[Federal Register Volume 66, Number 3 (Thursday, January 4, 2001)]
[Rules and Regulations]
[Pages 725-730]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-198]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD8922]
RIN 1545-AX00


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations relating to the 
circumstances under which a party, by reason of having made a qualified 
offer, will be entitled to an award of reasonable administrative and 
litigation costs in a civil tax proceeding brought in a court of the 
United States (including the Tax Court). The regulations implement 
certain changes made by section 3101(e) of the Internal Revenue Service 
Restructuring and Reform Act of 1998. They affect taxpayers who make 
qualified offers. The text of these regulations also serves as the text 
of the proposed regulations set forth in the notice of proposed 
rulemaking on this subject in the Proposed Rules section of this issue 
of the Federal Register.

DATES: Effective Dates. These regulations are effective January 3, 
2001.
    Applicability Date: These regulations apply to qualified offers 
made in administrative or court proceedings described in section 7430 
after January 3, 2001.

FOR FURTHER INFORMATION CONTACT: Thomas D. Moffitt (202) 622-7900 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Procedure and 
Administration Regulations (26 CFR part 301) that reflect changes to 
section 7430 made by section 3101(e) of the Internal Revenue Service 
Restructuring and Reform Act of 1998 relating to the circumstances 
under which taxpayers may recover reasonable administrative and 
litigation costs in a court proceeding with respect to the 
determination or refund of any tax, interest or penalty when taxpayers 
have made a qualified offer.

Explanation of Provisions

    In general, a prevailing party may recover the reasonable 
administrative and litigation costs incurred in administrative and 
court proceedings if the proceedings relate to the determination or 
refund of any tax, interest or penalty under the Internal Revenue Code. 
The regulations provide information concerning the circumstances under 
which the making of a qualified offer will result in the taxpayer being 
a prevailing party for purposes of a recovery of costs. In general, a 
taxpayer is a prevailing party by reason of making a qualified offer if 
the taxpayer's liability under the last qualified offer would equal or 
exceed the amount of the taxpayer's liability (determined without 
regard to interest) attributable to the adjustments included in the 
last qualified offer that were actually determined by the court through 
litigation, plus the amount of any additional adjustments included in 
the last qualified offer that were determined by settlements entered 
into after the making of the last qualified offer. Adjustments raised 
by any party subsequent to the making of the last qualified offer are 
disregarded in determining the liability of the taxpayer to be compared 
with the liability under the last qualified offer. These regulations 
apply in multiple taxpayer situations, such as joint returns, but do 
not set forth any special rules regarding the aggregation or 
segregation of the qualified offer or liability in situations that may 
present special circumstances, such as claims for innocent spouse 
relief. After study, further guidance may be issued elaborating on the 
treatment of such situations under these regulations.
    To qualify as a prevailing party under this rule, in addition to 
the above,

[[Page 726]]

