Source: https://www.irs.gov/irb/2016-12_IRB/ar07.html
Timestamp: 2017-02-19 14:22:59
Document Index: 520114178

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Internal Revenue Bulletin - March 21, 2016 - T.D. 9756
Internal Revenue Bulletin: 2016-12 March 21, 2016 T.D. 9756
Regulations under IRC Section 7430 Relating to Awards of Administrative Costs and Attorneys’ Fees Table of Contents
This document contains final regulations relating to awards of administrative costs and attorneys’ fees. The final regulations
conform the regulations 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.
Applicability date: For date of applicability, see § 301.7430–6.
This document contains final amendments to Treasury Regulations under section 7430 of the Internal Revenue Code (Code) relating
to awards of administrative and attorneys’ fees. Section 7430 generally permits a prevailing party in an administrative or
court proceeding to seek an award for reasonable administrative and litigation costs incurred in connection with such proceedings.
The amendments incorporate the 1997 and 1998 amendments to section 7430, which were enacted as part of the Taxpayer Relief
Act of 1997 (TRA), Public Law No. 105–34, 111 Stat. 788 (Aug. 5, 1997), and the IRS Restructuring and Reform Act of 1998 (RRA
‘98), Public Law No. 105–206, 112 Stat. 685 (Jul. 22, 1998).
The Treasury Department and the Internal Revenue Service published a notice of proposed rulemaking (REG–111833–99) in the
Federal Register, 74 FR 61589, on November 25, 2009 (the NPRM), proposing amendments to the regulations under section 7430. A public hearing was scheduled
for March 10, 2010. The Internal Revenue Service did not receive any requests to testify at the public hearing, and the public
hearing was cancelled. Two written comments responding to the NPRM were received and are available for public inspection at
http://www.regulations.gov or upon request. After consideration of the comments, the proposed regulations are adopted as revised
Section 7430 generally authorizes a court to award administrative and litigation costs, including attorneys’ fees, to a prevailing
party in an administrative or court proceeding brought by or against the United States in connection with the determination,
collection, or refund of any tax, interest, or penalty. To qualify as a “prevailing party” a taxpayer must substantially prevail
as to the amount in controversy or the most significant issue or set of issues in the proceeding, exhaust the administrative
remedies, meet net worth and size limitations, and pay or incur the costs. The taxpayer generally cannot qualify for an award
of such costs, however, if the government establishes that its position in the proceeding was substantially justified.
The TRA contained several amendments to section 7430 that are incorporated in the amendments to the regulations. First, the
TRA provided that a taxpayer has ninety days after the date the Internal Revenue Service mails to the taxpayer a final decision
determining tax, interest, or a penalty, to file an application with the Internal Revenue Service to recover administrative
costs. Section 7430 had previously been silent as to the timing for seeking administrative costs. Second, the TRA provided
that a taxpayer has ninety days after the date the Internal Revenue Service 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. Section
7430 had previously been silent as to the timing for seeking review in the Tax Court. Third, the TRA clarified the application
of the net worth and size limitations imposed by section 7430(c)(4) 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 and size limitations and also specified the date on which the net worth and size determination should be
made. Before the TRA’s clarification of the net worth and size limitations, section 7430 had stated only that a prevailing
party must meet the requirement of the first sentence of section 2412(d)(1)(B) of Title 28. Section 2412(d)(2)(B) establishes
the net worth and size limitations of the Equal Access to Justice Act. See 28 U.S.C. 2412 (EAJA). The TRA also added section
7436 to the Code, which gives the Tax Court jurisdiction in certain employment tax cases. Section 7436(d)(2) provides that
section 7430 applies to proceedings brought under section 7436.
RRA ‘98 also contained several amendments affecting section 7430. First, RRA ‘98 increased the hourly rate limitation for
attorneys’ fees in section 7430(c)(1) from $110 per hour to $125 per hour. Second, two special factors were added that may
be considered to allow an increase in an attorney’s hourly rate: (1) Difficulty of the issues presented and (2) local availability
of tax expertise. Prior to the enactment of RRA ’98, the only special factor included in section 7430(c)(1) was the limited
availability of qualified attorneys. Third, RRA ‘98 added a provision that requires a court to consider whether the Internal
Revenue Service has lost cases with substantially similar issues in other circuit courts of appeal in deciding whether the
Internal Revenue Service’s position was substantially justified. Fourth, RRA ‘98 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 Internal Revenue Service 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 who represented the taxpayer or such individual’s
employer. The Treasury Department and the Internal Revenue Service are releasing, simultaneously with these final regulations,
a revenue procedure detailing the procedures for the recovery of attorneys’ fees in the pro bono context. Fifth, RRA ‘98 extended the period for recovery of reasonable administrative costs 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. Previously,
administrative costs only included costs incurred on or after the date of the receipt by the taxpayer of the notice of the
decision of the Internal Revenue Service Office of Appeals, or the date of the notice of deficiency.
