[Federal Register Volume 68, Number 248 (Monday, December 29, 2003)]
[Rules and Regulations]
[Pages 74848-74855]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31822]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9106]
RIN 1545-AW99


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations relating to the 
qualified offer rule, including the requirements that an offer must 
satisfy to be treated as a

[[Page 74849]]

qualified offer under section 7430(g) and the requirements that a 
taxpayer must satisfy to qualify as a prevailing party by reason of 
having made a qualified offer. The regulations implement certain 
changes made by section 3101(e) of the Internal Revenue Service 
Restructuring and Reform Act of 1998. The final regulations affect 
taxpayers seeking attorney's fees and costs.

DATES: Effective Date: These regulations are effective December 24, 
2003.
    Applicability Date: These regulations apply to qualified offers 
postmarked or delivered after December 24, 2003, in administrative or 
court proceedings described in section 7430.

FOR FURTHER INFORMATION CONTACT: Tami C. Belouin (202) 622-7950 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    These final regulations contain amendments to the Procedure and 
Administration Regulations (26 CFR part 301) reflecting changes to 
section 7430 made by section 3101(e) of the Internal Revenue Service 
Restructuring and Reform Act of 1998, Public Law 105-206 (112 Stat. 
686), to recover reasonable administrative and litigation costs in a 
court proceeding with respect to the determination or refund of any 
tax, interest or penalty. Proposed and temporary regulations under 
sections 7430(c)(4)(E) and 7430(g) were contemporaneously issued on 
January 3, 2001 (REG-121928-98, TD 8922, C.B. 2001-1 [66 FR 725]). 
Written comments were submitted in response to the proposed regulations 
and are discussed in more detail below. The proposed regulations are 
adopted as revised by this Treasury decision.

Explanation of Revisions and Summary of Comments

    These final regulations generally adopt the provisions of the 
proposed regulations. The changes to the proposed regulations reflected 
in these final regulations, as well as the comments received, are 
discussed below.

1. Adjustments Affected by the Outcome of Another Proceeding

    A taxpayer's tax liability may be affected by the outcome of a 
separate court or administrative proceeding. The proposed regulations 
stated that the portion of the liability to be fully resolved, by 
stipulation of the parties, through another proceeding is ignored for 
purposes of applying the qualified offer rule. One commentator 
requested clarification regarding this rule. The final regulations 
clarify this rule and state that the types of proceeding contemplated 
include, but are not limited to, state or Federal court proceedings. 
For example, a taxpayer's tax liability may be affected by the outcome 
of a separate court proceeding, such as a probate, tort liability, or 
trademark action.

2. Specified Amount of Offer

    The proposed regulations provided that a qualified offer must state 
a specific dollar amount. Commentators noted that there are instances 
in which it would be difficult to calculate the taxpayer's tax 
liability and offer a specific dollar amount. To address those 
situations, the final regulations provide that a qualified offer may 
specify either a dollar amount of liability or a percentage of the 
adjustments at issue.

3. Requirement To Disclose All Relevant Information

    In order for an offer to be treated as a qualified offer, the 
proposed regulations required a taxpayer to disclose all relevant 
information concerning any issue raised by the taxpayer subsequent to 
the first letter of proposed deficiency which allows the taxpayer an 
opportunity for administrative review in the IRS Office of Appeals that 
remained unresolved at the time the qualified offer was made. This 
disclosure had to occur contemporaneously with or prior to the making 
of the qualified offer. One commentator requested that this requirement 
be modified to lower the standard. The final regulations do not adopt 
this comment because the proposed regulations reflected the standard 
set out in Treas. Reg. Sec.  301.7430-1 for exhaustion of 
administrative remedies.

4. End of Qualified Offer Period

    One commentator suggested that if a case is removed from the trial 
calendar within 30 days of the trial date, the period for making a 
qualified offer should be reopened. The final regulations do not adopt 
this comment. The Treasury Department and the IRS do not believe that 
the purpose of the statute would be furthered if a taxpayer were 
permitted to submit a qualified offer after the period for doing so has 
expired, even if the case subsequently is continued. Like the statute 
of limitations, once the qualified offer period has expired, it should 
not be revived.

