[Federal Register: December 29, 2003 (Volume 68, Number 248)]
[Rules and Regulations]
[Page 74848-74855]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29de03-5]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9106]
RIN 1545-AW99


Awards of Attorney's Fees and Other Costs Based Upon Qualified
Offers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations relating to the
qualified offer rule, including the requirements that an offer must
satisfy to be treated as a

[[Page 74849]]

qualified offer under section 7430(g) and the requirements that a
taxpayer must satisfy to qualify as a prevailing party by reason of
having made a qualified offer. The regulations implement certain
changes made by section 3101(e) of the Internal Revenue Service
Restructuring and Reform Act of 1998. The final regulations affect
taxpayers seeking attorney's fees and costs.

DATES: Effective Date: These regulations are effective December 24,
2003.
    Applicability Date: These regulations apply to qualified offers
postmarked or delivered after December 24, 2003, in administrative or
court proceedings described in section 7430.

FOR FURTHER INFORMATION CONTACT: Tami C. Belouin (202) 622-7950 (not a
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    These final regulations contain amendments to the Procedure and
Administration Regulations (26 CFR part 301) reflecting changes to
section 7430 made by section 3101(e) of the Internal Revenue Service
Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat.
686), to recover reasonable administrative and litigation costs in a
court proceeding with respect to the determination or refund of any
tax, interest or penalty. Proposed and temporary regulations under
sections 7430(c)(4)(E) and 7430(g) were contemporaneously issued on
January 3, 2001 (REG-121928-98, TD 8922, C.B. 2001-1 [66 FR 725]).
Written comments were submitted in response to the proposed regulations
and are discussed in more detail below. The proposed regulations are
adopted as revised by this Treasury decision.

Explanation of Revisions and Summary of Comments

    These final regulations generally adopt the provisions of the
proposed regulations. The changes to the proposed regulations reflected
in these final regulations, as well as the comments received, are
discussed below.

1. Adjustments Affected by the Outcome of Another Proceeding

    A taxpayer's tax liability may be affected by the outcome of a
separate court or administrative proceeding. The proposed regulations
stated that the portion of the liability to be fully resolved, by
stipulation of the parties, through another proceeding is ignored for
purposes of applying the qualified offer rule. One commentator
requested clarification regarding this rule. The final regulations
clarify this rule and state that the types of proceeding contemplated
include, but are not limited to, state or Federal court proceedings.
For example, a taxpayer's tax liability may be affected by the outcome
of a separate court proceeding, such as a probate, tort liability, or
trademark action.

2. Specified Amount of Offer

    The proposed regulations provided that a qualified offer must state
a specific dollar amount. Commentators noted that there are instances
in which it would be difficult to calculate the taxpayer's tax
liability and offer a specific dollar amount. To address those
situations, the final regulations provide that a qualified offer may
specify either a dollar amount of liability or a percentage of the
adjustments at issue.

3. Requirement To Disclose All Relevant Information

    In order for an offer to be treated as a qualified offer, the
proposed regulations required a taxpayer to disclose all relevant
information concerning any issue raised by the taxpayer subsequent to
the first letter of proposed deficiency which allows the taxpayer an
opportunity for administrative review in the IRS Office of Appeals that
remained unresolved at the time the qualified offer was made. This
disclosure had to occur contemporaneously with or prior to the making
of the qualified offer. One commentator requested that this requirement
be modified to lower the standard. The final regulations do not adopt
this comment because the proposed regulations reflected the standard
set out in Treas. Reg. Sec.  301.7430-1 for exhaustion of
administrative remedies.

4. End of Qualified Offer Period

    One commentator suggested that if a case is removed from the trial
calendar within 30 days of the trial date, the period for making a
qualified offer should be reopened. The final regulations do not adopt
this comment. The Treasury Department and the IRS do not believe that
the purpose of the statute would be furthered if a taxpayer were
permitted to submit a qualified offer after the period for doing so has
expired, even if the case subsequently is continued. Like the statute
of limitations, once the qualified offer period has expired, it should
not be revived.

5. Multiple Tax Years

    The proposed regulations do not specifically address the
requirements for making a valid qualified offer when multiple tax years
are at issue in a court or administrative proceeding. One commentator
requested clarification of the application of the qualified offer rule
in these situations. The final regulations provide that if adjustments
in different tax years arise from separate and distinct issues such
that the resolution of issues in one or more tax years will not affect
the taxpayer's liability in one or more of the other years at issue in
the proceeding, then a qualified offer may be made for less than all of
the tax years involved in the proceeding. A qualified offer, however,
must resolve all of the issues for the tax years covered by the offer
and also must cover all tax years in the proceeding affected by those
issues. A tax year (affected year) is affected by an issue if the
treatment of the issue in another tax year involved in the proceeding
necessarily affects the treatment of the issue in the affected year.
The final regulations include three new examples illustrating the
operation of the qualified offer rule in cases involving multiple tax
years.

