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Case Underscores IRS’s Power to Impose Tax Liens on Ministries

Agency’s action targets Florida minister who had more than $7 million in unpaid taxes.

Key point. The IRS can attach a lien on the property of a taxpayer to collect delinquent taxes through foreclosure, but it can also attach a lien on the property of a corporation that the taxpayer controls.

A federal court in Florida affirmed a determination by the Internal Revenue Service (IRS) that a minister (the “defendant”) owed $1 million in back taxes, and it agreed that the IRS could satisfy the delinquent taxes by attaching a lien on properties and assets owned by the minister and an incorporated ministry he created.

The defendant, described by a federal judge as a “serial tax defier who dislikes the federal government and believes he is not subject to federal income taxation,” failed to pay federal income tax on income over the course of a decade.

He claimed he was not a United States citizen, but rather, “a living man created by [his] creator” and therefore was not a “legal person” subject to federal income taxation.

Seven million reasons to sue

After a series of investigations into the defendant’s tax liability for tax years 1996 through 2005—and the defendant’s repeated failures to respond to the IRS about them—the IRS in 2008 notified the defendant that he owed more than $7 million in unpaid federal income taxes, penalties, and interest.

When the defendant refused to pay, the case went to trial. A jury sided with the federal government. The defendant was ordered to pay $976,000 in unpaid taxes, penalties, and interest until paid off.

The nominee doctrine

The court noted that:

Pursuant to Sections 6321 and 6322 of the Internal Revenue Code, upon the assessment of a federal income tax deficiency against a taxpayer, a tax lien arises in favor of the United States as a matter of law, which attaches to all property in which the taxpayer holds an interest. A federal district court may then foreclose the tax lien and force the sale of the property for the benefit of the United States. The language of [Section 6321] is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have. “Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes" (quoting the United States Supreme Court in Glass City Bank v. United States, 326 U.S. 265 (1945)).

The court upheld the authority of the IRS to place a tax lien on the defendant’s property, including real estate in the name of a religious ministry that was controlled by the defendant and that it conducted few, if any, religious activities.

The court observed:

A tax lien attaches not only to property in which the taxpayer presently holds an interest, but also to any property held by the taxpayer’s nominee. ... A nominee is one who holds bare legal title to property for the benefit of another. Put differently, when a taxpayer’s property or rights to property are held in the name of another or are transferred to another with the taxpayer retaining beneficial ownership, the third party is said to hold the property as a nominee for the taxpayer. ...

The nominee doctrine involves the determination of the true beneficial or equitable ownership of the property at issue. Focusing on the relationship between the taxpayer and the property, the [nominee doctrine] attempts to discern whether a taxpayer has engaged in a sort of legal fiction, for federal tax purposes, by placing legal title to property in the hands of another while, in actuality, retaining all or some of the benefits of being the true owner.

The court noted the following factors in determining whether property is being held by a nominee of the taxpayer: (1) whether the taxpayer exercised dominion and control over the property; (2) whether the property of the taxpayer was placed in the name of the nominee in anticipation of collection activity; (3) whether the purported nominee paid any consideration for the property, or whether the consideration paid was inadequate; (4) whether a close relationship exists between the taxpayer and the nominee; and, (5) whether the taxpayer pays the expenses (mortgage, property taxes, insurance) directly, or is the source of the funds for payments of the expenses.

The alter ego doctrine

The court also noted that a related principle to the nominee doctrine is the alter ego doctrine. If alter ego status is established, then “all of the assets held by the taxpayer’s alter ego may be liquidated to satisfy a delinquent tax debt." While the two doctrines are very similar, “both are independent bases for attaching the property of a third party in satisfaction of a delinquent tax liability.” While the nominee doctrine “focuses on the relationship between the taxpayer and the property, the alter ego doctrine focuses on whether the taxpayer is similar to or controls another individual, trust, business, or corporation.”

The court concluded that “the evidence overwhelmingly supported the conclusion that the defendant’s ministry and its property served no legitimate purpose, and that the defendant intentionally used his ministry as an alter ego fraudulently to avoid his federal income tax liabilities.”

The court authorized the IRS to sell the assets of the defendant and his ministry to satisfy the delinquent taxes.

What this case means for churches

This case illustrates the authority of the IRS to satisfy tax delinquencies by attaching liens on the assets of a taxpayer and, in some cases, on property controlled by a taxpayer, and selling the assets through a foreclosure sale. As this case demonstrates, the authority of the IRS to recover taxes through liens and foreclosure sales applies to religious organizations.

United States v. LLM et al., 2019 Law360 58-153.

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  • December 12, 2022

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