[Federal Register Volume 62, Number 1 (Thursday, January 2, 1997)]
[Proposed Rules]
[Pages 77-81]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32380]



[[Page 77]]

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DEPARTMENT OF THE TREASURY
26 CFR Parts 1 and 301

[REG-248770-96]
RIN 1545-AU64


Miscellaneous Sections Affected by the Taxpayer Bill of Rights 2 
and the Personal Responsibility and Work Opportunity Reconciliation Act 
of 1996

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to joint 
returns, property exempt from levy, interest, penalties, offers in 
compromise, and the awarding of costs and certain fees. The proposed 
regulations reflect changes to the law made by the Taxpayer Bill of 
Rights 2 and a conforming amendment made by the Personal Responsibility 
and Work Opportunity Reconciliation Act of 1996. The proposed 
regulations affect taxpayers with respect to filing of returns, 
interest, penalties, court costs, and payment, deposit, and collection 
of taxes.

DATES: Written comments and requests for a public hearing must be 
received by April 2, 1997.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-248770-96), room 
5228, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. In the alternative, submissions may be hand 
delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R 
(REG-248770-96), Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue NW, Washington DC. Finally, taxpayers may submit 
comments electronically via the INTERNET by selecting the ``Tax Regs'' 
option on the IRS Home Page, or by submitting comments directly to the 
IRS Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Beverly A. 
Baughman, (202) 622-4940 regarding joint returns and penalties; Robert 
A. Miller, (202) 622-3640 regarding levy; Donna J. Welch, (202) 622-
4910 regarding interest; Thomas D. Moffitt, (202) 622-7900 regarding 
court costs; and Kevin B. Connelly, (202) 622-3640 regarding 
compromises (not toll-free numbers). Concerning submissions, 
Evangelista Lee, (202) 622-7190 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, D.C. 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, D.C. 
20224. Comments on the collection of information should be received by 
March 3, 1997. Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in this proposed regulation is in 
Sec. 301.7430-2(c)(3)(i)(B). This information is required to obtain an 
award of reasonable administrative costs. This information will be used 
to determine if a taxpayer is entitled to an award of reasonable 
administrative costs. The collection of information is required to 
obtain the award. The likely respondents are individuals, business or 
other for-profit institutions, nonprofit institutions, and small 
businesses or organizations.
    Estimated total annual reporting burden: 10 hours.
    The estimated annual burden per respondent: 15 minutes.
    Estimated number of respondents: 38.
    Estimated annual frequency of responses: On occasion.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains proposed amendments to the Income Tax 
Regulations and the Regulations on Procedure and Administration (26 CFR 
parts 1 and 301, respectively) relating to joint returns under section 
6013, levy under section 6334, interest under section 6601, the failure 
to file penalty under section 6651, the failure to deposit penalty 
under section 6656, compromise under section 7122, and awards of costs 
and certain fees under section 7430. These sections were amended by the 
Taxpayer Bill of Rights 2 (TBOR2) (Pub. L. 104-168, 110 Stat. 1452 
(1996)) and the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996 (Pub. L. 104-193, 110 Stat. 2105 (1996)). 
The changes made by TBOR2 and the Personal Responsibility and Work 
Opportunity Reconciliation Act of 1996 are reflected in the proposed 
regulations.

Explanation of Provisions

Interest and Penalties

    Section 6601 requires a taxpayer to pay interest on late payments 
of tax. However, sections 6601(e)(2) and 6601(e)(3) provide an 
interest-free period if a taxpayer pays the tax due within a certain 
number of days after the date of the notice and demand for payment. 
Sections 303(a) and 303(b)(1) of TBOR2 amended sections 6601(e)(2) and 
6601(e)(3) to extend this interest-free period. Therefore, 
Sec. 301.6601-1(f) of the proposed regulations extends the interest-
free period from 10 days to 21 calendar days after the date of the 
notice and demand (10 business days if the amount for which the notice 
and demand is made equals or exceeds $100,000) with respect to any 
notice and demand made after December 31, 1996. The proposed 
regulations also define business day and calendar day for purposes of 
Sec. 301.6601-1(f).
    Section 6651(a)(3) imposes a penalty on any person who fails to pay 
the amount of tax that is required to be shown on a return but that is 
not so shown. However, a penalty-free period is provided if a taxpayer 
pays the tax due within a certain number of days after the date of the 
notice and demand for payment. Section 303(b)(2) of TBOR2 amended 
section 6651(a)(3) to extend the penalty-free period. Therefore, 
proposed Sec. 301.6651-1(a)(3) extends the penalty-free period from 10

