Exhaustion of Administrative Remedies

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 8543]

RIN 1545-AS60

Exhaustion of Administrative Remedies

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains the final regulations relating to the

circumstances in which a party shall be deemed to have exhausted the

administrative remedies available within the Internal Revenue Service

for purposes of the recovery of court costs and certain fees in a civil

tax proceeding brought in a court of the United States (including the

Tax Court and the Court of Federal Claims). These regulations differ

from the final regulations previously issued under section 7430, which

were effective for civil tax proceedings commenced after February 28,

1983, and before January 1, 1986, and addressed the exhaustion of

administrative remedies requirement for recovery of litigation costs

incurred by taxpayers with respect to a court proceeding in connection

with the determination, collection, or refund of any tax, interest, or

penalty. Portions of the final regulations previously issued under

section 7430 were held to be invalid by the United States Tax Court in

Minahan v. Commissioner, 88 T.C. 492 (1987). This regulation does not

contain those provisions of the previous final regulation found to be

invalid.

DATES: The final regulations are effective June 7, 1994, and apply to

court proceedings described in section 7430 filed in a court of the

United States (including the Tax Court and the Court of Federal Claims)

after May 7, 1992.

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:

Background

Proposed amendments 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 May 8, 1992 (57 FR 19828 [IA-003-

89, 1992-1 C.B. 1100]). The amendments were issued under the authority

contained in section 7805 of the Code.

One public comment was received concerning these regulations. After

consideration of the public comment received, the proposed regulations

are adopted, as revised by this Treasury decision.

Explanation of Regulatory Provisions

In general, under section 7430 of the Code, a prevailing party may

recover the reasonable litigation costs incurred in a civil proceeding

if the proceeding relates to the determination, collection or refund of

any tax, interest or penalty under the Internal Revenue Code and the

party has exhausted all the administrative remedies related to that

party's tax matter. These final regulations provide information

concerning the circumstances in which a party's administrative remedies

shall be deemed to have been exhausted. In general, administrative

remedies are deemed to have been exhausted if the party has requested

(and if granted, participated in) an Appeals office conference on the

party's tax matter prior to filing an action in a court of the United

States (including the Tax Court and the Court of Federal Claims). A

party has participated in an Appeals office conference if the party has

disclosed all relevant information regarding the matter to the Appeals

office. In the case of the revocation of a determination that an

organization is described in section 501(c)(3), a party must complete

the procedures set forth in section 7428 and in regulations, rules and

revenue procedures thereunder to exhaust its administrative remedies.

Where no administrative procedure covering a party's tax matter allows

the party to request an Appeals office conference, the party's

administrative remedies will not be deemed to have been exhausted

unless the party has filed a written claim for relief with the district

director having jurisdiction over the tax matter and allowed the

district director a reasonable period of time to act on the claim. A

party is not required to pursue its administrative remedies if the

Internal Revenue Service has notified the party in writing that such

pursuit is unnecessary, has not given the party an opportunity to

request an Appeals office conference before sending a statutory notice

of deficiency, or has failed to grant the party an Appeals office

conference with respect to a claim for refund within six months of the

filing of such claim for refund. A party must participate in an Appeals

office conference during either the deficiency procedures or the refund

procedures with respect to the tax matter, but is not required to

participate during both procedures. Thus, if a party participated in an

Appeals office conference with respect to a tax matter prior to the

issuance of the statutory notice of deficiency, the party does not need

to request an Appeals office conference after filing a claim for refund

with respect to the same tax matter.

Comments on the Proposed Regulations

One public comment objected to, and requested deletion of, the

requirement that a party request (and if granted, participate in) an

Appeals office conference on the party's tax matter prior to filing an

action in a court of the United States (including the Tax Court and the

Court of Federal Claims). This suggestion was not adopted in the final

regulations because conferences with Appeals have historically been a

fundamental method for providing administrative remedies to taxpayers

who do not agree with the Internal Revenue Service. Such remedies are

pivotal to the effort to resolve issues promptly, efficiently, fairly

and without resort to litigation. In order to avoid costly litigation

consistent with the legislative intent and to encourage usage of this

process to resolve disputes, the regulations require taxpayers, in

order to be deemed to have exhausted their administrative remedies, to

pursue such remedies with the Appeals office, if available, prior to

instituting litigation.

