[Federal Register Volume 59, Number 108 (Tuesday, June 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12828]
[[Page Unknown]]
[Federal Register: June 7, 1994]
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DEPARTMENT OF THE TREASURY
26 CFR Parts 301 and 602
[TD 8542]
RIN 1545-AN02
Recovery of Reasonable Administrative Costs
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains the final regulations relating to the
recovery of reasonable administrative costs incurred by taxpayers in
connection with an administrative proceeding within the Internal
Revenue Service. Changes to the applicable law were made by section
6239(a) of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA)
(Pub. L. No. 100-647, 102 Stat. 3342). These regulations affect all
taxpayers involved in an administrative proceeding within the Internal
Revenue Service, and provide guidance regarding the definition of
reasonable administrative costs and the period within which the costs
must be incurred in order to be recoverable. These regulations also set
forth the requirements and procedures for the recovery of such costs,
and the definitions of prevailing party, administrative proceeding and
administrative proceeding date. A table of contents to the regulations
under section 7430 is provided in Sec. 301.7430-0.
DATES: Sections 301.7430-0 and 301.7430-2 through 301.7430-6, except
for Sec. 301.7430-2(c)(5), are effective June 7, 1994, and 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 effective March 23, 1993. The amendment to
part 602 is effective June 7, 1994.
FOR FURTHER INFORMATION CONTACT: Thomas D. Moffitt of the Office of
Assistant Chief Counsel (Field Service), Internal Revenue Service,
(202) 622-7900 (not a toll-free call).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the requirements of the Paperwork Reduction Act (44
U.S.C. 3504(h)) under control number 1545-1356. The estimated average
annual burden per respondent is 120 minutes.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP,
Washington, DC 20224, and to the Office of Management and Budget, Attn:
Desk Officer for the Department of the Treasury, Office of Information
and Regulatory Affairs, Washington, DC 20503.
Background
Proposed additions to the Income Tax Regulations (26 CFR Part 301)
under section 7430 of the Internal Revenue Code (the Code) were
published in the Federal Register on December 23, 1992 (57 FR 61020
[IA-003-89, 1993-1 C.B. 789]). These proposed additions were issued
under the authority contained in section 7805 of the Code. A summary of
the proposed additions is contained in the preamble that was published
with the proposed additions.
Changes to the Proposed Regulations
No changes have been made to the proposed regulations. One public
comment objected to the failure of the regulations to provide for the
recovery of amounts expended by taxpayers during the examination of
their returns. As section 7430 does not provide for such awards, this
suggestion was not adopted. After consideration of the public comment
received, the proposed regulations are adopted as revised by this
Treasury decision.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It has also been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Code, the notice of
proposed rulemaking preceding these regulations was submitted to the
Small Business Administration for comment on their impact on small
business.
Drafting Information
The principal author of these regulations is Thomas D. Moffitt,
Office of Assistant Chief Counsel (Field Service), Internal Revenue
Service. However, other personnel from the Internal Revenue Service and
Treasury Department participated in their development.
List of Subjects
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 301 and 602 are 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. Sections 301.7430-0 and 301.7430-2 through 301.7430-6 are
added to read as follows:
Sec. 301.7430-0 Table of contents.
This section lists the captions that appear in Secs. 301.7430-1
through 301.7430-6.
Sec. 301.7430-1 Exhaustion of administrative remedies.
(a) In general.
(b) Requirements.
(1) In general.
(2) Participates.
(3) Tax matter.
(c) Revocation of a determination that an organization is described
in section 501(c)(3).
(d) Actions involving summonses, levies, liens, jeopardy and
termination assessments, etc.
(e) Exception to requirement that party pursue administrative
remedies.
(f) Examples.
(g) Effective date.
Sec. 301.7430-2 Requirements and procedures for recovery of
reasonable administrative costs.
(a) Introduction.
(b) Requirements for recovery.
(1) Determination by the Internal Revenue Service.
(i) Jurisdiction.
(ii) Administrative proceeding.
(iii) Administrative proceeding date.
(iv) Reasonable administrative costs.
(v) Prevailing party.
(vi) Not unreasonably protracted.
(vii) Procedural requirements.
(2) Determination by court.
(c) Procedure for recovering reasonable administrative costs.
(1) In general.
(2) Where request must be filed.
(3) Contents of request.
(i) Statements.
(ii) Affidavit or affidavits.