[[Page 78]]

days to 21 calendar days after the date of the notice and demand (10 
business days if the amount for which the notice and demand is made 
equals or exceeds $100,000) with respect to any notice and demand made 
after December 31, 1996. In addition, the proposed regulations amend 
section 301.6651-1(a)(3) to conform with changes made by section 
1502(b) of the Tax Reform Act of 1986 (Pub. L. 99-514, 100 Stat. 2085 
(1986)) to repeal the special coordination rule under section 
6651(c)(1)(B).
    Section 6651(a)(2) imposes a penalty on any person who fails to pay 
the amount of tax shown on a return by the payment due date (including 
extensions). Pursuant to section 6020(b), if a taxpayer does not file a 
tax return, the Secretary can make a substitute return for the 
taxpayer. Prior to TBOR2, a taxpayer with a substitute return was not 
subject to a section 6651(a)(2) penalty because the substitute return 
was not treated as a return for purposes of the penalty. See Rev. Rul. 
76-562, 1976-2 C.B. 430. Section 1301 of TBOR2 amended section 6651 to 
apply the section 6651(a)(2) failure to pay penalty to returns prepared 
by the Secretary pursuant to section 6020(b). Thus, for returns due 
(determined without regard to extensions) after July 30, 1996, proposed 
Sec. 301.6651-1(g) provides that a taxpayer with a substitute return 
may be subject to a failure to pay penalty under section 6651(a)(2).
    Section 6656 imposes a penalty for failure to deposit taxes with a 
government depository by the prescribed due date. Section 304 of TBOR2 
amended section 6656 to provide exceptions to the failure to deposit 
penalty for first time depositors of employment taxes. Accordingly, 
Sec. 301.6656-3(a) of the proposed regulations provides that in the 
case of first time depositors of employment taxes, the Secretary will 
generally waive the penalty for failure to deposit if (1) the failure 
to deposit is inadvertent based on all the facts and circumstances, (2) 
the depositing entity meets certain net worth requirements, (3) the 
failure to deposit occurs during the first quarter the depositing 
entity is required to deposit any employment tax, and (4) the return 
for the employment tax is filed on time.
    In addition, proposed Sec. 301.6656-3(b) provides that the 
Secretary may abate any penalty for failure to make deposits if the 
first time a depositor is required to make a deposit, the amount 
required to be deposited is inadvertently sent to the Secretary instead 
of to the appropriate government depository. Proposed Sec. 301.6656-3 
applies to deposits required to be made after July 30, 1996.

Joint Returns

    Prior to TBOR2, married individuals making an election under 
section 6013(b) to file a joint return after filing a separate return 
for the same taxable year were required to pay the full amount of the 
tax shown on the joint return at or before the time of filing the joint 
return. With respect to taxable years beginning after July 30, 1996, 
section 402 of TBOR2 amended section 6013(b) to permit married 
individuals who previously filed separate returns to file joint returns 
for the same taxable year without paying the full amount of tax shown 
on the joint return. Accordingly, Sec. 1.6013-2(b)(1) of the proposed 
regulations provides that the full payment requirement applies only to 
taxable years beginning on or before July 30, 1996.

