Regulations Under I.R.C. Section 7430 Relating to Awards of Administrative Costs and Attorneys Fees, 61589-61596 [E9-27948]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 74, Number 226 (Wednesday, November 25, 2009)]
[Proposed Rules]
[Pages 61589-61596]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-27948]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-111833-99]
RIN 1545-AX46


Regulations Under I.R.C. Section 7430 Relating to Awards of 
Administrative Costs and Attorneys Fees

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to awards 
of administrative costs and attorneys fees under section 7430 to 
conform to the amendments made in the Taxpayer Relief Act of 1997 and 
the IRS Restructuring and Reform Act of 1998. The regulations affect 
taxpayers seeking attorneys fees and costs. This document also provides 
notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by February 8, 
2010. Outlines of topics to be discussed at the public hearing 
scheduled for 10 a.m. on March 10, 2010 must be received by February 
10, 2010.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-111833-99), room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
111833-99), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the Federal eRulemaking Portal at https://www.regulations.gov (IRS REG-111833-99). The public hearing will be 
held in the Internal Revenue Building, Room 2615, 1111 Constitution 
Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the hearing, submission of 
written comments, and to be placed on the building access list to 
attend the hearing, contact Regina Johnson, (202) 622-7180; concerning 
the proposed regulations, contact Ronald J. Goldstein (202) 622-4910 
(not toll-free numbers).

Background and Explanation of Provisions

    The proposed amendments to the Treasury Regulations incorporate the 
1997 and 1998 amendments to section 7430 of the Internal Revenue Code 
relating to awards of attorneys fees. These amendments were enacted as 
part of the Taxpayer Relief Act of 1997, Public Law 105-34, 111 Stat. 
788, and the IRS Restructuring and Reform Act of 1998, Public Law 105-
206, 112 Stat. 685.
    The Taxpayer Relief Act of 1997 (TRA) contained several amendments 
to section 7430 that are addressed in the proposed amendments to the 
regulations. First, the TRA provided that a taxpayer has ninety days 
after the date the IRS mails to the taxpayer a final decision 
determining tax, interest or penalty, to file an application with the 
IRS to recover administrative costs. Second, a taxpayer has ninety days 
after the date the IRS mails to the taxpayer, by certified or 
registered mail, a final adverse decision regarding an award of 
administrative costs, to file a petition with the Tax Court. Third, the 
TRA clarified the application of the net worth requirements by 
providing that individuals filing joint returns should be treated as 
separate taxpayers for purposes of determining net worth. The TRA added 
trusts to the list of taxpayers subject to the net worth requirements 
and also specified the date on which the net worth determination should 
be made.
    The TRA also added section 7436 to the Code, which gives the Tax 
Court jurisdiction in certain employment tax cases. Under section 7436, 
if the IRS determines in connection with an audit that (1) one or more 
individuals performing services for the taxpayer are employees of the 
taxpayer or (2) the taxpayer is not entitled to relief from employment 
taxes under section 530 of the Revenue Act of 1978 with respect to the 
individual(s), and the IRS sends a Notice of Determination of Worker 
Classification (NDWC) to the taxpayer by certified or registered mail, 
the taxpayer may petition the Tax Court to determine (1) whether the 
IRS's determination, as set forth in the NDWC, is correct and (2) the 
proper amount of employment tax under the determination. Various 
restrictions on assessment and collection in section 6213 apply to a 
section 7436 proceeding in the same manner as if the NDWC were a notice 
of deficiency. Section 7436(d)(2) provides that section 7430 applies to 
proceedings brought under section 7436.
    The proposed amendments reflect the changes outlined in this 
preamble. Additional clarifying changes address the calculation of net 
worth. First, the regulation specifies that net worth will be 
calculated using the fair market value of assets to provide a more 
accurate assessment of a taxpayer's actual and current net worth as of 
the administrative proceeding date. Second, the regulation specifies 
which net worth and size limitations apply when a taxpayer is an owner 
of an unincorporated business. Third, the regulation has been amended 
to clarify the net worth requirement in cases involving partnerships 
subject to the unified audit and litigation procedures of sections 6221 
through 6234 of the Code (the TEFRA partnership procedures).
    The IRS Restructuring and Reform Act of 1998 (RRA) also contained 
several amendments affecting section 7430. First, the RRA increased the 
hourly rate limitation from $110 per hour to $125 per hour. Second, two 
special factors were added that may be considered to increase an 
attorney's hourly rate: Difficulty of the issues presented and local 
availability of tax experts. Third, the RRA added a provision that 
requires a court to consider whether the IRS has lost cases with 
substantially similar issues in other circuit courts of appeal in 
deciding whether the IRS's position was substantially justified. 
Fourth, the RRA created an exception to the requirement that to recover 
attorneys fees, the taxpayer must have paid or incurred the fees. The 
exception provides that if an individual who is authorized to practice 
before the Tax Court or the IRS is representing the taxpayer on a pro 
bono basis, then the taxpayer may petition for an award of reasonable 
attorneys fees in excess of the amounts that the taxpayer paid or 
incurred, as long as the fee award is ultimately paid to the individual 
or the individual's employer. Fifth, the period for recovery of 
reasonable administrative costs was extended to include costs incurred 
after the date on which the first letter of proposed deficiency, 
commonly known as a 30-day letter, is mailed to the taxpayer. The 
regulations clarify, however, that a taxpayer may be eligible to 
recover reasonable administrative costs from the date of the 30-day 
letter only if at least one issue (other than recovery of

[[Page 61590]]

administrative costs) remains in dispute as of the date that the IRS 
takes a position in the administrative proceeding.

Special Analyses

    It has been determined that this notice of proposed rulemaking 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, this regulation has been submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or electronic comments that are submitted timely 
to the IRS. The IRS and Treasury Department specifically request 
comments on the clarity of the proposed rules and how it may be made 
easier to understand. All public comments will be made available for 
public inspection and copying.
    A public hearing has been scheduled for 10 a.m. on March 10, 2010 
in the Internal Revenue Building, Room 2615, 1111 Constitution Avenue, 
NW., Washington, DC. Due to building security procedures, visitors must 
enter at the Constitution Avenue entrance. In addition, all visitors 
must present photo identification to enter the building. Because of 
access restrictions, visitors will not be admitted beyond the immediate 
entrance area more than 30 minutes before the hearing starts. For 
information about having a visitor's name placed on the building access 
list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT 
caption.
    An outline of the topics to be discussed and the time to be devoted 
to each topic (a signed original and eight (8) copies) must be 
submitted by any person that wishes to present oral comments at the 
hearing. Outlines must be received by February 10, 2010.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. A period of 
10 minutes will be allotted to each person for making comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving requests to speak has passed. Copies 
of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these regulations is Ronald J. Goldstein, 
Office of Associate Chief Counsel (Procedure and Administration).