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 Service and Treasury

Department participated in their development.

List of Subjects in 26 CFR Part 301

Employment taxes, Excise taxes, Gift taxes, Income taxes,

Penalties, Reporting and recordkeeping requirements, State taxes.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 301 is amended as follows:

Paragraph 1. The authority citation for part 301 continues to read

in part as follows:

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

Par. 2. Section 301.7430-1 is revised to read as follows:

Sec. 301.7430-1 Exhaustion of administrative remedies.

(a) In general. Section 7430(b)(1) provides that a court shall not

award reasonable litigation costs in any civil tax proceeding under

section 7430(a) unless the court determines that the prevailing party

has exhausted the administrative remedies available to the party within

the Internal Revenue Service. This section sets forth the circumstances

in which such administrative remedies shall be deemed to have been

exhausted.

(b) Requirements--(1) In general. A party has not exhausted the

administrative remedies available within the Internal Revenue Service

with respect to any tax matter for which an Appeals office conference

is available under Secs. 601.105 and 601.106 of this chapter (other

than a tax matter described in paragraph (c) of this section) unless--

(i) The party, prior to filing a petition in the Tax Court or a

civil action for refund in a court of the United States (including the

Court of Federal Claims), participates, either in person or through a

qualified representative described in Sec. 601.502 of this chapter, in

an Appeals office conference; or

(ii) If no Appeals office conference is granted, the party, prior

to the issuance of a statutory notice in the case of a petition in the

Tax Court or the issuance of a notice of disallowance in the case of a

civil action for refund in a court of the United States (including the

Court of Federal Claims)--

(A) Requests an Appeals office conference in accordance with

Secs. 601.105 and 601.106 of this chapter; and

(B) Files a written protest if a written protest is required to

obtain an Appeals office conference.

(2) Participates. For purposes of this section, a party or

qualified representative of the party described in Sec. 601.502 of this

chapter participates in an Appeals office conference if the party or

qualified representative discloses to the Appeals office all relevant

information regarding the party's tax matter to the extent such

information and its relevance were known or should have been known to

the party or qualified representative at the time of such conference.

(3) Tax matter. For purposes of this section, ``tax matter'' means

a matter in connection with the determination, collection or refund of

any tax, interest, penalty, addition to tax or additional amount under

the Internal Revenue Code.

(c) Revocation of a determination that an organization is described

in section 501(c)(3). A party has not exhausted the administrative

remedies available within the Internal Revenue Service with respect to

a revocation of a determination that it is an organization described in

section 501(c)(3) unless, prior to filing a declaratory judgment action

under section 7428, the party has exhausted its administrative remedies

in accordance with section 7428, and any regulations, rules, and

revenue procedures thereunder.

(d) Actions involving summonses, levies, liens, jeopardy and

termination assessments, etc. (1) A party has not exhausted the

administrative remedies available within the Internal Revenue Service

with respect to a matter other than one to which paragraph (b) or (c)

of this section applies (including summonses, levies, liens, and

jeopardy and termination assessments) unless, prior to filing an action

in a court of the United States (including the Tax Court and the Court

of Federal Claims)--

(i) The party submits to the district director of the district

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 such relief; and

(ii) The district director has denied the claim for relief in

writing or failed to act on the claim within a reasonable period after

such claim is received by the district director.

(2) For purposes of this paragraph (d)(2), a reasonable period is--

(i) The 5-day period preceding the filing of a petition to quash an

administrative summons issued under section 7609;

(ii) The 5-day period preceding the filing of a wrongful levy

action in which a demand for the return of property is made;

(iii) The period expressly provided for administrative review of

the party's claim by an applicable provision of the Internal Revenue

Code that expressly provides for the pursuit of administrative remedies

(such as the 16-day period provided under section 7429(b)(1)(B)

relating to review of jeopardy assessment procedures); or

(iv) The 60-day period following receipt of the claim for relief in

all other cases.