Levy and Compromise

    Section 6334 lists the items of property that are exempt from levy 
by the IRS. Section 502 of TBOR2 amended section 6334 to (1) increase 
the dollar amount exempt from levy under section 6334(a)(2) and provide 
that this exemption amount applies to all taxpayers, not just heads of 
a family; (2) increase the dollar amount exempt from levy under section 
6334(a)(3); and (3) provide a yearly inflation adjustment for the 
dollar amounts exempt from levy. In addition, section 110(l)(6) of the 
Personal Responsibility and Work Opportunity Reconciliation Act of 
1996, in a conforming amendment, amended section 6334(a)(11)(A) to 
delete the language ``(relating to aid to families with dependent 
children)''.
    Accordingly, Sec. 301.6334-1(a)(2) of the proposed regulations 
increases from $1,650 ($1,550 in the case of levies issued during 1989) 
to $2,500 the amount exempt from levy for fuel, provisions, furniture, 
and personal effects, and makes this exemption applicable to all 
taxpayers, not just taxpayers who are heads of a family. The proposed 
regulations also increase from $1,100 ($1,050 in the case of levies 
issued during 1989) to $1,250 the amount exempt from levy for books and 
tools of a trade, business, or profession. These changes are effective 
with respect to levies issued after December 31, 1996. In addition, for 
calendar years beginning after 1997, Sec. 301.6334-1(e) of the proposed 
regulations provides an inflation adjustment for the exemption amounts 
described above and for rounding to the nearest multiple of $10.
    Prior to the enactment of TBOR2, section 7122(b) required the 
General Counsel of the Treasury or his delegate to file an opinion with 
the Secretary whenever the Secretary compromised a case, unless the 
compromise involved a civil case in which the unpaid amount of the tax 
assessed (including any interest, additional amount, addition to the 
tax, or assessable penalty) was less than $500. Effective July 30, 
1996, section 503 of TBOR2 amended section 7122 to raise the dollar 
threshold for mandatory review of compromises of civil cases by the 
General Counsel of the Department of Treasury or his delegate from $500 
to $50,000. Accordingly, Sec. 301.7122-1(e) of the proposed regulations 
provides that for compromises accepted on or after July 30, 1996, no 
opinion is required if the unpaid amount of tax is less than $50,000.

Awarding of Costs and Certain Fees

    In general, under section 7430 a prevailing party may recover the 
reasonable administrative or litigation costs incurred in an 
administrative or a civil proceeding if the proceeding relates to the 
determination, collection, or refund of any tax, interest, or penalty. 
Prior to TBOR2, the taxpayer had the burden of proving that the 
position of the United States was not substantially justified. Section 
701 of TBOR2 amended section 7430(c)(4) to place on the government the 
burden of proving that the position of the United States is 
substantially justified. Under TBOR2, the position of the government 
will be presumed not to be substantially justified if the IRS did not 
follow its applicable published guidance. Section 701 defines 
applicable published guidance.
    The proposed regulations reflect these changes. Further, 
Sec. 301.7430-5(c)(3) of the proposed regulations clarifies that in the 
definition of applicable published guidance, ``regulations'' means 
final and temporary regulations. The proposed regulations also clarify 
the period during which and the issues upon which the position of the 
United States is presumed to be not substantially justified.
    Section 702 of TBOR2 amended section 7430(c)(1) to increase the 
allowable hourly rate of an award of attorney's fees and provide for a 
yearly inflation adjustment and rounding. Sections 301.7430-2 and 
301.7430-4 of the proposed regulations reflect these changes.
    Finally, section 703 of TBOR2 amended section 7430(b)(1) to clarify 
that any failure to agree to an extension of the statute of limitations 
will not affect the determination of whether a taxpayer has exhausted 
administrative

[[Page 79]]

remedies as a prerequisite to recovery of attorney's fees. Although 
this is consistent with an example in the prior regulations (Example 4, 
Sec. 301.7430-1(f)), the proposed regulations add Sec. 301.7430-1(b)(4) 
to reflect the statutory language.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required.
    It is hereby certified that the regulations in this document will 
not have a significant economic impact on a substantial number of small 
entities. This certification is based on a determination that in the 
past only an average of 38 taxpayers per year, the majority of whom 
were individuals, have filed a request to recover administrative costs. 
Accordingly, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) is not required.
    Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking will be submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or electronic comments that are submitted timely 
to the IRS. All comments will be available for public inspection and 
copying. A public hearing may be scheduled if requested in writing by 
any person that timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place for the hearing will be 
published in the Federal Register.