6. Settlement After Certain Court Rulings

    A federal tax case may be settled after a court has ruled on a
motion relating to the merits of one or more of the adjustments covered
by a qualified offer, even if the ruling does not fully resolve those
adjustments. For example, a court's granting of a motion for partial
summary judgment may resolve the underlying legal issue for an
adjustment covered by a qualified offer but still leave open issues of
substantiation or valuation. The parties at that time may resolve the
adjustment based on the court's ruling and the parties' evaluation of
the remaining issues not addressed by the court's ruling that affect
that adjustment. The final regulations provide that if one or more
adjustments covered by a qualified offer are settled following a ruling
by the court that substantially resolves those adjustments, then those
adjustments will not be treated as having been settled prior to the
entry of the judgment by the court and instead will be treated as
amounts included in the judgment as a result of the court's
determinations. Whether an adjustment covered by a qualified offer is
substantially resolved by a court ruling will depend on the facts and
circumstances, including the scope of the ruling and the nature and
importance of the issues affecting the

[[Page 74850]]

adjustment that remain to be resolved after the court ruling. The final
regulations further provide, however, that rulings relating to
discovery, admissibility of evidence, and burden of proof are not
treated as rulings that substantially resolve adjustments covered by a
qualified offer. These changes have been made in response to the Tax
Court's opinion in Gladden v. Commissioner, 120 T.C. 446 (2003). The
Department of Treasury and the IRS will give further consideration to
this issue and may issue additional guidance regarding the matter in
the future.

7. Spousal Defenses

    The proposed regulations do not address specifically how spousal
defenses affect the qualified offer rule. The preamble to the temporary
regulations stated that the qualified offer rule applies in multiple
taxpayer situations, such as those involving joint returns, but did not
address the potential aggregation or segregation of the qualified offer
or liability in situations that may present special circumstances, such
as claims for innocent spouse relief. Commentators requested more
specific rules addressing multiple taxpayer situations. The Treasury
Department and the IRS have decided not to include additional rules
involving multiple taxpayer situations in the final regulations. As the
law in this area continues to evolve, the Treasury Department and the
IRS may give further consideration to the issues raised and may issue
additional guidance regarding how the qualified offer rule applies in
these situations.

8. Recovery of Fees Relating to Settled Issues

    The proposed regulations provided that a prevailing party may not
recover fees under the qualified offer rule for any issue that is
settled. Recovery is limited to issues that are actually determined by
a court. One commentator recommended that the final regulations permit
the recovery of fees attributable to adjustments that are settled. The
final regulations do not adopt this comment. Section
7430(c)(4)(E)(ii)(I) provides that any case resolved pursuant to a
settlement is not eligible for recovery of fees under the qualified
offer rule. The qualified offer rule was enacted to encourage
settlements. Requiring the government to pay administrative and
litigation costs with respect to issues resolved exclusively pursuant
to a settlement would be contrary to that goal.

9. Delivery of Qualified Offer to the Proper Party

    The proposed regulations specify where an offer must be delivered
in order to be treated as a qualified offer. One commentator requested
further clarification of these provisions and greater flexibility with
respect to delivery locations. The Treasury Department and the IRS have
considered this comment but no change has been made to the regulations
because the regulations already provide specific instructions for the
delivery of an offer under a variety of circumstances, as well as a
default location for all other situations. Thus, the provision is
sufficiently comprehensive. With respect to the request for greater
flexibility, the comment was not adopted because it is important that a
qualified offer be received by the office with jurisdiction over the
case at the time the qualified offer is made in order that the
government may act expeditiously on the offer. The locations specified
in the regulations are designed to achieve that objective.

Special Analyses

    It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations and, because
these regulations do not impose a collection of information requirement
on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Therefore, a Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of the Internal Revenue Code, the
proposed regulations preceding these regulations were submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.

Drafting Information

    The principal author of these regulations is Tami C. Belouin,
Office of the Associate Chief Counsel (Procedure and Administration),
Administrative Provisions and Judicial Practice Division.

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

0
Paragraph 1. The authority citation for part 301 continues to read in
part as follows:

    Authority: 26 U.S.C. 7805 * * *

0
Par. 2. Section 301.7430-7 is added to read as follows:


Sec.  301.7430-7  Qualified offers.

    (a) In general. Section 7430(c)(4)(E) (the qualified offer rule)
provides that a party to a court proceeding satisfying the timely
filing and net worth requirements of section 7430(c)(4)(A)(ii) shall be
treated as the prevailing party if the liability of the taxpayer
pursuant to the judgment in the proceeding (determined without regard
to interest) is equal to or less than the liability of the taxpayer
which would have been so determined if the United States had accepted
the last qualified offer of the party as defined in section 7430(g).
For purposes of this section, the term judgment means the cumulative
determinations of the court concerning the adjustments at issue and
litigated to a determination in the court proceeding. In making the
comparison between the liability under the qualified offer and the
liability under the judgment, the taxpayer's liability under the
judgment is further modified by the provisions of paragraph (b)(3) of
this section. The provisions of the qualified offer rule do not apply
if the taxpayer's liability under the judgment, as modified by the
provisions of paragraph (b)(3) of this section, is determined
exclusively pursuant to a settlement, or to any proceeding in which the
amount of tax liability is not in issue, including any declaratory
judgment proceeding, any proceeding to enforce or quash any summons
issued pursuant to the Internal Revenue Code (Code), and any action to
restrain disclosure under section 6110(f). If the qualified offer rule
applies to the court proceeding, the determination of whether the
liability under the qualified offer would have equaled or exceeded the
liability pursuant to the judgment is made by reference to the last
qualified offer made with respect to the tax liability at issue in the
administrative or court proceeding. An award of reasonable
administrative and litigation costs under the qualified offer rule only
includes those costs incurred on or after the date of the last
qualified offer and is limited