(e) Exception to requirement that party pursue administrative

remedies. If the conditions set forth in paragraph (e)(1), (e)(2),

(e)(3), or (e)(4) of this section are satisfied, a party's

administrative remedies within the Internal Revenue Service shall be

deemed to have been exhausted for purposes of section 7430.

(1) The Internal Revenue Service notifies the party in writing that

the pursuit of administrative remedies in accordance with paragraphs

(b), (c), and (d) of this section is unnecessary.

(2) In the case of a petition in the Tax Court--

(i) The party did not receive a notice of proposed deficiency (30-

day letter) prior to the issuance of the statutory notice and the

failure to receive such notice was not due to actions of the party

(such as a failure to supply requested information or a current mailing

address to the district director or service center having jurisdiction

over the tax matter); and

(ii) The party does not refuse to participate in an Appeals office

conference while the case is in docketed status.

(3) In the case of a civil action for refund involving a tax matter

other than a tax matter described in paragraph (e)(4) of this section,

the party--

(i) Participates in an Appeals office conference with respect to

the tax matter prior to issuance of a statutory notice of deficiency

with respect to such tax matter; or

(ii) Did not receive written notification that an Appeals office

conference was available prior to issuance of a notice of disallowance

and the failure to receive such a notification was not due to the

actions of the party (such as the failure to supply requested

information or a current mailing address to the district director or

service center having jurisdiction over the tax matter); or

(iii) Did not receive either written or oral notification that an

Appeals office conference had been granted within six months from the

date of the filing of the claim for refund and the failure to receive

such notice was not due to actions of the party (such as the failure to

supply requested information or a current mailing address to the

district director or service center having jurisdiction over the tax

matter).

(4) In the case of a civil action for refund involving a tax matter

under sections 6703 or 6694--

(i) The party did not receive a notice of proposed disallowance

prior to issuance of a notice of disallowance and the failure to

receive such notice was not due to actions of the party (such as the

failure to supply requested information or a current mailing address to

the district director or service center having jurisdiction over the

tax matter); or

(ii) During the six-month period following the day on which the

party's claim for refund is filed, the party's claim for refund is not

denied, and the Internal Revenue Service has failed to process the

claim with due diligence.

(f) Examples. The provisions of this section may be illustrated by

the following examples:

Example 1. Taxpayer A exchanges property held for investment for

similar property and claims that the gain on the exchange is not

recognized under section 1031. The Internal Revenue Service conducts

a field examination and determines that there has not been a like-

kind exchange. No agreement is reached on the matter and a notice of

proposed deficiency (30-day letter) is sent to A. A does not file a

request for an Appeals office conference. A pays the amount of the

proposed deficiency and files a claim for refund. A notice of

proposed disallowance is issued by the Internal Revenue Service. A

does not request an Appeals office conference and, instead, files a

civil action for refund in a United States District Court. A has not

exhausted the administrative remedies available within the Internal

Revenue Service.

Example 2. Assume the same facts as in Example 1 except that,

after receiving the notice of proposed deficiency (30-day letter), A

files a request for an Appeals office conference. No agreement is

reached at the conference. A pays the amount of the proposed

deficiency and files a claim for refund. A notice of proposed

disallowance is issued by the Internal Revenue Service. A does not

request an Appeals office conference and files a civil action for

refund in a United States District Court. A has exhausted the

administrative remedies available within the Internal Revenue

Service.

Example 3. Assume the same facts as in Example 1 except A first

requests an Appeals office conference after A's receipt of the

notice of proposed disallowance. A is granted an Appeals office

conference and A participates in such conference. A has exhausted

the administrative remedies available within the Internal Revenue

Service.

Example 4. Taxpayer B receives a notice of proposed deficiency

(30-day letter) after completion of a field examination. B provided

to the Internal Revenue Service during the examination all relevant

information under the taxpayer's control and all relevant legal

arguments supporting the taxpayer's position. B properly requests an

Appeals office conference. The Appeals office, to obtain an

additional period of time to consider the tax matter, requests that

B sign Form 872 to extend the time for an assessment of tax, but B

declines. Appeals then denies the request for a conference and

issues a notice of deficiency. B has exhausted the administrative

remedies available within the Internal Revenue Service.