5. Multiple Tax Years

    The proposed regulations do not specifically address the 
requirements for making a valid qualified offer when multiple tax years 
are at issue in a court or administrative proceeding. One commentator 
requested clarification of the application of the qualified offer rule 
in these situations. The final regulations provide that if adjustments 
in different tax years arise from separate and distinct issues such 
that the resolution of issues in one or more tax years will not affect 
the taxpayer's liability in one or more of the other years at issue in 
the proceeding, then a qualified offer may be made for less than all of 
the tax years involved in the proceeding. A qualified offer, however, 
must resolve all of the issues for the tax years covered by the offer 
and also must cover all tax years in the proceeding affected by those 
issues. A tax year (affected year) is affected by an issue if the 
treatment of the issue in another tax year involved in the proceeding 
necessarily affects the treatment of the issue in the affected year. 
The final regulations include three new examples illustrating the 
operation of the qualified offer rule in cases involving multiple tax 
years.

6. Settlement After Certain Court Rulings

    A federal tax case may be settled after a court has ruled on a 
motion relating to the merits of one or more of the adjustments covered 
by a qualified offer, even if the ruling does not fully resolve those 
adjustments. For example, a court's granting of a motion for partial 
summary judgment may resolve the underlying legal issue for an 
adjustment covered by a qualified offer but still leave open issues of 
substantiation or valuation. The parties at that time may resolve the 
adjustment based on the court's ruling and the parties' evaluation of 
the remaining issues not addressed by the court's ruling that affect 
that adjustment. The final regulations provide that if one or more 
adjustments covered by a qualified offer are settled following a ruling 
by the court that substantially resolves those adjustments, then those 
adjustments will not be treated as having been settled prior to the 
entry of the judgment by the court and instead will be treated as 
amounts included in the judgment as a result of the court's 
determinations. Whether an adjustment covered by a qualified offer is 
substantially resolved by a court ruling will depend on the facts and 
circumstances, including the scope of the ruling and the nature and 
importance of the issues affecting the

[[Page 74850]]

adjustment that remain to be resolved after the court ruling. The final 
regulations further provide, however, that rulings relating to 
discovery, admissibility of evidence, and burden of proof are not 
treated as rulings that substantially resolve adjustments covered by a 
qualified offer. These changes have been made in response to the Tax 
Court's opinion in Gladden v. Commissioner, 120 T.C. 446 (2003). The 
Department of Treasury and the IRS will give further consideration to 
this issue and may issue additional guidance regarding the matter in 
the future.

7. Spousal Defenses

    The proposed regulations do not address specifically how spousal 
defenses affect the qualified offer rule. The preamble to the temporary 
regulations stated that the qualified offer rule applies in multiple 
taxpayer situations, such as those involving joint returns, but did not 
address the potential aggregation or segregation of the qualified offer 
or liability in situations that may present special circumstances, such 
as claims for innocent spouse relief. Commentators requested more 
specific rules addressing multiple taxpayer situations. The Treasury 
Department and the IRS have decided not to include additional rules 
involving multiple taxpayer situations in the final regulations. As the 
law in this area continues to evolve, the Treasury Department and the 
IRS may give further consideration to the issues raised and may issue 
additional guidance regarding how the qualified offer rule applies in 
these situations.

8. Recovery of Fees Relating to Settled Issues

    The proposed regulations provided that a prevailing party may not 
recover fees under the qualified offer rule for any issue that is 
settled. Recovery is limited to issues that are actually determined by 
a court. One commentator recommended that the final regulations permit 
the recovery of fees attributable to adjustments that are settled. The 
final regulations do not adopt this comment. Section 
7430(c)(4)(E)(ii)(I) provides that any case resolved pursuant to a 
settlement is not eligible for recovery of fees under the qualified 
offer rule. The qualified offer rule was enacted to encourage 
settlements. Requiring the government to pay administrative and 
litigation costs with respect to issues resolved exclusively pursuant 
to a settlement would be contrary to that goal.