List of Subjects in 26 CFR Part 301

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

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 301 is proposed to be 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 301.7430-0 is amended by:
    1. Adding a new entry for Sec.  301.7430-3(c)(4).
    2. Adding new entries for Sec.  301.7430-4(b)(3)(iii)(A) through 
(F) and (d).
    3. Revising the entries for Sec.  301.7430-5.
    4. Revising the section heading for Sec.  301.7430-6.
    5. Adding new entries for Sec. Sec.  301.7430-7 and 301.7430-8.
    The additions and revisions read as follows:


Sec.  301.7430-0  Table of contents.

* * * * *


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

* * * * *
    (c) * * *
    (4) First letter of proposed deficiency that allows the taxpayer an 
opportunity for administrative review in the Office of Appeals.
* * * * *


Sec.  301.7430-4  Reasonable administrative costs.

* * * * *
    (b) * * *
    (3) * * *
    (iii) * * *
    (A) In general.
    (B) Special factor.
    (C) Limited availability.
    (D) Local availability of tax expertise.
    (E) Difficulty of the issues.
    (F) Example.
    (c) * * *
    (d) Pro bono services.
    (1) In general.
    (2) Requirements.
    (3) Nominal fee.
    (4) Payment when services provided for a nominal fee.
    (5) Requirements.
    (6) Hourly rate.
    (7) Examples.


Sec.  301.7430-5  Prevailing party.

    (a) In general.
    (b) Position of the Internal Revenue Service.
    (c) Examples.
    (d) Substantially justified.
    (1) In general.
    (2) Position in courts of appeal.
    (3) Examples.
    (4) Included costs.
    (5) Examples.
    (6) Exception.
    (7) Presumption.
    (e) Amount in controversy.
    (f) Most significant issue or set of issues presented.
    (1) In general.
    (2) Example.
    (g) Net worth and size limitations.
    (1) Individuals.
    (2) Estates and trusts.
    (3) Others.
    (4) Special rule for charitable organizations and certain 
cooperatives.
    (5) Special rule for TEFRA partnerships.
    (h) Determination of prevailing party.
    (i) Examples.


Sec.  301.7430-6  Effective/applicability dates.


Sec.  301.7430-7  Qualified offers.

    (a) In general.
    (b) Requirements for treatment as a prevailing party based upon 
having made a qualified offer.
    (1) In general.
    (2) Liability under the last qualified offer.
    (3) Liability pursuant to the judgment.
    (c) Qualified offer.
    (1) In general.
    (2) To the United States.
    (3) Specifies the offered amount.
    (4) Designated at the time it is made as a qualified offer.
    (5) Remains open.
    (6) Last qualified offer.
    (7) Qualified offer period.
    (8) Interest as a contested issue.
    (d) [Reserved].
    (e) Examples.
    (f) Effective date.


Sec.  301.7430-8  Administrative costs incurred in damage actions for 
violations of section 362 or 524 of the Bankruptcy Code.

    (a) In general.

[[Page 61591]]

    (b) Prevailing party.
    (c) Administrative proceeding.
    (d) Costs incurred after filing of bankruptcy petition.
    (e) Time for filing claim for administrative costs.
    (f) Effective date.
    Par. 3. Section 301.7430-1 is amended by:
    1. Revising paragraphs (b)(1)(ii)(A), (d)(1)(i), (d)(1)(ii) and 
(d)(2) introductory text.
    2. Removing the language ``district director'' in paragraphs 
(f)(2)(i), (f)(3)(ii), (f)(3)(iii), (f)(4)(i) and (g) Examples 6, 7 and 
8 and adding the language ``Internal Revenue Service office'' in its 
place in all locations.
    3. Removing the language ``such'' in the second sentence of 
paragraph (g) Example 9 and adding the language ``these'' in its place.
    The revisions read as follows:


Sec.  301.7430-1  Exhaustion of administrative remedies.

* * * * *
    (b) * * *
    (1) * * *
    (ii) * * *
    (A) Requests an Appeals office conference in accordance with 
Sec. Sec.  601.105 and 601.106 of this chapter or any successor 
published guidance; and
* * * * *
    (d) * * *
    (1) * * *
    (i) The party follows all applicable Internal Revenue Service 
procedures for contesting the matter (including filing a written 
protest or claim, requesting an administrative appeal, and 
participating in an administrative hearing or conference); or
    (ii) If there are no applicable Internal Revenue Service 
procedures, the party submits to the area director of the area having 
jurisdiction over the dispute a written claim for relief reciting facts 
and circumstances sufficient to show the nature of the relief requested 
and that the party is entitled to the requested relief; and the area 
director has denied the claim for relief in writing or failed to act on 
the claim within a reasonable period after the claim is received by the 
area director.
    (2) For purposes of paragraph (d)(1)(ii) of this section, a 
reasonable period is--
* * * * *
    Par. 4. Section 301.7430-2 is amended by:
    1. Adding the language ``from the Internal Revenue Service'' at the 
end of the last sentence of paragraph (a).
    2. Removing the language ``such'' in the fourth and fifth sentences 
of paragraph (b)(2) and adding the language ``these'' in its place in 
both locations.
    3. Removing the ``;'' at the end of paragraph (c)(3)(i)(B) and 
adding a ``.'' in its place.
    4. Adding a new sentence at the end of paragraphs (c)(3)(i)(B), 
(c)(3)(i)(E) and (c)(7).
    5. Revising paragraphs (c)(3)(ii)(C), (c)(5) and (e).
    6. Adding new paragraph (c)(3)(iii)(C).
    7. Removing the language ``which'' in the first sentence of 
paragraph (c)(4) and adding the language ``that'' in its place.
    8. Removing the language ``such'' in the second sentence of 
paragraph (c)(6) and adding the language ``the'' in its place.
    The additions and revisions read as follows:


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

* * * * *
    (c) * * *
    (3) * * *
    (i) * * *
    (B) * * * For costs incurred after January 18, 1999, if the 
taxpayer alleges that the United States has lost in courts of appeal 
for other circuits on substantially similar issues, the taxpayer must 
provide the full name of the case, volume and pages of the reporter in 
which the opinion appears, the circuit in which the case was decided, 
and the year of the opinion;
* * * * *
    (E) * * * This statement must identify whether the representation 
is on a pro bono basis as defined in Sec.  301.7430-4(d) and, if so, to 
whom payment should be made. Specifically, the statement must direct 
whether payment should be made to the taxpayer's representative or to 
the representative's employer.
    (ii) * * *
    (C) For costs incurred after January 18, 1999, if more than $125 
per hour as adjusted for increases in the cost of living pursuant to 
Sec.  301.7430-4(b)(3) is claimed for the fees of a representative in 
connection with the administrative proceeding, an affidavit stating 
that a special factor described in Sec.  301.7430-4(b)(3) is 
applicable, such as the difficulty of the issues presented in the case 
or the lack of local availability of tax expertise. If a special factor 
is claimed based on specialized skills and distinctive knowledge as 
described in Sec.  301.7430-4(b)(2)(ii), the affidavit must state--
    (1) Why the specialized skills and distinctive knowledge were 
necessary in the representation;
    (2) That there is a limited availability of representatives 
possessing these specialized skills and distinctive knowledge; and
    (3) How the education and experience qualifies the representative 
as someone with the necessary specialized skills and distinctive 
knowledge.
    (iii) * * *
    (C) In cases of pro bono representation, time records similar to 
billing records, detailing the time spent and work completed must be 
submitted for the requested fees.
* * * * *
    (5) Period for requesting costs from the Internal Revenue Service. 
To recover reasonable administrative costs pursuant to section 7430 and 
this section, the taxpayer must file a written request for costs within 
90 days after the date the final adverse decision of the Internal 
Revenue Service with respect to all tax, additions to tax, interest, 
and penalties at issue in the administrative proceeding is mailed or 
otherwise furnished to the taxpayer. For purposes of this section, 
interest means the interest that is specifically at issue in the 
administrative proceeding independent of the taxpayer's objections to 
the underlying tax imposed. The final decision of the Internal Revenue 
Service for purposes of this section is the document that resolves the 
tax liability of the taxpayer with regard to all tax, additions to tax, 
interest, and penalties at issue in the administrative proceeding (such 
as a Form 870 or closing agreement), or a notice of assessment for that 
liability (such as the notice and demand under section 6303), whichever 
is earlier mailed or otherwise furnished to the taxpayer. For purposes 
of this section, if the 90th day falls on a Saturday, Sunday, or a 
legal holiday, the 90-day period shall end on the next succeeding day 
that is not a Saturday, Sunday, or a legal holiday as defined by 
section 7503.
* * * * *
    (7) * * * If the notice of decision denying (in whole or in part) 
an award for reasonable administrative costs was mailed by the Internal 
Revenue Service via certified mail or registered mail, a taxpayer may 
obtain judicial review of that decision by filing a petition for review 
with the Tax Court prior to the 91st day after the mailing of the 
notice of decision.
* * * * *
    (e) * * *

    Example 1. Taxpayer A receives a notice of proposed deficiency 
(30-day letter). A requests and is granted Appeals office 
consideration. Appeals requests that A submit certain documents as 
substantiation for the tax matters at issue. Appeals determines that 
the information submitted is

[[Page 61592]]

insufficient. Appeals then issues a notice of deficiency. After 
receiving the notice of deficiency but before the 90-day period for 
filing a petition with the Tax Court has expired, A convinces 
Appeals that the information submitted during the review by Appeals 
is sufficient and, therefore, the notice of deficiency is incorrect 
and A owes no additional tax. Appeals then closes the case showing a 
zero deficiency and mails A a notice to this effect. Assuming that 
all of the other requirements of section 7430 are satisfied, A may 
recover reasonable administrative costs incurred after the date of 
the 30-day letter (the administrative proceeding date). To recover 
these costs, A must file a request for administrative costs with the 
Appeals office personnel who settled A's tax matter, or if that 
person is unknown to A, with the Area Director of the area that 
considered the underlying matter, within 90 days after the date of 
mailing of the Office of Appeals' final decision that A owes no 
additional tax.
    Example 2. Taxpayer B files a request for an abatement of 
interest pursuant to section 6404 and the regulations thereunder. 
The Area Director issues a notice of proposed disallowance of the 
abatement request (akin to a 30-day letter). B requests and is 
granted Appeals office consideration. No agreement is reached with 
Appeals and the Office of Appeals issues a notice of disallowance of 
the abatement request. B does not file suit in the Tax Court, but 
instead contacts the Appeals office within 180 days after the 
mailing date of the notice of disallowance of the abatement request 
to attempt to reverse the decision. B convinces the Appeals office 
that the notice of disallowance is in error. The Appeals office 
agrees to abate the interest and mails the taxpayer a notification 
of this decision. The mailing date of the notification from Appeals 
of the decision to abate interest commences the 90-day period from 
which the taxpayer may request administrative costs. Assuming that 
all of the other requirements of section 7430 are satisfied, B may 
recover reasonable administrative costs incurred after the date of 
the notice of proposed disallowance of the abatement request (the 
administrative proceeding date). To recover these costs, B must file 
a request for costs with the Appeals office personnel who settled 
B's tax matter, or if that person is unknown to B, with the Area 
Director of the area that considered the underlying matter within 90 
days after the date of mailing of the Office of Appeals' final 
decision that B is entitled to abatement of interest.
    Example 3. Taxpayer C receives a notice of proposed adjustment 
and employment tax 30-day letter. C requests and is granted Appeals 
office consideration. Appeals requests that C submit certain 
documents to support C's position in the tax matters at issue. 
Appeals determines that the documents submitted are insufficient. 
Appeals then issues a notice of determination of worker 
classification. After receiving the notice of determination but 
before the 90-day period for filing a petition with the Tax Court 
has expired, C convinces Appeals that the documents submitted during 
the review by Appeals adequately support its position and, 
therefore, C owes no additional employment tax. Appeals then closes 
the case showing a zero tax adjustment and mails C a no-change 
letter. Assuming that all of the other requirements of section 7430 
are satisfied, C may recover reasonable administrative costs 
incurred after the date of the notice of proposed adjustment and 30-
day letter (the administrative proceeding date). To recover these 
costs, C must file a request for administrative costs with the 
Appeals office personnel who settled C's tax matter, or if that 
person is unknown to C, with the Area Director of the area that 
considered the underlying matter, within 90 days after the date of 
mailing of the Office of Appeals' final decision that C owes no 
additional tax.