[[Page 74851]]

to those costs attributable to the adjustments at issue at the time the
last qualified offer was made that were included in the court's
judgment other than by reason of settlement. The qualified offer rule
is inapplicable to reasonable administrative or litigation costs
otherwise awarded to a taxpayer who is a prevailing party under any
other provision of section 7430(c)(4). This section sets forth the
requirements to be satisfied for a taxpayer to be treated as a
prevailing party by reason of the taxpayer making a qualified offer, as
well as the circumstances leading to the application of the exceptions,
special rules, and coordination provisions of the qualified offer rule.
Furthermore, this section sets forth the elements necessary for an
offer to be treated as a qualified offer under section 7430(g).
    (b) Requirements for treatment as a prevailing party based upon
having made a qualified offer--(1) In general. In order to be treated
as a prevailing party by reason of having made a qualified offer, the
liability of the taxpayer for the type or types of tax and the taxable
year or years at issue in the proceeding (as calculated pursuant to
paragraph (b)(2) of this section), based on the last qualified offer
(as defined in paragraph (c) of this section) made by the taxpayer in
the court or administrative proceeding, must equal or exceed the
liability of the taxpayer pursuant to the judgment by the court for the
same type or types of tax and the same taxable year or years (as
calculated pursuant to paragraph (b)(3) of this section). Furthermore,
the taxpayer must meet the timely filing and net worth requirements of
section 7430(c)(4)(A)(ii). If all of the adjustments subject to the
last qualified offer are settled prior to the entry of the judgment by
the court, the taxpayer is not a prevailing party by reason of having
made a qualified offer. The taxpayer may, however, still qualify as a
prevailing party if the requirements of section 7430(c)(4)(A) are met.
If one or more adjustments covered by a qualified offer (see paragraph
(c)(3)) are settled following a ruling by the court that substantially
resolves those adjustments, then those adjustments will not be treated
as having been settled prior to the entry of the judgment by the court
and instead will be treated as amounts included in the judgment as a
result of the court's determinations. For purposes of the preceding
sentence, rulings relating to discovery, admissibility of evidence, and
burden of proof are not rulings that substantially resolve adjustments
covered by a qualified offer.
    (2) Liability under the last qualified offer. For purposes of
paragraph (b)(1) of this section, the taxpayer's liability under the
last qualified offer is the change in the taxpayer's liability that
would have resulted if the United States had accepted the taxpayer's
last qualified offer on all of the adjustments that were at issue in
the administrative or court proceeding at the time that the offer was
made compared to the amount shown on the return or returns (or as
previously adjusted). The portion of a taxpayer's liability that is
attributable to adjustments raised by either party after the making of
the last qualified offer is not included in the calculation of the
liability under that offer. The taxpayer's liability under the last
qualified offer is calculated without regard to adjustments that the
parties have stipulated will be resolved in accordance with the outcome
of a separate pending Federal, state, or other judicial or
administrative proceeding. For example, the parties may stipulate that
the taxpayer's liability will be resolved in accordance with the
outcome of an alternative dispute resolution proceeding or a separate
court proceeding, such as a probate, tort liability, or trademark
action. Furthermore, the taxpayer's liability under the last qualified
offer is calculated without regard to interest, unless the taxpayer's
liability for, or entitlement to, interest is a contested issue in the
administrative or court proceeding and is one of the adjustments
included in the last qualified offer.
    (3) Liability pursuant to the judgment. For purposes of paragraph
(b)(1) of this section, the taxpayer's liability pursuant to the
judgment is the change in the taxpayer's liability resulting from
amounts contained in the judgment as a result of the court's
determinations, and amounts contained in settlements not included in
the judgment, that are attributable to all adjustments that were
included in the last qualified offer compared to the amount shown on
the return or returns (or as previously adjusted). This liability
includes amounts attributable to adjustments included in the last
qualified offer and settled by the parties prior to the entry of
judgment regardless of whether those amounts are actually included in
the judgment entered by the court. The taxpayer's liability pursuant to
the judgment does not include amounts attributable to adjustments that
are not included in the last qualified offer, even if those amounts are
actually included in the judgment entered by the court. The taxpayer's
liability under the judgment is calculated without regard to
adjustments that the parties have stipulated will be resolved in
accordance with the outcome of a separate pending Federal, state, or
other judicial or administrative proceeding. Furthermore, the
taxpayer's liability pursuant to the judgment is calculated without
regard to interest, unless the taxpayer's liability for, or entitlement
to, interest is a contested issue in the administrative or court
proceeding and is one of the adjustments included in the last qualified
offer. Where adjustments raised by either party subsequent to the
making of the last qualified offer are included in the judgment entered
by the court, or are settled prior to the court proceeding, the
taxpayer's liability pursuant to the judgment is calculated by treating
the subsequently raised adjustments as if they had never been raised.
    (c) Qualified offer--(1) In general. A qualified offer is defined
in section 7430(g) to mean a written offer which--
    (i) Is made by the taxpayer to the United States during the
qualified offer period;
    (ii) Specifies the offered amount of the taxpayer's liability
(determined without regard to interest, unless interest is a contested
issue in the proceeding);
    (iii) Is designated at the time it is made as a qualified offer for
purposes of section 7430(g); and
    (iv) By its terms, remains open during the period beginning on the
date it is made and ending on the earliest of the date the offer is
rejected, the date the trial begins, or the 90th day after the date the
offer is made.
    (2) To the United States. (i) A qualified offer is made to the
United States when it is delivered to the office or personnel within
the Internal Revenue Service, Office of Appeals, Office of Chief
Counsel (including field personnel) or Department of Justice that has
jurisdiction over the tax matter at issue in the administrative or
court proceeding. If those offices or persons are unknown to the
taxpayer making the qualified offer, the taxpayer may deliver the offer
to the appropriate office, as follows:
    (A) If the taxpayer's initial pleading in a court proceeding has
been answered, the taxpayer may deliver the offer to the office that
filed the answer.
    (B) If the taxpayer's petition in the Tax Court has not yet been
answered, the taxpayer may deliver the offer to the Office of Chief
Counsel, 1111 Constitution Avenue, NW., Washington, DC 20224.
    (C) If the taxpayer's initial pleading in any Federal court, other
than the Tax