taxpayers must also satisfy the net worth requirements of section 
7430(c)(4)(A)(ii). Furthermore, to qualify for an award, taxpayers must 
satisfy the remaining requirements of section 7430, such as not 
unreasonably protracting the proceedings and, for purposes of an award 
of litigation costs, exhausting their administrative remedies. On the 
other hand, a taxpayer qualifying as a prevailing party by reason of 
having made a qualified offer need not substantially prevail on either 
the amount in controversy or the most significant issue or set of 
issues presented. Similarly, whether the positions of the United States 
in the administrative and litigation proceedings were substantially 
justified is not relevant for an award under the qualified offer rule. 
An award based upon the taxpayer having made a qualified offer is 
limited to those reasonable administrative and litigation costs 
incurred on or after the date of the last qualified offer, with respect 
to the adjustments that were included in the last qualified offer, and 
litigated to a judicial determination. If the taxpayer qualifies as a 
prevailing party without regard to the qualified offer rule, the 
reasonable administrative and litigation costs to which the taxpayer is 
thus entitled may not be awarded again by reason of the taxpayer having 
made a qualified offer.
    A qualified offer is a written offer that: (1) Is made by the 
taxpayer to the United States during the qualified offer period; (2) 
establishes the taxpayer's liability (determined without regard to 
interest) by setting forth the amount of the taxpayer's offer on all 
adjustments at issue in the proceeding at the time the qualified offer 
is made; (3) is designated as a qualified offer at the time it is made; 
and (4) remains open at least until the earliest of the date the offer 
is rejected, the date the trial begins, or the 90th day after the date 
the offer is made.
    The qualified offer period ends on the date which is thirty days 
before the date the case is first set for trial. In cases that are 
pending in the United States Tax Court, cases are placed upon a 
calendar for trial. Each case appearing on a trial calendar is to be 
called at the time and place scheduled. In determining when the 
qualified offer period ends for cases in the Tax Court and other courts 
of the United States using calendars for trial, a case is considered to 
be set for trial on the date scheduled for the calendar call. Cases may 
be removed from a trial calendar at any time. Thus, a case may be 
removed from a calendar before the date that precedes by thirty days 
the date scheduled for that calendar. To promote the settlement of such 
cases, the qualified offer period does not end until the case remains 
on a calendar for trial on the date that precedes by 30 days the 
scheduled date of the calendar call for that trial session. The 
qualified offer period may not be extended, although the period during 
which a qualified offer remains open may extend beyond the end of the 
qualified offer period.
    A taxpayer cannot qualify as a prevailing party by reason of having 
made a qualified offer if the determination of the court in the 
proceeding with respect to the adjustments included in the last 
qualified offer is entered exclusively pursuant to a settlement. 
Neither can a taxpayer qualify as a prevailing party by reason of 
having made a qualified offer in any proceeding in which the amount of 
tax liability is not in issue, including any declaratory judgment 
proceeding, any proceeding to enforce or quash any summons issued 
pursuant to the Internal Revenue Code of 1986, and any action to 
restrain disclosure under section 6110(f).

Special Analyses

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

Drafting Information

    The principal author of these regulations is Thomas D. Moffitt, 
Office of Associate Chief Counsel (Income Tax and Accounting). However, 
other personnel from the IRS and Treasury Department participated in 
their development.

List of Subjects in 26 CFR Part 301

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

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 301 is 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. Section 301.7430-7T is added to read as follows:


Sec. 301.7430-7T  Qualified offers (temporary).

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

[[Page 727]]