(iii) Documentation and information.
(4) Form of request.
(5) Period for requesting costs from the Internal Revenue Service.
(6) Notice.
(7) Appeal to Tax Court.
(d) Unreasonable protraction of administrative proceeding.
(e) Examples.
Sec. 301.7430-3 Administrative proceeding and administrative
proceeding date.
(a) Administrative proceeding.
(b) Collection action.
(c) Administrative proceeding date.
(1) General rule.
(2) Notice of the decision of the Internal Revenue Service Office of
Appeals.
(3) Notice of deficiency.
(d) Examples.
Sec. 301.7430-4 Reasonable administrative costs.
(a) In general.
(b) Costs described.
(1) In general.
(2) Representative and specially qualified representative.
(i) Representative.
(ii) Specially qualified representative.
(3) Limitation on fees for a representative.
(i) In general.
(ii) Cost of living adjustment.
(iii) Special factor adjustment.
(c) Certain costs excluded.
(1) Costs not incurred in an administrative proceeding.
(2) Costs incurred in an administrative proceeding but not
reasonable.
(i) In general.
(ii) Special rule for expert witness' fees on issue of prevailing
market rates.
(3) Litigation costs.
(4) Examples.
Sec. 301.7430-5 Prevailing party.
(a) In general.
(b) Position of the Internal Revenue Service.
(c) Substantially justified.
(1) In general.
(2) Exception.
(d) Amount in controversy.
(e) Most significant issue or set of issues presented.
(f) Net worth and size limitations.
(1) Individuals and estates.
(2) Others.
(3) Special rule for charitable organizations and certain
cooperatives.
(g) Determination of prevailing party.
(h) Examples.
Sec. 301.7430-6 Effective date.
Sec. 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.
(b) Requirements for recovery--(1) Determination by the Internal
Revenue Service. The Internal Revenue Service will grant a taxpayer's
request for recovery of reasonable administrative costs incurred in
connection with an administrative proceeding under section 7430 and
this section only if--
(i) Jurisdiction. The underlying substantive issues or the issue of
reasonable administrative costs are not, and have never been, before
any court of the United States (including the Tax Court or United
States Court of Federal Claims) with jurisdiction over those issues;
(ii) Administrative proceeding. The costs were incurred in
connection with an administrative proceeding as defined in
Sec. 301.7430-3(a);
(iii) Administrative proceeding date. The costs were incurred on or
after the administrative proceeding date as defined in Sec. 301.7430-
3(c);
(iv) Reasonable administrative costs. The costs were reasonable
administrative costs as defined in Sec. 301.7430-4;
(v) Prevailing party. The taxpayer is a prevailing party as defined
in Sec. 301.7430-5;
(vi) Not unreasonably protracted. The administrative proceeding was
not unreasonably protracted by the taxpayer as discussed in paragraph
(d) of this section; and
(vii) Procedural requirements. The taxpayer follows the procedures
set forth in paragraph (c) of this section.
(2) Determination by court. Although the Internal Revenue Service
will not grant a request for reasonable administrative costs where the
requirements of paragraph (b)(1)(i) of this section are not met, a
taxpayer may file a claim for reasonable administrative costs with the
court with jurisdiction over the judicial proceeding. The court may
award the taxpayer reasonable administrative costs under section
7430(a). Under section 7430(c)(4)(B)(ii), where the final determination
with respect to the tax, interest, or penalty at issue is made by a
court, the court determines whether the taxpayer qualifies as a
prevailing party. Thus, where the requirements of paragraph (b)(1)(i)
of this section are not met, the taxpayer's only possibility of
obtaining an award of reasonable administrative costs is to obtain an
award of such costs from the court. In the event the court awards
reasonable administrative costs, it may also award litigation costs for
the reasonable costs of pursuing the claim for reasonable
administrative costs, provided the requirements under section 7430
regarding an award of reasonable administrative costs are satisfied
with respect to such costs. A claim filed with the court should be made
in accordance with the rules of the court.
(c) Procedure for recovering reasonable administrative costs--(1)
In general. The Internal Revenue Service will not award administrative
costs under section 7430 unless the taxpayer files a written request to
recover reasonable administrative costs in accordance with the
provisions of this section.