[[Page 74852]]

Court, has not yet been answered, the taxpayer may deliver the offer to
the Attorney General of the United States, 950 Pennsylvania Ave., NW.,
Washington, DC 20530-0001. For a suit brought in a United States
district court, a copy of the offer should also be delivered to the
United States Attorney for the district in which the suit was brought.
    (D) In any other situation, the taxpayer may deliver the offer to
the office that sent the taxpayer the first letter of proposed
deficiency which allows the taxpayer an opportunity for administrative
review in the Internal Revenue Service Office of Appeals.
    (ii) Until an offer is received by the appropriate personnel or
office under this paragraph (c)(2), it is not considered to have been
made, with the following exception. If the offer is deposited in the
United States mail, in an envelope or other appropriate wrapper,
postage prepaid, properly addressed to the appropriate personnel or
office under this paragraph (c)(2), the date of the United States
postmark stamped on the cover in which the offer is mailed shall be
deemed to be the date of receipt of that offer by the addressee. If any
offer is deposited with a designated delivery service, as defined in
section 7502(f)(2), in lieu of the United States mail, the provisions
of section 7502(f)(1) shall apply in determining whether that offer
qualifies for this exception.
    (3) Specifies the offered amount. A qualified offer specifies the
offered amount if it clearly specifies the amount for the liability of
the taxpayer, calculated as set forth in paragraph (b)(2) of this
section. The offer may be a specific dollar amount of the total
liability or a percentage of the adjustments at issue in the proceeding
at the time the offer is made. This amount must be with respect to all
of the adjustments at issue in the administrative or court proceeding
at the time the offer is made and only those adjustments. The specified
amount must be an amount, the acceptance of which by the United States
will fully resolve the taxpayer's liability, and only that liability
(determined without regard to adjustments that the parties have
stipulated will be resolved in accordance with the outcome of a
separate pending Federal, state, or other judicial or administrative
proceeding, or interest, unless interest is a contested issue in the
proceeding) for the type or types of tax and the taxable year or years
at issue in the proceeding. In cases involving multiple tax years, if
adjustments in different tax years arise from separate and distinct
issues such that the resolution of issues in one or more tax years will
not affect the taxpayer's liability in one or more of the other tax
years in the proceeding, then a qualified offer may be made for less
than all of the tax years involved. A qualified offer, however, must
resolve all of the issues for the tax years covered by the offer and
also must cover all tax years in the proceeding affected by those
issues. A tax year (affected year) is affected by an issue if the
treatment of the issue in another tax year involved in the proceeding
necessarily affects the treatment of the issue in the affected year.
    (4) Designated at the time it is made as a qualified offer. An
offer is not a qualified offer unless it designates in writing at the
time it is made that it is a qualified offer for purposes of section
7430(g). An offer made at a time when one or more adjustments not
included in the first letter of proposed deficiency which allows the
taxpayer an opportunity for administrative review in the Internal
Revenue Service Office of Appeals have been raised by the taxpayer and
remain unresolved, is not considered to be a qualified offer unless
contemporaneously or prior to the making of the offer, the taxpayer has
provided the United States with the substantiation and legal and
factual arguments necessary to allow for informed consideration of the
merits of those adjustments. For example, a taxpayer will be considered
to have provided the United States with the necessary substantiation
and legal and factual arguments if the taxpayer (or a recognized
representative of the taxpayer described in Sec.  601.502 of this
chapter) participates in an Appeals office conference, participates in
an Area Counsel conference, or confers with the Department of Justice,
and at that time, discloses all relevant information. All relevant
information includes, but is not limited to, the legal and factual
arguments supporting the taxpayer's position on any adjustments raised
by the taxpayer after the issuance of the first letter of proposed
deficiency which allows the taxpayer an opportunity for administrative
review in the Internal Revenue Service Office of Appeals. A taxpayer
has disclosed all relevant information if the taxpayer has supplied
sufficient information to allow informed consideration of the
taxpayer's tax matter to the extent the information and its relevance
were known or should have been known to the taxpayer at the time of the
conference.
    (5) Remains open. A qualified offer must, by its terms, remain open
for acceptance by the United States from the date it is made, as
defined in paragraph (c)(2)(ii) of this section, until the earliest of
the date it is rejected in writing by a person with authority to reject
the offer, the date the trial begins, or the 90th day after being
received by the United States. The offer, by its written terms, may
remain open after the occurrence of one or more of the above-referenced
events. Once made, the period during which a qualified offer remains
open may be extended by the taxpayer prior to its expiration, but an
extension cannot be used to make an offer meet the minimum period for
remaining open required by this paragraph (c)(5).
    (6) Last qualified offer. A taxpayer may make multiple qualified
offers during the qualified offer period. For purposes of the
comparison under paragraph (b) of this section, the making of a
qualified offer supersedes any previously made qualified offers. In
making the comparison described in paragraph (b) of this section, only
the qualified offer made most closely in time to the end of the
qualified offer period is compared to the taxpayer's liability under
the judgment.
    (7) Qualified offer period. To constitute a qualified offer, an
offer must be made during the qualified offer period. The qualified
offer period begins on the date on which the first letter of proposed
deficiency which allows the taxpayer an opportunity for administrative
review in the Internal Revenue Service Office of Appeals is sent to the
taxpayer. For this purpose, the date of the notice of claim
disallowance will begin the qualified offer period in a refund case. If
there has been no notice of claim disallowance in a refund case, the
qualified offer period begins on the date on which the answer or other
responsive pleading is filed with the court. The qualified offer period
ends on the date which is thirty days before the date the case is first
set for trial. In determining when the qualified offer period ends for
cases in the Tax Court and other Federal courts using calendars for
trial, a case will be considered set for trial on the date scheduled
for the calendar call. A case may be removed from a trial calendar at
any time. Thus, a case may be removed from a trial calendar before the
date that precedes by thirty days the date scheduled for that trial
calendar. The qualified offer period does not end until the case
remains on a trial calendar on the date that precedes by 30 days the
scheduled date of the calendar call for that trial session. The
qualified offer period may not be extended beyond the periods set forth
in this paragraph (c)(7), although the period during which a qualified
offer remains open may extend

[[Page 74853]]

beyond the end of the qualified offer period.
    (d) [Reserved]
    (e) Examples. The following examples illustrate the provisions of
this section:

    Example 1. Definition of a judgment. The Internal Revenue
Service (IRS) audits Taxpayer A for year X and issues a notice of
proposed deficiency (30-day letter) proposing to disallow deductions
1, 2, 3, and 4. A files a protest and participates in a conference
with the Internal Revenue Service Office of Appeals (Appeals).
Appeals allows deduction 1, and issues a statutory notice of
deficiency for deductions 2, 3, and 4. A's petition to the United
States Tax Court for year X never mentions deduction 2. Prior to
trial, A concedes deduction 3. After the trial, the Tax Court issues
an opinion allowing A to deduct a portion of deduction 4. As used in
paragraph (a) of this section, the term judgment means the
cumulative determinations of the court concerning the adjustments at
issue in the court proceeding. Thus, the term judgment does not
include deduction 1 because it was never at issue in the court
proceeding. Similarly, the term judgment does not include deduction
2 because it was not placed at issue by A in the court proceeding.
Although deduction 3 was at issue in the court proceeding, it is not
included in the term judgment because it was not determined by the
court, but rather by concession or settlement. For purposes of
section 7430(c)(4)(E), the term judgment only includes the portion
of deduction 4 disallowed by the Tax Court.
    Example 2. Liability under the offer and liability under the
judgment. Assume the same facts as in Example 1 except that A makes
a qualified offer after the Appeals conference, which is not
accepted by the IRS. A's offer is with respect to all adjustments at
issue at that time. Those adjustments are deductions 2, 3, and 4. At
the conclusion of the litigation, A's entitlement to an award based
upon the qualified offer will depend, among other things, on a
comparison of the change in A's liability for income tax for year X
resulting from the judgment of the Tax Court with the change that
would have resulted had the IRS accepted A's qualified offer. In
making this comparison, the term judgment (as discussed in Example
1) is modified by including the amounts of settled or conceded
adjustments that were at issue at the time the qualified offer was
made. Any settled or conceded adjustments that were not at issue at
the time the qualified offer was made, either because the settlement
or concession occurred before the offer or because the adjustment
was not raised until after the offer, are not included in the
comparison. Thus, A's offer on deductions 2, 3, and 4 is compared
with the change in A's liability resulting from the Tax Court's
determination of deduction 4, and the concessions of issues 2 and 3
by A.
    Example 3. Offer must resolve full liability. Assume the same
facts as in Example 2 except that A's offer after the Appeals
conference explicitly states that it is only with respect to
adjustments 2 and 3 and not with respect to adjustment 4. Even if
A's liability pursuant to the judgment, calculated under paragraph
(b)(3) of this section as illustrated in Example 2, is equal to or
less than it would have been had the IRS accepted A's offer after
the Appeals conference, A is not a prevailing party under section
7430(c)(4)(E). A qualified offer must include all adjustments at
issue at the time the offer is made. Since A's offer excluded
adjustment 4, which was an adjustment at issue at the time the offer
was made, it does not constitute a qualified offer pursuant to
paragraph (b)(2) of this section.
    Example 4. Offer must resolve full liability. Assume the same
facts as in Example 1, except that A makes a qualified offer that is
accepted by the IRS. After the offer is accepted, A attempts to
reduce the amount A will pay pursuant to the offer by applying net
operating loss carryovers to the years in issue. Because the net
operating losses were not at issue when the offer was made, A's
offer was a qualified offer. Whether A is entitled to apply net
operating losses to reduce the amount stated in the offer will
depend upon the application of contract principles, local court
rules, and, because net operating losses are at issue, section
6511(d) and related provisions.
    Example 5. Qualified offer rule for multiple tax years, partial
resolution offer is a qualified offer. Taxpayer B receives a notice
of deficiency for taxable years 2001, 2002, and 2003. For 2001, the
statutory notice disallows business deductions. For 2002, the
statutory notice increases income for unreported lottery winnings.
For 2003, the statutory notice disallows a child care credit. B
submits a qualified offer only with respect to 2002. Since the
adjustments for the three tax years are separate and distinct, B may
submit a qualified offer for a single year. If B's liability under