9. Delivery of Qualified Offer to the Proper Party

    The proposed regulations specify where an offer must be delivered 
in order to be treated as a qualified offer. One commentator requested 
further clarification of these provisions and greater flexibility with 
respect to delivery locations. The Treasury Department and the IRS have 
considered this comment but no change has been made to the regulations 
because the regulations already provide specific instructions for the 
delivery of an offer under a variety of circumstances, as well as a 
default location for all other situations. Thus, the provision is 
sufficiently comprehensive. With respect to the request for greater 
flexibility, the comment was not adopted because it is important that a 
qualified offer be received by the office with jurisdiction over the 
case at the time the qualified offer is made in order that the 
government may act expeditiously on the offer. The locations specified 
in the regulations are designed to achieve that objective.

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 a collection of information requirement 
on small entities, 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, the 
proposed regulations preceding these regulations were 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 Tami C. Belouin, 
Office of the Associate Chief Counsel (Procedure and Administration), 
Administrative Provisions and Judicial Practice Division.

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

0
Accordingly, 26 CFR part 301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

0
Paragraph 1. The authority citation for part 301 continues to read in 
part as follows:

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

0
Par. 2. Section 301.7430-7 is added to read as follows:


Sec.  301.7430-7  Qualified offers.

    (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 (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 of the last 
qualified offer and is limited

[[Page 74851]]

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. 
If one or more adjustments covered by a qualified offer (see paragraph 
(c)(3)) are settled following a ruling by the court that substantially 
resolves those adjustments, then those adjustments will not be treated 
as having been settled prior to the entry of the judgment by the court 
and instead will be treated as amounts included in the judgment as a 
result of the court's determinations. For purposes of the preceding 
sentence, rulings relating to discovery, admissibility of evidence, and 
burden of proof are not rulings that substantially resolve adjustments 
covered by a qualified offer.
    (2) Liability under the last qualified offer. For purposes of 
paragraph (b)(1) of this section, the taxpayer's liability under the 
last qualified offer is the change in the taxpayer's liability that 
would have resulted if the United States had accepted the taxpayer's 
last qualified offer on all of the adjustments that were at issue in 
the administrative or court proceeding at the time that the offer was 
made compared to the amount shown on the return or returns (or as 
previously adjusted). 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 that the 
parties have stipulated will be resolved in accordance with the outcome 
of a separate pending Federal, state, or other judicial or 
administrative proceeding. For example, the parties may stipulate that 
the taxpayer's liability will be resolved in accordance with the 
outcome of an alternative dispute resolution proceeding or a separate 
court proceeding, such as a probate, tort liability, or trademark 
action. 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 paragraph 
(b)(1) of this section, the taxpayer's liability pursuant to the 
judgment is the change in the taxpayer's liability resulting from 
amounts 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 compared to the amount shown on 
the return or returns (or as previously adjusted). 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 under the judgment is calculated without regard to 
adjustments that the parties have stipulated will be resolved in 
accordance with the outcome of a separate pending Federal, state, or 
other judicial 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 when it is delivered to the office or personnel within 
the Internal Revenue Service, Office of Appeals, Office of Chief 
Counsel (including field personnel) or Department of Justice that has 
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 any Federal court, other 
than the Tax

[[Page 74852]]