Drafting Information

    The principal authors of these regulations are Beverly A. Baughman 
and Donna J. Welch, Office of Assistant Chief Counsel (Income Tax and 
Accounting), Robert A. Miller and Kevin B. Connelly, Office of 
Assistant Chief Counsel (General Litigation), and Thomas D. Moffitt, 
Office of Assistant Chief Counsel (Field Service). However, other 
personnel from the IRS and Treasury Department participated in their 
development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

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

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as 
follows:

PART 1--INCOME TAXES

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

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


Sec. 1.6013-2  [Amended]

    Par. 2. Section 1.6013-2(b)(1) is amended by removing the language 
``Unless'' and adding ``Beginning on or before July 30, 1996, unless'' 
in its place.

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 3. The authority citation for part 301 continues to read in 
part as follows:

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

    Par. 4. Section 301.6334-1 is amended by:
    1. Revising paragraph (a)(2).
    2. Removing the language ``$1,100 ($1,050 for levies issued prior 
to January 1, 1990)'' from paragraph (a)(3) and adding ``$1,250'' in 
its place.
    3. Removing the language ``(relating to aid to families with 
dependent children)'' from paragraph (a)(11)(i).
    4. Redesignating paragraph (e) as paragraph (f) and adding a new 
paragraph (e).
    5. Revising newly designated paragraph (f).
    The additions and revisions read as follows:


Sec. 301.6334-1  Property exempt from levy.

    (a) * * *
    (2) Fuel, provisions, furniture, and personal effects. So much of 
the fuel, provisions, furniture, and personal effects in the taxpayer's 
household, and of the arms for personal use, livestock, and poultry of 
the taxpayer, that does not exceed $2,500 in value.
* * * * *
    (e) Inflation adjustment. For any calendar year beginning after 
December 31, 1997, each dollar amount referred to in paragraphs (a)(2) 
and (a)(3) of this section will be increased by an amount equal to the 
dollar amount multiplied by the cost-of-living adjustment determined 
under section 1(f)(3) for the calendar year (substituting ``calendar 
year 1996'' for ``calendar year 1992'' in section 1(f)(3)(B)). If any 
dollar amount as adjusted is not a multiple of $10, the dollar amount 
will be rounded to the nearest multiple of $10 (rounding up if the 
amount is a multiple of $5).
    (f) Effective date. Generally, these provisions are applicable with 
respect to levies made on or after July 1, 1989. However, any 
reasonable attempt by a taxpayer to comply with the statutory 
amendments addressed by the regulations in this section prior to 
February 21, 1995, will be considered as meeting the requirements of 
the regulations in this section. In addition, paragraphs (a)(2), 
(a)(3), (a)(11)(i) and (e) of this section are applicable with respect 
to levies issued after December 31, 1996.
    Par. 5. Section 301.6601-1 is amended by:
    1. Revising paragraphs (f)(3) and (f)(4).
    2. Redesignating paragraph (f)(5) as paragraph (f)(6) and adding 
new paragraph (f)(5).
    The additions and revisions read as follows:


Sec. 301.6601-1  Interest on underpayments.

