[Federal Register Volume 59, Number 108 (Tuesday, June 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12828]


[[Page Unknown]]

[Federal Register: June 7, 1994]


-----------------------------------------------------------------------


DEPARTMENT OF THE TREASURY
26 CFR Parts 301 and 602

[TD 8542]
RIN 1545-AN02

 

Recovery of Reasonable Administrative Costs

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains the final regulations relating to the 
recovery of reasonable administrative costs incurred by taxpayers in 
connection with an administrative proceeding within the Internal 
Revenue Service. Changes to the applicable law were made by section 
6239(a) of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA) 
(Pub. L. No. 100-647, 102 Stat. 3342). These regulations affect all 
taxpayers involved in an administrative proceeding within the Internal 
Revenue Service, and provide guidance regarding the definition of 
reasonable administrative costs and the period within which the costs 
must be incurred in order to be recoverable. These regulations also set 
forth the requirements and procedures for the recovery of such costs, 
and the definitions of prevailing party, administrative proceeding and 
administrative proceeding date. A table of contents to the regulations 
under section 7430 is provided in Sec. 301.7430-0.

DATES: Sections 301.7430-0 and 301.7430-2 through 301.7430-6, except 
for Sec. 301.7430-2(c)(5), are effective June 7, 1994, and apply to 
claims for reasonable administrative costs filed with the Internal 
Revenue Service after December 23, 1992, with respect to costs incurred 
in administrative proceedings commenced after November 10, 1988. 
Section 301.7430-2(c)(5) is effective March 23, 1993. The amendment to 
part 602 is effective June 7, 1994.

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:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the requirements of the Paperwork Reduction Act (44 
U.S.C. 3504(h)) under control number 1545-1356. The estimated average 
annual burden per respondent is 120 minutes.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, 
Washington, DC 20224, and to the Office of Management and Budget, Attn: 
Desk Officer for the Department of the Treasury, Office of Information 
and Regulatory Affairs, Washington, DC 20503.

Background

    Proposed additions 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 December 23, 1992 (57 FR 61020 
[IA-003-89, 1993-1 C.B. 789]). These proposed additions were issued 
under the authority contained in section 7805 of the Code. A summary of 
the proposed additions is contained in the preamble that was published 
with the proposed additions.

Changes to the Proposed Regulations

    No changes have been made to the proposed regulations. One public 
comment objected to the failure of the regulations to provide for the 
recovery of amounts expended by taxpayers during the examination of 
their returns. As section 7430 does not provide for such awards, this 
suggestion was not adopted. After consideration of the public comment 
received, the proposed regulations are adopted as revised by this 
Treasury decision.

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 Internal Revenue Service and 
Treasury Department participated in their development.

List of Subjects

26 CFR Part 301

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

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 301 and 602 are amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

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

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

    Par. 2. Sections 301.7430-0 and 301.7430-2 through 301.7430-6 are 
added to read as follows:


Sec. 301.7430-0  Table of contents.

    This section lists the captions that appear in Secs. 301.7430-1 
through 301.7430-6.

Sec. 301.7430-1  Exhaustion of administrative remedies.

(a) In general.
(b) Requirements.
(1) In general.
(2) Participates.
(3) Tax matter.
(c) Revocation of a determination that an organization is described 
in section 501(c)(3).
(d) Actions involving summonses, levies, liens, jeopardy and 
termination assessments, etc.
(e) Exception to requirement that party pursue administrative 
remedies.
(f) Examples.
(g) Effective date.

Sec. 301.7430-2  Requirements and procedures for recovery of 
reasonable administrative costs.

(a) Introduction.
(b) Requirements for recovery.
(1) Determination by the Internal Revenue Service.
(i) Jurisdiction.
(ii) Administrative proceeding.
(iii) Administrative proceeding date.
(iv) Reasonable administrative costs.
(v) Prevailing party.
(vi) Not unreasonably protracted.
(vii) Procedural requirements.
(2) Determination by court.
(c) Procedure for recovering reasonable administrative costs.
(1) In general.
(2) Where request must be filed.
(3) Contents of request.
(i) Statements.
(ii) Affidavit or affidavits.
(iii) Documentation and information.
(4) Form of request.
(5) Period for requesting costs from the Internal Revenue Service.
(6) Notice.
(7) Appeal to Tax Court.
(d) Unreasonable protraction of administrative proceeding.
(e) Examples.

Sec. 301.7430-3  Administrative proceeding and administrative 
proceeding date.

(a) Administrative proceeding.
(b) Collection action.
(c) Administrative proceeding date.
(1) General rule.
(2) Notice of the decision of the Internal Revenue Service Office of 
Appeals.
(3) Notice of deficiency.
(d) Examples.

Sec. 301.7430-4  Reasonable administrative costs.

(a) In general.
(b) Costs described.
(1) In general.
(2) Representative and specially qualified representative.
(i) Representative.
(ii) Specially qualified representative.
(3) Limitation on fees for a representative.
(i) In general.
(ii) Cost of living adjustment.
(iii) Special factor adjustment.
(c) Certain costs excluded.
(1) Costs not incurred in an administrative proceeding.
(2) Costs incurred in an administrative proceeding but not 
reasonable.
(i) In general.
(ii) Special rule for expert witness' fees on issue of prevailing 
market rates.
(3) Litigation costs.
(4) Examples.

Sec. 301.7430-5  Prevailing party.

(a) In general.
(b) Position of the Internal Revenue Service.
(c) Substantially justified.
(1) In general.
(2) Exception.
(d) Amount in controversy.
(e) Most significant issue or set of issues presented.
(f) Net worth and size limitations.
(1) Individuals and estates.
(2) Others.
(3) Special rule for charitable organizations and certain 
cooperatives.
(g) Determination of prevailing party.
(h) Examples.

