[Federal Register Volume 59, Number 108 (Tuesday, June 7, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12827]
[[Page Unknown]]
[Federal Register: June 7, 1994]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[TD 8543]
RIN 1545-AS60
Exhaustion of Administrative Remedies
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains the final regulations relating to the
circumstances in which a party shall be deemed to have exhausted the
administrative remedies available within the Internal Revenue Service
for purposes of the recovery of court costs and certain fees in a civil
tax proceeding brought in a court of the United States (including the
Tax Court and the Court of Federal Claims). These regulations differ
from the final regulations previously issued under section 7430, which
were effective for civil tax proceedings commenced after February 28,
1983, and before January 1, 1986, and addressed the exhaustion of
administrative remedies requirement for recovery of litigation costs
incurred by taxpayers with respect to a court proceeding in connection
with the determination, collection, or refund of any tax, interest, or
penalty. Portions of the final regulations previously issued under
section 7430 were held to be invalid by the United States Tax Court in
Minahan v. Commissioner, 88 T.C. 492 (1987). This regulation does not
contain those provisions of the previous final regulation found to be
invalid.
DATES: The final regulations are effective June 7, 1994, and apply to
court proceedings described in section 7430 filed in a court of the
United States (including the Tax Court and the Court of Federal Claims)
after May 7, 1992.
FOR FURTHER INFORMATION CONTACT: Thomas D. Moffitt of the Office of
Assistant Chief Counsel (Field Service), Internal Revenue Service,
(202) 622-7900 (not a toll-free call).
SUPPLEMENTARY INFORMATION:
Background
Proposed amendments to the Income Tax Regulations (26 CFR part 301)
under section 7430 of the Internal Revenue Code (the Code) were
published in the Federal Register on May 8, 1992 (57 FR 19828 [IA-003-
89, 1992-1 C.B. 1100]). The amendments were issued under the authority
contained in section 7805 of the Code.
One public comment was received concerning these regulations. After
consideration of the public comment received, the proposed regulations
are adopted, as revised by this Treasury decision.
Explanation of Regulatory Provisions
In general, under section 7430 of the Code, a prevailing party may
recover the reasonable litigation costs incurred in a civil proceeding
if the proceeding relates to the determination, collection or refund of
any tax, interest or penalty under the Internal Revenue Code and the
party has exhausted all the administrative remedies related to that
party's tax matter. These final regulations provide information
concerning the circumstances in which a party's administrative remedies
shall be deemed to have been exhausted. In general, administrative
remedies are deemed to have been exhausted if the party has requested
(and if granted, participated in) an Appeals office conference on the
party's tax matter prior to filing an action in a court of the United
States (including the Tax Court and the Court of Federal Claims). A
party has participated in an Appeals office conference if the party has
disclosed all relevant information regarding the matter to the Appeals
office. In the case of the revocation of a determination that an
organization is described in section 501(c)(3), a party must complete
the procedures set forth in section 7428 and in regulations, rules and
revenue procedures thereunder to exhaust its administrative remedies.
Where no administrative procedure covering a party's tax matter allows
the party to request an Appeals office conference, the party's
administrative remedies will not be deemed to have been exhausted
unless the party has filed a written claim for relief with the district
director having jurisdiction over the tax matter and allowed the
district director a reasonable period of time to act on the claim. A
party is not required to pursue its administrative remedies if the
Internal Revenue Service has notified the party in writing that such
pursuit is unnecessary, has not given the party an opportunity to
request an Appeals office conference before sending a statutory notice
of deficiency, or has failed to grant the party an Appeals office
conference with respect to a claim for refund within six months of the
filing of such claim for refund. A party must participate in an Appeals
office conference during either the deficiency procedures or the refund
procedures with respect to the tax matter, but is not required to
participate during both procedures. Thus, if a party participated in an
Appeals office conference with respect to a tax matter prior to the
issuance of the statutory notice of deficiency, the party does not need
to request an Appeals office conference after filing a claim for refund
with respect to the same tax matter.
