Recovery of Reasonable Administrative Costs

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