The final regulations reflect the changes made by the TRA as originated in the proposed regulations. Clarifying changes included
in the proposed regulations and adopted here address the calculation of net worth. Section 7430 imposes net worth and size
limitations on who can recover costs. First, the proposed and final regulations specify which limitations with respect to
net worth and size apply when a taxpayer is an owner of an unincorporated business. Second, the proposed and final regulations
clarify the net worth and size limitations 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 final regulations reflect a further clarification that was not included in the proposed regulations. The proposed regulations
merely noted that the net worth of taxpayers who filed joint returns should be calculated separately. The final regulations
further explain how the separate calculation will be conducted in various situations. When taxpayers who file joint returns
jointly petition the court and incur joint costs, each taxpayer qualifies for a separate net worth limitation of $2 million,
but the limitation will be evaluated jointly. As such, taxpayers will meet the net worth limitation so long as their combined
assets are equal to or less than $4 million, regardless of how the assets are distributed. This prevents high net worth taxpayers
from avoiding the net worth limitation by seeking costs on behalf of a spouse with a lower net worth. When taxpayers file
a joint return, but petition the court separately and incur separate costs, the limitation will be evaluated separately. As
such, each taxpayer will have his/her assets applied toward a separate $2 million cap for each spouse. This analysis protects
the ability of spouses with fewer assets to seek representation when the spouse with higher-value assets is unwilling or unable
to incur those costs.
The final regulations do not adopt the proposed rule in §§ 301.7430–5(g)(1) and (2) that the net worth limitation is computed
based on the fair market value of the taxpayer’s assets. The existing section 7430 regulations do not address this issue and
no comments from the public were received on this issue. The existing case law, however, generally recognizes that the net
worth calculation is made based on the acquisition costs of the taxpayer’s assets. Because the case law is clear and provides
an existing standard for determining net worth, the final regulations follow the case law and do not adopt the proposed rule
in § 301.7430–5(g)(1) and (2) relating to the determination of the value of the taxpayer’s assets. Accordingly, the final
regulations add a new paragraph (6) to § 301.7430–5(g) to clarify that for purposes of determining net worth, assets are valued
based on the cost of their acquisition.
Consistent with the changes made by RRA ’98, the final regulations clarify 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 administrative
costs) remains in dispute as of the date that the Internal Revenue Service takes a position in the administrative proceeding.
This requirement follows RRA ‘98’s prevailing party definition. Under the changes made by RRA ‘98, the position of the United
States is established in the administrative proceeding on the earlier of the date the taxpayer receives the notice of the
decision of the Internal Revenue Service Office of Appeals or the date of the notice of deficiency. Where the Internal Revenue
Service concedes an issue in the Office of Appeals prior to issuing a notice of deficiency or notice of the decision of the
Office of Appeals, the United States does not take a position, so an award of administrative costs is not available. Where
the Internal Revenue Service concedes an issue in the notice of decision, the position of the United States is necessarily
substantially justified. See, for example, Fla. Country Clubs, Inc. v. Commissioner, 122 T.C. 73, 78–86 (2004), aff’d, 404 F.3d 1291 (11th Cir. 2005) (Where the Office of Appeals determined that taxpayer did not owe any additional tax after
issuing a 30-day letter, but without ever issuing a notice of deficiency or notice of determination, the Internal Revenue
Service did not take a position), Purciello v. Commissioner, T.C. Memo. 2014–50 (Where the Internal Revenue Service conceded the matter at issue in full in the notice of decision, the
Internal Revenue Service was substantially justified).
The Treasury Department and the Internal Revenue Service received two written comments in response to the NPRM, both of which
related to the provisions in the proposed regulations providing for the award of reasonable attorneys’ fees when an individual
is representing a party on a pro bono basis. This section addresses those comments. This section also describes the significant differences between the rules proposed
in the NPRM and those adopted in the final regulations.