Comments on the Proposed Regulations
One public comment objected to, and requested deletion of, the
requirement that a party request (and if granted, participate in) an
Appeals office conference on the party's tax matter prior to filing an
action in a court of the United States (including the Tax Court and the
Court of Federal Claims). This suggestion was not adopted in the final
regulations because conferences with Appeals have historically been a
fundamental method for providing administrative remedies to taxpayers
who do not agree with the Internal Revenue Service. Such remedies are
pivotal to the effort to resolve issues promptly, efficiently, fairly
and without resort to litigation. In order to avoid costly litigation
consistent with the legislative intent and to encourage usage of this
process to resolve disputes, the regulations require taxpayers, in
order to be deemed to have exhausted their administrative remedies, to
pursue such remedies with the Appeals office, if available, prior to
instituting litigation.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It has also been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Code, the notice of
proposed rulemaking preceding these regulations was submitted to the
Small Business Administration for comment on their impact on small
business.
Drafting Information
The principal author of these regulations is Thomas D. Moffitt,
Office of Assistant Chief Counsel (Field Service), Internal Revenue
Service. However, other personnel from the Service and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 301
Employment taxes, Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping requirements, State taxes.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 301 is amended as follows:
Paragraph 1. The authority citation for part 301 continues to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.7430-1 is revised to read as follows:
Sec. 301.7430-1 Exhaustion of administrative remedies.
(a) In general. Section 7430(b)(1) provides that a court shall not
award reasonable litigation costs in any civil tax proceeding under
section 7430(a) unless the court determines that the prevailing party
has exhausted the administrative remedies available to the party within
the Internal Revenue Service. This section sets forth the circumstances
in which such administrative remedies shall be deemed to have been
exhausted.
(b) Requirements--(1) In general. A party has not exhausted the
administrative remedies available within the Internal Revenue Service
with respect to any tax matter for which an Appeals office conference
is available under Secs. 601.105 and 601.106 of this chapter (other
than a tax matter described in paragraph (c) of this section) unless--
(i) The party, prior to filing a petition in the Tax Court or a
civil action for refund in a court of the United States (including the
Court of Federal Claims), participates, either in person or through a
qualified representative described in Sec. 601.502 of this chapter, in
an Appeals office conference; or
(ii) If no Appeals office conference is granted, the party, prior
to the issuance of a statutory notice in the case of a petition in the
Tax Court or the issuance of a notice of disallowance in the case of a
civil action for refund in a court of the United States (including the
Court of Federal Claims)--
(A) Requests an Appeals office conference in accordance with
Secs. 601.105 and 601.106 of this chapter; and
(B) Files a written protest if a written protest is required to
obtain an Appeals office conference.
(2) Participates. For purposes of this section, a party or
qualified representative of the party described in Sec. 601.502 of this
chapter participates in an Appeals office conference if the party or
qualified representative discloses to the Appeals office all relevant
information regarding the party's tax matter to the extent such
information and its relevance were known or should have been known to
the party or qualified representative at the time of such conference.
(3) Tax matter. For purposes of this section, ``tax matter'' means
a matter in connection with the determination, collection or refund of
any tax, interest, penalty, addition to tax or additional amount under
the Internal Revenue Code.
(c) Revocation of a determination that an organization is described
in section 501(c)(3). A party has not exhausted the administrative
remedies available within the Internal Revenue Service with respect to
a revocation of a determination that it is an organization described in
section 501(c)(3) unless, prior to filing a declaratory judgment action
under section 7428, the party has exhausted its administrative remedies
in accordance with section 7428, and any regulations, rules, and
revenue procedures thereunder.
(d) Actions involving summonses, levies, liens, jeopardy and
termination assessments, etc. (1) A party has not exhausted the
administrative remedies available within the Internal Revenue Service
with respect to a matter other than one to which paragraph (b) or (c)
of this section applies (including summonses, levies, liens, and
jeopardy and termination assessments) unless, prior to filing an action
in a court of the United States (including the Tax Court and the Court
of Federal Claims)--
(i) The party submits to the district director of the district
having jurisdiction over the dispute a written claim for relief
reciting facts and circumstances sufficient to show the nature of the
relief requested and that the party is entitled to such relief; and
(ii) The district director has denied the claim for relief in
writing or failed to act on the claim within a reasonable period after
such claim is received by the district director.