of the last qualified offer and is limited to those costs attributable 
to the adjustments at issue at the time the last qualified offer was 
made that were included in the court's judgment other than by reason of 
settlement. The qualified offer rule is inapplicable to reasonable 
administrative or litigation costs otherwise awarded to a taxpayer who 
is a prevailing party under any other provision of section 7430(c)(4). 
This section sets forth the requirements to be satisfied for a taxpayer 
to be treated as a prevailing party by reason of the taxpayer making a 
qualified offer as well as the circumstances leading to the application 
of the exceptions, special rules, and coordination provisions of the 
qualified offer rule. Furthermore, this section sets forth the elements 
necessary for an offer to be treated as a qualified offer under section 
7430(g).
    (b) Requirements for treatment as a prevailing party based upon 
having made a qualified offer.--(1) In general. In order to be treated 
as a prevailing party by reason of having made a qualified offer, the 
liability of the taxpayer for the type or types of tax and the taxable 
year or years at issue in the proceeding, as calculated pursuant to 
paragraph (b)(2) of this section, based on the last qualified offer, as 
defined in paragraph (c) of this section, made by the taxpayer in the 
court or administrative proceeding, must equal or exceed the liability 
of the taxpayer pursuant to the judgment by the court for the same type 
or types of tax and the same taxable year or years, as calculated 
pursuant to paragraph (b)(3) of this section. Furthermore, the taxpayer 
must meet the timely filing and net worth requirements of section 
7430(c)(4)(A)(ii). If all of the adjustments subject to the last 
qualified offer are settled prior to the entry of the judgment by the 
court, the taxpayer is not a prevailing party by reason of having made 
a qualified offer. The taxpayer may, however, still qualify as a 
prevailing party if the requirements of section 7430(c)(4)(A) are met.
    (2) Liability under the last qualified offer. For purposes of 
making the comparison of liability described in paragraph (b)(1) of 
this section, the taxpayer's liability under the last qualified offer 
is the change in the taxpayer's liability for the type or types of tax 
and the taxable year or years at issue in the proceeding from the tax 
shown on the return or returns (or as previously adjusted) which would 
have resulted from the acceptance by the United States of the 
taxpayer's last qualified offer on all of the adjustments at issue in 
the administrative or court proceeding at the time that offer was made. 
The portion of a taxpayer's liability that is attributable to 
adjustments raised by either party after the making of the last 
qualified offer is not included in the calculation of the liability 
under that offer. The taxpayer's liability under the last qualified 
offer is calculated without regard to adjustments to be fully resolved, 
by stipulation of the parties, through any other pending court or 
administrative proceeding. Furthermore, the taxpayer's liability under 
the last qualified offer is calculated without regard to interest 
unless the taxpayer's liability for, or entitlement to, interest is a 
contested issue in the administrative or court proceeding and is one of 
the adjustments included in the last qualified offer.
    (3) Liability pursuant to the judgment. For purposes of making the 
comparison of liability described in paragraph (b)(1) of this section, 
the taxpayer's liability pursuant to the judgment is the change in the 
taxpayer's liability for the type or types of tax and the taxable year 
or years at issue in the proceeding from the tax shown on the return or 
returns (or as previously adjusted), resulting from amounts contained, 
or to be contained, in the judgment as a result of the court's 
determinations, and amounts contained in settlements not included in 
the judgment, that are attributable to all adjustments that were 
included in the last qualified offer. This liability includes amounts 
attributable to adjustments included in the last qualified offer and 
settled by the parties prior to the entry of judgment regardless of 
whether those amounts are actually included in the judgment entered by 
the court. The taxpayer's liability pursuant to the judgment does not 
include amounts attributable to adjustments that are not included in 
the last qualified offer, even if those amounts are actually included 
in the judgment entered by the court. The taxpayer's liability pursuant 
to the judgment is calculated without regard to adjustments to be fully 
resolved, by stipulation of the parties, through any other pending 
court or administrative proceeding. Furthermore, the taxpayer's 
liability pursuant to the judgment is calculated without regard to 
interest unless the taxpayer's liability for, or entitlement to, 
interest is a contested issue in the administrative or court proceeding 
and is one of the adjustments included in the last qualified offer. 
Where adjustments raised by either party subsequent to the making of 
the last qualified offer are included in the judgment entered by the 
court, or are settled prior to the court proceeding, the taxpayer's 
liability pursuant to the judgment is calculated by treating the 
subsequently raised adjustments as if they had never been raised.
    (c) Qualified offer--(1) In general. A qualified offer is defined 
in section 7430(g) to mean a written offer which--
    (i) Is made by the taxpayer to the United States during the 
qualified offer period;
    (ii) Specifies the offered amount of the taxpayer's liability 
(determined without regard to interest, unless interest is a contested 
issue in the proceeding);
    (iii) Is designated at the time it is made as a qualified offer for 
purposes of section 7430(g); and
    (iv) By its terms, remains open during the period beginning on the 
date it is made and ending on the earliest of the date the offer is 
rejected, the date the trial begins, or the 90th day after the date the 
offer is made.
    (2) To the United States. (i) A qualified offer is made to the 
United States if it is delivered to the Internal Revenue Service; 
Office of Appeals; Office of Chief Counsel (including field personnel), 
Internal Revenue Service; or Department of Justice office or personnel 
having jurisdiction over the tax matter at issue in the administrative 
or court proceeding. If those offices or persons are unknown to the 
taxpayer making the qualified offer, the taxpayer may deliver the offer 
to the appropriate office, as follows:
    (A) If the taxpayer's initial pleading in a court proceeding has 
been answered, the taxpayer may deliver the offer to the office that 
filed the answer.
    (B) If the taxpayer's petition in the Tax Court has not yet been 
answered, the taxpayer may deliver the offer to the Office of Chief 
Counsel, 1111 Constitution Avenue, NW., Washington, DC 20224.
    (C) If the taxpayer's initial pleading in a court of the United 
States other than the Tax Court has not yet been answered, the taxpayer 
may deliver the offer to the Attorney General of the United States, 950 
Pennsylvania Ave., NW., Washington, DC 20530-0001 and for a suit 
brought in a United States district court, a copy of the offer should 
also be delivered to the United States Attorney for the district in 
which the suit was brought.
    (D) In any other situation, the taxpayer may deliver the offer to 
the office that sent the taxpayer the first letter of proposed 
deficiency which allows the taxpayer an opportunity for administrative 
review in the Internal Revenue Service Office of Appeals.
    (ii) Until an offer is received by the appropriate personnel or 
office under