(2) Where request must be filed. A request required by paragraph
(c)(1) of this section must be filed with the Internal Revenue Service
personnel who have jurisdiction over the tax matter underlying the
claim for the costs. However, if those persons are unknown to the
taxpayer making the request, the taxpayer may send the request to the
District Director for the district that considered the underlying
matter.
(3) Contents of request. The request must be in writing and must
contain the following statements, affidavits, documentation, and
information with regard to the taxpayer's administrative proceeding:
(i) Statements. (A) A statement that the underlying substantive
issues or the issue of reasonable administrative costs are not, and
have never been, before any court of the United States (including the
Tax Court or United States Court of Federal Claims) with jurisdiction
over those issues;
(B) A clear and concise statement of the reasons why the taxpayer
alleges that the position of the Internal Revenue Service in the
administrative proceeding was not substantially justified;
(C) A statement sufficient to demonstrate that the taxpayer has
substantially prevailed as to the amount in controversy or with respect
to the most significant issue or set of issues presented in the
proceeding;
(D) A statement that the taxpayer has not unreasonably protracted
the portion of the administrative proceeding for which the taxpayer is
requesting costs; and
(E) A statement supported by a detailed affidavit executed by the
taxpayer or the taxpayer's representative that sets forth the nature
and amount of each specific item of reasonable administrative costs for
which the taxpayer is seeking recovery.
(ii) Affidavit or affidavits. (A) An affidavit executed by the
taxpayer stating that the taxpayer meets the net worth and size
limitations of Sec. 301.7430-5(f);
(B) An affidavit supporting the statement described in paragraph
(c)(3)(i)(E) of this section; and
(C) If more than $75 per hour, as adjusted by an increase in the
cost of living as set forth in Sec. 301.7430-4(b)(3), is claimed for
the fees of a representative in connection with the administrative
proceeding, then an affidavit that specialized skills and distinctive
knowledge as described in that section were necessary in the
representation of the taxpayer in the proceeding and that there is a
limited availability of representatives possessing such skills and
knowledge as described in that section, or an affidavit that another
special factor is applicable.
(iii) Documentation and information. (A) A copy of the billing
records of the representative for the requested fees; and
(B) An address at which the taxpayer wishes to receive notice of
the determination of the Internal Revenue Service with regard to the
request for reasonable administrative costs.
(4) Form of Request. No specific form is required for the request
other than one which satisfies the requirements of paragraph (c)(3) of
this section. Where practicable the required statements may be included
in a single document. Similarly, where practicable, the required
affidavits may be combined in a single affidavit to the extent they are
to be executed by the same person.
(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 request for costs no later than
90 days after the date the final decision of the Internal Revenue
Service with respect to all tax, additions to tax and penalties at
issue in the administrative proceeding is mailed, or otherwise
furnished, to the taxpayer. The final decision of the Internal Revenue
Service for purposes of this section is the document which resolves the
tax liability of the taxpayer with regard to all tax, additions to tax
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
which is not a Saturday, Sunday, or a legal holiday. The term legal
holiday means a legal holiday in the District of Columbia. If the
request for costs is to be filed with the Internal Revenue Service at
an office of the Internal Revenue Service located outside the District
of Columbia but within an internal revenue district, the term legal
holiday also means a Statewide legal holiday in the State where such
office is located.
(6) Notice. The Internal Revenue Service is authorized, but not
required, to notify the taxpayer of its decision to grant or deny (in
whole or in part) an award for reasonable administrative costs under
section 7430 and this section by certified mail or registered mail. If
the Internal Revenue Service does not respond on the merits to a
request by the taxpayer for an award of reasonable administrative costs
filed under paragraph (c)(1) of this section within 6 months after such
request is filed, the Internal Revenue Service's failure to respond may
be considered by the taxpayer as a decision of the Internal Revenue
Service denying an award for reasonable administrative costs.
(7) Appeal to Tax Court. A taxpayer may appeal a decision by the
Internal Revenue Service denying (in whole or in part) a request for
reasonable administrative costs under section 7430 and this section by
filing a petition for reasonable administrative costs with the Tax
Court. The petition must be in accordance with the Tax Court's Rules of
Practice and Procedure and must be filed with the Tax Court after the
Internal Revenue Service denies (in whole or in part) the taxpayer's
request for reasonable administrative costs.