    Par. 5. Section 301.7430-3 is amended by:
    1. Revising paragraphs (b), (c)(1), (c)(3) and (d).
    2. Adding paragraph (c)(4).
    The addition and revisions read as follows:


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

* * * * *
    (b) Collection action. A collection action generally includes any 
action taken by the Internal Revenue Service to collect a tax (or any 
interest, additional amount, addition to tax, or penalty, together with 
any costs in addition to the tax) or any action taken by a taxpayer in 
response to the Internal Revenue Service's act or failure to act in 
connection with the collection of a tax (including any interest, 
additional amount, addition to tax, or penalty, together with any costs 
in addition to the tax). A collection action for purposes of section 
7430 and this section includes any action taken by the Internal Revenue 
Service under Chapter 64 of Subtitle F to collect a tax. Collection 
actions also include collection due process hearings under sections 
6320 and 6330 (unless the underlying tax liability is properly at 
issue), and those actions taken by a taxpayer to remedy the Internal 
Revenue Service's failure to release a lien under section 6325 or to 
remedy any unauthorized collection action as defined by section 7433, 
except those collection actions described by section 7433(e). An action 
or procedure directly relating to a claim for refund after payment of 
an assessed tax is not a collection action.
    (c) Administrative proceeding date--(1) General rule. For purposes 
of section 7430 and the regulations thereunder, the term administrative 
proceeding date means the earlier of--
    (i) The date of the receipt by the taxpayer of the notice of the 
decision of the Internal Revenue Service Office of Appeals;
    (ii) The date of the notice of deficiency; or
    (iii) The date on which the first letter of proposed deficiency 
that allows the taxpayer an opportunity for administrative review in 
the Internal Revenue Service Office of Appeals is sent.
    (2) * * *
    (3) Notice of deficiency. A notice of deficiency is a notice 
described in section 6212(a), including a notice rescinded pursuant to 
section 6212(d). For purposes of determining reasonable administrative 
costs under section 7430 and the regulations thereunder, the following 
will be treated as a notice of deficiency:
    (i) A notice of final partnership administrative adjustment 
described in section 6223(a)(2).
    (ii) A notice of determination of worker classification issued 
pursuant to section 7436.
    (iii) A final notice of determination denying innocent spouse 
relief issued pursuant to section 6015.
    (4) First letter of proposed deficiency that allows the taxpayer an 
opportunity for administrative review in the Office of Appeals. 
Generally, the first letter of proposed deficiency that allows the 
taxpayer an opportunity for administrative review in the Office of 
Appeals is the first letter issued to the taxpayer that describes the 
proposed adjustments and advises the taxpayer of the opportunity to 
contact the Office of Appeals. It also may be a claim disallowance or 
the first letter of determination that allows the taxpayer an 
opportunity for administrative review in the Office of Appeals.
    (d) Examples. The provisions of this section are illustrated by the 
following examples:

    Example 1. Taxpayer A receives a notice of proposed deficiency 
(30-day letter). A files a request for and is granted an Appeals 
office conference. At the Appeals conference no agreement is reached 
on the tax matters at issue. The Office of Appeals then issues a 
notice of deficiency. Upon receiving the notice of deficiency, A 
does not file a petition with the Tax Court. Instead, A pays the 
deficiency and files a claim for refund. The claim for refund is 
considered by the Internal Revenue Service and the Area Director 
issues a notice of proposed claim disallowance. A requests and is 
granted Appeals office consideration. A convinces Appeals that A's 
claim is correct and Appeals allows A's claim. A may recover 
reasonable administrative costs incurred on or after the date of the 
notice of proposed deficiency (30-day letter), but only if the other 
requirements of section 7430 and the regulations thereunder are 
satisfied. A cannot recover costs incurred prior to the date of the 
30-day letter because these costs were incurred before the 
administrative proceeding date.

[[Page 61593]]

    Example 2. Taxpayer B files an individual income tax return 
showing a balance due. No payment is made with the return and the 
Internal Revenue Service assesses the amount shown on the return. 
The Internal Revenue Service issues a notice of levy pursuant to 
section 6330. B requests and is granted a Collection Due Process 
(CDP) hearing. In connection with the CDP hearing, B enters into an 
installment agreement as a collection alternative. The costs that B 
incurred in connection with the CDP hearing were not incurred in an 
administrative proceeding, but rather in a collection action. 
Accordingly, B may not recover those costs as reasonable 
administrative costs under section 7430 and the regulations 
thereunder.

    Par. 6. Section 301.7430-4 is amended by:
    1. Removing the language ``such'' in the second and fifth sentences 
of paragraph (b)(2)(ii) and adding the language ``that'' in its place 
in both locations.
    2. Revising paragraphs (b)(3)(i), (b)(3)(iii)(B), and (c)(4) 
Examples 1 and 2.
    3. Removing the language ``$110'' from the first and second 
sentences in paragraph (b)(3)(ii) and adding the language ``$125'' in 
its place in both locations.
    4. Revising the first sentence in paragraph (b)(3)(iii)(C).
    5. Redesignating paragraph (b)(3)(iii)(D) as paragraph 
(b)(3)(iii)(F) and revising newly-designated paragraph (b)(3)(iii)(F).
    6. Adding new paragraphs (b)(3)(iii)(D), (b)(3)(iii)(E) and (d).
    7. Removing the language ``Such'' in the third sentence of 
paragraph (c)(2)(i) and adding the language ``These'' in its place.
    8. Removing the language ``$110'' from the second and third 
sentences in paragraph (c)(2)(ii) and adding the language ``$125'' in 
its place in both locations.
    9. Removing the language ``which'' in the fourth sentence of 
paragraph (c)(2)(i) and adding the language ``that'' in its place.
    The additions and revisions read as follows:


Sec.  301.7430-4  Reasonable administrative costs.