the judgment is equal to or less than the qualified offer with
respect to 2002, irrespective of 2001 and 2003, B is a prevailing
party for 2002 for purposes of section 7430(g). Assuming B satisfies
the remaining requirements of section 7430, B may recover reasonable
administrative and litigation costs that are attributable to 2002
from the date of the qualified offer. To qualify for any costs with
respect to 2001 or 2003, B must satisfy the requirements of section
7430(c)(4).
    Example 6. Qualified offer rule for multiple tax years, partial
resolution offer is not a qualified offer. Assume the same facts as
in Example 5 except that with respect to 2002, in addition to
increasing B's income for the unreported lottery winnings, the
statutory notice also disallows a charitable contribution deduction.
B submits a settlement offer that purports to be a qualified offer,
but only covers the unreported lottery winnings. B's offer is not a
qualified offer because it does not address the charitable
contribution issue, and thus, does not fully resolve B's liability
for 2002.
    Example 7. Qualified offer rule for multiple tax years, partial
resolution offer is not a qualified offer. Taxpayer C receives a
notice of deficiency for taxable years 2001, 2002, and 2003
adjusting the amount of a depreciation deduction due to the Internal
Revenue Service's increase to the recovery period. C submits a
settlement offer relating only to 2003 that purports to be a
qualified offer. C's offer is not a qualified offer because the
issue in the three tax years is not separable given that the
treatment of the issue in one of the years necessarily affects the
treatment of the issue in the other years, and C's offer only
applies to one of the years in the proceeding. In cases involving
multiple tax years with nonseparable tax issues affecting all tax
years, an offer is not a qualified offer unless it resolves the
liability for all tax years at issue in the administrative or
judicial proceeding.
    Example 8. Qualified offer rule inapplicable when all issues
settled. Taxpayer D receives a notice of proposed deficiency (30-day
letter) proposing to disallow both a personal interest deduction in
the amount of $10,000 (Adjustment 1), and a charitable contribution
deduction in the amount of $2,000 (Adjustment 2), and to include in
income $4,000 of unreported interest income (Adjustment 3). D timely
files a protest with Appeals. At the Appeals conference, D presents
substantiation for the charitable contribution and presents
arguments that the interest paid was deductible mortgage interest
and that the interest received was held in trust for Taxpayer E. At
the conference, D also provides the Appeals officer assigned to D's
case a written offer to settle the case for a deficiency of $2,000,
exclusive of interest. The offer states that it is a qualified offer
for purposes of section 7430(g) and that it will remain open for
acceptance by the IRS for a period in excess of 90 days. After
considering D's substantiation and arguments, the Appeals Officer
accepts the $2,000 offer to settle the case in full. Although D's
offer is a qualified offer, because all three adjustments contained
in the qualified offer were settled, the qualified offer rule is
inapplicable.
    Example 9. Qualified offer rule inapplicable when all issues
contained in the qualified offer are settled; subsequently raised
adjustments ignored. Assume the same facts as in Example 8 except
that D's qualified offer was for a deficiency of $1,800 and the IRS
rejected that offer. Subsequently, the IRS issued a statutory notice
of deficiency disallowing the three adjustments contained in Example
8, and, in addition, disallowing a home office expense in the amount
of $5,000 (Adjustment 4). After petitioning the Tax Court, D
presents the field attorney assigned to the case with a written
offer, which is not designated as a qualified offer for purposes of
section 7430(g), to settle the three adjustments that had been the
subject of the qualified offer, plus adjustment 4, for a total
deficiency of $2,500. After negotiating with D, a settlement is
reached on the three adjustments that were the subject of the
rejected qualified offer, for a deficiency of $1,800. Adjustment 4
is litigated in the Tax Court and the court determines that D is
entitled to the full $5,000 deduction for that adjustment.
Consequently, a decision is entered by the Tax Court reflecting the
$1,800 settlement amount, which matches exactly the amount of D's
only qualified offer in the case. Although the determined liability
for adjustments 1, 2, and 3 equals that of the rejected qualified
offer, because all three adjustments contained in the qualified
offer