As discussed in this preamble, prior to RRA ’98, only those costs incurred by the taxpayer were eligible for payment under
section 7430. RRA ’98 provided that the court could award costs in excess of the costs actually incurred by the taxpayer if
those costs were less than the reasonable attorneys’ fees because an individual is representing the taxpayer on a pro bono basis. The statute defined pro bono as representation provided for no fee or for a fee which (taking into account all the facts and circumstances) is no more
than a nominal fee. Finally, the statute directed that awards for pro bono representation must be paid to the representative or that representative’s employer, as opposed to section 7430’s general
requirement that awards are paid to the taxpayer.
Section 7430 establishes net worth and size limitations that a taxpayer must meet in order to recover administrative or litigation
costs. The proposed regulations included an additional requirement related to a taxpayer’s net worth: they stated that, for
reasonable administrative costs to be awarded for legal services provided on a pro bono basis, the services must be 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, 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 organization’s financial
resources. Both of the commentators recommended revising the regulations to provide that organizations to whom or on whose
behalf representation may be provided include low income taxpayer clinics, clinics participating in the Internal Revenue Service
student tax clinic program, and clinics operating as approved clinics in the United States Tax Court. Both commentators also
proposed changes in the proposed regulations’ income limitation for persons on whose behalf pro bono legal representation must be provided. The proposed regulations provided an income limitation based on the eligibility requirements
for programs funded by the Legal Services Corporation (see 42 U.S.C. 2996e(a)(1)(A)), which is 125 percent of the current
Federal Poverty Guidelines published by the United States Department of Health and Human Services. One commentator recommended
that the limitation be expanded to include individuals and households whose incomes do not exceed 250 percent of the poverty
level as determined in accordance with criteria established by the Director of the Office of Management and Budget. The other
commentator recommended that the regulations should not contain an income threshold for persons on whose behalf pro bono representation
is provided, and recommended that the only limitation should be that pro bono representation must be provided to persons with limited means if payment of a standard legal fee would significantly deplete
the person’s financial resources.
The Treasury Department and the Internal Revenue Service have carefully considered both comments and have considered the difficulty
of establishing fair and easily applied limitations on eligibility for attorneys’ fees for pro bono representation based upon the income and financial resources of the taxpayer. The Treasury Department and the Internal Revenue
Service have determined that eligibility should not be limited based on the income or financial resources of the recipient
of the representation beyond the limit provided by section 7430(c)(4)(A)(ii). As a result, the rule contained in the proposed
regulations is not being finalized. This change makes it unnecessary to revise the eligibility requirements as proposed by
An example in the proposed regulations stated that an award for representation by attorneys employed by a low income taxpayer
clinic who do not have a customary hourly rate would be limited to the rate prescribed under section 7430(c)(1)(B). Section
7430(c)(1)(B)(iii) provides for attorneys’ fees based on prevailing market rates for the kind or quality of services furnished,
except that the fee is limited to a statutory rate of $125 an hour plus cost of living adjustments, unless a special factor
justifies a higher rate. One commentator stated that because of the difficulty of determining the prevailing market rates
for the kind or quality of services furnished in the case of attorneys representing low income taxpayers, and because of the
unlikelihood that a low income taxpayer clinic or student taxpayer clinic program would become involved in a case that would
justify a rate in excess of the statutory rate, the rate for pro bono attorneys who do not have a customary hourly rate should be set at the statutory rate.
After publishing the proposed regulations, the Treasury Department and the Internal Revenue Service determined that details
such as the rate of compensation for pro bono attorneys who do not have a customary hourly rate would more logically be contained in a revenue procedure. The Treasury
Department and the Internal Revenue Service are releasing simultaneously Rev. Proc. 2016–17, which provides that pro bono attorneys who do not charge an hourly rate receive the statutory rate for their services unless they establish that a special
factor, as described in section 7430(c)(1)(B)(iii), applies to justify a higher hourly rate. The final regulations, therefore,
do not contain the example in the proposed regulations on the rate applicable to pro bono attorneys who do not have a customary hourly rate. Instead, these recommendations are taken into account in Rev. Proc. 2016–17.