Example 5. Taxpayer C receives a notice of proposed deficiency

(30-day letter) and a written statement that C need not file a

written protest or request an Appeals office conference since a

conference will not be granted. C files a petition in the Tax Court

after receiving the statutory notice of deficiency. C's

administrative remedies within the Internal Revenue Service are

deemed to have been exhausted.

Example 6. On January 2, the Internal Revenue Service serves a

summons issued under section 7609 on third-party recordkeeper D to

produce records of taxpayer E. On January 5, notice of the summons

is given to E. The last day on which E may file a petition in a

court of the United States to quash the summons is January 25.

Thereafter, E files a written claim for relief with the district

director having jurisdiction over the matter together with a copy of

the summons. The claim and copy are received by the district

director on January 20. On January 25, E files a petition to quash

the summons. E has exhausted the administrative remedies available

within the Internal Revenue Service.

Example 7. A notice of Federal tax lien is filed in County M on

March 3, in the name of F. On April 2, F pays the entire liability

thereby satisfying the lien. On May 2, F files a written claim with

the district director having jurisdiction over the tax matter

demanding a certificate of release of lien. Thereafter, F provides

the district director with a copy of the notice of Federal tax lien

and a copy of the canceled check in satisfaction of the lien, which

are received by the district director on May 15. F's claim is deemed

to have been filed on May 15. Accordingly, F must wait until after

July 14 (60 days following the filing of the claim for relief on May

15) to commence an action, in order to have exhausted the

administrative remedies available within the Internal Revenue

Service.

Example 8. A revenue officer seizes an automobile to effect

collection of G's liability on January 10. On January 22, H submits

a written claim to the district director having jurisdiction over

the tax matter claiming that H purchased the automobile from G for

an adequate consideration before the tax lien against G arose, and

demands immediate return of the automobile. A copy of the title

certificate and H's canceled check are submitted with the claim. The

claim is received by the district director on January 25. On January

30, H brings a wrongful levy action. H has exhausted the

administrative remedies available within the Internal Revenue

Service.

Example 9. The Internal Revenue Service issues a revenue ruling

which holds that ear piercing does not affect a function or

structure of the body within the meaning of section 213 and

therefore is not deductible. Taxpayer I deducts the costs of ear

piercing and, following an examination, receives a notice of

proposed deficiency (30-day letter) disallowing the treatment of

such costs. Because of the revenue ruling, I believes a conference

would not aid in the resolution of the tax dispute. Accordingly, I

does not request an Appeals office conference. After receiving a

statutory notice of deficiency, I files a petition in the Tax Court.

I has not exhausted the administrative remedies available within the

Internal Revenue Service. The issuance of a revenue ruling covering

the same fact situation but taking a contrary position does not

constitute notification by the Internal Revenue Service to I that

the pursuit of administrative remedies is unnecessary. Similarly,

the issuance to I of a private letter ruling or technical advice

does not constitute notification by the Internal Revenue Service

that the pursuit of administrative remedies is unnecessary.

Example 10. Taxpayer J is assessed a penalty under section 6701

for aiding in the understatement of the tax liability of another

person. J pays 15% of the penalty in accordance with section 6703

and files a claim for refund on June 15. J is not issued a notice of

proposed disallowance and thus cannot participate in an Appeals

office conference within six months of the filing of the claim for

refund. J brings an action on December 23. J has exhausted the

administrative remedies available within the Internal Revenue

Service.

Example 11. Taxpayer K receives a notice of proposed deficiency

(30-day letter) and neither requests nor participates in an Appeals

office conference. The Service then issues a statutory notice of

deficiency (90-day letter). Upon receiving the statutory notice, and

after filing a petition with the Tax Court, K requests an Appeals

office conference. K has not exhausted the administrative remedies

available within the Internal Revenue Service because the request

for an Appeals office conference was made after the issuance of the

statutory notice.

(g) Effective date. This section applies to court proceedings

described in section 7430 filed in a court of the United States

(including the Tax Court after May 7, 1992.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: May 9, 1994.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 94-12827 Filed 6-6-94; 8:45 am]

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