## Facts

- Rice Investment Company loaned Handy Stop, Inc. $67,583.20 in October 1973 and took a security interest in all inventory then owned or thereafter acquired.
- Rice perfected by filing a financing statement with the Texas Secretary of State on October 29, 1973; Handy Stop later owed Rice $46,317.54.
- Handy Stop incurred federal employment tax liabilities for the 3rd and 4th quarters of 1973 and the 1st quarter of 1974; the IRS assessed taxes in March 1974.
- The IRS filed notices of federal tax liens on April 26, 1974 and August 5, 1974.
- On August 18, 1974, the IRS levied on Handy Stop’s inventory and sold it for total proceeds of $4,250.
- Rice admitted it could not determine when the seized inventory items were acquired and that none of the inventory on hand in October 1973 was among the goods seized; the levy reached only after-acquired inventory.

## Issues

1. Whether a perfected security interest in after-acquired inventory, created and perfected before notice of federal tax liens, has priority over those liens as to inventory acquired after assessment but before filing of the lien notices.
2. Whether the creditor proved its interest qualified as a “security interest” under 26 U.S.C. § 6323(h)(1) by showing the interest, as to the specific seized inventory, was protected under Texas law against a subsequent judgment lien.

## Decision

- The Fifth Circuit reversed the district court’s summary judgment for Rice.
- The court held Rice failed to carry its burden to show that, for the particular inventory seized, its interest was protected under local law against a subsequent judgment lien at the relevant times as required by § 6323(h)(1).
- Because Rice could not show when the debtor acquired the seized items, it could not establish priority over the federal tax liens for that collateral.
- The federal tax liens had priority, and the IRS levy and sale were not unlawful as against Rice’s claim to the proceeds.

## Legal Principles

- A federal tax lien arises at assessment and attaches to all of the taxpayer’s property and rights to property; priority against protected competing interests is governed by 26 U.S.C. § 6323.
- To defeat a federal tax lien under § 6323, a claimant must prove its interest is a “security interest” as defined in § 6323(h)(1), including that it is protected under local law against a subsequent judgment lien and is perfected by filing, possession, or similar steps.
- For after-acquired collateral, it is not sufficient that the security agreement and financing statement broadly cover after-acquired property; the claimant must prove, as to the specific disputed property, when the debtor acquired it and that the interest was locally protected against a hypothetical judgment lien at the relevant times.
- The secured creditor bears the burden of proof on the requirements for priority under § 6323; failure of proof defeats the claimed priority.

## Conclusion

The court held that a secured creditor claiming priority over federal tax liens in after-acquired inventory must prove, item by item, that its interest satisfied § 6323(h)(1)’s local-law protection requirement; because Rice could not establish when the seized inventory was acquired, the federal tax liens prevailed.


Rice Inv. Co. v. United States, 625 F.2d 565 (5th Cir. 1980)