One commentator recommended a change to the section of the proposed regulations that provided that the limited local availability
of tax expertise is a special factor that would justify an award at a rate higher than the statutory rate. The proposed regulations
provided that 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. The commentator stated that she did not think this special
factor produces a fair result in the case of pro bono representatives because, even if attorneys possessing tax expertise practice within a taxpayer’s geographic area, those attorneys
may not be willing or able to take on pro bono cases. The commentator suggested that the regulation be revised so that, in pro bono cases, the special factor based on the limited local availability of tax expertise would apply if there is no representative
possessing tax expertise practicing within the taxpayer’s geographic area who is willing or able to represent the taxpayer
The Treasury Department and the Internal Revenue Service disagree that the proposed rule does not produce a fair result in
the case of pro bono representatives. The rule permits the award of an enhanced rate based on the limited local availability of tax expertise
because such a circumstance reasonably could have an unfair impact on a taxpayer who pays or incurs liability for attorneys’
fees. For example, the taxpayer who must go outside his geographic area to retain a representative with tax expertise might
be required to pay more for the representation than the generally prevailing market rate for representatives in the taxpayer’s
geographic area. Taxpayers who are represented on a pro bono basis are entitled to the enhanced rate in the same manner as
taxpayers who incur fees. Therefore, the final regulations adopt the rule in the proposed regulations without change.
The proposed regulations did not discuss issues relating to the award of attorneys’ fees based on the work of volunteer law
students. Both commentators recommended clarifying the proposed regulations to state that payment for work performed by law
students should be made to the attorneys under whom the students work or to such an attorney’s employer rather than to the
One commentator expressed concern that fees may be awarded based on the work of law students who volunteer in low income taxpayer
clinics and clinics participating in the Internal Revenue Service student taxpayer clinic program, but that such students
do not have customary hourly rates. The commentator proposed setting an hourly rate for law students at 40 percent of the
statutory hourly rate for attorneys. The commentator also requested clarification that the work of law students can be compensated
as attorneys’ fees or costs regardless of whether the students have special orders authorizing them to practice before the
The Treasury Department and the Internal Revenue Service agree that awarding fees based on the work of volunteer students
may be appropriate and are addressing this issue in a revenue procedure being released contemporaneously with these final
regulations. In Rev. Proc. 2016–17, the Treasury Department and the Internal Revenue Service clarify that work performed by
students authorized to practice before the Internal Revenue Service or the Tax Court may be compensable at 35 percent of the
statutory hourly rate for attorneys, unless the student can demonstrate that a rate in excess of that 35 percent is appropriate,
with the award payable to the clinic or organization with which the student is affiliated. Rev. Proc. 2016–17 further clarifies
that with respect to students who are not authorized to practice before the Internal Revenue Service or the Tax Court, the
requester will have the burden of proving that an award of costs is appropriate and what rate of compensation is reasonable.
The proposed regulations provided that the changes in §§ 301.7430–2, 301.7430–3, 301.7430–4, and 301.7430–5 would apply to
costs incurred and services performed as of the date of publication of the final regulations, without regard to when a petition
was filed. That meant that these changes could have applied in cases where a petition was filed before publication of the
final regulations in the Federal Register. To ensure that these changes are not mandatory for cases in which a petition was filed before publication of the final regulations
in the Federal Register, the effective/applicability date in § 301.7430–6 of the final regulations has been revised to provide that the changes in
§§ 301.7430–2, 301.7430–3, 301.7430–4, and 301.7430–5 apply to costs incurred and services performed in cases in which the
petition was filed on or after the date of publication of the final regulations in the Federal Register. However, taxpayers may rely on the changes contained in §§ 301.7430–2, 301.7430–3, 301.7430–4, and 301.7430–5 of the final
regulations for costs incurred and services performed in which a petition was filed prior to March 1, 2016.
In addition, no effective/applicability date was proposed with respect to the rules for qualified offers under § 301.7430–7,
but one has been added to the final regulations. Accordingly, under § 301.7430–7(f) of the final regulations, section 301.7430–7
applies to qualified offers made in administrative court proceedings described in section 7430 after December 24, 2003, except
that section 301.7430–7(c)(8) is effective as of the date these final regulations are published in the Federal Register.
For copies of recently issued Revenue Procedures, Revenue Ruling, notices and other guidance published in the Internal Revenue
Bulletin, visit the IRS Web site at http://www.irs.gov.
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, the Notice of Proposed Rulemaking was submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small business. No comments were received.
