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

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 301 [TD8922] RIN 1545-AX00

TITLE: Awards of attorney's fees and other costs based upon
qualified offers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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, 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 90 day
after the date the offer this 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:
§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 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 90 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 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 §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 90 th 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 Appeals 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 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 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 Internal Revenue
Service accepted A's offer after the Appeals 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,
equals 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 1 . On May 15 , 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 31 , E delivers a
qualified offer to the field attorney assigned to the case. On
August 31 , 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 31 ,
but less than the amount offered, as similarly calculated, in the
qualified offer delivered on August 31 . Because the qualified offer
period did not end until September 1 , and the offer of August 31
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 31 . 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 15 . 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 date of
the calendar call for that trial session, the offer delivered on May
31 was E's last qualified offer. The August 31 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 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, 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 3, 2004.

Robert E. Wenzel
Deputy Commissioner of Internal Revenue

Approved: 12-6-00

Jonathan Talisman
Acting Assistant Secretary of the Treasury

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