Read the decision: Road and Highway Builders [PDF 88 KB]
In 2000, the IRS issued a taxpayer identification number (TIN) to a newly incorporated entity. In 2001, the taxpayer entity changed its name, but did not notify the IRS of this name change but continued to use its originally issued TIN in its tax filings.
In 2004, loans made to the taxpayer were secured by deeds of trust that were recorded against the taxpayer’s property.
In 2004 and 2005, the IRS filed notices of federal tax liens against the the taxpayer because of its failure to fully pay its employment taxes in 2003 and 2004. The tax lien notices, however, were filed in the name of the company on the original TIN (and not the name of the company that the taxpayer was then currently using).
Subsequently, in 2005, more loans were made to the taxpayer, and additional deeds of trust were recorded against the taxpayer’s property.
Eventually, when the taxpayer defaulted on its loans, foreclosure proceedings were initiated followed by the taxpayer’s Chapter 11 bankruptcy petition. The lender ended up purchasing the property at a foreclosure sale for $1.43 million.
The IRS notified the lender / purchaser of the foreclosed property that it would release the IRS’s right of redemption in exchange for $100,000. [Under section 7452(d), the IRS has a statutory right of redemption against which it has a valid tax lien.] In 2006, the parties negotiated a settlement agreement in which the IRS executed a release of its right of redemption in exchange for $100,000.
In 2007, the bankruptcy court concluded that the IRS notices of federal tax lien did not give “constructive notice” because they were recorded under the taxpayer’s former name, not under the new name used by the taxpayer. The bankruptcy court awarded surplus proceeds from the foreclosure sale to the lender, but expressed no opinion concerning the $100,000 payment for release of the federal tax liens. The IRS appealed, and eventually the Ninth Circuit affirmed.
Present judicial action
The lender filed suit against the government in 2009, seeking a return of the $100,000 by asserting that the settlement agreement was void for lack of consideration. The Court of Federal Claims held that the lender had failed to show that the IRS agents had acted in bad faith when the IRS entered into the release negotiation.
The Federal Circuit today affirmed, finding that the Court of Federal Claims did not err in holding that the lender had failed to satisfy its burden of proof by clear and convincing evidence and had failed to rebut the presumption that the IRS agents had discharged their duties in good faith.