      a priority dispute under the ‘‘first in time’’ and choateness
                                      tests, the Court must first determine what property interest
                                      exists under State law and then determine priority under
                                      Federal law. Aquilino v. United States, 363 U.S. at 512–514.
                                      Under New Jersey law, an ‘‘account’’ is defined as a right to
                                      payment for, among other things, ‘‘property that has been or
                                      is to be sold, leased, licensed, assigned, or otherwise disposed
                                      of, * * * [or] for services rendered or to be rendered’’ that is
                                      not ‘‘evidenced by chattel paper or an instrument’’. N.J. Stat.
                                      Ann. sec. 12A:9–102(a)(2) (West 2004). Penn Business
                                      Credit’s financing statement covers, among other things,
                                      accounts, accounts receivable, and other rights to payments
                                      for services rendered. Neither party contests that the rights
                                      covered by the financing statement are accounts receivable
                                      under both New Jersey law and section 301.6323(c)–
                                      1(c)(2)(ii), Proced. & Admin. Regs.
                                         We proceed to the question of priority in petitioner’s
                                      accounts receivable, which is governed by Federal law. See
                                      Aquilino v. United States, supra at 512–514. It may be
                                      assumed that the accounts receivable on petitioner’s books
                                      before the filing of the NFTL were choate because the
                                      amounts were fixed and ascertainable at that time. If so,




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                                      Penn Business Credit had a priority interest in that prop-
                                      erty. See United States v. Equitable Life Assurance Socy., 384
                                      U.S. at 327–328; Shawnee State Bank v. United States, 735
                                      F.2d at 310–311. However, accounts receivable petitioner had
                                      not yet acquired at the time the NFTL was filed were
                                      inchoate. See Shawnee State Bank v. United States, supra at
                                      310–311; Texas Oil & Gas Corp. v. United States, 466 F.2d
                                      at 1051. To the extent that accounts receivable were acquired
                                      more than 45 days after the NFTL was filed or after Penn
                                      Business Credit had actual knowledge of the NFTL, whichever
                                      was earlier, the Government’s tax lien had priority in such
                                      property. See Shawnee State Bank v. United States, supra at
                                      310–311; Texas Oil & Gas Corp. v. United States, supra at
                                      1051–1052.
                                         Although the Commissioner’s Appeals Office has discretion
                                      under section 6325(d) to determine whether it is in the
                                      Government’s interest to subordinate a Federal tax lien, it
                                      appears that Mr. Lee’s refusal to consider petitioner’s request
                                      to subordinate the lien was based on an error of law. To the
                                      extent it was based upon an error of law, his determination
                                      constitutes an abuse of discretion. See Swanson v. Commis-
                                      sioner, 121 T.C. 111, 119 (2003). Accordingly, we hold that it
                                      was an abuse of discretion for respondent’s settlement officer
                                      to fail to consider petitioner’s request to subordinate the Fed-
                                      eral tax lien on the basis of an erroneous conclusion of law
                                      that the Federal tax lien did not have priority.
                                         Petitioner contends that it requested only that respondent
                                      withdraw the NFTL as an alternative in the event that
                                      respondent determined that it was impossible to subordinate
                                      the Federal tax lien. Because we hold that the Federal tax
                                      lien could have been subordinated and that respondent’s
                                      settlement officer committed an error of law when he deter-
                                      mined that the Federal tax lien could not have been subordi-
                                      nated, we need not consider the question of whether he
                                      abused his discretion by refusing to withdraw the NFTL.
                                      II. Whether Respondent Abused His Discretion by Declining
                                          To Enter Into an Installment Agreement With Petitioner
                                        Respondent contends that because petitioner had fallen
                                      behind on its obligation to make timely deposits of its
                                      employment taxes, it was ineligible for an installment agree-




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                                      192                136 UNITED STATES TAX COURT REPORTS                                         (178)