(d) Unreasonable protraction of administrative proceeding. An award
of reasonable administrative costs will not be made where the taxpayer
unreasonably protracted the administrative proceeding. However, a
taxpayer that unreasonably protracted only a portion of the
administrative proceeding, but not other portions of the administrative
proceeding, may recover reasonable administrative costs for the
portion(s) of the administrative proceeding that the taxpayer did not
unreasonably protract, if the requirements of paragraph (b)(1) of this
section are otherwise satisfied.
(e) 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 requests and is granted Appeals office
consideration. Appeals requests that A submit certain documents as
substantiation for the tax matters at issue. Although A complies
with this request, the information is misdirected and not considered
by Appeals. Appeals then issues a notice of deficiency. A does not
file a petition with the Tax Court. After receiving the notice of
deficiency, A convinces Appeals that the notice of deficiency is
incorrect and that A owes no tax. Appeals then closes the case
showing a zero deficiency and mails A a notice to this effect.
Assuming that the other requirements of this section are satisfied,
A may recover reasonable administrative costs incurred after the
date of the notice of deficiency (the administrative proceeding
date). To recover these costs, A must file a request for costs with
the Appeals office personnel who settled A's tax matter, or if that
person is unknown to A, with the District Director of the district
which considered the underlying matter, within 90 days after the
date of mailing of the Office of Appeals' final decision that A owes
no tax.
Example 2. Assume the same facts as in Example 1, except that
after receipt of the notice of deficiency, A meets with an Appeals
officer, but no agreement is reached on the tax matters at issue. A
then files a petition with the Tax Court and prevails. Since the
underlying tax issues have been determined by a court, the Internal
Revenue Service will not grant a request for recovery of the
reasonable administrative costs incurred by A. To recover reasonable
administrative costs, A must file a claim with the Tax Court as
prescribed under the Tax Court's Rules of Practice and Procedure.
Sec. 301.7430-3 Administrative proceeding and administrative
proceeding date.
(a) Administrative proceeding. For purposes of section 7430, an
administrative proceeding generally means any procedure or other action
before the Internal Revenue Service that is commenced after November
10, 1988. However, an administrative proceeding does not include--
(1) Proceedings involving matters of general application, including
hearings on regulations, comments on forms, or proceedings involving
revenue rulings or revenue procedures;
(2) Proceedings involving requests for private letter rulings or
similar determinations;
(3) Proceedings involving technical advice memoranda, except those
submitted after the administrative proceeding date (as defined in
paragraph (c) of this section); and
(4) Proceedings in connection with collection actions (as defined
in paragraph (b) of this section), including proceedings under sections
7432 or 7433.
(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). For example, 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 those actions taken by a taxpayer
to remedy the Internal Revenue Service's failure to release a lien
under section 6325 and to remedy any unauthorized collection action as
defined by section 7433. However, an action or procedure directly
relating to a claim for refund filed with the Service Center's
Collection Branch or District Director's Collection Division 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; or
(ii) The date of the notice of deficiency.
(2) Notice of the decision of the Internal Revenue Service Office
of Appeals. For purposes of section 7430 and the regulations
thereunder, a notice of the decision of the Internal Revenue Service
Office of Appeals is the final written document, mailed or delivered to
the taxpayer, that is signed by an individual in the Office of Appeals
who has been delegated the authority to settle the dispute on behalf of
the Commissioner, and states or indicates that the notice is the final
determination of the entire case. A notice of claim disallowance issued
by the Office of Appeals is a notice of the decision of the Internal
Revenue Service Office of Appeals. Solely for purposes of determining
the administrative proceeding date, a notice of deficiency issued by
the Office of Appeals is not a notice of the decision of the Internal
Revenue Service Office of Appeals.
(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, a notice of
final partnership administrative adjustment described in section
6223(a)(2) will be treated as a notice of deficiency. A notice of final
S corporation administrative adjustment issued pursuant to section
6223(a)(2) as made applicable to subchapter S items by section 6244
will also be treated as a notice of deficiency.
(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 conference, an agreement is reached on the
tax matters at issue. A cannot recover any costs because they were
not incurred on or after the administrative proceeding date, which
is the earlier of the date of 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.
Example 2. Taxpayer B receives a notice of proposed deficiency
(30-day letter). B pays the amount of the proposed deficiency and
files a claim for refund. B's claim is disallowed and a notice of
proposed disallowance is issued by the District Director. B does not
request an Appeals office conference and the District Director
issues a notice of claim disallowance. B then files suit in a United
States District Court. B cannot recover reasonable administrative
costs because, although the District Director issued a notice of
claim disallowance, the Internal Revenue Service did not issue
either a notice of decision of the Internal Revenue Service Office
of Appeals or a notice of deficiency.