(2) For purposes of this paragraph (d)(2), a reasonable period is--
(i) The 5-day period preceding the filing of a petition to quash an
administrative summons issued under section 7609;
(ii) The 5-day period preceding the filing of a wrongful levy
action in which a demand for the return of property is made;
(iii) The period expressly provided for administrative review of
the party's claim by an applicable provision of the Internal Revenue
Code that expressly provides for the pursuit of administrative remedies
(such as the 16-day period provided under section 7429(b)(1)(B)
relating to review of jeopardy assessment procedures); or
(iv) The 60-day period following receipt of the claim for relief in
all other cases.
(e) Exception to requirement that party pursue administrative
remedies. If the conditions set forth in paragraph (e)(1), (e)(2),
(e)(3), or (e)(4) of this section are satisfied, a party's
administrative remedies within the Internal Revenue Service shall be
deemed to have been exhausted for purposes of section 7430.
(1) The Internal Revenue Service notifies the party in writing that
the pursuit of administrative remedies in accordance with paragraphs
(b), (c), and (d) of this section is unnecessary.
(2) In the case of a petition in the Tax Court--
(i) The party did not receive a notice of proposed deficiency (30-
day letter) prior to the issuance of the statutory notice and the
failure to receive such notice was not due to actions of the party
(such as a failure to supply requested information or a current mailing
address to the district director or service center having jurisdiction
over the tax matter); and
(ii) The party does not refuse to participate in an Appeals office
conference while the case is in docketed status.
(3) In the case of a civil action for refund involving a tax matter
other than a tax matter described in paragraph (e)(4) of this section,
the party--
(i) Participates in an Appeals office conference with respect to
the tax matter prior to issuance of a statutory notice of deficiency
with respect to such tax matter; or
(ii) Did not receive written notification that an Appeals office
conference was available prior to issuance of a notice of disallowance
and the failure to receive such a notification was not due to the
actions of the party (such as the failure to supply requested
information or a current mailing address to the district director or
service center having jurisdiction over the tax matter); or
(iii) Did not receive either written or oral notification that an
Appeals office conference had been granted within six months from the
date of the filing of the claim for refund and the failure to receive
such notice was not due to actions of the party (such as the failure to
supply requested information or a current mailing address to the
district director or service center having jurisdiction over the tax
matter).
(4) In the case of a civil action for refund involving a tax matter
under sections 6703 or 6694--
(i) The party did not receive a notice of proposed disallowance
prior to issuance of a notice of disallowance and the failure to
receive such notice was not due to actions of the party (such as the
failure to supply requested information or a current mailing address to
the district director or service center having jurisdiction over the
tax matter); or
(ii) During the six-month period following the day on which the
party's claim for refund is filed, the party's claim for refund is not
denied, and the Internal Revenue Service has failed to process the
claim with due diligence.
(f) Examples. The provisions of this section may be illustrated by
the following examples:
Example 1. Taxpayer A exchanges property held for investment for
similar property and claims that the gain on the exchange is not
recognized under section 1031. The Internal Revenue Service conducts
a field examination and determines that there has not been a like-
kind exchange. No agreement is reached on the matter and a notice of
proposed deficiency (30-day letter) is sent to A. A does not file a
request for an Appeals office conference. A pays the amount of the
proposed deficiency and files a claim for refund. A notice of
proposed disallowance is issued by the Internal Revenue Service. A
does not request an Appeals office conference and, instead, files a
civil action for refund in a United States District Court. A has not
exhausted the administrative remedies available within the Internal
Revenue Service.
Example 2. Assume the same facts as in Example 1 except that,
after receiving the notice of proposed deficiency (30-day letter), A
files a request for an Appeals office conference. No agreement is
reached at the conference. A pays the amount of the proposed
deficiency and files a claim for refund. A notice of proposed
disallowance is issued by the Internal Revenue Service. A does not
request an Appeals office conference and files a civil action for
refund in a United States District Court. A has exhausted the
administrative remedies available within the Internal Revenue
Service.
Example 3. Assume the same facts as in Example 1 except A first
requests an Appeals office conference after A's receipt of the
notice of proposed disallowance. A is granted an Appeals office
conference and A participates in such conference. A has exhausted
the administrative remedies available within the Internal Revenue
Service.
Example 4. Taxpayer B receives a notice of proposed deficiency
(30-day letter) after completion of a field examination. B provided
to the Internal Revenue Service during the examination all relevant
information under the taxpayer's control and all relevant legal
arguments supporting the taxpayer's position. B properly requests an
Appeals office conference. The Appeals office, to obtain an
additional period of time to consider the tax matter, requests that
B sign Form 872 to extend the time for an assessment of tax, but B
declines. Appeals then denies the request for a conference and
issues a notice of deficiency. B has exhausted the administrative
remedies available within the Internal Revenue Service.