[[Page 728]]

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

    Example 1. Definition of a judgment. The Internal Revenue 
Service audits Taxpayer A for year X and issues a notice of proposed 
deficiency (30-day letter) proposing to disallow deductions 1, 2, 3, 
and 4. A files a protest and participates in a conference with the 
Internal Revenue Service Office of Appeals (Appeals). Appeals allows 
deduction 1, and issues a statutory notice of deficiency for 
deductions 2, 3, and 4. A's petition to the United States Tax Court 
for year X never mentions deduction 2. Prior to trial, A concedes 
deduction 3. After the trial, the Tax Court issues an opinion 
allowing A to deduct a portion of deduction 4. As used in paragraph 
(a) of this section, the term judgment means the cumulative 
determinations of the court concerning the adjustments at issue in 
the court proceeding. Thus, the term judgment does not include 
deduction 1 because it was never at issue in the court proceeding. 
Similarly, the term judgment does not include deduction 2 because it 
was not placed at issue by A in the court proceeding. Although 
deduction 3 was at issue in the court proceeding, it is not included 
in the term judgment because it was not determined by the court, but 
rather by concession or settlement. For purposes of section 
7430(c)(4)(e), the term judgment only includes the portion of 
deduction 4 disallowed by the Tax Court.

    Example 2. Liability under the offer and liability under the 
judgment. Assume the same facts as in Example 1 except that A makes 
a qualified offer after the Appeal's conference which is not 
accepted by the Internal Revenue Service. A's offer is with respect 
to all adjustments at issue at that time. Those adjustments are 
deductions 2, 3, and 4. At the conclusion of the litigation, A's 
entitlement to an award based upon the qualified offer will depend, 
among other things, on a comparison of the change in A's liability 
for income tax for year X resulting

[[Page 729]]

from the judgment of the Tax Court with the change that would have 
resulted had the Internal Revenue Service accepted A's qualified 
offer. In making this comparison, the term judgment (as discussed in 
Example 1) is modified by including the amounts of settled or 
conceded adjustments that were at issue at the time the qualified 
offer was made. Any settled or conceded adjustments that were not at 
issue at the time the qualified offer was made, either because the 
settlement or concession occurred before the offer or because the 
adjustment was not raised until after the offer, are not included in 
the comparison. Thus, A's offer on deductions 2, 3, and 4 is 
compared with the change in A's liability resulting from the Tax 
Court's determination on deduction 4, and the concessions of issues 
2 and 3 by A.