Sec. 301.7430-6  Effective date.


Sec. 301.7430-2  Requirements and procedures for recovery of reasonable 
administrative costs.

    (a) Introduction. Section 7430(a)(1) provides for the recovery, 
under certain circumstances, of reasonable administrative costs 
incurred in connection with an administrative proceeding before the 
Internal Revenue Service. Paragraph (b) of this section lists the 
requirements that a taxpayer must meet to be entitled to an award of 
reasonable administrative costs.
    (b) Requirements for recovery--(1) Determination by the Internal 
Revenue Service. The Internal Revenue Service will grant a taxpayer's 
request for recovery of reasonable administrative costs incurred in 
connection with an administrative proceeding under section 7430 and 
this section only if--
    (i) Jurisdiction. The underlying substantive issues or the issue of 
reasonable administrative costs are not, and have never been, before 
any court of the United States (including the Tax Court or United 
States Court of Federal Claims) with jurisdiction over those issues;
    (ii) Administrative proceeding. The costs were incurred in 
connection with an administrative proceeding as defined in 
Sec. 301.7430-3(a);
    (iii) Administrative proceeding date. The costs were incurred on or 
after the administrative proceeding date as defined in Sec. 301.7430-
3(c);
    (iv) Reasonable administrative costs. The costs were reasonable 
administrative costs as defined in Sec. 301.7430-4;
    (v) Prevailing party. The taxpayer is a prevailing party as defined 
in Sec. 301.7430-5;
    (vi) Not unreasonably protracted. The administrative proceeding was 
not unreasonably protracted by the taxpayer as discussed in paragraph 
(d) of this section; and
    (vii) Procedural requirements. The taxpayer follows the procedures 
set forth in paragraph (c) of this section.
    (2) Determination by court. Although the Internal Revenue Service 
will not grant a request for reasonable administrative costs where the 
requirements of paragraph (b)(1)(i) of this section are not met, a 
taxpayer may file a claim for reasonable administrative costs with the 
court with jurisdiction over the judicial proceeding. The court may 
award the taxpayer reasonable administrative costs under section 
7430(a). Under section 7430(c)(4)(B)(ii), where the final determination 
with respect to the tax, interest, or penalty at issue is made by a 
court, the court determines whether the taxpayer qualifies as a 
prevailing party. Thus, where the requirements of paragraph (b)(1)(i) 
of this section are not met, the taxpayer's only possibility of 
obtaining an award of reasonable administrative costs is to obtain an 
award of such costs from the court. In the event the court awards 
reasonable administrative costs, it may also award litigation costs for 
the reasonable costs of pursuing the claim for reasonable 
administrative costs, provided the requirements under section 7430 
regarding an award of reasonable administrative costs are satisfied 
with respect to such costs. A claim filed with the court should be made 
in accordance with the rules of the court.
    (c) Procedure for recovering reasonable administrative costs--(1) 
In general. The Internal Revenue Service will not award administrative 
costs under section 7430 unless the taxpayer files a written request to 
recover reasonable administrative costs in accordance with the 
provisions of this section.
    (2) Where request must be filed. A request required by paragraph 
(c)(1) of this section must be filed with the Internal Revenue Service 
personnel who have jurisdiction over the tax matter underlying the 
claim for the costs. However, if those persons are unknown to the 
taxpayer making the request, the taxpayer may send the request to the 
District Director for the district that considered the underlying 
matter.
    (3) Contents of request. The request must be in writing and must 
contain the following statements, affidavits, documentation, and 
information with regard to the taxpayer's administrative proceeding:
    (i) Statements. (A) A statement that the underlying substantive 
issues or the issue of reasonable administrative costs are not, and 
have never been, before any court of the United States (including the 
Tax Court or United States Court of Federal Claims) with jurisdiction 
over those issues;
    (B) A clear and concise statement of the reasons why the taxpayer 
alleges that the position of the Internal Revenue Service in the 
administrative proceeding was not substantially justified;
    (C) A statement sufficient to demonstrate that the taxpayer has 
substantially prevailed as to the amount in controversy or with respect 
to the most significant issue or set of issues presented in the 
proceeding;
    (D) A statement that the taxpayer has not unreasonably protracted 
the portion of the administrative proceeding for which the taxpayer is 
requesting costs; and
    (E) A statement supported by a detailed affidavit executed by the 
taxpayer or the taxpayer's representative that sets forth the nature 
and amount of each specific item of reasonable administrative costs for 
which the taxpayer is seeking recovery.
    (ii) Affidavit or affidavits. (A) An affidavit executed by the 
taxpayer stating that the taxpayer meets the net worth and size 
limitations of Sec. 301.7430-5(f);
    (B) An affidavit supporting the statement described in paragraph 
(c)(3)(i)(E) of this section; and
    (C) If more than $75 per hour, as adjusted by an increase in the 
cost of living as set forth in Sec. 301.7430-4(b)(3), is claimed for 
the fees of a representative in connection with the administrative 
proceeding, then an affidavit that specialized skills and distinctive 
knowledge as described in that section were necessary in the 
representation of the taxpayer in the proceeding and that there is a 
limited availability of representatives possessing such skills and 
knowledge as described in that section, or an affidavit that another 
special factor is applicable.
    (iii) Documentation and information. (A) A copy of the billing 
records of the representative for the requested fees; and
    (B) An address at which the taxpayer wishes to receive notice of 
the determination of the Internal Revenue Service with regard to the 
request for reasonable administrative costs.
    (4) Form of Request. No specific form is required for the request 
other than one which satisfies the requirements of paragraph (c)(3) of 
this section. Where practicable the required statements may be included 
in a single document. Similarly, where practicable, the required 
affidavits may be combined in a single affidavit to the extent they are 
to be executed by the same person.
    (5) Period for requesting costs from the Internal Revenue Service. 
To recover reasonable administrative costs pursuant to section 7430 and 
this section, the taxpayer must file a request for costs no later than 
90 days after the date the final decision of the Internal Revenue 
Service with respect to all tax, additions to tax and penalties at 
issue in the administrative proceeding is mailed, or otherwise 
furnished, to the taxpayer. The final decision of the Internal Revenue 
Service for purposes of this section is the document which resolves the 
tax liability of the taxpayer with regard to all tax, additions to tax 
and penalties at issue in the administrative proceeding (such as a Form 
870 or closing agreement), or a notice of assessment for that liability 
(such as the notice and demand under section 6303), whichever is 
earlier mailed, or otherwise furnished, to the taxpayer. For purposes 
of this section, if the 90th day falls on a Saturday, Sunday, or a 
legal holiday, the 90-day period shall end on the next succeeding day 
which is not a Saturday, Sunday, or a legal holiday. The term legal 
holiday means a legal holiday in the District of Columbia. If the 
request for costs is to be filed with the Internal Revenue Service at 
an office of the Internal Revenue Service located outside the District 
of Columbia but within an internal revenue district, the term legal 
holiday also means a Statewide legal holiday in the State where such 
office is located.
    (6) Notice. The Internal Revenue Service is authorized, but not 
required, to notify the taxpayer of its decision to grant or deny (in 
whole or in part) an award for reasonable administrative costs under 
section 7430 and this section by certified mail or registered mail. If 
the Internal Revenue Service does not respond on the merits to a 
request by the taxpayer for an award of reasonable administrative costs 
filed under paragraph (c)(1) of this section within 6 months after such 
request is filed, the Internal Revenue Service's failure to respond may 
be considered by the taxpayer as a decision of the Internal Revenue 
Service denying an award for reasonable administrative costs.
    (7) Appeal to Tax Court. A taxpayer may appeal a decision by the 
Internal Revenue Service denying (in whole or in part) a request for 
reasonable administrative costs under section 7430 and this section by 
filing a petition for reasonable administrative costs with the Tax 
Court. The petition must be in accordance with the Tax Court's Rules of 
Practice and Procedure and must be filed with the Tax Court after the 
Internal Revenue Service denies (in whole or in part) the taxpayer's 
request for reasonable administrative costs.
    (d) Unreasonable protraction of administrative proceeding. An award 
of reasonable administrative costs will not be made where the taxpayer 
unreasonably protracted the administrative proceeding. However, a 
taxpayer that unreasonably protracted only a portion of the 
administrative proceeding, but not other portions of the administrative 
proceeding, may recover reasonable administrative costs for the 
portion(s) of the administrative proceeding that the taxpayer did not 
unreasonably protract, if the requirements of paragraph (b)(1) of this 
section are otherwise satisfied.
    (e) Examples. The provisions of this section are illustrated by the 
following examples:

    Example 1. Taxpayer A receives a notice of proposed deficiency 
(30-day letter). A requests and is granted Appeals office 
consideration. Appeals requests that A submit certain documents as 
substantiation for the tax matters at issue. Although A complies 
with this request, the information is misdirected and not considered 
by Appeals. Appeals then issues a notice of deficiency. A does not 
file a petition with the Tax Court. After receiving the notice of 
deficiency, A convinces Appeals that the notice of deficiency is 
incorrect and that A owes no tax. Appeals then closes the case 
showing a zero deficiency and mails A a notice to this effect. 
Assuming that the other requirements of this section are satisfied, 
A may recover reasonable administrative costs incurred after the 
date of the notice of deficiency (the administrative proceeding 
date). To recover these costs, A must file a request for costs with 
the Appeals office personnel who settled A's tax matter, or if that 
person is unknown to A, with the District Director of the district 
which considered the underlying matter, within 90 days after the 
date of mailing of the Office of Appeals' final decision that A owes 
no tax.
    Example 2. Assume the same facts as in Example 1, except that 
after receipt of the notice of deficiency, A meets with an Appeals 
officer, but no agreement is reached on the tax matters at issue. A 
then files a petition with the Tax Court and prevails. Since the 
underlying tax issues have been determined by a court, the Internal 
Revenue Service will not grant a request for recovery of the 
reasonable administrative costs incurred by A. To recover reasonable 
administrative costs, A must file a claim with the Tax Court as 
prescribed under the Tax Court's Rules of Practice and Procedure.


Sec. 301.7430-3  Administrative proceeding and administrative 
proceeding date.