[[Page 74854]]

were settled, the qualified offer rule is inapplicable.
    Example 10. Exclusion of adjustments made after the qualified
offer is made. Assume the same facts as in Example 9 except the
settlement is reached only on adjustments 1 and 2, for a liability
of $1,500. Adjustments 3 and 4 are tried in the Tax Court and in
accordance with the court's opinion, the taxpayer has a $300
deficiency attributable to adjustment 3, and a $1,550 deficiency
attributable to adjustment 4. Consequently, a decision is entered
reflecting the $1,500 settled amount, the $300 liability on
adjustment 3, and the $1,550 liability on adjustment 4. The $3,350
deficiency reflected in the Tax Court's decision exceeds the last
(and only) qualified offer made by D. For purposes of determining
whether D is a prevailing party as a result of having made a
qualified offer in the proceeding, the liability attributable to
adjustment 4, which was raised after the last qualified offer was
made, is not included in the comparison of D's liability under the
judgment with D's offered liability under the last qualified offer.
Thus, D's $1,800 liability under the judgment, as modified for
purposes of the qualified offer rule comparison, is equal to D's
offered liability under the last qualified offer. Because D's
liability under the last qualified offer equals or exceeds D's
liability under the judgment, as calculated under paragraph (b)(3)
of this section, D is a prevailing party for purposes of section
7430. Assuming D satisfies the remaining requirements of section
7430, D may recover those reasonable administrative and litigation
costs attributable to adjustment 3. To qualify for any further award
of reasonable administrative and litigation costs, D must satisfy
the requirements of section 7430(c)(4)(A).
    Example 11. Qualified offer in a refund case. Taxpayer E timely
files an amended return claiming a refund of $1,000. This refund
claim results from several omitted deductions which, if allowed,
would reduce E's tax liability from $10,000 to $9,000. E receives a
notice of claim disallowance and files a complaint with the
appropriate United States District Court. Subsequently, E makes a
qualified offer for a refund of $500. The offer is rejected and
after trial the court finds E is entitled to a refund of $700. The
change in E's liability from the tax shown on the return that would
have resulted from the acceptance of E's qualified offer is a
reduction in that liability of $500. The change in E's liability
from the tax shown on the return resulting from the judgment of the
court is a reduction in that liability of $700. Because E's
liability under the qualified offer exceeds E's liability under the
judgment, E is a prevailing party for purposes of section 7430.
Assuming E satisfies the remaining requirements of section 7430, E
may recover those reasonable litigation costs incurred on or after
the date of the qualified offer. To qualify for any further award of
reasonable administrative and litigation costs E must satisfy the
requirements of section 7430(c)(4)(A).
    Example 12. End of qualified offer period when case is removed
from Tax Court trial calendar more than 30 days before scheduled
trial calendar. Taxpayer F has petitioned the Tax Court in response
to the issuance of a notice of deficiency. F receives notice that
the case will be heard on the July trial session in F's city of
residence. The scheduled date for the calendar call for that trial
session is July 1st. On May 15th, F's motion to remove the case from
the July trial session and place it on the October trial session for
that city is granted. The scheduled date for the calendar call for
the October trial session is October 1st. On May 31st, F delivers a
qualified offer to the field attorney assigned to the case. On
August 31st, F delivers a revised qualified offer to the field
attorney assigned to the case. Neither offer is accepted. The case
is tried during the October trial session, and at some time
thereafter, a decision is entered by the court. Assume the judgment
in the case, as calculated under paragraph (b)(3) of this section,
is greater than the amount offered, as calculated under paragraph
(b)(2) of this section, in the qualified offer delivered on May
31st, but less than the amount offered, as similarly calculated, in
the qualified offer delivered on August 31st. Because the qualified
offer period did not end until September 1st, and the offer of
August 31st otherwise satisfied the requirements of paragraph (c) of
this section, the offer delivered on August 31st is a qualified
offer. Furthermore, because the August 31st qualified offer is
closer in time to the end of the qualified offer period than the May
31st qualified offer, the August 31st qualified offer is the last
qualified offer made by F. Consequently, the August 31st offer is
the qualified offer that is compared to the judgment for purposes of
determining whether F is a prevailing party under section
7430(c)(4)(E). Because F's liability under the August 31st qualified
offer equals or exceeds F's liability under the judgment as