Example 3. Assume the same facts as in Example 2, except that
after B files a claim for refund and receives the notice of proposed
disallowance, B requests and is granted Appeals office
consideration. No agreement is reached with Appeals and the Office
of Appeals issues a notice of claim disallowance. B does not file
suit in District Court but instead contacts the Appeals office to
attempt to reverse the decision. B convinces the Appeals officer
that the notice of claim disallowance is in error. The Appeals
officer then abates the assessment. Because a notice of claim
disallowance issued by Appeals is a notice of the decision of the
Internal Revenue Service Office of Appeals, B may recover reasonable
administrative costs incurred on or after the receipt of the notice
of claim disallowance (the administrative proceeding date), but only
if the other requirements of section 7430 and the regulations
thereunder are satisfied. B cannot recover the costs incurred prior
to receipt of the notice of claim disallowance because they were
incurred before the administrative proceeding date.
Example 4. Taxpayer C receives a notice of proposed deficiency
(30-day letter). C 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 C does
not file a petition with the Tax Court. Instead, C pays the
deficiency and files a claim for refund. The claim for refund is
considered by the Internal Revenue Service and the District Director
issues a notice of proposed disallowance. C requests and is granted
Appeals office consideration. C convinces Appeals that C's claim is
correct and Appeals allows C's claim. C may recover reasonable
administrative costs incurred on or after the date of the notice of
deficiency (the administrative proceeding date), but only if the
other requirements of section 7430 and the regulations thereunder
are satisfied.
Example 5. Taxpayer D receives a District Director's Collection
Division (Collection) proposed assessment of trust fund taxes (Trust
Fund Recovery Penalty) pursuant to section 6672. D requests and is
granted Appeals office consideration. Upon consideration, Appeals
upholds D's position. D cannot recover reasonable administrative
costs because the costs were not incurred on or after the
administrative proceeding date.
Example 6. Taxpayer E 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 and demand for tax
pursuant to section 6303. E contacts the Collection Division
(Collection) regarding E's outstanding liability. No agreement is
reached with respect to the timing of E's payment, and Collection
issues a notice of intent to levy pursuant to section 6331(d). Prior
to the levy, E enters into an installment agreement with Collection.
The costs that E incurred in connection with the notice and demand
were not incurred in an administrative proceeding, but rather in a
collection action. Accordingly, E may not recover those costs as
reasonable administrative costs under section 7430 and the
regulations thereunder.
Example 7. Taxpayer F receives a District Director's Collection
Division (Collection) proposed assessment of trust fund taxes (Trust
Fund Recovery Penalty) pursuant to section 6672. F requests and is
granted Appeals office consideration. Appeals considers the issues
and decides to uphold Collection's recommended assessment. Appeals
notifies F of this decision in writing. Collection then assesses the
tax. Pursuant to section 6672(b), within 30 days after the notice
and demand is made, F pays the minimum amount required to commence a
court proceeding, files a claim for refund, and furnishes the
required bond. Collection then considers and disallows the claim.
Appeals then reconsiders the claim and reverses its original
position, thus upholding F's position. Appeals then abates the
assessment. F may recover reasonable administrative costs incurred
after the receipt of the original decision of Appeals (the
administrative proceeding date) that Appeals was upholding
Collection's recommended assessment, but only if the other
requirements of section 7430 and the regulations thereunder are
satisfied. F cannot recover costs that are attributable to any
procedure or other action before Collection prior to filing F's
administrative claim for refund.
Sec. 301.7430-4 Reasonable administrative costs.
(a) In general. For purposes of section 7430 and the regulations
thereunder, reasonable administrative costs are any costs described in
paragraph (b) of this section that are incurred in connection with an
administrative proceeding (as defined in Sec. 301.7430-3(a)) and
incurred on or after the administrative proceeding date (as defined in
Sec. 301.7430-3(c)).