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. 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 this paragraph (c)(2), 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 clearly specifies the amount for the liability of 
the taxpayer, calculated as set forth in paragraph (b)(2) of this 
section. The offer may be a specific dollar amount of the total 
liability or a percentage of the adjustments at issue in the proceeding 
at the time the offer is made. 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 an 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 that the parties have 
stipulated will be resolved in accordance with the outcome of a 
separate pending Federal, state, or other judicial 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. In cases involving multiple tax years, if 
adjustments in different tax years arise from separate and distinct 
issues such that the resolution of issues in one or more tax years will 
not affect the taxpayer's liability in one or more of the other tax 
years in the proceeding, then a qualified offer may be made for less 
than all of the tax years involved. A qualified offer, however, must 
resolve all of the issues for the tax years covered by the offer and 
also must cover all tax years in the proceeding affected by those 
issues. A tax year (affected year) is affected by an issue if the 
treatment of the issue in another tax year involved in the proceeding 
necessarily affects the treatment of the issue in the affected year.
    (4) Designated at the time it is made as a qualified offer. An 
offer is not a qualified offer unless it designates 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 a qualified offer unless 
contemporaneously or prior to the making of the 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 recognized 
representative of the taxpayer described in Sec.  601.502 of this 
chapter) participates in an Appeals office conference, participates in 
an Area Counsel conference, or confers with the Department of Justice, 
and at that time, discloses all relevant information. 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. A taxpayer 
has disclosed all relevant information if the taxpayer has supplied 
sufficient information to allow informed consideration of the 
taxpayer's tax matter to the extent the information and its relevance 
were known or should have been known to the taxpayer at the time of the 
conference.
    (5) Remains open. A qualified offer must, by its terms, remain open 
for acceptance by the United States from the date it is made, as 
defined in paragraph (c)(2)(ii) of this section, until the earliest of 
the date it is rejected in writing by a person with authority to reject 
the offer, 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 an 
extension cannot be used to make an offer meet the minimum period for 
remaining open required by this paragraph (c)(5).
    (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 Federal courts using calendars for 
trial, a case will be considered 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 trial calendar before the 
date that precedes by thirty days the date scheduled for that trial 
calendar. The qualified offer period does not end until the case 
remains on a trial calendar 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 (c)(7), although the period during which a qualified 
offer remains open may extend

[[Page 74853]]

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 (IRS) 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 Appeals conference, which is not 
accepted by the IRS. 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 from the judgment of the Tax Court with the change that 
would have resulted had the IRS 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 of 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 IRS accepted A's offer after 
the Appeals conference, A is not a prevailing party under section 
7430(c)(4)(E). 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. Offer must resolve full liability. Assume the same 
facts as in Example 1, except that A makes a qualified offer that is 
accepted by the IRS. After the offer is accepted, A attempts to 
reduce the amount A will pay pursuant to the offer by applying net 
operating loss carryovers to the years in issue. Because the net 
operating losses were not at issue when the offer was made, A's 