* * * * *
    (f) * * *
    (3) Interest will not be imposed on any assessable penalty, 
addition to the tax, or additional amount if the amount is paid within 
21 calendar days (10 business days if the amount stated in the notice 
and demand equals or exceeds $100,000) from the date of the notice and 
demand. If interest is imposed, it will be imposed only for the period 
from the date of the notice and demand to the date on which payment is 
received. This paragraph (f)(3) is applicable with respect to any 
notice and demand made after December 31, 1996.
    (4) If notice and demand is made after December 31, 1996, for any 
amount and the amount is paid within 21 calendar days (10 business days 
if the amount equals or exceeds $100,000) from the date of the notice 
and demand, interest will not be imposed for the period after the date 
of the notice and demand.
    (5) For purposes of paragraphs (f)(3) and (f)(4) of this section--
    (i) The term business day means any day other than a Saturday, 
Sunday, legal holiday in the District of Columbia, or a statewide legal 
holiday in the state where the taxpayer resides or where the taxpayer's 
principal place of business is located. With respect to the tenth

[[Page 80]]

business day (after taking into account the first sentence of this 
paragraph (f)(5)(i)), see section 7503 relating to time for performance 
of acts where the last day falls on a statewide legal holiday in the 
state where the act is required to be performed.
    (ii) The term calendar day means any day. With respect to the 
twenty-first calendar day, see section 7503 relating to time for 
performance of acts where the last day falls on a Saturday, Sunday, or 
legal holiday.
* * * * *
    Par. 6. Section 301.6651-1 is amended by:
    1. Revising paragraph (a)(3).
    2. Adding paragraph (g).
    The additions and revisions read as follows:


Sec. 301.6651-1  Failure to file tax return or to pay tax.

    (a) * * *
    (3) Failure to pay tax not shown on return. In the case of failure 
to pay any amount of any tax required to be shown on a return specified 
in paragraph (a)(1) of this section that is not so shown (including an 
assessment made pursuant to section 6213(b)) within 21 calendar days 
from the date of the notice and demand (10 business days if the amount 
for which the notice and demand is made equals or exceeds $100,000) 
with respect to any notice and demand made after December 31, 1996, 
there will be added to the amount stated in the notice and demand the 
amount specified below unless the failure to pay the tax within the 
prescribed time is shown to the satisfaction of the district director 
or the director of the service center to be due to reasonable cause and 
not to willful neglect. The amount added to the tax is 0.5 percent of 
the amount stated in the notice and demand if the failure is for not 
more than 1 month, with an additional 0.5 percent for each additional 
month or fraction thereof during which the failure continues, but not 
to exceed 25 percent in the aggregate.
* * * * *
    (g) Treatment of returns prepared by the Secretary--(1) In general. 
A return prepared by the Secretary under section 6020(b) will be 
disregarded for purposes of determining the amount of the addition to 
tax for failure to file any return pursuant to paragraph (a)(1) of this 
section. However, the return prepared by the Secretary will be treated 
as a return filed by the taxpayer for purposes of determining the 
amount of the addition to tax for failure to pay the tax shown on any 
return and for failure to pay the tax required to be shown on a return 
that is not so shown pursuant to paragraphs (a)(2) and (a)(3) of this 
section, respectively.
    (2) Effective date. This paragraph (g) applies to returns the due 
date for which (determined without regard to extensions) is after July 
30, 1996.
    Par. 7. Section 301.6656-3 is added to read as follows:


Sec. 301.6656-3  Abatement of penalty.

    (a) Exception for first time depositors of employment taxes--(1) 
Waiver. The Secretary will generally waive the penalty imposed by 
section 6656(a) on a person's failure to deposit any employment tax 
under subtitle C of the Internal Revenue Code if--
    (i) The failure is inadvertent;
    (ii) The person meets the requirements referred to in section 
7430(c)(4)(A)(ii) (relating to the net worth requirements applicable 
for awards of attorney's fees);
    (iii) The failure occurs during the first quarter that the person 
is required to deposit any employment tax; and
    (iv) The return of the tax is filed on or before the due date.
    (2) Inadvertent failure. For purposes of paragraph (a)(1)(i) of 
this section, the Secretary will determine if a failure to deposit is 
inadvertent based on all the facts and circumstances.
    (b) Deposit sent to Secretary. The Secretary may abate the penalty 
imposed by section 6656(a) if the first time a depositor is required to 
make a deposit, the amount required to be deposited is inadvertently 
sent to the Secretary instead of to the appropriate government 
depository.
    (c) Effective date. This section applies to deposits required to be 
made after July 30, 1996.
    Par. 8. Paragraph (e) of Sec. 301.7122-1 is revised to read as 
follows:


Sec. 301.7122-1  Compromises.

