IRS Did Not Abuse Its Discretion in Rejecting Nonprofit's Installment Agreement Request

(Parker Tax Publishing June 2017)

The Tax Court held that an IRS settlement officer did not abuse his discretion in rejecting the installment agreement request of a nonprofit corporation that was delinquent in filing its Forms 990, Return of Organization Exempt from Income Tax, for the years at issue. The fact that the nonprofit had since filed late Forms 990 did not mean that the IRS had abused its discretion, because the filings were delinquent at the time of the request. First Rock Baptist Church Child Development Center v. Comm'r, 148 T.C. No. 17 (2017).

Background

First Rock Baptist Church Child Development Center is a separately incorporated affiliate of First Rock Baptist Church located in Washington, D.C. The Center and the Church had separate addresses and taxpayer identification numbers (TINs). The Center fell behind on its employment tax liabilities for ten calendar quarters during 2007-2010. It filed Forms 941, Employer's Quarterly Federal Tax Return, reporting payroll taxes due for these periods, but did not include any payments. As of November 2012, the assessed liabilities, including penalties and interest, totaled approximately $438,000. The IRS sent Forms 4340, Certificate of Assessments, Payments, and Other Specified Matters, confirming that these assessments were made against the taxpayer with the Center's TIN.

The IRS sent a Notice of Federal Tax Lien (NFTL) Filing and Your Right to a Hearing to the Center at its correct address in November 2012. The notice showed the Center's TIN and described the NFTL as having been filed to collect the Center's employment tax liabilities of approximately $438,000 for the ten calendar quarters ending June 30, 2010. However, the notice was addressed to First Rock Baptist Church. The notice also included a Form 668, Notice of Federal Tax Lien, which showed the notice as having been filed against a taxpayer located at the Center's address with the Center's TIN. It also showed the notice as having been filed to collect the Center's employment tax liabilities. The Form 668 also showed the name of the taxpayer as First Rock Baptist Church.

The Center and the Church requested a collection due process (CDP) hearing, and the case was assigned to a settlement officer (SO). In October 2013, the Center submitted an installment agreement request under its own TIN offering to make monthly payments of approximately $2,200. The SO determined that there was no alternative to collection, although the basis for her decision was unclear. The SO also determined that the NFTL was correctly and properly filed. In June 2014, the IRS issued a notice of determination sustaining the collection action by certified mail to the Center's address. The notice showed the Center's TIN but again was addressed to First Rock Baptist Church.

The Center and the Church filed a joint Tax Court petition in July 2014 contending that the NFTL should be withdrawn. In October 2015, the IRS moved to remand the case to its Appeals Office in order to further consider whether the NFTL should be withdrawn and to clarify why the SO rejected the Center's proposed installment agreement.

The case was then assigned to a new SO, who decided that the NFTL documentation was ambiguous and that the lien should be withdrawn. However, he determined that the Center's installment agreement proposal could not be granted because the Center was not in compliance with its return filing requirements. He noted that the Center was organized in 2006 but had not filed a Form 990, Return of Organization Exempt from Income Tax, for tax years 2006-2013.

The IRS issued a supplemental notice of determination in January 2016 which stated that the NFTL was being withdrawn and that the Center's installment request had been denied. This notice was mailed to the Center at its address and correctly showed the Center's TIN. Again, it was addressed to First Rock Baptist Church.

Taxpayer and IRS Arguments

In December 2016, the IRS filed a motion to dismiss on grounds of mootness. According to the IRS, the Center and the Church had secured the principal relief they requested, withdrawal of the NFTL. The IRS asserted that the Center had fully paid its liabilities for the first three quarters at issue and did not contest its liabilities for the remaining seven quarters. On the abuse of discretion issue, the IRS argued that the second SO did not abuse his discretion in rejecting the proposed installment agreement because the Center was not in full compliance with its Form 990 return filing obligations.

The Center responded that there were still outstanding tax liabilities for the seven quarters ending in June 2010, although it disputed its liability for the final quarter on the ground that its original Form 941 incorrectly doubled the amount owed. The Center said that it had claimed a refund on Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, in August 2014. The Center also disputed its liability for certain penalties and interest, and noted that it had made several previous requests on Form 843, Claim for Refund and Request for Abatement, for abatements of late filing and failure to pay penalties as well as for penalties and interest for failure to file its Forms 990. Regarding the SO's rejection of its installment agreement request, the Center did not dispute that it was not in full compliance with its return obligations at the time the IRS issued the supplemental notice of determination. However, the Center said that it was now in full compliance with its tax obligations after filing late Forms 990 for the relevant years.

The Tax Court agreed with the IRS that the case was moot on the issue of the NFTL because the IRS had withdrawn it. The case was also moot regarding the Center's employment tax liabilities for the first three quarters of 2007 because the Center had fully paid them. The remaining issues for the Tax Court were (1) the outstanding liabilities for the other seven quarters of 2007-2010, and (2) whether the second SO's rejection of the Center's proposed installment agreement was an abuse of discretion.

The Tax Court held that under Code Sec. 6330(c)(2) it could consider only issues that were raised in the Center's CDP hearing, and that none of the Center's challenges to its employment tax liabilities had been raised in either the original or supplemental CDP hearings. The Center challenged its underlying employment tax liabilities for only one calendar quarter, the quarter ending June 30, 2010, on the basis that its original Form 941 incorrectly doubled the amount owed. The Tax Court found no evidence, and the Center did not contend, that this issue was raised in the Center's CDP hearings. Regarding its liability for penalties, the Center said that its August 2014 Form 843 referred to late filing and failure to pay penalties assessed for the June 30, 2010 quarter. The Tax Court also found no evidence that the Center raised this issue in its CDP hearings, nor did it raise this issue in its Tax Court petition. The Center also disputed its liability for interest and referred to its Form 843 claim for abatement of interest assessed in connection with the late filing of its Forms 990 for 2012 and 2014. The Center also failed to raise the interest issue in its CDP hearings; moreover, the Tax Court determined that it could not consider that issue in any event because the case before it concerned only the Center's employment tax liabilities.

The Tax Court also held that the second SO did not abuse his discretion in rejecting the Center's installment agreement request. There is no abuse of discretion, the court said, in rejecting an installment proposal where a taxpayer is not in compliance with its tax obligations for tax years after the years at issue. The Center acknowledged that it was delinquent in its Form 990 filing obligations at the time of its supplemental CDP hearing. The Tax Court said that, having filed delinquent Forms 990, the Center was free to submit a new installment agreement proposal with the IRS, which the IRS may well accept.

For a discussion of the criteria for obtaining installment agreements, see Parker Tax ¶250,515.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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