* * * * *
    (b) * * *
    (3) Limitation on fees for a representative--(i) In general. Except 
as otherwise provided in this section, fees incurred after January 18, 
1999, and described in paragraph (b)(1)(iv) of this section that are 
recoverable under section 7430 and the regulations thereunder as 
reasonable administrative costs may not exceed $125 per hour increased 
by a cost of living adjustment (and if appropriate, a special factor 
adjustment).
* * * * *
    (iii) * * *
    (B) Special factor. A special factor is a factor, other than an 
increase in the cost of living, that justifies an increase in the $125 
per hour limitation of section 7430(c)(1)(B)(iii). The undesirability 
of the case, the work and the ability of counsel, the results obtained, 
and customary fees and awards in other cases, are factors applicable to 
a broad spectrum of litigation and do not constitute special factors 
for the purpose of increasing the $125 per hour limitation. By 
contrast, the limited availability of a specially qualified 
representative for the proceeding, the difficulty of the issues, and 
the limited local availability of tax expertise are special factors 
justifying an increase in the $125 per hour limitation.
    (C) Limited availability. Limited availability of a specially 
qualified representative is established by demonstrating that a 
specially qualified representative for the proceeding is not available 
at the $125 per hour rate (as adjusted for an increase in the cost of 
living). * * *
    (D) Limited local availability of tax expertise. Limited local 
availability of tax expertise is established by demonstrating that a 
representative possessing tax expertise is not available in the 
taxpayer's geographical area. Initially, this showing may be made by 
submission of an affidavit signed by the taxpayer, or by the taxpayer's 
counsel, that no representative possessing tax expertise practices 
within a reasonable distance from the taxpayer's principal residence or 
principal office. The hourly rate charged by representatives in the 
geographical area is not relevant in determining whether tax expertise 
is locally available. If the Internal Revenue Service challenges this 
initial showing, the taxpayer may submit additional evidence to 
establish the limited local availability of a representative possessing 
tax expertise.
    (E) Difficulty of the issues. In determining whether the difficulty 
of the issues justifies an increase in the $125 per hour limitation on 
the applicable hourly rate, the Internal Revenue Service will consider 
the following factors:
    (1) The number of different provisions of law involved in each 
issue.
    (2) The complexity of the particular provision or provisions of law 
involved in each issue.
    (3) The number of factual issues present in the proceeding.
    (4) The complexity of the factual issues present in the proceeding.
    (F) Example. The provisions of this section are illustrated by the 
following example:

    Example. Taxpayer A is represented by B, a CPA and attorney with 
a LL.M. Degree in Taxation with Highest Honors and who regularly 
handles cases dealing with TEFRA partnership issues. B represents A 
in an administrative proceeding involving TEFRA partnership issues 
that is subject to the provisions of this section. Assuming the 
taxpayer qualifies for an award of reasonable administrative costs 
by meeting the requirements of section 7430, the amount of the award 
attributable to the fees of B may not exceed the $125 per hour 
limitation (as adjusted for the cost of living), absent a special 
factor. B is not a specially qualified representative because 
extraordinary knowledge of the tax laws does not constitute 
distinctive knowledge or a unique and specialized skill constituting 
a special factor. A special factor must be comprised of nontax 
expertise unless the taxpayer establishes the limited local 
availability of tax expertise.

* * * * *
    (c) * * *
    (4) * * *

    Example 1. After incurring fees for representation during the 
Internal Revenue Service's examination of taxpayer A's income tax 
return, A receives a notice of proposed deficiency (30-day letter). 
A files a request for and is granted an Appeals office conference. 
At the conference no agreement is reached on the tax matters at 
issue. The Internal Revenue Service then issues a notice of 
deficiency. Upon receiving the notice of deficiency, A discontinues 
A's administrative efforts and files a petition with the Tax Court. 
A's costs incurred before the date of the mailing of the 30-day 
letter are not reasonable administrative costs because they were 
incurred before the administrative proceeding date. Similarly, A's 
costs incurred in connection with the preparation and filing of a 
petition with the Tax Court are litigation costs and not reasonable 
administrative costs.

    Example 2. Assume the same facts as in Example 1 except that 
after A receives the notice of deficiency, A recontacts Appeals and 
Appeals agrees with A. If A seeks administrative costs, A may 
recover costs incurred after the date of the mailing of the 30-day 
letter, costs incurred in recontacting Appeals after the issuance of 
the notice of deficiency, and costs incurred up to the time the Tax 
Court petition was filed, as reasonable administrative costs, but 
only if the other requirements of section 7430 and the regulations 
thereunder are satisfied. The costs incurred before the date of the 
mailing of the 30-day letter are not reasonable administrative costs 
because they were incurred before the administrative proceeding 
date, as set forth in Sec.  301.7430-3(c)(1)(iii). A's costs 
incurred in connection with the filing of a petition with the Tax 
Court are not reasonable administrative costs because those costs 
are litigation costs. Similarly, A's costs incurred after the filing 
of the petition are not reasonable administrative costs, as they are 
litigation costs.


[[Page 61594]]


    (d) Pro bono services--(1) In general. Fees recoverable under 
section 7430 and the regulations thereunder as reasonable 
administrative costs may exceed the attorneys' fees paid or incurred by 
the prevailing party if these fees are less than the reasonable 
attorneys' fees because an individual is representing the prevailing 
party on a pro bono basis. In addition to attorneys' fees, reasonable 
costs incurred or paid by the individual providing the pro bono 
services that are normally billed separately also may be recovered 
under this section.
    (2) Requirements. Pro bono representation is established by 
demonstrating--
    (i) Legal services were provided for no fee or for a fee that 
(taking into account all the facts and circumstances) constitutes a 
nominal fee;
    (ii) The legal services were provided to or on behalf of either--
    (A) Persons of limited financial means who meet the eligibility 
requirements for programs funded by the Legal Services Corporation as 
set forth in 45 CFR 1611; or
    (B) Organizations operating primarily to address the needs of 
persons with limited means if payment of a standard legal fee would 
significantly deplete the person's financial resources; and
    (iii) The service provider intended to perform services for no fee 
or for a nominal fee from the commencement of the representation. 
Intent to perform services for no fee or for a nominal fee may be 
demonstrated through documentation such as a retainer agreement. An 
individual will not be considered to have represented a client on a pro 
bono basis if the facts demonstrate that the individual anticipated a 
fee or provided services on a contingency fee basis. The fact that the 
service provider intended to seek recovery of fees under section 7430 
will not prevent the service provider from satisfying this requirement.
    (3) Nominal fee. A nominal fee is defined as one that is slight, 
inconsiderable or trifling (taking into account all the facts and 
circumstances).
    (4) Payment when services provided at no charge or for a nominal 
fee. A prevailing party who receives legal services at no charge or for 
a nominal fee and who satisfies the requirements under this section is 
eligible to receive reasonable fees in excess of the fees actually paid 
or incurred and those otherwise meeting the requirements of this 
paragraph. Payment will be made to the representative or the 
representative's employer.
    (5) Recordkeeping. Contemporaneous records must be maintained, 
demonstrating the work performed and the time allocated to each task. 
These records should contain similar information to billing records.
    (6) Hourly rate. For purposes of this section, the hourly rate may 
not exceed the lesser of--
    (i) The rate prescribed under section 7430(c)(1)(B); or
    (ii) The hourly rate customarily charged by the representative in 
cases that are not handled on a pro bono basis.
    (7) Examples. The provisions of this section are illustrated by the 
following examples:

    Example 1. Taxpayer A, an attorney, files a petition with the 
Tax Court and pays a $60 filing fee. A appears pro se in the court 
proceeding. If A prevails, he will not be entitled to an award of 
reasonable litigation costs for his services. A is rendering 
services on his own behalf, not providing pro bono representation. 
His lost opportunity costs are not compensable under section 7430. A 
may recover the filing fee as a litigation cost, but only if the 
other requirements of section 7430 and the regulations thereunder 
are satisfied.
    Example 2. Taxpayer retains attorney B with regard to the audit 
of taxpayer's individual income tax return. B agrees to represent 
taxpayer on a pro bono basis. Under this arrangement, taxpayer pays 
to attorney B a nominal fee. The customary hourly rate charged by B 
in cases not handled on a pro bono basis is less than the rate 
prescribed under section 7430(c)(1)(B). Any award paid to attorney 
B, or attorney B's employer, would be limited to attorney B's 
customary hourly rate. Thus, attorney B, or attorney B's employer, 
would receive the customary hourly rate charged in cases not handled 
by attorney B on a pro bono basis rather than the nominal fee 
actually paid or incurred by the taxpayer.
    Example 3. Assume the same facts in Example 2 except that 
attorney B's customary hourly rate exceeds the rate prescribed under 
section 7430(c)(1)(B). Any award paid to attorney B, or attorney B's 
employer, would be made at the rate prescribed under section 
7430(c)(1)(B).
    Example 4. Organization C, a low income taxpayer clinic within 
the meaning of section 7526, agrees to represent taxpayer on a pro 
bono basis. Attorneys employed by C do not have a customary hourly 
rate and work exclusively for C. Any award paid to C, for 
representation by its attorneys, would be limited to the rate 
prescribed under section 7430(c)(1)(B).


Sec.  301.7430-5  [Amended]

    Par. 7. For each entry in the table, redesignate the paragraph 
designated in the ``Old Paragraph'' column as the new paragraph 
designation in the ``New Paragraph'' column to read as follows:

------------------------------------------------------------------------
           Old paragraph                        New paragraph
------------------------------------------------------------------------
          301.7430-5(a)(1)                     301.7430-5(a)(2)
          301.7430-5(a)(2)                     301.7430-5(a)(3)
          301.7430-5(a)(3)                     301.7430-5(a)(4)
             301.7430-5(c)                     301.7430-5(d)(1)
          301.7430-5(c)(2)                     301.7430-5(d)(6)
          301.7430-5(c)(3)                     301.7430-5(d)(7)
             301.7430-5(d)                        301.7430-5(e)
             301.7430-5(e)                     301.7430-5(f)(1)
          301.7430-5(f)(1)                     301.7430-5(g)(1)
          301.7430-5(f)(2)                     301.7430-5(g)(3)
          301.7430-5(f)(3)                     301.7430-5(g)(4)
             301.7430-5(g)                        301.7430-5(h)
------------------------------------------------------------------------

     Par. 8. Section 301.7430-5 is amended by:
    1. Removing the language ``only if--'' at the end of the 
introductory text in paragraph (a) and adding the language ``(other 
than by reason of section 7430(c)(4)(E)) only if--'' in its place.
    2. Adding new paragraphs (a)(1), (c), (d)(2), (d)(3), (d)(4), 
(d)(5), (g)(2) and (g)(5).
    3. Revising paragraph (b).
    4. Revising the third sentence and removing the language ``(c)(3)'' 
from the fourth sentence in newly-designated paragraph (d)(7) and 
adding the language ``(d)(7)'' in its place.
    5. Revising the paragraph heading for newly-designated paragraph 
(f)(1) and adding new paragraph (f)(2).
    6. Revising newly-designated paragraphs (g)(1) and (g)(3).
    7. Removing the language ``Internal Revenue Code'' in the first 
sentence of newly-designated paragraph (g)(4) in both places.
    8. Removing the language ``such'' in the first sentence of newly-
designated paragraph (h) and adding the language ``an'' in its place.
    9. Removing paragraph (h).
    The additions and revisions read as follows:


Sec.  301.7430-5  Prevailing party.

    (a) * * *
    (1) At least one issue (other than recovery of administrative 
costs) remains in dispute as of the date that the Internal Revenue 
Service takes a position in the administrative proceeding, as described 
in paragraph (b) of this section;
* * * * *
    (b) Position of the Internal Revenue Service. The position of the 
Internal Revenue Service in an administrative proceeding is the 
position taken by the Internal Revenue Service as of the earlier of--
    (1) The date of the receipt by the taxpayer of the notice of the 
decision of the Internal Revenue Service Office of Appeals; or
    (2) The date of the notice of deficiency or any date thereafter.
* * * * *
    (c) Examples. The provisions of this section may be illustrated by 
the following examples:


[[Page 61595]]


    Example 1. Taxpayer A receives a notice of proposed deficiency 
(30-day letter). A pays the amount of the proposed deficiency and 
files a claim for refund. A's claim is considered and a notice of 
proposed claim disallowance is issued by the Area Director. A does 
not request an Appeals office conference and the Area Director 
issues a notice of claim disallowance. A then files suit in a United 
States District Court. A cannot recover reasonable administrative 
costs because the notice of claim disallowance is not a notice of 
the decision of the Internal Revenue Service Office of Appeals or a 
notice of deficiency. Accordingly, the Internal Revenue Service has 
not taken a position in the administrative proceeding pursuant to 
section 7430(c)(7)(B).
    Example 2. Taxpayer B receives a notice of proposed deficiency 
(30-day letter). B disputes the proposed adjustments and requests an 
Appeals office conference. The Appeals office determines that B has 
no additional tax liability. B requests administrative costs from 
the date of the 30-day letter. B is not the prevailing party and may 
not recover administrative costs because all of the proposed 
adjustments in the case were resolved as of the date that the 
Internal Revenue Service took a position in the administrative 
proceeding.