Example 5. Taxpayer C receives a notice of proposed deficiency
(30-day letter) and a written statement that C need not file a
written protest or request an Appeals office conference since a
conference will not be granted. C files a petition in the Tax Court
after receiving the statutory notice of deficiency. C's
administrative remedies within the Internal Revenue Service are
deemed to have been exhausted.
Example 6. On January 2, the Internal Revenue Service serves a
summons issued under section 7609 on third-party recordkeeper D to
produce records of taxpayer E. On January 5, notice of the summons
is given to E. The last day on which E may file a petition in a
court of the United States to quash the summons is January 25.
Thereafter, E files a written claim for relief with the district
director having jurisdiction over the matter together with a copy of
the summons. The claim and copy are received by the district
director on January 20. On January 25, E files a petition to quash
the summons. E has exhausted the administrative remedies available
within the Internal Revenue Service.
Example 7. A notice of Federal tax lien is filed in County M on
March 3, in the name of F. On April 2, F pays the entire liability
thereby satisfying the lien. On May 2, F files a written claim with
the district director having jurisdiction over the tax matter
demanding a certificate of release of lien. Thereafter, F provides
the district director with a copy of the notice of Federal tax lien
and a copy of the canceled check in satisfaction of the lien, which
are received by the district director on May 15. F's claim is deemed
to have been filed on May 15. Accordingly, F must wait until after
July 14 (60 days following the filing of the claim for relief on May
15) to commence an action, in order to have exhausted the
administrative remedies available within the Internal Revenue
Service.
Example 8. A revenue officer seizes an automobile to effect
collection of G's liability on January 10. On January 22, H submits
a written claim to the district director having jurisdiction over
the tax matter claiming that H purchased the automobile from G for
an adequate consideration before the tax lien against G arose, and
demands immediate return of the automobile. A copy of the title
certificate and H's canceled check are submitted with the claim. The
claim is received by the district director on January 25. On January
30, H brings a wrongful levy action. H has exhausted the
administrative remedies available within the Internal Revenue
Service.
Example 9. The Internal Revenue Service issues a revenue ruling
which holds that ear piercing does not affect a function or
structure of the body within the meaning of section 213 and
therefore is not deductible. Taxpayer I deducts the costs of ear
piercing and, following an examination, receives a notice of
proposed deficiency (30-day letter) disallowing the treatment of
such costs. Because of the revenue ruling, I believes a conference
would not aid in the resolution of the tax dispute. Accordingly, I
does not request an Appeals office conference. After receiving a
statutory notice of deficiency, I files a petition in the Tax Court.
I has not exhausted the administrative remedies available within the
Internal Revenue Service. The issuance of a revenue ruling covering
the same fact situation but taking a contrary position does not
constitute notification by the Internal Revenue Service to I that
the pursuit of administrative remedies is unnecessary. Similarly,
the issuance to I of a private letter ruling or technical advice
does not constitute notification by the Internal Revenue Service
that the pursuit of administrative remedies is unnecessary.
Example 10. Taxpayer J is assessed a penalty under section 6701
for aiding in the understatement of the tax liability of another
person. J pays 15% of the penalty in accordance with section 6703
and files a claim for refund on June 15. J is not issued a notice of
proposed disallowance and thus cannot participate in an Appeals
office conference within six months of the filing of the claim for
refund. J brings an action on December 23. J has exhausted the
administrative remedies available within the Internal Revenue
Service.
Example 11. Taxpayer K receives a notice of proposed deficiency
(30-day letter) and neither requests nor participates in an Appeals
office conference. The Service then issues a statutory notice of
deficiency (90-day letter). Upon receiving the statutory notice, and
after filing a petition with the Tax Court, K requests an Appeals
office conference. K has not exhausted the administrative remedies
available within the Internal Revenue Service because the request
for an Appeals office conference was made after the issuance of the
statutory notice.
(g) Effective date. This section applies to court proceedings
described in section 7430 filed in a court of the United States
(including the Tax Court after May 7, 1992.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: May 9, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-12827 Filed 6-6-94; 8:45 am]
BILLING CODE 4830-01-U