New Rock Baptist Church Continues Development of Collection Due Process Law

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Located not too far from the Tax Court’s building in D.C., New Rock Baptist Church and its nursery school provided the setting for an interesting full TC opinion looking at who can bring a Collection Due Process (CDP) case as well as when does the case become moot.  The Court finds that only the real taxpayer can bring a CDP case even if the IRS lists the wrong taxpayer in its notice of federal tax lien and that fixing the lien problem by withdrawing the notice does not end the CDP case for the taxpayer seeking to adjudicate their collection issue.

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It’s not unusual for a church to host a nursery school.  It’s not unusual for the church and the nursery school to exist as two separate entities despite the close relationship they have in sharing a building and often other matters as well.  In this case, the church and the school did have separate identities and separate EINs and even separate addresses.  The nursery school ran into trouble with its payroll taxes.  The IRS eventually assessed a decent sized liability of over $400,000 against the nursery school and decided that it needed to file a notice of federal tax lien in order to protect its interest.

Unfortunately, when the IRS filed the notice of federal tax lien, it did not file it in the name of the New Rock Baptist Church Child Development Center but rather filed it in the name of New Rock Baptist Church.  Although the NFTL correctly identified the address and EIN of the nursery school, the church did not appreciate having a NFTL filed in its name rather than the name of the nursery school and took the opportunity to join in filing a CDP request.  The person receiving the CDP notice at the nursery school seems to have shared the notice with the church, and one might even imagine some discussions occurring regarding the nature and the existence of the NFTL, because the nursery school also filed a CDP request.

The CDP requests of the church and the school were consolidated in the hands of one settlement officer.  I base my comments on the opinion and not the underlying documents.  Based on the opinion, it appears that the CDP requests filed by both entities focused on obtaining an installment agreement for the nursery school instead of focusing on the separate issue of the correctness of the NFTL.  The SO, perhaps unaware of the incorrectness of the NFTL, rejected the proposed installment agreement stating “no collection alternative can be approved.”  The Court notes that the SO did not make the basis for rejection clear.  I would speculate that the basis was a failure of the nursery school to keep current with its filing requirements or payment requirements.  Surprisingly, although perhaps attributable to neither party raising the issue, the SO further determined that “the NFTL was correctly and properly filed.”  Even if neither the church nor the nursery school mentioned the incorrect name on the NFTL, the existence of CDP requests from both entities should have served as at least a mild clue that something was amiss.

On June 20, 2014, the IRS issued a notice of determination.  The Court’s choice of words makes me think that only one notice of determination was issued.  It was sent, like the NFTL to the correct address, with the correct EIN and the wrong taxpayer name.  The nursery school and the church jointly petitioned the Tax Court from the notice of determination requesting that the IRS should withdraw the NFTL.  Chief Counsel’s office requested a remand of the case to Appeals for it to: 1) give further consideration into withdrawing the NFTL, and 2) provide greater explanation regarding why it rejected the IA.  The Court granted the motion of the IRS for a remand.

On remand the IRS assigned a new SO.  The new SO, perhaps alerted to the issue by the Chief Counsel attorney, determined that the NFTL was ambiguous (this is the Court’s word; it is possible to conclude that the NFTL was simply wrong or that it violated disclosure laws by wrongfully naming a taxpayer with no liability and telling the world that it had a whopping liability) and that the NFTL should be withdrawn.  The new SO determined that the nursery school did not qualify for an IA because it was not in compliance with all return filing requirements.  Despite having identified the problem with the lien, the new SO sent the supplemental notice of determination to the correct address for the nursery school, with the correct EIN and with the name of the church rather than the nursery school.  Some things die hard.  Once the IRS has used the wrong name, getting it to switch and use the right name can require an act of God, or at least a Tax Court judge, and here again the IRS misidentifies the taxpayer even after recognizing the problem of misidentification.

Before finishing the discussion of the case, I want to pause here to make sure everyone understands that the withdrawal of the NFTL does not impact the federal tax lien itself which continues to exist and continues to attach to all property and rights to property owned by the nursery school.  Withdrawal of a NFTL simply removes the notice of the lien but not the lien itself.  Withdrawing the notice has an impact on the security of the lien and its priority vis a vis other creditors, but not the validity of the underlying lien or the liability secured by the lien.  Do not get sucked into thinking that withdrawal of the NFTL fixes the nursery school’s tax problems.  Withdrawal does, however, remove from the public record the erroneous statement that the church has a tax liability.  The church may still need more statements from the IRS to the effect that it never owed any federal taxes giving rise to the NFTL because creditors will, or may, know that the withdrawal does not signal the church no longer owes.