calculated under paragraph (b)(3) of this section, F is a prevailing
party for purposes of section 7430.
    Example 13. End of qualified offer period when case is removed
from Tax Court trial calendar less than 30 days before scheduled
trial calendar. Assume the same facts as in Example 12 except that
F's motion was granted on June 15th. Because the qualified offer
period ended on June 1st when the case remained on the July trial
session on the date that preceded by 30 days the scheduled date of
the calendar call for that trial session, the offer delivered on May
31st was F's last qualified offer. The August 31st offer is not a
qualified offer for purposes of this rule. Consequently, F is not a
prevailing party under the qualified offer rule. Therefore, F must
satisfy the requirements of section 7430(c)(4)(A) to qualify for any
award of reasonable administrative and litigation costs.
    Example 14. When a qualified offer can be made and to whom it
must be made. During the examination of Taxpayer G's return, the IRS
issues a notice of deficiency without having first issued a 30-day
letter. After receiving the notice of deficiency G timely petitions
the Tax Court. The next day G mails an offer to the office that
issued the notice of deficiency, which offer satisfies the
requirements of paragraphs (c)(3) through (6) of this section. This
is the only written offer made by G during the administrative or
court proceeding, and by its terms it is to remain open for a period
in excess of 90 days after the date of mailing to the office issuing
the notice of deficiency. The office that issued the notice of
deficiency transmitted the offer to the field attorney with
jurisdiction over the Tax Court case. After answering the case, the
field attorney refers the case to Appeals pursuant to Rev. Proc. 87-
24 (1987-1 C.B. 720). See Sec.  601.601(d)(2)(ii)(b) of this
chapter. After careful consideration, Appeals rejects the offer and
holds a conference with G during which some adjustments are settled.
The remainder of the adjustments are tried in the Tax Court and G's
liability resulting from the Tax Court's determinations, when added
to G's liability resulting from the settled adjustments, is less
than G's liability would have been under the offer rejected by
Appeals. Because the Tax Court case had not yet been answered when
the offer was sent, G properly mailed the offer to the office that
issued the notice of deficiency. Thus, G's offer satisfied the
requirements of paragraph (c)(2) of this section. Furthermore, even
though G did not receive a 30-day letter, G's offer was made after
the beginning of the qualified offer period, satisfying the
requirements of paragraph (c)(7) of this section, because the
issuance of the statutory notice provided G with notice of the IRS's
determination of a deficiency, and the docketing of the case
provided G with an opportunity for administrative review in the
Internal Revenue Service Office of Appeals under Rev. Proc. 87-24.
See Sec.  601.601(d)(2)(ii)(b) of this chapter. Because G's offer
satisfied all of the requirements of paragraph (c) of this section,
the offer was a qualified offer and G is a prevailing party.
    Example 15. Substitution of parties permitted under last
qualified offer. Taxpayer H receives a 30-day letter and
participates in a conference with the Office of Appeals but no
agreement is reached. Subsequently, H receives a notice of
deficiency and petitions the Tax Court. Upon receiving the Internal
Revenue Service's answer to the petition, H sends a qualified offer
to the field attorney who signed the answer, by United States mail.
The qualified offer stated that it would remain open for more than
90 days. Thirty days after making the offer, H dies and, on motion
under Rule 63(a) of the Tax Court's Rules of Practice and Procedure
by H's personal representative, I is substituted for H as a party in
the Tax Court proceeding. I makes no qualified offers to settle the
case and the case proceeds to trial, with the Tax Court issuing an
opinion partially in favor of I. Even though I was not a party when
the qualified offer was made by H, that offer constitutes a
qualified offer because by its terms, when made, it was to remain
open until at least the earlier of the date it is rejected, the date
of trial, or 90 days. If the liability of I under the qualified
offer, as determined under paragraph (b)(2) of this section, equals
or exceeds the liability under the judgment of the Tax Court, as
determined under paragraph (b)(3) of this section, I will be a
prevailing party for purposes of an award of reasonable litigation
costs under section 7430.


[[Page 74855]]


    (g) Effective date. This section is applicable with respect to
qualified offers made in administrative or court proceedings described
in section 7430 after December 24, 2003.


Sec.  301.7430-7T  [Removed]

0
Par. 3. Section 301.7430-7T is removed.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: December 19, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03-31822 Filed 12-24-03; 8:45 am]

BILLING CODE 4830-01-P