offer was a qualified offer. Whether A is entitled to apply net 
operating losses to reduce the amount stated in the offer will 
depend upon the application of contract principles, local court 
rules, and, because net operating losses are at issue, section 
6511(d) and related provisions.
    Example 5. Qualified offer rule for multiple tax years, partial 
resolution offer is a qualified offer. Taxpayer B receives a notice 
of deficiency for taxable years 2001, 2002, and 2003. For 2001, the 
statutory notice disallows business deductions. For 2002, the 
statutory notice increases income for unreported lottery winnings. 
For 2003, the statutory notice disallows a child care credit. B 
submits a qualified offer only with respect to 2002. Since the 
adjustments for the three tax years are separate and distinct, B may 
submit a qualified offer for a single year. If B's liability under 
the judgment is equal to or less than the qualified offer with 
respect to 2002, irrespective of 2001 and 2003, B is a prevailing 
party for 2002 for purposes of section 7430(g). Assuming B satisfies 
the remaining requirements of section 7430, B may recover reasonable 
administrative and litigation costs that are attributable to 2002 
from the date of the qualified offer. To qualify for any costs with 
respect to 2001 or 2003, B must satisfy the requirements of section 
7430(c)(4).
    Example 6. Qualified offer rule for multiple tax years, partial 
resolution offer is not a qualified offer. Assume the same facts as 
in Example 5 except that with respect to 2002, in addition to 
increasing B's income for the unreported lottery winnings, the 
statutory notice also disallows a charitable contribution deduction. 
B submits a settlement offer that purports to be a qualified offer, 
but only covers the unreported lottery winnings. B's offer is not a 
qualified offer because it does not address the charitable 
contribution issue, and thus, does not fully resolve B's liability 
for 2002.
    Example 7. Qualified offer rule for multiple tax years, partial 
resolution offer is not a qualified offer. Taxpayer C receives a 
notice of deficiency for taxable years 2001, 2002, and 2003 
adjusting the amount of a depreciation deduction due to the Internal 
Revenue Service's increase to the recovery period. C submits a 
settlement offer relating only to 2003 that purports to be a 
qualified offer. C's offer is not a qualified offer because the 
issue in the three tax years is not separable given that the 
treatment of the issue in one of the years necessarily affects the 
treatment of the issue in the other years, and C's offer only 
applies to one of the years in the proceeding. In cases involving 
multiple tax years with nonseparable tax issues affecting all tax 
years, an offer is not a qualified offer unless it resolves the 
liability for all tax years at issue in the administrative or 
judicial proceeding.
    Example 8. Qualified offer rule inapplicable when all issues 
settled. Taxpayer D 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). D timely 
files a protest with Appeals. At the Appeals conference, D 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 E. At 
the conference, D also provides the Appeals officer assigned to D'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 IRS for a period in excess of 90 days. After 
considering D's substantiation and arguments, the Appeals Officer 
accepts the $2,000 offer to settle the case in full. Although D's 
offer is a qualified offer, because all three adjustments contained 
in the qualified offer were settled, the qualified offer rule is 
inapplicable.
    Example 9. 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 8 except 
that D's qualified offer was for a deficiency of $1,800 and the IRS 
rejected that offer. Subsequently, the IRS issued a statutory notice 
of deficiency disallowing the three adjustments contained in Example 
8, and, in addition, disallowing a home office expense in the amount 
of $5,000 (Adjustment 4). After petitioning the Tax Court, D 
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 D, 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 D 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 D's 
only qualified offer in the case. Although the determined liability 
for adjustments 1, 2, and 3 equals that of the rejected qualified 
offer, because all three adjustments contained in the qualified 
offer