So, back in the Tax Court the IRS moves to dismiss the case as moot since the new SO fixed the problem by withdrawing the NFTL.  The nursery school, however, says not so fast because it still wants to have a hearing on the liabilities it owes.  The Tax Court determines that it has jurisdiction over the CDP case involving the nursery school basically finding that even though the NFTL did not mention the nursery school by its precise name it was close enough to trigger CDP rights; however, with respect to the church the Court finds that it was not a proper party.  It says no valid notice of determination was issued to the church despite the fact that the notice of determination listed the name of the church and not the nursery school.  Maybe this works in an opinion written when the NFTL has already been withdrawn; however, I am troubled that an entity clearly listed on the NFTL and on the notice of determination is denied the opportunity to seek relief from the impact of the NFTL.

Perhaps the Court thinks that the 7432 provisions regarding liens provide sufficient protection but it does not spell out why it thinks an individual or entity listed on an NFTL and listed in the notice of determination as the taxpayer against whom the IRS is taking collection action giving right to a CDP hearing has no right to seek redress through such a hearing.  It says that no valid federal tax lien existed with respect to the church.  True, but CDP protection does not depend on a valid federal tax lien it depends on the filing of an NFTL.  Determining the validity of the NFTL is an integral part of the CDP process.  A taxpayer listed in an NFTL should be able to use the CDP process to contest the validity of the NFTL and the underlying lien.  The Court does not explain why the lack of an underlying federal tax lien has an impact on the jurisdiction of the Court in a CDP case.  Does this mean that if the Court should reach the conclusion in another case that no lien exists, say because the assessment is invalid, it must dismiss the case rather than grant relief.  I cannot follow the logic here.

The Court also says no valid notice of determination was issued.  I have a similar problem.  A notice of determination was issued in the name of the church.  Yes, the IRS made a mistake in sending the notice of determination (as well as the notice of supplemental determination) in the name of the church but that should not prevent the church from receiving relief.  Maybe it would be useful for a taxpayer who wrongfully gets listed on an NFTL and who receives a notice of determination to have a court opinion that says it was wrong so it can show its creditors that it was wrong.

The Court may reach its conclusion because the notice of determination uses the separate address of the nursery school to say that the church did not receive this notice.  It does not make that explicit and the link between the organizations still creates a problem for the church that CDP might resolve.

In the end, after determining that it has jurisdiction to consider the CDP relief requested by the nursery school, the Court finds that the withdrawal of the NFTL did not moot the case.  Even though it has jurisdiction and even though issues regarding liability still exist, the nursery school has problems that prevent it from getting any relief through CDP.  It raised some issues it wanted the Court to address after making its CDP request, and the Court says those issues are not properly before it.  Because the nursery school was not in compliance with its filing requirements at the time of the Appeals determination, the Court sustains the Appeals determination that it is not eligible for an IA.  The nursery school alleges that it is now in filing compliance, and the Court responds correctly that losing a CDP case does not prevent it from entering into an IA at the conclusion of the case.  That’s the nice thing about CDP.  It’s just a skirmish on the road to collection and not the ending point.

 

 

Comments

  1. frank D says:

    Just an odd set of circumstances, but I do understand the TD’s determinations. BUT what I don’t understand would be the SO actions. Maybe the lien withdrawal was the most expedious manner in resolving the incorrect lien issue, but I don’t believe so. I recently had a client case in which he, as an indivudual, was incorrectly listed as a manager of a LLC on the NFTL- which is totally inappropriate. I contacted the R/O who, within a week’s time, had corrected liens filed with the County Recorder’s office removing his name from the lien. From my time with the IRS, this was SOP- correct the lien by removing or clarifying the entity name with another lien that references the prior NFTL by filing date and recorder number. In this manner the IRS maintains its established lien priority which was lost in this particular case! The church here also had (and now has) a Certificate of Non-attachment at its disposal, which would also clarify that the earlier lien wasn’t applicable to that entity. Work is created for the likes of us when the NFTL is filed incorrectly, but knowing how to naviagate these issues can save our client’s time and money!

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