(b) Costs described--(1) In general. The costs described in this
paragraph are the reasonable and necessary amount of costs incurred by
the taxpayer to present the taxpayer's position with respect to the
merits of the tax controversy or the recovery of reasonable
administrative costs. These costs include--
(i) Any administrative fees or similar charges imposed by the
Internal Revenue Service;
(ii) Reasonable expenses of expert witnesses;
(iii) Reasonable costs of any study, analysis, engineering report,
test or project that is necessary for, and incurred in preparation of,
the taxpayer's case; and
(iv) Reasonable fees paid or incurred for the services of a
representative (as defined in paragraph (b)(2) of this section) in
connection with the administrative proceeding.
(2) Representative and specially qualified representative--(i)
Representative. A representative is a person compensated for services
rendered in connection with the administrative proceeding, who is
authorized to practice before the Internal Revenue Service or the Tax
Court.
(ii) Specially qualified representative. For purposes of paragraphs
(b)(3)(iii) and (c)(2)(ii) of this section, a specially qualified
representative is a representative (as defined in paragraph (b)(2)(i)
of this section) possessing a distinctive knowledge or a unique and
specialized skill that is necessary to adequately represent the
taxpayer in the proceeding. Examples of a unique and specialized skill
or distinctive knowledge would be an identifiable practice specialty
such as patent law or knowledge of a foreign law or language where such
specialty or knowledge is necessary to adequately represent the
taxpayer in the proceeding. For purposes of this paragraph, neither
knowledge of tax law nor experience in representing taxpayers before
the Internal Revenue Service is considered distinctive knowledge or a
unique and specialized skill. An extraordinary level of general
representational knowledge and ability that is useful in all
proceedings is not considered, in and of itself, distinctive knowledge
or a unique and specialized skill. Specially qualified representatives
also do not include those who have a distinctive knowledge of the
underlying subject matter of the controversy in circumstances where
such distinctive knowledge could reasonably be supplied through the use
of an expert, or could readily be obtained through literature
pertaining to the subject.
(3) Limitation on fees for a representative--(i) In general. Except
as otherwise provided in this section, fees 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 $75 per hour increased by a cost of living adjustment (and if
appropriate, a special factor adjustment).
(ii) Cost of living adjustment--(A) In general. The Internal
Revenue Service will make a cost of living adjustment to the $75 per
hour limit by using the Consumer Price Index of All-Urban Consumers
(CPI-U) published by the Department of Labor, Bureau of Labor
Statistics and referenced in Internal Revenue Code section 1(f)(5). If
the CPI-U is no longer published, a comparable index will be used, and
any reference in this section to the CPI-U will be considered to refer
to such comparable index.
(B) Percentage adjustment. For purposes of paragraph (b)(3)(ii)(A)
of this section, the base year for determining the cost of living
adjustment is the calendar year 1986. The cost of living adjustment for
fees incurred in any calendar year subsequent to 1986 is the percentage
(if any) by which the yearly average CPI-U for the calendar year
immediately prior to the year in which the fees are incurred exceeds
the January CPI-U for the calendar year 1986.
(iii) Special factor adjustment--(A) In general. If the presence of
a special factor is demonstrated by the taxpayer, the amount
reimbursable is the amount of reasonable fees paid or incurred by the
taxpayer in connection with the proceeding for the services of a
representative as defined in paragraph (b)(2)(i) of this section.
(B) Special factor. A special factor is a factor, other than an
increase in the cost of living, which justifies an increase in the $75
per hour limitation of section 7430(c)(1)(B)(iii). The novelty and
difficulty of the issues, 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 $75 per hour limitation. The limited availability of a
specially qualified representative for the proceeding does constitute a
special factor justifying an increase in the $75 per hour limitation.
(C) Limited availability. Unless disputed by the Internal Revenue
Service, limited availability of a specially qualified representative
is established by demonstrating that a specially qualified
representative for the proceeding is not available at the $75 per hour
rate (as adjusted for an increase in the cost of living). Initially,
this showing may be made by submission of an affidavit signed by the
taxpayer or by the taxpayer's counsel, that in a case similar to the
taxpayer's, a specially qualified representative that practices within
a reasonable distance from the taxpayer's principal residence or
principal office would normally charge a client similar to the taxpayer
at a rate in excess of this amount. If the Internal Revenue Service
challenges this initial showing, the taxpayer may submit additional
evidence to establish the limited availability of a specially qualified
representative at the rate specified above.
(D) Example. The provisions of this section are illustrated by the
following example:
Example. Taxpayer A is represented by B, a CPA and attorney with
an 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
and 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 $75 per hour
limitation (as adjusted for the cost of living), absent a special
factor. Under these facts alone, B is not a specially qualified
representative since even extraordinary knowledge of the tax laws
does not constitute distinctive knowledge or a unique and
specialized skill constituting a special factor.