* * * * *
    (e) Record--(1) In general. If an offer in compromise is accepted, 
there will be placed on file the opinion of the Chief Counsel of the 
IRS with respect to the compromise, with the reasons for the opinion, 
and including a statement of--
    (i) The amount of tax assessed;
    (ii) The amount of interest, additional amount, addition to the 
tax, or assessable penalty, imposed by law on the person against whom 
the tax is assessed; and
    (iii) The amount actually paid in accordance with the terms of the 
compromise.
    (2) Exception. For compromises accepted on or after July 30, 1996, 
no opinion will be required with respect to the compromise of any civil 
case in which the unpaid amount of tax assessed (including any 
interest, additional amount, addition to the tax, or assessable 
penalty) is less than $50,000. However, the compromise will be subject 
to continuing quality review by the Secretary.
* * * * *


Sec. 301.7430-0  [Amended]

    Par 9. Section 301.7430-0 is amended by:
    1. Adding under the heading Sec. 301.7430-1, a caption (b)(4) to 
read ``(4) Failure to agree to extension of time for assessments.''.
    2. Adding under the heading Sec. 301.7430-5, a caption (c)(3) to 
read ``(3) Presumption.''.
    Par. 10. Section 301.7430-1 is amended by adding paragraph (b)(4) 
to read as follows:


Sec. 301.7430-1  Exhaustion of administrative remedies.

* * * * *
    (b) * * *
    (4) Failure to agree to extension of time for assessments. Any 
failure by the prevailing party to agree to an extension of the time 
for the assessment of any tax will not be taken into account for 
purposes of determining whether the prevailing party has exhausted the 
administrative remedies available to the party within the IRS.
* * * * *
    Par. 11. Section 301.7430-2 is amended by:
    1. Removing the language ``7430(c)(4)(B)(ii)'' from the third 
sentence of paragraph (b)(2) and adding ``7430(c)(4)(C)(ii)'' in its 
place.
    2. Revising paragraph (c)(3)(i)(B).
    3. Removing the language ``If more than $75'' from paragraph 
(c)(3)(ii)(C) and adding ``In the case of administrative proceedings 
commenced after July 30, 1996, if more than $110'' in its place.
    The revision reads as follows:


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

* * * * *
    (c) * * *
    (3) * * *
    (i) * * *
    (B) A clear and concise statement of the reasons why the taxpayer 
alleges that the position of the IRS in the administrative proceeding 
was not substantially justified. For administrative proceedings 
commenced after July 30, 1996, if the taxpayer alleges that the IRS did 
not follow any applicable published guidance, the statement must 
identify all applicable published guidance that the taxpayer

[[Page 81]]

alleges that the IRS did not follow. For purposes of this paragraph 
(c)(3)(i)(B), the term applicable published guidance means final or 
temporary regulations, revenue rulings, revenue procedures, information 
releases, notices, announcements, and, if issued to the taxpayer, 
private letter rulings, technical advice memoranda, and determination 
letters. Also, for purposes of this paragraph (c)(3)(i)(B), the term 
administrative proceeding includes only those administrative 
proceedings or portions of administrative proceedings occurring on or 
after the administrative proceeding date as defined in Sec. 301.7430-
3(c).
* * * * *
    Par. 12. Section 301.7430-4 is amended by:
    1. Removing the language ``$75'' from paragraph (b)(3)(i) and 
adding ``, in the case of proceedings commenced after July 30, 1996, 
$110'' in its place.
    2. Revising paragraph (b)(3)(ii).
    3. Removing the language ``$75'' from the first, second, and third 
sentences of paragraph (b)(3)(iii)(B) and adding ``$110'' in its place.
    4. Removing the language ``$75'' from paragraph (b)(3)(iii)(C) and 
adding ``$110'' in its place.
    5. Removing the language ``$75'' from the third sentence of the 
example in paragraph (b)(3)(iii)(D) and adding ``$110'' in its place.
    6. Removing the language ``$75'' from the second and third 
sentences of paragraph (c)(2)(ii) and adding ``$110'' in its place.
    The revision reads as follows:


Sec. 301.7430-4  Reasonable administrative costs.