                                      ment. Respondent urges us to hold that the issue of subordi-
                                      nation of the tax lien is irrelevant because even if the tax
                                      lien had been subordinated, petitioner still would have been
                                      ineligible for a collection alternative because it was not in
                                      compliance with its employment tax deposits. In his briefs
                                      respondent did not even address the relevant law governing
                                      the priority of tax liens, nor did he bother to respond to peti-
                                      tioner’s arguments that Mr. Lee erred in his interpretation
                                      of that law.
                                         Instead, respondent rests his entire argument on a pre-
                                      vious case in which we upheld the Commissioner’s policy of
                                      rejecting collection alternatives when taxpayers have failed
                                      to pay their current taxes. See Giamelli v. Commissioner, 129
                                      T.C. 107, 111 (2007). However, respondent’s reliance on
                                      Giamelli is misplaced. In Giamelli and other previous cases
                                      in which we have upheld the Commissioner’s rejection of
                                      collection alternatives because the taxpayers had failed to
                                      satisfy current tax obligations, the Commissioner had done
                                      nothing to contribute to the taxpayers’ failures to remain cur-
                                      rent with their tax liabilities. In contrast, respondent’s abuse
                                      of discretion contributed to petitioner’s failure to make timely
                                      tax deposits.
                                         After remaining current with its employment tax deposits
                                      for six quarters, petitioner failed to make timely deposits of
                                      its employment taxes during the third quarter of 2008. It
                                      was at that point that respondent issued his notice of deter-
                                      mination rejecting petitioner’s request for an installment
                                      agreement. Petitioner contends that it would have been able
                                      to remain current with its employment tax deposits if it had
                                      been able to borrow against its accounts receivable. However,
                                      because of the NFTL, Penn Business Credit had exercised its
                                      right under the security agreement to refuse to extend fur-
                                      ther loans to petitioner. Petitioner informed respondent of
                                      the importance of the accounts receivable financing in its
                                      January 25, 2008, letter, and it explained that its request to
                                      subordinate the NFTL was urgent. Nevertheless, respondent
                                      did not reply to petitioner for nearly 4 months.
                                         When respondent’s settlement officer, Mr. Lee, met with
                                      petitioner’s counsel on June 26, 2008, Mr. Lee declined to
                                      even consider subordination of the NFTL because of his erro-
                                      neous conclusion that the NFTL did not have priority over
                                      Penn Business Credit’s security interest in petitioner’s




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                                      accounts receivable. At that date, petitioner was still current
                                      on its employment tax deposits. Had petitioner been able to
                                      borrow against its accounts receivable in June or even ear-
                                      lier, it contends that it would have been able to timely make
                                      its deposits for the third quarter of 2008. Accordingly, it
                                      appears that petitioner’s failure to make timely deposits of
                                      employment taxes for the third quarter of 2008 was not inde-
                                      pendent of Mr. Lee’s erroneous determination that it was
                                      impossible to subordinate the NFTL, which we have held was
                                      an abuse of his discretion.
                                         We do not accept respondent’s argument that Mr. Lee’s
                                      decision regarding subordination of the tax lien is irrelevant.
                                      Indeed, accepting respondent’s contention would be tanta-
                                      mount to granting respondent the power to abuse his discre-
                                      tion at will as long as petitioner eventually misses a deposit
                                      on its employment taxes. In situations similar to the instant
                                      case, where petitioner’s business is in a dire position largely
                                      due to industry conditions beyond its control, the Commis-
                                      sioner’s decision not to subordinate an NFTL could exacerbate
                                      taxpayers’ cashflow problems and make it difficult, if not
                                      impossible, for taxpayers to remain current with their tax
                                      deposits while continuing to run their businesses. The
                                      Commissioner could hold off issuing a notice of determination
                                      indefinitely until the taxpayer missed a deposit, and the
                                      Commissioner could then refuse to grant an installment
                                      agreement on the basis of the taxpayer’s failure to remain
                                      current with its tax deposits. Because the taxpayer would
                                      have already fallen behind on current tax liabilities, we
                                      would be unable to meaningfully review the Commissioner’s
                                      decision not to subordinate the NFTL. We find such a scenario
                                      unacceptable.
                                         The Commissioner has discretion to enter into an install-
                                      ment agreement with a taxpayer if he determines ‘‘that such
                                      agreement will facilitate full or partial collection of such
                                      liability.’’ Sec. 6159(a). The IRM advises: ‘‘When taxpayers are
                                      unable to pay a liability in full, an installment agreement
                                      (IA) should be considered.’’ IRM pt. 5.14.1.2(4) (July 12, 2005)
                                      (emphasis added). The IRM also instructs: ‘‘Compliance with
                                      filing, paying estimated taxes, and federal tax deposits must
                                      be current from the date the installment agreement begins.’’
                                      Id. pt. 5.14.1.5.1(19).