Par. 2. Section 301.7430–0 is amended by:
1. Adding an entry for § 301.7430–3(c)(4).
2. Adding entries to § 301.7430–4, paragraphs (b)(3)(iii)(A) through (F) and (d).
3. Revising the entries for § 301.7430–5.
4. Revising the section heading for § 301.7430–6.
5. Adding entries for §§ 301.7430–7 and 301.7430–8.
§ 301.7430–0 Table of contents.
§ 301.7430–3 Administrative proceeding and administrative proceeding date.
(4) First letter of proposed deficiency that allows the taxpayer an opportunity for administrative review in the Office of
§ 301.7430–4 Reasonable administrative costs.
§ 301.7430–5 Prevailing party.
§ 301.7430–6 Effective/applicability dates.
§ 301.7430–7 Qualified offers.
§ 301.7430–8 Administrative costs incurred in damage actions for violations of section 362 or 524 of the Bankruptcy Code.
Par. 3. Section 301.7430–1 is amended by revising paragraphs (b)(1)(ii)(A), (d)(1)(i) and (ii) and (d)(2) introductory text
§ 301.7430–1 Exhaustion of administrative remedies.
(A) Requests an Appeals office conference in accordance with §§ 601.105 and 601.106 of this chapter or any successor published
(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 denies the claim for relief
in writing or fails to act on the claim within a reasonable period after the claim is received by the Area Director.
Par. 4. Section 301.7430–2 is amended by:
2. Removing the semicolon at the end of paragraph (c)(3)(i)(B) and adding a period in its place, and adding a sentence at
4. Revising paragraph (c)(3)(ii)(C), adding paragraph (c)(3)(iii)(C).,and revising paragraph (c)(5).
§ 301.7430–2 Requirements and procedures for recovery of reasonable administrative costs.
(a) Introduction. Section 7430(a)(1) provides for the recovery, under certain circumstances, of reasonable administrative costs incurred in
connection with an administrative proceeding before the Internal Revenue Service. Paragraph (b) of this section lists the
requirements that a taxpayer must meet to be entitled to an award of reasonable administrative costs from the Internal Revenue
Service. Paragraph (c) of this section describes the procedures that a taxpayer must follow to recover reasonable administrative
costs. Paragraphs (b) and (c) apply to requests for administrative costs regarding all administrative proceedings within the
(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, for each such case, 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 § 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.
(C) For costs incurred after January 18, 1999, if more than $125 per hour (as adjusted for an increase in the cost of living
pursuant to § 301.7430–4(b)(3)) is claimed for the fees of a representative in connection with the administrative proceeding,
an affidavit is necessary stating that a special factor described in § 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 § 301.7430–4(b)(2)(ii), the affidavit should state—
(3) How the representative’s education and experience qualifies the representative as someone with the necessary specialized
skills and distinctive knowledge.
(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, additions to tax, and penalties imposed. The final decision of the Internal Revenue Service for purposes
of this section is the document that resolves the taxpayer’s liability 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) * * * Once a notice of decision denying (in whole or in part) an award for reasonable administrative costs is mailed by
the Internal Revenue Service via certified mail or registered mail as required by paragraph (c)(6) of this section, 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.
Example 1. Taxpayer A receives a notice of proposed deficiency (30-day letter). A requests and is granted Appeals office consideration.
The administrative file contains certain documents provided by A as substantiation for the tax matters at issue. Appeals determines
that the information submitted is 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, and before filing a petition
with the Tax Court, A convinces Appeals that the information previously submitted and reviewed by Appeals is sufficient and,
therefore, the notice of deficiency is incorrect and A owes no additional tax. Pursuant to section 6212(d), the notice of
deficiency is rescinded. Appeals then closes the case showing a zero deficiency and mails A a notice to this effect. Assuming
that Appeals did not rely on any new information provided by A in rescinding the notice of deficiency and 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 as defined in Treas. Reg. § 301.7430–3(c)). 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 Appeals did not rely on
any new information provided by B in reversing its notice of disallowance, and that all of the other requirements of section
7430 are satisfied, B may recover reasonable administrative costs incurred after the date the Area Director issued the notice
of proposed disallowance of the abatement request (the administrative proceeding date as defined in Treas. Reg. § 301.7430–3(c)).
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. The administrative file contains certain documents provided by C 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 of worker classification but before the 90-day period
for filing a petition with the Tax Court has expired, C convinces Appeals that the documents previously submitted and reviewed
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 Appeals did not rely on any new information provided
by C in reversing its notice of determination of worker classification, and 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 as defined in Treas. Reg. § 301.7430–3(c)). 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:
§ 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 described
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—
(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.