    (a) Administrative proceeding. For purposes of section 7430, an 
administrative proceeding generally means any procedure or other action 
before the Internal Revenue Service that is commenced after November 
10, 1988. However, an administrative proceeding does not include--
    (1) Proceedings involving matters of general application, including 
hearings on regulations, comments on forms, or proceedings involving 
revenue rulings or revenue procedures;
    (2) Proceedings involving requests for private letter rulings or 
similar determinations;
    (3) Proceedings involving technical advice memoranda, except those 
submitted after the administrative proceeding date (as defined in 
paragraph (c) of this section); and
    (4) Proceedings in connection with collection actions (as defined 
in paragraph (b) of this section), including proceedings under sections 
7432 or 7433.
    (b) Collection action. A collection action generally includes any 
action taken by the Internal Revenue Service to collect a tax (or any 
interest, additional amount, addition to tax, or penalty, together with 
any costs in addition to the tax) or any action taken by a taxpayer in 
response to the Internal Revenue Service's act or failure to act in 
connection with the collection of a tax (including any interest, 
additional amount, addition to tax, or penalty, together with any costs 
in addition to the tax). For example, a collection action for purposes 
of section 7430 and this section includes any action taken by the 
Internal Revenue Service under Chapter 64 of Subtitle F to collect a 
tax. Collection actions also include those actions taken by a taxpayer 
to remedy the Internal Revenue Service's failure to release a lien 
under section 6325 and to remedy any unauthorized collection action as 
defined by section 7433. However, an action or procedure directly 
relating to a claim for refund filed with the Service Center's 
Collection Branch or District Director's Collection Division after 
payment of an assessed tax is not a collection action.
    (c) Administrative proceeding date--(1) General rule. For purposes 
of section 7430 and the regulations thereunder, the term administrative 
proceeding date means the earlier of--
    (i) The date of the receipt by the taxpayer of the notice of the 
decision of the Internal Revenue Service Office of Appeals; or
    (ii) The date of the notice of deficiency.
    (2) Notice of the decision of the Internal Revenue Service Office 
of Appeals. For purposes of section 7430 and the regulations 
thereunder, a notice of the decision of the Internal Revenue Service 
Office of Appeals is the final written document, mailed or delivered to 
the taxpayer, that is signed by an individual in the Office of Appeals 
who has been delegated the authority to settle the dispute on behalf of 
the Commissioner, and states or indicates that the notice is the final 
determination of the entire case. A notice of claim disallowance issued 
by the Office of Appeals is a notice of the decision of the Internal 
Revenue Service Office of Appeals. Solely for purposes of determining 
the administrative proceeding date, a notice of deficiency issued by 
the Office of Appeals is not a notice of the decision of the Internal 
Revenue Service Office of Appeals.
    (3) Notice of deficiency. A notice of deficiency is a notice 
described in section 6212(a), including a notice rescinded pursuant to 
section 6212(d). For purposes of determining reasonable administrative 
costs under section 7430 and the regulations thereunder, a notice of 
final partnership administrative adjustment described in section 
6223(a)(2) will be treated as a notice of deficiency. A notice of final 
S corporation administrative adjustment issued pursuant to section 
6223(a)(2) as made applicable to subchapter S items by section 6244 
will also be treated as a notice of deficiency.
    (d) Examples. The provisions of this section are illustrated by the 
following examples:

    Example 1. Taxpayer A receives a notice of proposed deficiency 
(30-day letter). A files a request for and is granted an Appeals 
office conference. At the conference, an agreement is reached on the 
tax matters at issue. A cannot recover any costs because they were 
not incurred on or after the administrative proceeding date, which 
is the earlier of the date of receipt by the taxpayer of the notice 
of the decision of the Internal Revenue Service Office of Appeals, 
or the date of the notice of deficiency.
    Example 2. Taxpayer B receives a notice of proposed deficiency 
(30-day letter). B pays the amount of the proposed deficiency and 
files a claim for refund. B's claim is disallowed and a notice of 
proposed disallowance is issued by the District Director. B does not 
request an Appeals office conference and the District Director 
issues a notice of claim disallowance. B then files suit in a United 
States District Court. B cannot recover reasonable administrative 
costs because, although the District Director issued a notice of 
claim disallowance, the Internal Revenue Service did not issue 
either a notice of decision of the Internal Revenue Service Office 
of Appeals or a notice of deficiency.
    Example 3. Assume the same facts as in Example 2, except that 
after B files a claim for refund and receives the notice of proposed 
disallowance, B requests and is granted Appeals office 
consideration. No agreement is reached with Appeals and the Office 
of Appeals issues a notice of claim disallowance. B does not file 
suit in District Court but instead contacts the Appeals office to 
attempt to reverse the decision. B convinces the Appeals officer 
that the notice of claim disallowance is in error. The Appeals 
officer then abates the assessment. Because a notice of claim 
disallowance issued by Appeals is a notice of the decision of the 
Internal Revenue Service Office of Appeals, B may recover reasonable 
administrative costs incurred on or after the receipt of the notice 
of claim disallowance (the administrative proceeding date), but only 
if the other requirements of section 7430 and the regulations 
thereunder are satisfied. B cannot recover the costs incurred prior 
to receipt of the notice of claim disallowance because they were 
incurred before the administrative proceeding date.
    Example 4. Taxpayer C receives a notice of proposed deficiency 
(30-day letter). C files a request for and is granted an Appeals 
office conference. At the Appeals conference no agreement is reached 
on the tax matters at issue. The Office of Appeals then issues a 
notice of deficiency. Upon receiving the notice of deficiency C does 
not file a petition with the Tax Court. Instead, C pays the 
deficiency and files a claim for refund. The claim for refund is 
considered by the Internal Revenue Service and the District Director 
issues a notice of proposed disallowance. C requests and is granted 
Appeals office consideration. C convinces Appeals that C's claim is 
correct and Appeals allows C's claim. C may recover reasonable 
administrative costs incurred on or after the date of the notice of 
deficiency (the administrative proceeding date), but only if the 
other requirements of section 7430 and the regulations thereunder 
are satisfied.
    Example 5. Taxpayer D receives a District Director's Collection 
Division (Collection) proposed assessment of trust fund taxes (Trust 
Fund Recovery Penalty) pursuant to section 6672. D requests and is 
granted Appeals office consideration. Upon consideration, Appeals 
upholds D's position. D cannot recover reasonable administrative 
costs because the costs were not incurred on or after the 
administrative proceeding date.
    Example 6. Taxpayer E files an individual income tax return 
showing a balance due. No payment is made with the return and the 
Internal Revenue Service assesses the amount shown on the return. 
The Internal Revenue Service issues a notice and demand for tax 
pursuant to section 6303. E contacts the Collection Division 
(Collection) regarding E's outstanding liability. No agreement is 
reached with respect to the timing of E's payment, and Collection 
issues a notice of intent to levy pursuant to section 6331(d). Prior 
to the levy, E enters into an installment agreement with Collection. 
The costs that E incurred in connection with the notice and demand 
were not incurred in an administrative proceeding, but rather in a 
collection action. Accordingly, E may not recover those costs as 
reasonable administrative costs under section 7430 and the 
regulations thereunder.
    Example 7. Taxpayer F receives a District Director's Collection 
Division (Collection) proposed assessment of trust fund taxes (Trust 
Fund Recovery Penalty) pursuant to section 6672. F requests and is 
granted Appeals office consideration. Appeals considers the issues 
and decides to uphold Collection's recommended assessment. Appeals 
notifies F of this decision in writing. Collection then assesses the 
tax. Pursuant to section 6672(b), within 30 days after the notice 
and demand is made, F pays the minimum amount required to commence a 
court proceeding, files a claim for refund, and furnishes the 
required bond. Collection then considers and disallows the claim. 
Appeals then reconsiders the claim and reverses its original 
position, thus upholding F's position. Appeals then abates the 
assessment. F may recover reasonable administrative costs incurred 
after the receipt of the original decision of Appeals (the 
administrative proceeding date) that Appeals was upholding 
Collection's recommended assessment, but only if the other 
requirements of section 7430 and the regulations thereunder are 
satisfied. F cannot recover costs that are attributable to any 
procedure or other action before Collection prior to filing F's 
administrative claim for refund.