* * * * *
    (b) * * *
    (3) * * *
    (ii) Cost of living adjustment. The IRS will make a cost of living 
adjustment to the $110 per hour limitation for fees incurred in any 
calendar year beginning after December 31, 1996. The cost of living 
adjustment will be an amount equal to $110 multiplied by the cost-of-
living adjustment determined under section 1(f)(3) for the calendar 
year (substituting ``calendar year 1995'' for ``calendar year 1992'' in 
section 1(f)(3)(B)). If the dollar limitation as adjusted by this cost-
of-living increase is not a multiple of $10, the dollar amount will be 
rounded to the nearest multiple of $10 (rounding up if the amount is a 
multiple of $5).
* * * * *
    Par. 13. Section 301.7430-5 is amended by:
    1. Revising paragraph (a).
    2. Adding paragraph (c)(3).
    The addition and revision read as follows:


Sec. 301.7430-5  Prevailing party.

    (a) In general. For purposes of an award of reasonable 
administrative costs under section 7430 in the case of administrative 
proceedings commenced after July 30, 1996, a taxpayer is a prevailing 
party only if--
    (1) The position of the IRS was not substantially justified;
    (2) The taxpayer substantially prevails as to the amount in 
controversy or with respect to the most significant issue or set of 
issues presented; and
    (3) The taxpayer satisfies the net worth and size limitations 
referenced in paragraph (f) of this section.
* * * * *
    (c) * * *
    (3) Presumption. If the IRS did not follow any applicable published 
guidance in an administrative proceeding commenced after July 30, 1996, 
the position of the IRS, on those issues to which the guidance applies 
and for all periods during which the guidance was not followed, will be 
presumed not to be substantially justified. This presumption may be 
rebutted. For purposes of this paragraph (c)(3), the term applicable 
published guidance means final or temporary regulations, revenue 
rulings, revenue procedures, information releases, notices, 
announcements, and, if issued to the taxpayer, private letter rulings, 
technical advice memoranda, and determination letters. Also, for 
purposes of this paragraph (c)(3), the term administrative proceeding 
includes only those administrative proceedings or portions of 
administrative proceedings occurring on or after the administrative 
proceeding date as defined in Sec. 301.7430-3(c).
* * * * *
    Par. 14. Section 301.7430-6 is revised to read as follows:


Sec. 301.7430-6  Effective date.

    Sections 301.7430-2 through 301.7430-6, other than Secs. 301.7430-2 
(b)(2), (c)(3)(i)(B), (c)(3)(ii)(C), and (c)(5); Secs. 301.7430-4 
(b)(3)(i), (b)(3)(ii), (b)(3)(iii)(B), (b)(3)(iii)(C), (b)(3)(iii)(D), 
and (c)(2)(ii); and Secs. 301.7430-5 (a) and (c)(3), apply to claims 
for reasonable administrative costs filed with the IRS after December 
23, 1992, with respect to costs incurred in administrative proceedings 
commenced after November 10, 1988. Section 301.7430-2(c)(5) is 
applicable March 23, 1993. Section 301.7430-0, Secs. 301.7430-2 (b)(2), 
(c)(3)(i)(B), and (c)(3)(ii)(C); Secs. 301.7430-4 (b)(3)(i), 
(b)(3)(ii), (b)(3)(iii)(B), (b)(3)(iii)(C), (b)(3)(iii)(D), and 
(c)(2)(ii); and Secs. 301.7430-5 (a) and (c)(3) are applicable for 
administrative proceedings commenced after July 30, 1996.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 96-32380 Filed 12-31-96; 8:45 am]
BILLING CODE 4830-01-U