    Example 3. Offer Must resolve full liability. Assume the same 
facts as in Example 2 except that A's offer after the Appeals 
conference explicitly states that it is only with respect to 
adjustments 2 and 3 and not with respect to adjustment 4. Even if 
A's liability pursuant to the judgment, calculated under paragraph 
(b)(3) of this section as illustrated in Example 2, is equal to or 
less than it would have been had the Internal Revenue Service 
accepted A's offer after the Appeal's conference, A is not a 
prevailing party under section 7430(c)(4)(E). This is because a 
qualified offer must include all adjustments at issue at the time 
the offer is made. Since A's offer excluded adjustment 4, which was 
an adjustment at issue at the time the offer was made, it does not 
constitute a qualified offer pursuant to paragraph (b)(2) of this 
section.

    Example 4. Qualified offer rule inapplicable when all issues 
settled. Taxpayer B receives a notice of proposed deficiency (30-day 
letter) proposing to disallow both a personal interest deduction in 
the amount of $10,000 (Adjustment 1), and a charitable contribution 
deduction in the amount of $2,000 (Adjustment 2), and to include in 
income $4,000 of unreported interest income (Adjustment 3). B timely 
files a protest with Appeals. At the Appeals conference B presents 
substantiation for the charitable contribution and presents 
arguments that the interest paid was deductible mortgage interest 
and that the interest received was held in trust for Taxpayer C. At 
the conference, B also provides the Appeals officer assigned to B's 
case a written offer to settle the case for a deficiency of $2,000, 
exclusive of interest. The offer states that it is a qualified offer 
for purposes of section 7430(g) and that it will remain open for 
acceptance by the Internal Revenue Service for a period in excess of 
90 days. After considering B's substantiation and arguments, the 
Appeals Officer accepts the $2,000 offer to settle the case in full. 
Although B's offer is a qualified offer, because all three 
adjustments contained in the qualified offer were settled, the 
qualified offer rule is inapplicable.

    Example 5. Qualified offer rule inapplicable when all issues 
contained in the qualified offer are settled; subsequently raised 
adjustments ignored. Assume the same facts as in Example 4 except 
that B's qualified offer was for a deficiency of $1,800 and the 
Internal Revenue Service rejected that offer. Subsequently, the 
Internal Revenue Service issued a statutory notice of deficiency 
disallowing the three adjustments contained in Example 4, and, in 
addition, disallowing a home office expense in the amount of $5,000 
(Adjustment 4). After petitioning the Tax Court, B presents the 
field attorney assigned to the case with a written offer, which is 
not designated as a qualified offer for purposes of section 7430(g), 
to settle the three adjustments that had been the subject of the 
qualified offer, plus adjustment 4, for a total deficiency of 
$2,500. After negotiating with B, a settlement is reached on the 
three adjustments that were the subject of the rejected qualified 
offer, for a deficiency of $1,800. Adjustment 4 is litigated in the 
Tax Court and the court determines that B is entitled to the full 
$5,000 deduction for that adjustment. Consequently, a decision is 
entered by the Tax Court reflecting the $1,800 settlement amount, 
which matches exactly the amount of B's only qualified offer in the 
case. Although the determined liability for adjustments 1, 2, and 3, 
equal that of the rejected qualified offer, because all three 
adjustments contained in the qualified offer were settled, the 
qualified offer rule is inapplicable.

    Example 6. Exclusion of adjustments made after the qualified 
offer is made. Assume the same facts as in Example 5 except the 
settlement is reached only on adjustments 1 and 2, for a liability 
of $1,500. Adjustments 3 and 4 are tried in the Tax Court and in 
accordance with the court's opinion, the taxpayer has a $300 
deficiency attributable to Adjustment 3, and a $1,550 deficiency 
attributable to adjustment 4. Consequently, a decision is entered 
reflecting the $1,500 settled amount, the $300 liability on 
adjustment 3, and the $1,550 liability on adjustment 4. The $3,350 
deficiency reflected in the Tax Court's decision exceeds the last 
(and only) qualified offer made by B. For purposes of determining 
whether B is a prevailing party as a result of having made a 
qualified offer in the proceeding, the liability attributable to 
adjustment 4, which was raised after the last qualified offer was 
made, is not included in the comparison of B's liability under the 
judgment with B's offered liability under the last qualified offer. 
Thus, B's $1,800 liability under the judgment, as modified for 
purposes of the qualified offer rule comparison, is equal to B's 
offered liability under the last qualified offer. Because B's 
liability under the last qualified offer equals or exceeds B's 
liability under the judgment, as calculated under paragraph (b)(3) 
of this section, B is a prevailing party for purposes of section 
7430. Assuming B satisfies the remaining requirements of section 
7430, B may recover those reasonable administrative and litigation 
costs attributable to adjustment 3. To qualify for any further award 
of reasonable administrative and litigation costs, B must satisfy 
the full requirements of section 7430(c)(4)(A).