    (d) * * *
    (2) Position in courts of appeal. Whether the United States has won 
or lost an issue substantially similar to the one in the taxpayer's 
case in courts of appeal for circuits other than the one to which the 
taxpayer's case would be appealable should be taken into consideration 
in determining whether the Internal Revenue Service's position was 
substantially justified.
    (3) Example. The provisions of this section are illustrated by the 
following example:

    Example. The Internal Revenue Service, in the conduct of a 
correspondence examination of taxpayer A's individual income tax 
return, requests substantiation from A of claimed medical expenses. 
A does not respond to the request and the Service issues a notice of 
deficiency. After receiving the notice of deficiency, A presents 
sufficient information and arguments to convince a revenue agent 
that the notice of deficiency is incorrect and that A owes no tax. 
The revenue agent then closes the case showing no deficiency. 
Although A incurred costs after the issuance of the notice of 
deficiency, A is unable to recover these costs because, as of the 
date these costs were incurred, A had not presented relevant 
information under A's control and relevant legal arguments 
supporting A's position to the appropriate Internal Revenue Service 
personnel. Accordingly, the position of the Internal Revenue Service 
was substantially justified at the time the costs were incurred.

    (4) Included costs. (i) An award of reasonable administrative costs 
shall only include costs incurred on or after the earliest of--
    (A) The date of the receipt by the taxpayer of the notice of 
decision from Appeals;
    (B) The date of the notice of deficiency; or
    (C) The date on which the first letter of proposed deficiency that 
allows the taxpayer an opportunity for administrative review in the 
Office of Appeals is sent.
    (ii) If the Internal Revenue Service takes a position in an 
administrative proceeding, as defined in paragraph (b) of this section, 
and the position is not substantially justified, the taxpayer may be 
permitted to recover costs incurred before the position was taken, but 
not before the dates set forth in this paragraph (d)(4).
    (5) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example 1. Pursuant to section 6672, taxpayer D receives from 
the Area Director Collection Operations (Collection) a proposed 
assessment of trust fund taxes (Trust Fund Recovery Penalty). D 
requests and is granted Appeals office consideration. Appeals 
considers the issues and decides to uphold Collection's recommended 
assessment. Appeals notifies D of this decision in writing. 
Collection then assesses the tax and notice and demand is made. D 
timely pays the minimum amount required to commence a court 
proceeding, files a claim for refund, and furnishes the required 
bond. Collection disallows the claim, but Appeals, on 
reconsideration, reverses its original position, thus upholding D's 
position. If Appeals concedes its initial determination was not 
substantially justified, D may recover administrative costs incurred 
on or after the mailing of the proposed assessment of trust fund 
taxes, because the proposed assessment is the first determination 
letter that allows the taxpayer an opportunity for administrative 
review in the Internal Revenue Service Office of Appeals.
    Example 2. Taxpayer E receives a notice of proposed deficiency 
(30-day letter). E pays the amount of the proposed deficiency and 
files a claim for refund. E's claim is considered and a notice of 
proposed disallowance is issued by the Area Director. E requests and 
is granted Appeals office consideration. No agreement is reached 
with Appeals and the Office of Appeals issues a notice of claim 
disallowance. E does not file suit in a United States District Court 
but instead contacts the Appeals office to attempt to reverse the 
decision. E convinces the Appeals officer that the notice of claim 
disallowance is in error. The Appeals officer then abates the 
assessment. E may recover reasonable administrative costs if the 
position taken in the notice of claim disallowance issued by the 
Office of Appeals was not substantially justified and the other 
requirements of section 7430 and the regulations thereunder are 
satisfied. If so, E may recover administrative costs incurred from 
the mailing date of the 30-day letter because the requirements of 
paragraph (c)(2) of this section are met. E cannot recover the costs 
incurred prior to the mailing of the 30-day letter because they were 
incurred before the administrative proceeding date.
* * * * *
    (7) Presumption. * * * For purposes of this paragraph (d)(7), the 
term applicable published guidance means final or temporary 
regulations, revenue rulings, revenue procedures, information releases, 
notices and announcements published in the Internal Revenue Bulletin 
and, if issued to the taxpayer, private letter rulings, technical 
advice memoranda, and determination letters (Sec.  601.601(d)(2) of 
this chapter). * * *
* * * * *
    (f) Most significant issue or set of issues presented--(1) In 
general. * * *
    (2) Example. The provisions of this section may be illustrated by 
the following example:

    Example. In the purchase of an ongoing business, Taxpayer F 
obtains from the previous owner of the business a covenant not to 
compete for a period of five years. On audit of F's individual 
income tax return for the year in which the business is acquired, 
the Internal Revenue Service challenges the basis assigned to the 
covenant not to compete and a deduction taken as a business expense 
for a seminar attended by F. Both parties agree that the covenant 
not to compete is amortizable over a period of five years; however, 
the Internal Revenue Service asserts that the proper basis of the 
covenant is $2X while F asserts the basis is $4X. The deduction for 
the seminar attended by F was reported on the return in question in 
the amount of $7X. The Internal Revenue Service determines that the 
deduction for the seminar should be disallowed entirely. In the 
notice of deficiency, the Internal Revenue Service adjusts the 
amortization deduction to reflect the change to the basis of the 
covenant not to compete, and disallows the seminar expense. Thus, of 
the two adjustments determined for the year under audit, the 
adjustment attributable to the disallowance of the seminar is larger 
than that attributable to the covenant not to compete. Due to the 
impact on the next succeeding four years, however, the covenant not 
to compete adjustment is objectively the most significant issue to 
both F and the Internal Revenue Service.
* * * * *
    (g) Net worth and size limitations--(1) Individuals. A taxpayer who 
is a natural person meets the net worth and size limitations of this 
paragraph if the taxpayer's net worth does not exceed two million 
dollars. The net worth limitation shall be determined for individuals 
using the fair market value of the individual's assets as of the 
administrative proceeding date. For purposes of determining net worth, 
individuals filing a joint return shall be treated as separate 
individuals. Thus,

