[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