Sec. 301.7430-4  Reasonable administrative costs.

    (a) In general. For purposes of section 7430 and the regulations 
thereunder, reasonable administrative costs are any costs described in 
paragraph (b) of this section that are incurred in connection with an 
administrative proceeding (as defined in Sec. 301.7430-3(a)) and 
incurred on or after the administrative proceeding date (as defined in 
Sec. 301.7430-3(c)).
    (b) Costs described--(1) In general. The costs described in this 
paragraph are the reasonable and necessary amount of costs incurred by 
the taxpayer to present the taxpayer's position with respect to the 
merits of the tax controversy or the recovery of reasonable 
administrative costs. These costs include--
    (i) Any administrative fees or similar charges imposed by the 
Internal Revenue Service;
    (ii) Reasonable expenses of expert witnesses;
    (iii) Reasonable costs of any study, analysis, engineering report, 
test or project that is necessary for, and incurred in preparation of, 
the taxpayer's case; and
    (iv) Reasonable fees paid or incurred for the services of a 
representative (as defined in paragraph (b)(2) of this section) in 
connection with the administrative proceeding.
    (2) Representative and specially qualified representative--(i) 
Representative. A representative is a person compensated for services 
rendered in connection with the administrative proceeding, who is 
authorized to practice before the Internal Revenue Service or the Tax 
Court.
    (ii) Specially qualified representative. For purposes of paragraphs 
(b)(3)(iii) and (c)(2)(ii) of this section, a specially qualified 
representative is a representative (as defined in paragraph (b)(2)(i) 
of this section) possessing a distinctive knowledge or a unique and 
specialized skill that is necessary to adequately represent the 
taxpayer in the proceeding. Examples of a unique and specialized skill 
or distinctive knowledge would be an identifiable practice specialty 
such as patent law or knowledge of a foreign law or language where such 
specialty or knowledge is necessary to adequately represent the 
taxpayer in the proceeding. For purposes of this paragraph, neither 
knowledge of tax law nor experience in representing taxpayers before 
the Internal Revenue Service is considered distinctive knowledge or a 
unique and specialized skill. An extraordinary level of general 
representational knowledge and ability that is useful in all 
proceedings is not considered, in and of itself, distinctive knowledge 
or a unique and specialized skill. Specially qualified representatives 
also do not include those who have a distinctive knowledge of the 
underlying subject matter of the controversy in circumstances where 
such distinctive knowledge could reasonably be supplied through the use 
of an expert, or could readily be obtained through literature 
pertaining to the subject.
    (3) Limitation on fees for a representative--(i) In general. Except 
as otherwise provided in this section, fees described in paragraph 
(b)(1)(iv) of this section that are recoverable under section 7430 and 
the regulations thereunder as reasonable administrative costs may not 
exceed $75 per hour increased by a cost of living adjustment (and if 
appropriate, a special factor adjustment).
    (ii) Cost of living adjustment--(A) In general. The Internal 
Revenue Service will make a cost of living adjustment to the $75 per 
hour limit by using the Consumer Price Index of All-Urban Consumers 
(CPI-U) published by the Department of Labor, Bureau of Labor 
Statistics and referenced in Internal Revenue Code section 1(f)(5). If 
the CPI-U is no longer published, a comparable index will be used, and 
any reference in this section to the CPI-U will be considered to refer 
to such comparable index.
    (B) Percentage adjustment. For purposes of paragraph (b)(3)(ii)(A) 
of this section, the base year for determining the cost of living 
adjustment is the calendar year 1986. The cost of living adjustment for 
fees incurred in any calendar year subsequent to 1986 is the percentage 
(if any) by which the yearly average CPI-U for the calendar year 
immediately prior to the year in which the fees are incurred exceeds 
the January CPI-U for the calendar year 1986.
    (iii) Special factor adjustment--(A) In general. If the presence of 
a special factor is demonstrated by the taxpayer, the amount 
reimbursable is the amount of reasonable fees paid or incurred by the 
taxpayer in connection with the proceeding for the services of a 
representative as defined in paragraph (b)(2)(i) of this section.
    (B) Special factor. A special factor is a factor, other than an 
increase in the cost of living, which justifies an increase in the $75 
per hour limitation of section 7430(c)(1)(B)(iii). The novelty and 
difficulty of the issues, the undesirability of the case, the work and 
the ability of counsel, the results obtained, and customary fees and 
awards in other cases, are factors applicable to a broad spectrum of 
litigation and do not constitute special factors for the purpose of 
increasing the $75 per hour limitation. The limited availability of a 
specially qualified representative for the proceeding does constitute a 
special factor justifying an increase in the $75 per hour limitation.
    (C) Limited availability. Unless disputed by the Internal Revenue 
Service, limited availability of a specially qualified representative 
is established by demonstrating that a specially qualified 
representative for the proceeding is not available at the $75 per hour 
rate (as adjusted for an increase in the cost of living). Initially, 
this showing may be made by submission of an affidavit signed by the 
taxpayer or by the taxpayer's counsel, that in a case similar to the 
taxpayer's, a specially qualified representative that practices within 
a reasonable distance from the taxpayer's principal residence or 
principal office would normally charge a client similar to the taxpayer 
at a rate in excess of this amount. If the Internal Revenue Service 
challenges this initial showing, the taxpayer may submit additional 
evidence to establish the limited availability of a specially qualified 
representative at the rate specified above.
    (D) Example. The provisions of this section are illustrated by the 
following example:

    Example. Taxpayer A is represented by B, a CPA and attorney with 
an LL.M. Degree in Taxation with Highest Honors and who regularly 
handles cases dealing with TEFRA partnership issues. B represents A 
in an administrative proceeding involving TEFRA partnership issues 
and subject to the provisions of this section. Assuming the taxpayer 
qualifies for an award of reasonable administrative costs by meeting 
the requirements of section 7430, the amount of the award 
attributable to the fees of B may not exceed the $75 per hour 
limitation (as adjusted for the cost of living), absent a special 
factor. Under these facts alone, B is not a specially qualified 
representative since even extraordinary knowledge of the tax laws 
does not constitute distinctive knowledge or a unique and 
specialized skill constituting a special factor.

    (c) Certain costs excluded--(1) Costs not incurred in an 
administrative proceeding. Costs that are not reasonable administrative 
costs for purposes of section 7430 include any costs incurred in 
connection with a proceeding that is not an administrative proceeding 
within the meaning of Sec. 301.7430-3.
    (2) Costs incurred in an administrative proceeding but not 
reasonable--(i) In general. Costs incurred in an administrative 
proceeding that are incurred on or after the administrative proceeding 
date, and that are otherwise described in paragraph (b) of this 
section, are not recoverable unless they are reasonable in both nature 
and amount. For example, costs normally included in the hourly rate of 
the representative by the custom and usage of the representative's 
profession, when billed separately, are not recoverable separate and 
apart from the representative's hourly rate. Such costs typically 
include costs such as secretarial and overhead expenses. In contrast, 
costs which are normally billed separately may be reasonable 
administrative costs that may be recoverable in addition to the 
representative's hourly rate. Therefore, necessary costs incurred for 
travel; expedited mail delivery; messenger service; expenses while on 
travel; long distance telephone calls; and necessary copying fees 
imposed by the Internal Revenue Service, any court, bank or other third 
party, when normally billed separately from the representative's hourly 
rate, may be reasonable administrative costs.
    (ii) Special Rule for Expert Witness' Fees on Issue of Prevailing 
Market Rates. Under paragraph (b)(3)(iii)(C) of this section, the 
taxpayer may initially establish a limited availability of specially 
qualified representatives for the proceeding by submission of an 
affidavit signed by the taxpayer or by the taxpayer's representative. 
The Internal Revenue Service may endeavor to rebut the affidavit 
submitted on this issue by demonstrating either that a specially 
qualified representative was not necessary to represent the taxpayer in 
the proceeding, that the taxpayer's representative is not a specially 
qualified representative or that the prevailing rate for specially 
qualified representatives does not exceed $75 per hour (as adjusted for 
an increase in the cost of living). Unless the Internal Revenue Service 
endeavors to demonstrate that the prevailing rate for specially 
qualified representatives does not exceed $75 per hour (as adjusted for 
an increase in the cost of living), fees for expert witnesses used to 
establish prevailing market rates are not included in the term 
reasonable administrative costs.
    (3) Litigation costs. Litigation costs are not reasonable 
administrative costs because they are not incurred in connection with 
an administrative proceeding. Litigation costs include--
    (i) Costs incurred in connection with the preparation and filing of 
a petition with the United States Tax Court or in connection with the 
commencement of any other court proceeding; and
    (ii) Costs incurred after the filing of a petition with the United 
States Tax Court or after the commencement of any other court 
proceeding.
    (4) Examples. The provisions of this section are illustrated by the 
following examples:

    Example 1. Taxpayer A receives a notice of proposed deficiency 
(30-day letter). A files a request for and is granted an Appeals 
office conference. At the conference no agreement is reached on the 
tax matters at issue. The Internal Revenue Service then issues a 
notice of deficiency. Upon receiving the notice of deficiency, A 
discontinues A's administrative efforts and files a petition with 
the Tax Court. A's costs incurred in connection with the preparation 
and filing of a petition with the Tax Court are litigation costs and 
not reasonable administrative costs. Furthermore, A's costs incurred 
before the administrative proceeding date (date of the notice of 
deficiency as set forth in Sec. 301.7430-3(c)(3)), are not 
reasonable administrative costs.
    Example 2. Assume the same facts as in Example 1 except that 
after A receives the notice of deficiency, A recontacts Appeals. 
Again, A's costs incurred before the administrative proceeding date, 
the date of the notice of deficiency as set forth in Sec. 301.7430-
3(c)(3), are not reasonable administrative costs. A's costs incurred 
in recontacting and working with Appeals after the issuance of the 
notice of deficiency, and up to and including the time of filing of 
the petition, are reasonable administrative costs. A's costs 
incurred in connection with the filing of a petition with the Tax 
Court are not reasonable administrative costs because those costs 
are litigation costs. Similarly, A's costs incurred after the filing 
of the petition are not reasonable administrative costs, as those 
are litigation costs.