(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:
(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.
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.
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 Intent to Levy And
Notice Of Your Right To A Hearing pursuant to sections 6330(a) and 6331(d). B timely 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
Par. 6. Section 301.7430–4 is amended by:
1. Removing the language “such” the second time it appears in the second sentence and in the fifth sentence of paragraph (b)(2)(ii)
and adding the language “that” in its place.
4. Redesignating paragraph (b)(3)(iii)(D) as paragraph (b)(3)(iii)(F), adding new paragraphs (b)(3)(iii)(D) and (b)(3)(iii)(E),
and revising newly redesignated paragraph (b)(3)(iii)(F).
(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 (as adjusted for an increase in the cost of living and, if appropriate, a special factor adjustment).
(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 limited local availability of tax expertise, and the difficulty of the issues 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).
The representative’s special qualification must be based on nontax expertise. * * *
(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:
Example. Taxpayer A is represented by B, a CPA and attorney with a LL.M. Degree in Taxation with Highest Honors 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 A 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 an increase in 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 higher rate may be justified by another special factor, that is, the limited local
availability of tax expertise or the difficulty of the issues.
Example 1. After incurring fees for representation during the Internal Revenue Service’s examination of 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, in addition to petitioning the Tax Court, A recontacts Appeals and
A convinces Appeals that the information previously submitted during the review by Appeals is sufficient and, therefore, the
notice of deficiency is incorrect and A owes no additional tax. The Internal Revenue Service and A agree to a stipulated decision
in the Tax Court case to reflect Appeals’ decision. The Tax Court enters the decision. 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 § 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
(d) Pro bono representation—(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 such 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 representation that are normally billed separately also may be recovered under this
section. The Treasury Department and the Internal Revenue Service may, in revenue rulings, notices, or other guidance published
in the Internal Revenue Bulletin, provide for additional rules that apply for awards of costs for pro bono representation
for purposes of this paragraph (d).
(i) Representation was provided for no fee or for a fee that (taking into account all the facts and circumstances) constitutes
a nominal fee;
(ii) The representative intended to provide representation for no fee or for a nominal fee from the commencement of the representation.
Intent to provide representation 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 greater than a nominal fee or provided representation on a contingency fee basis. The
fact that the representative intended to seek recovery of fees under section 7430 will not prevent the representative from
(3) Nominal fee. A nominal fee is defined as a fee that is insignificantly small or minimal. A nominal fee is a trivial payment, bearing no relation to
the value of the representation provided, taking into account all the facts and circumstances. (4) Payment when representation provided at no charge or for a nominal fee. A prevailing party who receives representation 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. 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.
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.
Par. 7. Section 301.7430–5 is revised to read as follows:
(a) In general. For purposes of an award of reasonable administrative costs under section 7430 in the case of administrative proceedings
commenced after July 30, 1996, a taxpayer is a prevailing party (other than by reason of section 7430(c)(4)(E)) only if—
(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
(3) The taxpayer substantially prevails as to the amount in controversy or with respect to the most significant issue or set
of issues presented; and
(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;
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
(d) Substantially justified—(1) In general. The position of the Internal Revenue Service is substantially justified if it has a reasonable basis in both fact and law.
A significant factor in determining whether the position of the Internal Revenue Service is substantially justified as of
a given date is whether, on or before that date, the taxpayer has presented all relevant information under the taxpayer’s
control and relevant legal arguments supporting the taxpayer’s position to the appropriate Internal Revenue Service personnel.
The appropriate Internal Revenue Service personnel are personnel responsible for reviewing the information or arguments, or
personnel who would transfer the information or arguments in the normal course of procedure and administration to the personnel
(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.
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 Internal Revenue Service
issues a notice of deficiency. After receiving the notice of deficiency, A presents sufficient information and arguments to
convince a tax compliance officer 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 administrative proceeding
date as defined in section 301.7430–3(c) of this chapter.
(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).
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’ 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.
(6) Exception. If the position of the Internal Revenue Service was substantially justified with respect to some issues in the proceeding
and not substantially justified with respect to the remaining issues, any award of reasonable administrative costs to the
taxpayer may be limited to only reasonable administrative costs attributable to those issues with respect to which the position
of the Internal Revenue Service was not substantially justified. If the position of the Internal Revenue Service was substantially
justified for only a portion of the period of the proceeding and not substantially justified for the remaining portion of
the proceeding, any award of reasonable administrative costs to the taxpayer may be limited to only reasonable administrative
costs attributable to that portion during which the position of the Internal Revenue Service was not substantially justified.