    Example 7. Qualified offer in a refund case. Taxpayer C timely 
files an amended return claiming a refund of $1,000. This refund 
claim results from several omitted deductions which, if allowed, 
would reduce D's tax liability from $10,000 to $9,000. C receives a 
notice of claim disallowance and files a complaint with the 
appropriate United States District Court. Subsequently, C makes a 
qualified offer for a refund of $500. The offer is rejected and 
after trial the court finds C is entitled to a refund of $700. The 
change in C's liability from the tax shown on the return that would 
have resulted from the acceptance of C's qualified offer is a 
reduction in that liability of $500. The change in C's liability 
from the tax shown on the return resulting from the judgment of the 
court is a reduction in that liability of $700. Because C's 
liability under the qualified offer exceeds C's liability under the 
judgment, C is a prevailing party for purposes of section 7430. 
Assuming C satisfies the remaining requirements of section 7430, C 
may recover those reasonable litigation costs incurred on or after 
the date of the qualified offer. To qualify for any further award of 
reasonable administrative and litigation costs C must satisfy the 
full requirements of section 7430(c)(4)(A).

    Example 8. End of qualified offer period when case is removed 
from tax court trial calendar more than 30 days before scheduled 
trial calendar. Taxpayer E has petitioned the Tax Court in response 
to the issuance of a notice of deficiency. E receives notice that 
the case will be heard on the July trial session in E's city of 
residence. The scheduled date for the calendar call for that trial 
session is July 1st. On May 15th, E's motion to remove the case from 
the July trial session and place it on the October trial session for 
that city is granted. The scheduled date for the calendar call for 
the October trial session is October 1st. On May 31st, E delivers a 
qualified offer to the field attorney assigned to the case. On 
August 31st, E delivers a revised qualified offer to the field 
attorney assigned to the case. Neither offer is accepted. The case 
is tried during the October trial session, and at some time 
thereafter, a decision is entered by the court. Assume the judgment 
in the case, as calculated under paragraph (b)(3) of this section, 
is greater than the amount offered, as calculated under paragraph 
(b)(2) of this section, in the qualified offer delivered on May 
31st, but less than the amount offered, as similarly calculated, in 
the qualified offer delivered on August 31st. Because the qualified 
offer period did not end until September 1st, and the offer of 
August 31st otherwise satisfied the requirements of paragraph (c) of 
this section, the last qualified offer which is compared to the 
judgment was the offer delivered on August 31st. Consequently, E is 
a prevailing party under section 7430(c)(4)(e).

    Example 9. End of qualified offer period when case is removed 
from tax court trial calendar less than 30 days before scheduled 
trial calendar. Assume the same facts as in Example 8 except that 
E's motion was granted on June 15th. Because the qualified offer 
period had ended on June 1st when the case remained on the July 
trial session on the date that preceded by 30 days the scheduled

[[Page 730]]

date of the calendar call for that trial session, the offer 
delivered on May 31st was E's last qualified offer. The August 31st 
offer is not a qualified offer for purposes of this rule. 
Consequently, E is not a prevailing party under the qualified offer 
rule. Therefore, E must satisfy the full requirements of section 
7430(c)(4)(A) to qualify for any award of reasonable administrative 
and litigation costs.