(c) Certain costs excluded--(1) Costs not incurred in an
administrative proceeding. Costs that are not reasonable administrative
costs for purposes of section 7430 include any costs incurred in
connection with a proceeding that is not an administrative proceeding
within the meaning of Sec. 301.7430-3.
(2) Costs incurred in an administrative proceeding but not
reasonable--(i) In general. Costs incurred in an administrative
proceeding that are incurred on or after the administrative proceeding
date, and that are otherwise described in paragraph (b) of this
section, are not recoverable unless they are reasonable in both nature
and amount. For example, costs normally included in the hourly rate of
the representative by the custom and usage of the representative's
profession, when billed separately, are not recoverable separate and
apart from the representative's hourly rate. Such costs typically
include costs such as secretarial and overhead expenses. In contrast,
costs which are normally billed separately may be reasonable
administrative costs that may be recoverable in addition to the
representative's hourly rate. Therefore, necessary costs incurred for
travel; expedited mail delivery; messenger service; expenses while on
travel; long distance telephone calls; and necessary copying fees
imposed by the Internal Revenue Service, any court, bank or other third
party, when normally billed separately from the representative's hourly
rate, may be reasonable administrative costs.
(ii) Special Rule for Expert Witness' Fees on Issue of Prevailing
Market Rates. Under paragraph (b)(3)(iii)(C) of this section, the
taxpayer may initially establish a limited availability of specially
qualified representatives for the proceeding by submission of an
affidavit signed by the taxpayer or by the taxpayer's representative.
The Internal Revenue Service may endeavor to rebut the affidavit
submitted on this issue by demonstrating either that a specially
qualified representative was not necessary to represent the taxpayer in
the proceeding, that the taxpayer's representative is not a specially
qualified representative or that the prevailing rate for specially
qualified representatives does not exceed $75 per hour (as adjusted for
an increase in the cost of living). Unless the Internal Revenue Service
endeavors to demonstrate that the prevailing rate for specially
qualified representatives does not exceed $75 per hour (as adjusted for
an increase in the cost of living), fees for expert witnesses used to
establish prevailing market rates are not included in the term
reasonable administrative costs.
(3) Litigation costs. Litigation costs are not reasonable
administrative costs because they are not incurred in connection with
an administrative proceeding. Litigation costs include--
(i) Costs incurred in connection with the preparation and filing of
a petition with the United States Tax Court or in connection with the
commencement of any other court proceeding; and
(ii) Costs incurred after the filing of a petition with the United
States Tax Court or after the commencement of any other court
proceeding.
(4) 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 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 in connection with the preparation
and filing of a petition with the Tax Court are litigation costs and
not reasonable administrative costs. Furthermore, A's costs incurred
before the administrative proceeding date (date of the notice of
deficiency as set forth in Sec. 301.7430-3(c)(3)), are 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.
Again, A's costs incurred before the administrative proceeding date,
the date of the notice of deficiency as set forth in Sec. 301.7430-
3(c)(3), are not reasonable administrative costs. A's costs incurred
in recontacting and working with Appeals after the issuance of the
notice of deficiency, and up to and including the time of filing of
the petition, are reasonable administrative costs. 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 those
are litigation costs.
Sec. 301.7430-5 Prevailing party.
(a) In general. For purposes of an award of reasonable
administrative costs under section 7430, a taxpayer is a prevailing
party only if the taxpayer--
(1) Establishes that the position of the Internal Revenue Service
was not substantially justified;
(2) Substantially prevails as to the amount in controversy or with
respect to the most significant issue or set of issues presented; and
(3) Satisfies the net worth and size limitations referenced in
paragraph (f) 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 administrative
proceeding date (as defined in Sec. 301.7430-3(c)) or any date
thereafter.
(c) 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 who are
responsible.
(2) 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.
(d) 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.
(e) Most significant issue or set of issues presented. 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.
(f) Net worth and size limitations--(1) Individuals and estates. An
individual taxpayer or an estate meets the net worth and size
limitations of this paragraph if, on the administrative proceeding
date, the taxpayer's net worth does not exceed two million dollars. For
this purpose, individuals filing a joint return shall be treated as 1
taxpayer, except in the case of a spouse relieved of liability under
section 6013(e).