Where an award of reasonable administrative costs is limited to that portion of the administrative proceeding during which
the position of the Internal Revenue Service was not substantially justified, whether the position of the Internal Revenue
Service was substantially justified is determined as of the date any cost is incurred.
(7) Presumption. If the Internal Revenue Service did not follow any applicable published guidance in an administrative proceeding commenced
after July 30, 1996, the position of the Internal Revenue Service, on those issues to which the guidance applies and for all
periods during which the guidance was not followed, will be presumed not to be substantially justified. This presumption may
be rebutted. For purposes of this paragraph (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 or with respect to the taxpayer, private letter rulings, technical
advice memoranda, and determination letters (§ 601.601(d)(2) of this chapter). Also, for purposes of this paragraph (d)(7),
the term administrative proceeding includes only those administrative proceedings or portions of administrative proceedings
occurring on or after the administrative proceeding date as defined in § 301.7430–3(c).
(e) Amount in controversy. The amount in controversy shall include the amount in issue as of the administrative proceeding date as increased by any
amounts subsequently placed in issue by any party. The amount in controversy is determined without increasing or reducing
the amount in controversy for amounts of loss, deduction, or credit carried over from years not in issue.
(f) Most significant issue or set of issues presented. (1) In general. Where the taxpayer has not substantially prevailed with respect to the amount in controversy the taxpayer may nonetheless
be a prevailing party if the taxpayer substantially prevails with respect to the most significant issue or set of issues presented.
The issues presented include those raised as of the administrative proceeding date and those raised subsequently. Only in
a multiple issue proceeding can a most significant issue or set of issues presented exist. However, not all multiple issue
proceedings contain a most significant issue or set of issues presented. An issue or set of issues constitutes the most significant
issue or set of issues presented if, despite involving a lesser dollar amount in the proceeding than the other issue or issues,
it objectively represents the most significant issue or set of issues for the taxpayer or the Internal Revenue Service. This
may occur because of the effect of the issue or set of issues on other transactions or other taxable years of the taxpayer
or related parties.
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 was 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 $25,000, while F asserts the
basis is $50,000 and claims a deduction of $10,000 in the year in which the business was acquired. F deducted $12,000 for
the seminar. 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 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. For purposes of determining net worth, individuals filing a joint return, and jointly
incurring administrative or litigation costs shall have their net worth determined jointly, with all assets and liabilities
treated as joint for purposes of the net worth evaluation, and applying a joint cap of four million dollars. Individuals who
file a joint return, but incur separate administrative or litigation costs, by retaining separate representation, and/or seeking
individual administrative review or petitioning the court individually, such as under section 6015, shall have their net worth
determined separately, with only those assets and liabilities reasonably attributable to each spouse considered against separate
caps of two million dollars per spouse.
(2) Estates and trusts. An estate or a trust meets the net worth and size limitations of this paragraph if the estate or trust’s net worth does
not exceed two million dollars. The net worth of an estate shall be determined 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 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
(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
(4) Special rule for charitable organizations and certain cooperatives. An organization described in section 501(c)(3) exempt from taxation under section 501(a), or a cooperative association as
defined in section 15(a) of the Agricultural Marketing Act, 12 U.S.C. 1141j(a) (as in effect on October 22, 1986), meets the
net worth and size limitations of this paragraph if, as of the administrative proceeding date, the organization or cooperative
association does not have more than 500 employees.
(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
(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.
(h) Determination of prevailing party. If the final decision with respect to the tax, interest, or penalty is made at the administrative level, the determination
of whether a taxpayer is a prevailing party shall be made by agreement of the parties, or absent an agreement, by the Internal
Revenue Service. See § 301.7430–2(c)(7) regarding the right to appeal the decision of the Internal Revenue Service denying
(in whole or in part) a request for reasonable administrative costs to the Tax Court.