[[Page 74854]]

were settled, the qualified offer rule is inapplicable.
    Example 10. Exclusion of adjustments made after the qualified 
offer is made. Assume the same facts as in Example 9 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 D. For purposes of determining 
whether D 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 D's liability under the 
judgment with D's offered liability under the last qualified offer. 
Thus, D's $1,800 liability under the judgment, as modified for 
purposes of the qualified offer rule comparison, is equal to D's 
offered liability under the last qualified offer. Because D's 
liability under the last qualified offer equals or exceeds D's 
liability under the judgment, as calculated under paragraph (b)(3) 
of this section, D is a prevailing party for purposes of section 
7430. Assuming D satisfies the remaining requirements of section 
7430, D may recover those reasonable administrative and litigation 
costs attributable to adjustment 3. To qualify for any further award 
of reasonable administrative and litigation costs, D must satisfy 
the requirements of section 7430(c)(4)(A).
    Example 11. Qualified offer in a refund case. Taxpayer E timely 
files an amended return claiming a refund of $1,000. This refund 
claim results from several omitted deductions which, if allowed, 
would reduce E's tax liability from $10,000 to $9,000. E receives a 
notice of claim disallowance and files a complaint with the 
appropriate United States District Court. Subsequently, E makes a 
qualified offer for a refund of $500. The offer is rejected and 
after trial the court finds E is entitled to a refund of $700. The 
change in E's liability from the tax shown on the return that would 
have resulted from the acceptance of E's qualified offer is a 
reduction in that liability of $500. The change in E'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 E's 
liability under the qualified offer exceeds E's liability under the 
judgment, E is a prevailing party for purposes of section 7430. 
Assuming E satisfies the remaining requirements of section 7430, E 
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 E must satisfy the 
requirements of section 7430(c)(4)(A).
    Example 12. End of qualified offer period when case is removed 
from Tax Court trial calendar more than 30 days before scheduled 
trial calendar. Taxpayer F has petitioned the Tax Court in response 
to the issuance of a notice of deficiency. F receives notice that 
the case will be heard on the July trial session in F's city of 
residence. The scheduled date for the calendar call for that trial 
session is July 1st. On May 15th, F'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, F delivers a 
qualified offer to the field attorney assigned to the case. On 
August 31st, F 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 offer delivered on August 31st is a qualified 
offer. Furthermore, because the August 31st qualified offer is 
closer in time to the end of the qualified offer period than the May 
31st qualified offer, the August 31st qualified offer is the last 
qualified offer made by F. Consequently, the August 31st offer is 
the qualified offer that is compared to the judgment for purposes of 
determining whether F is a prevailing party under section 
7430(c)(4)(E). Because F's liability under the August 31st qualified 
offer equals or exceeds F's liability under the judgment as 
calculated under paragraph (b)(3) of this section, F is a prevailing 
party for purposes of section 7430.
    Example 13. 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 12 except that 
F's motion was granted on June 15th. Because the qualified offer 
period ended on June 1st when the case remained on the July trial 
session on the date that preceded by 30 days the scheduled date of 
the calendar call for that trial session, the offer delivered on May 
31st was F's last qualified offer. The August 31st offer is not a 
qualified offer for purposes of this rule. Consequently, F is not a 
prevailing party under the qualified offer rule. Therefore, F must 
satisfy the requirements of section 7430(c)(4)(A) to qualify for any 
award of reasonable administrative and litigation costs.
    Example 14. When a qualified offer can be made and to whom it 
must be made. During the examination of Taxpayer G's return, the IRS 
issues a notice of deficiency without having first issued a 30-day 
letter. After receiving the notice of deficiency G timely petitions 
the Tax Court. The next day G mails an offer to the office that 
issued the notice of deficiency, which offer satisfies the 
requirements of paragraphs (c)(3) through (6) of this section. This 
is the only written offer made by G 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). See Sec.  601.601(d)(2)(ii)(b) of this 
chapter. After careful consideration, Appeals rejects the offer and 
holds a conference with G during which some adjustments are settled. 
The remainder of the adjustments are tried in the Tax Court and G's 
liability resulting from the Tax Court's determinations, when added 
to G's liability resulting from the settled adjustments, is less 
than G'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, G properly mailed the offer to the office that 
issued the notice of deficiency. Thus, G's offer satisfied the 
requirements of paragraph (c)(2) of this section. Furthermore, even 
though G did not receive a 30-day letter, G'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 G with notice of the IRS's 
determination of a deficiency, and the docketing of the case 
provided G with an opportunity for administrative review in the 
Internal Revenue Service Office of Appeals under Rev. Proc. 87-24. 
See Sec.  601.601(d)(2)(ii)(b) of this chapter. Because G's offer 
satisfied all of the requirements of paragraph (c) of this section, 
the offer was a qualified offer and G is a prevailing party.
    Example 15. Substitution of parties permitted under last 
qualified offer. Taxpayer H receives a 30-day letter and 
participates in a conference with the Office of Appeals but no 
agreement is reached. Subsequently, H receives a notice of 
deficiency and petitions the Tax Court. Upon receiving the Internal 
Revenue Service's answer to the petition, H sends a qualified offer 
to the field attorney who 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, H dies and, on motion 
under Rule 63(a) of the Tax Court's Rules of Practice and Procedure 
by H's personal representative, I is substituted for H as a party in 
the Tax Court proceeding. I 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 I. Even though I was not a party when 
the qualified offer was made by H, 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 I under the 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, I will be a 
prevailing party for purposes of an award of reasonable litigation 
costs under section 7430.


[[Page 74855]]


    (g) Effective date. This section is applicable with respect to 
qualified offers made in administrative or court proceedings described 
in section 7430 after December 24, 2003.


Sec.  301.7430-7T  [Removed]

0
Par. 3. Section 301.7430-7T is removed.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: December 19, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03-31822 Filed 12-24-03; 8:45 am]
BILLING CODE 4830-01-P