(2) Others. A taxpayer that is an owner of an unincorporated
business, or any partnership, corporation, association, unit of local
government, or organization (other than an organization described in
paragraph (f)(3) of this section) meets the net worth and size
limitations of this paragraph if, as of the administrative proceeding
date--
(i) The taxpayer's net worth does not exceed seven million dollars;
and
(ii) The taxpayer does not have more than 500 employees.
(3) Special rule for charitable organizations and certain
cooperatives. An organization described in Internal Revenue Code
section 501(c)(3) exempt from taxation under Internal Revenue Code
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.
(g) 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 such agreement, by
the Internal Revenue Service. See Sec. 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.
(h) Examples. The provisions of this section are illustrated by the
following examples:
Example 1. 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 Center 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.
Example 2. In the purchase of an ongoing business, taxpayer B
obtains from the previous owner of the business a covenant not to
compete for a period of five years. On audit of B'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 B. 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 the taxpayer asserts the basis is $4X. Thus,
under the Internal Revenue Service's position, B is entitled to a
deduction of two-fifths $X in the year under audit and for each of
the subsequent four years. B's position, however, would result in a
deduction of four-fifths $X for the year under audit and each of the
subsequent four years. The deduction for the seminar attended by B
was reported on the return in question in the amount of $X. The
Internal Revenue Service's position is that the deduction for the
seminar should be disallowed entirely. In the notice of deficiency,
the Internal Revenue Service determines adjustments of two-fifths $X
(the difference between the Internal Revenue Service's position of
two-fifths $X and the reported four-fifths $X) regarding the basis
of the covenant not to compete, and $X resulting from the
disallowance of the seminar expense. Thus, of the two adjustments
determined for the year under audit, that attributable to the
disallowance of the seminar is larger than that attributable to the
covenant not to compete. However, due to the impact on the next
succeeding four years, the covenant not to compete adjustment is
objectively the most significant issue to both B and the Internal
Revenue Service.
Example 3. The Collection Branch of a Service Center of the
Internal Revenue Service determines in the matching process of
various Forms 1099 and W-2 that taxpayer C has not filed an
individual income tax return. The Internal Revenue Service sends
notices to C requesting that C file an income tax return. C does not
file a return, so the Service Center's Collection Branch prepares a
substitute for return pursuant to section 6020(b). The calculation
is sent to C requesting that C either sign the return pursuant to
section 6020(a) or file a tax return prepared by C. C does not
respond to the Internal Revenue Service's request and the Service
Center's Collection Branch issues a notice of deficiency based on
information in its possession. C does not file a petition with the
Tax Court and does not pay the asserted deficiency. The Internal
Revenue Service then assesses the tax shown on the notice of
deficiency and issues a notice and demand for tax pursuant to
section 6303. After receiving notice and demand, C contacts the
Collection Branch and convinces Collection to stay the collection
process because C does not owe any taxes. The Collection Branch
recommends that the Examination Division examine the tax liability
and make an adjustment to income. The Examination Division then
redetermines the tax and abates the assessment due to information
and arguments presented by C at that time. The costs C incurred
before the Collection Branch are incurred in connection with an
action taken by the Internal Revenue Service to collect a tax.
Therefore, these costs are incurred with respect to a collection
action and not an administrative proceeding. Accordingly, they are
not recoverable as reasonable administrative costs. Costs incurred
before the Examination Division are reasonable administrative costs;
however, C may not recover any reasonable administrative costs with
respect to the proceeding before the Examination Division because,
as of the date the costs were incurred, C had not previously
presented all relevant information under C's control and all
relevant legal arguments supporting C's position to the Collection
Branch or Examination Division personnel (the appropriate Internal
Revenue Service personnel under Sec. 301.7430-5(c)), and thus, the
position of the Internal Revenue Service was substantially justified
based upon the information it had.
Sec. 301.7430-6 Effective date.
Sections 301.7430-0, and 301.7430-2 through 301.7430-6, other than
Sec. 301.7430-2(c)(5), 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 effective March
23, 1993.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 3. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Sec. 602.101 [Amended]
Par. 4. Section 602.101(c) is amended by adding the entry
``301.7430-2(c) . . . . 1545-1356'' in numerical order in the table.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: May 9, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-12828 Filed 6-6-94; 8:45 am]
BILLING CODE 4830-01-M