    Example 10. When a qualified offer can be made and to whom it 
must be made. During the examination of Taxpayer F's return, the 
Internal Revenue Service issues a notice of deficiency without 
having first issued a 30-day letter. After receiving the notice of 
deficiency F timely petitions the Tax Court. The next day F mails an 
offer to the office that issued the notice of deficiency, which 
offer satisfies the requirements of paragraphs (c)(3), (4), (5) and 
(6) of this section. This is the only written offer made by F during 
the administrative or court proceeding, and by its terms it is to 
remain open for a period in excess of 90 days after the date of 
mailing to the office issuing the notice of deficiency. The office 
that issued the notice of deficiency transmitted the offer to the 
field attorney with jurisdiction over the Tax Court case. After 
answering the case, the field attorney refers the case to Appeals 
pursuant to Rev. Proc. 87-24 (1987-1 C.B. 720). After careful 
consideration, Appeals rejects the offer and holds a conference with 
F where some adjustments are settled. The remainder of the 
adjustments are tried in the Tax Court and F's liability resulting 
from the Tax Court's determinations, when added to F's liability 
resulting from the settled adjustments, is less than F's liability 
would have been under the offer rejected by Appeals. Because the Tax 
Court case had not yet been answered when the offer was sent, F 
properly mailed the offer to the office that issued the notice of 
deficiency. Thus, F's offer satisfied the requirements of paragraph 
(c)(2) of this section. Furthermore, even though F did not receive a 
30-day letter, F's offer was made after the beginning of the 
qualified offer period, satisfying the requirements of paragraph 
(c)(7) of this section, because the issuance of the statutory notice 
provided F with notice of the Internal Revenue Service's 
determination of a deficiency, and the docketing of the case 
provided F with an opportunity for administrative review in the 
Internal Revenue Service Office of Appeals under Rev. Proc. 87-24 
(1987-1 C.B. 720). Because F's offer satisfied all of the 
requirements of paragraph (c) of this section, the offer was a 
qualified offer and F is a prevailing party.

    Example 11. Last qualified offer. Assume the same facts as in 
Example 10 except that at the Appeals conference F makes a new 
qualified offer concerning the remaining issues. Because this 
subsequent qualified offer is closer in time to the end of the 
qualified offer period than the offer made one day after the 
petition was filed, the subsequent offer would be the last qualified 
offer made by F and it is F's liability under this offer which would 
be compared to F's liability under the judgment to determine whether 
F was a prevailing party under the qualified offer rule.

    Example 12. Substitution of parties permitted under last 
qualified offer. Taxpayer G receives a 30-day letter and 
participates in a conference with the Office of Appeals but no 
agreement is reached. Subsequently, G receives a notice of 
deficiency and petitions the Tax Court. Upon receiving the Internal 
Revenue Service's answer to the petition, G sends a qualified offer 
to the field attorney that signed the answer, by United States mail. 
The qualified offer stated that it would remain open for more than 
90 days. Thirty days after making the offer, G dies and, on motion 
under Rule 63(a) of the Tax Court's Rules of Practice and Procedure 
by G's personal representative, H is substituted for G as a party in 
the Tax Court proceeding. H makes no qualified offers to settle the 
case and the case proceeds to trial, with the Tax Court issuing an 
opinion partially in favor of H. Even though H was not a party when 
the qualified offer was made, that offer constitutes a qualified 
offer because by its terms, when made, it was to remain open until 
at least the earlier of the date it is rejected, the date of trial, 
or 90 days. If the liability of H under that last qualified offer, 
as determined under paragraph (b)(2) of this section, equals or 
exceeds the liability under the judgment of the Tax Court, as 
determined under paragraph (b)(3) of this section, H will be a 
prevailing party for purposes of an award of reasonable litigation 
costs under section 7430.
    (f) Effective date. This section is applicable with respect to 
qualified offers made in administrative or court proceedings described 
in section 7430 after January 3, 2001 and before January 5, 2004.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: December 6, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 01-198 Filed 1-3-01; 8:45 am]
BILLING CODE 4830-01-P