Sec. 301.7430-5  Prevailing party.

    (a) In general. For purposes of an award of reasonable 
administrative costs under section 7430, a taxpayer is a prevailing 
party only if the taxpayer--
    (1) Establishes that the position of the Internal Revenue Service 
was not substantially justified;
    (2) Substantially prevails as to the amount in controversy or with 
respect to the most significant issue or set of issues presented; and
    (3) Satisfies the net worth and size limitations referenced in 
paragraph (f) of this section.
    (b) Position of the Internal Revenue Service. The position of the 
Internal Revenue Service in an administrative proceeding is the 
position taken by the Internal Revenue Service as of the administrative 
proceeding date (as defined in Sec. 301.7430-3(c)) or any date 
thereafter.
    (c) Substantially justified--(1) In general. The position of the 
Internal Revenue Service is substantially justified if it has a 
reasonable basis in both fact and law. A significant factor in 
determining whether the position of the Internal Revenue Service is 
substantially justified as of a given date is whether, on or before 
that date, the taxpayer has presented all relevant information under 
the taxpayer's control and relevant legal arguments supporting the 
taxpayer's position to the appropriate Internal Revenue Service 
personnel. The appropriate Internal Revenue Service personnel are 
personnel responsible for reviewing the information or arguments, or 
personnel who would transfer the information or arguments in the normal 
course of procedure and administration to the personnel who are 
responsible.
    (2) Exception. If the position of the Internal Revenue Service was 
substantially justified with respect to some issues in the proceeding 
and not substantially justified with respect to the remaining issues, 
any award of reasonable administrative costs to the taxpayer may be 
limited to only reasonable administrative costs attributable to those 
issues with respect to which the position of the Internal Revenue 
Service was not substantially justified. If the position of the 
Internal Revenue Service was substantially justified for only a portion 
of the period of the proceeding and not substantially justified for the 
remaining portion of the proceeding, any award of reasonable 
administrative costs to the taxpayer may be limited to only reasonable 
administrative costs attributable to that portion during which the 
position of the Internal Revenue Service was not substantially 
justified. Where an award of reasonable administrative costs is limited 
to that portion of the administrative proceeding during which the 
position of the Internal Revenue Service was not substantially 
justified, whether the position of the Internal Revenue Service was 
substantially justified is determined as of the date any cost is 
incurred.
    (d) Amount in controversy. The amount in controversy shall include 
the amount in issue as of the administrative proceeding date as 
increased by any amounts subsequently placed in issue by any party. The 
amount in controversy is determined without increasing or reducing the 
amount in controversy for amounts of loss, deduction, or credit carried 
over from years not in issue.
    (e) Most significant issue or set of issues presented. Where the 
taxpayer has not substantially prevailed with respect to the amount in 
controversy the taxpayer may nonetheless be a prevailing party if the 
taxpayer substantially prevails with respect to the most significant 
issue or set of issues presented. The issues presented include those 
raised as of the administrative proceeding date and those raised 
subsequently. Only in a multiple issue proceeding can a most 
significant issue or set of issues presented exist. However, not all 
multiple issue proceedings contain a most significant issue or set of 
issues presented. An issue or set of issues constitutes the most 
significant issue or set of issues presented if, despite involving a 
lesser dollar amount in the proceeding than the other issue or issues, 
it objectively represents the most significant issue or set of issues 
for the taxpayer or the Internal Revenue Service. This may occur 
because of the effect of the issue or set of issues on other 
transactions or other taxable years of the taxpayer or related parties.
    (f) Net worth and size limitations--(1) Individuals and estates. An 
individual taxpayer or an estate meets the net worth and size 
limitations of this paragraph if, on the administrative proceeding 
date, the taxpayer's net worth does not exceed two million dollars. For 
this purpose, individuals filing a joint return shall be treated as 1 
taxpayer, except in the case of a spouse relieved of liability under 
section 6013(e).
    (2) Others. A taxpayer that is an owner of an unincorporated 
business, or any partnership, corporation, association, unit of local 
government, or organization (other than an organization described in 
paragraph (f)(3) of this section) meets the net worth and size 
limitations of this paragraph if, as of the administrative proceeding 
date--
    (i) The taxpayer's net worth does not exceed seven million dollars; 
and
    (ii) The taxpayer does not have more than 500 employees.
    (3) Special rule for charitable organizations and certain 
cooperatives. An organization described in Internal Revenue Code 
section 501(c)(3) exempt from taxation under Internal Revenue Code 
section 501(a), or a cooperative association as defined in section 
15(a) of the Agricultural Marketing Act, 12 U.S.C. 1141j(a) (as in 
effect on October 22, 1986), meets the net worth and size limitations 
of this paragraph if, as of the administrative proceeding date, the 
organization or cooperative association does not have more than 500 
employees.
    (g) Determination of prevailing party. If the final decision with 
respect to the tax, interest, or penalty is made at the administrative 
level, the determination of whether a taxpayer is a prevailing party 
shall be made by agreement of the parties, or absent such agreement, by 
the Internal Revenue Service. See Sec. 301.7430-2(c)(7) regarding the 
right to appeal the decision of the Internal Revenue Service denying 
(in whole or in part) a request for reasonable administrative costs to 
the Tax Court.
    (h) Examples. The provisions of this section are illustrated by the 
following examples:

    Example 1. The Internal Revenue Service, in the conduct of a 
correspondence examination of taxpayer A's individual income tax 
return, requests substantiation from A of claimed medical expenses. 
A does not respond to the request and the Service Center issues a 
notice of deficiency. After receiving the notice of deficiency, A 
presents sufficient information and arguments to convince a revenue 
agent that the notice of deficiency is incorrect and that A owes no 
tax. The revenue agent then closes the case showing no deficiency. 
Although A incurred costs after the issuance of the notice of 
deficiency, A is unable to recover these costs because, as of the 
date these costs were incurred, A had not presented relevant 
information under A's control and relevant legal arguments 
supporting A's position to the appropriate Internal Revenue Service 
personnel. Accordingly, the position of the Internal Revenue Service 
was substantially justified at the time the costs were incurred.
    Example 2. In the purchase of an ongoing business, taxpayer B 
obtains from the previous owner of the business a covenant not to 
compete for a period of five years. On audit of B's individual 
income tax return for the year in which the business is acquired, 
the Internal Revenue Service challenges the basis assigned to the 
covenant not to compete and a deduction taken as a business expense 
for a seminar attended by B. Both parties agree that the covenant 
not to compete is amortizable over a period of five years. However, 
the Internal Revenue Service asserts that the proper basis of the 
covenant is $2X while the taxpayer asserts the basis is $4X. Thus, 
under the Internal Revenue Service's position, B is entitled to a 
deduction of two-fifths $X in the year under audit and for each of 
the subsequent four years. B's position, however, would result in a 
deduction of four-fifths $X for the year under audit and each of the 
subsequent four years. The deduction for the seminar attended by B 
was reported on the return in question in the amount of $X. The 
Internal Revenue Service's position is that the deduction for the 
seminar should be disallowed entirely. In the notice of deficiency, 
the Internal Revenue Service determines adjustments of two-fifths $X 
(the difference between the Internal Revenue Service's position of 
two-fifths $X and the reported four-fifths $X) regarding the basis 
of the covenant not to compete, and $X resulting from the 
disallowance of the seminar expense. Thus, of the two adjustments 
determined for the year under audit, that attributable to the 
disallowance of the seminar is larger than that attributable to the 
covenant not to compete. However, due to the impact on the next 
succeeding four years, the covenant not to compete adjustment is 
objectively the most significant issue to both B and the Internal 
Revenue Service.
    Example 3. The Collection Branch of a Service Center of the 
Internal Revenue Service determines in the matching process of 
various Forms 1099 and W-2 that taxpayer C has not filed an 
individual income tax return. The Internal Revenue Service sends 
notices to C requesting that C file an income tax return. C does not 
file a return, so the Service Center's Collection Branch prepares a 
substitute for return pursuant to section 6020(b). The calculation 
is sent to C requesting that C either sign the return pursuant to 
section 6020(a) or file a tax return prepared by C. C does not 
respond to the Internal Revenue Service's request and the Service 
Center's Collection Branch issues a notice of deficiency based on 
information in its possession. C does not file a petition with the 
Tax Court and does not pay the asserted deficiency. The Internal 
Revenue Service then assesses the tax shown on the notice of 
deficiency and issues a notice and demand for tax pursuant to 
section 6303. After receiving notice and demand, C contacts the 
Collection Branch and convinces Collection to stay the collection 
process because C does not owe any taxes. The Collection Branch 
recommends that the Examination Division examine the tax liability 
and make an adjustment to income. The Examination Division then 
redetermines the tax and abates the assessment due to information 
and arguments presented by C at that time. The costs C incurred 
before the Collection Branch are incurred in connection with an 
action taken by the Internal Revenue Service to collect a tax. 
Therefore, these costs are incurred with respect to a collection 
action and not an administrative proceeding. Accordingly, they are 
not recoverable as reasonable administrative costs. Costs incurred 
before the Examination Division are reasonable administrative costs; 
however, C may not recover any reasonable administrative costs with 
respect to the proceeding before the Examination Division because, 
as of the date the costs were incurred, C had not previously 
presented all relevant information under C's control and all 
relevant legal arguments supporting C's position to the Collection 
Branch or Examination Division personnel (the appropriate Internal 
Revenue Service personnel under Sec. 301.7430-5(c)), and thus, the 
position of the Internal Revenue Service was substantially justified 
based upon the information it had.


Sec. 301.7430-6  Effective date.

    Sections 301.7430-0, and 301.7430-2 through 301.7430-6, other than 
Sec. 301.7430-2(c)(5), apply to claims for reasonable administrative 
costs filed with the Internal Revenue Service after December 23, 1992, 
with respect to costs incurred in administrative proceedings commenced 
after November 10, 1988. Section 301.7430-2(c)(5) is effective March 
23, 1993.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 3. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


Sec. 602.101  [Amended]

    Par. 4. Section 602.101(c) is amended by adding the entry 
``301.7430-2(c) . . . . 1545-1356'' in numerical order in the table.
Margaret Milner Richardson,
Commissioner of Internal Revenue.

    Approved: May 9, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-12828 Filed 6-6-94; 8:45 am]
BILLING CODE 4830-01-M