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                                         Accordingly, the Commissioner must consider whether the
                                      installment agreement will facilitate collection of the
                                      liability, but he may not authorize an installment agreement
                                      until the taxpayer is current with its Federal tax deposits.
                                      However, nothing in the Code, the regulations, the IRM, or
                                      our decisions requires that the Commissioner deny the tax-
                                      payer’s request for an installment agreement simply because
                                      it is not, at that moment, current with its Federal tax
                                      deposits. The Commissioner could, instead, wait until the
                                      taxpayer is current and then enter into the installment
                                      agreement. Even when an installment agreement is in place
                                      and the taxpayer fails to remain current with its tax liabil-
                                      ities, the Commissioner is not required to terminate the
                                      agreement; rather, he has the discretion to do so. Sec.
                                      301.6159–1(c)(2), Proced. & Admin. Regs.
                                         Mr. Lee would not even consider petitioner’s efforts to
                                      become current on its deposits for the third quarter of 2008.
                                      After receiving a letter from petitioner’s counsel promising
                                      that petitioner would make the late deposits by the end of
                                      the third quarter, Mr. Lee telephoned petitioner’s counsel
                                      and effectively told him that it was too late and that peti-
                                      tioner should not bother because Mr. Lee’s decision was
                                      already made.
                                         Accordingly, we hold that it was an abuse of discretion for
                                      respondent’s settlement officer to refuse to enter into an
                                      installment agreement on the basis of petitioner’s failure to
                                      stay current with its tax deposits where respondent’s abuse
                                      of discretion in refusing to consider subordination of the NFTL
                                      contributed to petitioner’s falling behind on its tax deposits
                                      and where petitioner was not given the opportunity to
                                      become current.
                                         Consequently, we will deny respondent’s motion for sum-
                                      mary judgment, grant petitioner’s motion for summary judg-
                                      ment, and remand this case to respondent’s Appeals Office
                                      for reconsideration of petitioner’s request to subordinate the
                                      NFTL and enter into an installment agreement. 8

                                        8 Some of Mr. Lee’s notes in his case activity log suggest that Mr. Lee’s belief that petitioner’s

                                      proposed installment agreement was unrealistic may have been a factor in his denial of the in-
                                      stallment agreement. On remand, we also direct the Appeals Office to consider Internal Revenue
                                      Manual (IRM) pt. 5.14.1.4(8) (June 1, 2010), which does not contemplate rejecting an install-
                                      ment agreement simply because the Commissioner believes that the installment agreement is
                                      unrealistic given the taxpayer’s financial condition. Insofar as Mr. Lee’s determination to reject
                                      the installment agreement was based in any part on his assessment that petitioner could not




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                                      (178)               ALESSIO AZZARI, INC. v. COMMISSIONER                                       195


                                         In reaching these holdings, we have considered all the par-
                                      ties’ arguments, and, to the extent not addressed herein, we
                                      conclude that they are moot, irrelevant, or without merit.
                                         To reflect the foregoing,
                                                                                 An appropriate order will be issued.

                                                                               f




                                      afford to meet its obligations under the installment agreement, such reasoning does not appear
                                      to be in accord with the IRM. See Lites v. Commissioner, T.C. Memo. 2005–206.




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