[[Page 61596]]

individuals filing a joint return will each be subject to a separate 
net worth limitation of two million dollars.
    (2) Estates and trusts. An estate or a trust meets the net worth 
and size limitations of this paragraph if the taxpayer's net worth does 
not exceed two million dollars. The net worth of an estate shall be 
determined using the fair market value of the assets of the estate as 
of the date of the decedent's death provided the date of death is prior 
to the date the court proceeding is commenced. The net worth of a trust 
shall be determined using the fair market value of the assets of the 
trust as of the last day of the last taxable year involved in the 
proceeding.
    (3) Others. (i) A taxpayer that is a partnership, corporation, 
association, unit of local government, or organization (other than an 
organization described in paragraph (g)(4) of this section) meets the 
net worth and size limitations of this paragraph if, as of the 
administrative proceeding date:
    (A) The taxpayer's net worth does not exceed seven million 
dollars.; and
    (B) The taxpayer does not have more than 500 employees.
    (ii) A taxpayer who is a natural person and owns an unincorporated 
business is subject to the net worth and size limitations contained in 
paragraph (g)(3)(i) of this section if the tax at issue (or any 
interest, additional amount, addition to tax, or penalty, together with 
any costs in addition to the tax) relates directly to the business 
activities of the unincorporated business.
    (4) * * *
    (5) Special rule for TEFRA partnership proceedings. (i) In cases 
involving partnerships subject to the unified audit and litigation 
procedures of subchapter C of chapter 63 of the Internal Revenue Code 
(TEFRA partnership cases), the TEFRA partnership meets the net worth 
and size limitations requirements of this paragraph (g) if, on the 
administrative proceeding date--
    (A) The partnership's net worth does not exceed seven million 
dollars; and
    (B) The partnership does not have more than 500 employees.
    (ii) In addition, each partner requesting fees pursuant to section 
7430 must meet the appropriate net worth and size limitations set forth 
in paragraph (g)(1), (g)(2) or (g)(3) of this section. For example, if 
a partner is an individual, his or her net worth must not exceed two 
million dollars as of the administrative proceeding date. If the 
partner is a corporation, its net worth must not exceed seven million 
dollars and it must not have more than 500 employees.
    Par. 9. Section 301.7430-6 is amended by revising the section 
heading and adding a new sentence at the end of the paragraph to read 
as follows:


Sec.  301.7430-6  Effective/applicability dates.

    * * *Sections 301.7430-2(c)(3)(i)(B), (c)(3)(i)(E), (c)(3)(ii)(C), 
(c)(3)(iii)(C), (c)(5), (c)(7), (e); 301.7430-3(c)(1), (c)(4), (d); 
301.7430-4(b)(3)(i), (b)(3)(iii)(B), (b)(3)(iii)(D), (b)(3)(iii)(E), 
(c)(4), (d); and 301.7430-5(a), (b), (c), (d)(2), (d)(3), (d)(4), 
(d)(5), (f)(2), (g)(1), (g)(2) and (g)(5), as proposed, apply to costs 
incurred and services performed as of the date of publication of a 
Treasury decision adopting these rules as final regulations in the 
Federal Register.
    Par. 10. Section 301.7430-7 is amended by adding new paragraph 
(c)(8) and new Examples 16 and 17 to paragraph (e) to read as follows:


Sec.  301.7430-7  Qualified offers.

* * * * *
    (c) * * *
    (8) Interest as a contested issue. To constitute a qualified offer, 
an offer must specify the offered amount of the taxpayer's liability 
(determined without regard to interest, unless interest is a contested 
issue in the proceeding), as provided in paragraphs (c)(1)(ii) and 
(c)(3) of this section. Therefore, a qualified offer generally may only 
include an offer to compromise tax, penalties, additions to the tax and 
additional amounts. Interest may only be included in a qualified offer 
if interest is a contested issue in the proceeding. For purposes of 
this section, interest is a contested issue in the proceeding only if 
the court in which the proceeding could be brought would have 
jurisdiction to determine the amount of interest due on the underlying 
tax, penalties, additions to the tax and additional amounts. Examples 
of proceedings in which interest might be a contested issue include 
proceedings in which the increased interest rate for large corporate 
underpayments under section 6621(c) is imposed by the Internal Revenue 
Service and interest abatement proceedings brought under section 6404. 
Interest is not a contested issue in the proceeding if the court that 
would have jurisdiction over the proceeding would not have jurisdiction 
to determine the amount or rate of interest, regardless of whether the 
taxpayer attempts to raise interest as an issue in the proceeding. 
Consequently, interest will not be a contested issue in the vast 
majority of tax cases because they merely involve the straight forward 
application of statutory interest under section 6601. Accordingly, in 
those cases, interest may not be included in the offer.
* * * * *
    (e) * * *

    Example 16. Qualified offer may not compromise interest unless 
it is a contested issue. Taxpayer J receives a notice of deficiency 
making an adjustment resulting in a deficiency in tax of $6,500 plus 
a penalty of $500. Interest is not a contested issue in the 
proceeding. Within the qualified offer period, J submits a written 
offer to settle the case for a deficiency of $1,000, including all 
taxes, penalties, and 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 of 90 days. 
Section 7430(g)(2)(B) and paragraph (c)(3) of this section state 
that the amount of a qualified offer must be without regard to 
interest unless interest is at issue in the proceeding. Since J's 
offer attempts to compromise interest, which is not a contested 
issue in the proceeding, it is not a qualified offer.
    Example 17. Qualified offer based on new defense or legal 
theory. Taxpayers K and L received a statutory notice of deficiency 
for tax year 2005, a tax year when they were married and filed a 
joint income tax return. Taxpayer K files a sole petition claiming 
innocent spouse relief and simultaneously submits an offer 
purporting to be a qualified offer. The offer states that K is 
entitled to innocent spouse relief and offers to settle the 2005 
deficiency as to K in the amount of $1,000. K's innocent spouse 
claim was not raised during K and L's audit, nor was it raised 
during their appeals conference. Additionally, at no time prior to 
or contemporaneously with submitting the offer did K file with the 
IRS a Form 8857, Request for Innocent Spouse Relief, or otherwise 
provide the information specified in Sec.  1.6015-5(a) of this 
chapter. K's offer is not a qualified offer because K did not file a 
Form 8857 or otherwise provide substantiation or legal and factual 
arguments necessary to allow for informed consideration of the 
merits of the innocent spouse claim as required by paragraph (c)(4) 
of this section, contemporaneously with the offer or prior to making 
the offer.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E9-27948 Filed 11-24-09; 8:45 am]
BILLING CODE 4830-01-P