Par. 8. Section 301.7430–6 is revised to read as follows:
Sections 301.7430–2 through 301.7430–6, other than §§ 301.7430–2(b)(2), (c)(3)(i)(B), (c)(3)(i)(E), (c)(3)(ii)(C), (c)(3)(iii)(C),
(c)(5), (c)(7), and (e); §§ 301.7430–3(c)(1), (c)(3), (c)(4), and (d); §§ 301.7430–4(b)(3)(i), (b)(3)(ii), (b)(3)(iii)(B),
(b)(3)(iii)(C), (b)(3)(iii)(D), (b)(3)(iii)(E), (b)(3)(iii)(F), (c)(2)(ii), (c)(4), and (d); and §§ 301.7430–5(a), (b), (c)(3),
(d)(2), (d)(3), (d)(4), (d)(5), (d)(7), (f)(2), (g)(1), (g)(2), (g)(3), (g)(5), and (g)(6) apply to claims for reasonable
administrative costs filed with the Internal Revenue Service after December 23, 1992, with respect to costs incurred in administrative
proceedings commenced after November 10, 1988. Section 301.7430–2(c)(5) is applicable to costs incurred and services performed
in cases in which the petition was filed on or after March 1, 2016, except for the last two sentences, which are applicable
March 23, 1993. Sections 301.7430–2(b)(2), and (c)(3)(i)(B) (except the last sentence); 301.7430–4(b)(3)(ii), (b)(3)(iii)(C)
(except the first two sentences), and (c)(2)(ii) (except for references to the statutory cap as $125); and 301.7430–5(a) (except
the parenthetical of 5(a) and all of 5(a)(1)), and the first and last sentence of (d)(7) are applicable for administrative
proceedings commenced after July 30, 1996. Sections 301.7430–1(e), 301.7430–2(c)(2), 7430–3(a)(4) and (b) are applicable with
respect to actions taken by the Internal Revenue Service after July 22, 1998. The last sentence of § 301.7430–2(c)(3)(i)(B),
the first two sentences of § 301.7430–2(b)(3)(iii)(C), §§ 301.7430–2(c)(3)(i)(E), (c)(3)(ii)(C), (c)(3)(iii)(C), (c)(7), (e);
301.7430–3(c)(1), (c)(3), (c)(4), (d); 301.7430–4(b)(3)(i), (b)(3)(iii)(B), (b)(3)(iii)(E), (b)(3)(iii)(F), (c)(2)(ii) (to
the extent it references the statutory cap as $125), (c)(4), (d); the parenthetical of § 301.7430–5(a) and §§ 301.7430–5(a)(1),
(b), (d)(2), (d)(3), (d)(4), (d)(5), (d)(7), except the first and last sentences, (f)(2), (g)(1), (g)(2), (g)(3), (g)(5),
and (g)(6) apply to costs incurred and services performed in cases in which the petition was filed on or after March 1, 2016.
Par. 9. Section 301.7430–7 is amended by:
(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 straightforward application
of statutory interest under section 6601. Accordingly, in those cases, interest may not be included in the offer.
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 Internal Revenue Service
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 separate 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. 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 Internal
Revenue Service a Form 8857, Request for Innocent Spouse Relief, or otherwise provide the information specified in § 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.
(f) Effective/applicability date. This section is applicable with respect to qualified offers made in administrative or court proceedings described in section
7430 after December 24, 2003, except that paragraph (c)(8) is effective as of March 1, 2016.
§§ 301.7430–1, 301.7430–2, 301.7430–4, and 301.7430–5 [Amended]
§ 301.7430–1(f)(2)(i)
§ 301.7430–1(f)(3)(ii)
§ 301.7430–1(f)(3)(iii)
§ 301.7430–1(f)(4)(i)
§ 301.7430–1(g) Example 6 third and fourth sentences
§ 301.7430–1(g) Example 7 third and fourth sentences
§ 301.7430–1(g) Example 8 second and fourth sentences
§ 301.7430–1(g) Example 9 second sentence
§ 301.7430–2(b)(2) fourth and fifth sentences
§ 301.7430–2(c)(4) first sentence
§ 301.7430–2(c)(6) second sentence
§ 301.7430–4(b)(3)(ii) first and second sentences
§ 301.7430–4(c)(2)(i) third sentence
§ 301.7430–4(c)(2)(i) fourth sentence
§ 301.7430–4(c)(2)(ii) second and third sentences
§ 301.7430–5(h) first sentence
(Filed by the Office of the Federal Register on February 29, 2016, 8:45 a.m., and published in the issue of the Federal Register
for March 1, 2016, 81 F.R. 10479)