Miscellaneous Sections Affected by the Taxpayer Bill of Rights 2 and the Personal Responsibility and Work Opportunity Reconciliation Act of 1996

DEPARTMENT OF THE TREASURY

26 CFR Parts 1 and 301

[REG-248770-96]

RIN 1545-AU64

Miscellaneous Sections Affected by the Taxpayer Bill of Rights 2

and the Personal Responsibility and Work Opportunity Reconciliation Act

of 1996

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to joint

returns, property exempt from levy, interest, penalties, offers in

compromise, and the awarding of costs and certain fees. The proposed

regulations reflect changes to the law made by the Taxpayer Bill of

Rights 2 and a conforming amendment made by the Personal Responsibility

and Work Opportunity Reconciliation Act of 1996. The proposed

regulations affect taxpayers with respect to filing of returns,

interest, penalties, court costs, and payment, deposit, and collection

of taxes.

DATES: Written comments and requests for a public hearing must be

received by April 2, 1997.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-248770-96), room

5228, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. In the alternative, submissions may be hand

delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R

(REG-248770-96), Courier's Desk, Internal Revenue Service, 1111

Constitution Avenue NW, Washington DC. Finally, taxpayers may submit

comments electronically via the INTERNET by selecting the ``Tax Regs''

option on the IRS Home Page, or by submitting comments directly to the

IRS Internet site at http://www.irs.ustreas.gov/prod/tax__regs/

comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Beverly A.

Baughman, (202) 622-4940 regarding joint returns and penalties; Robert

A. Miller, (202) 622-3640 regarding levy; Donna J. Welch, (202) 622-

4910 regarding interest; Thomas D. Moffitt, (202) 622-7900 regarding

court costs; and Kevin B. Connelly, (202) 622-3640 regarding

compromises (not toll-free numbers). Concerning submissions,

Evangelista Lee, (202) 622-7190 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed

rulemaking has been submitted to the Office of Management and Budget

for review in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3507(d)). Comments on the collection of information should be

sent to the Office of Management and Budget, Attn: Desk Officer for the

Department of the Treasury, Office of Information and Regulatory

Affairs, Washington, D.C. 20503, with copies to the Internal Revenue

Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, D.C.

20224. Comments on the collection of information should be received by

March 3, 1997. Comments are specifically requested concerning:

Whether the proposed collection of information is necessary for the

proper performance of the functions of the Internal Revenue Service,

including whether the information will have practical utility;

The accuracy of the estimated burden associated with the proposed

collection of information (see below);

How the quality, utility, and clarity of the information to be

collected may be enhanced;

How the burden of complying with the proposed collection of

information may be minimized, including through the application of

automated collection techniques or other forms of information

technology; and

Estimates of capital or start-up costs and costs of operation,

maintenance, and purchase of services to provide information.

The collection of information in this proposed regulation is in

Sec. 301.7430-2(c)(3)(i)(B). This information is required to obtain an

award of reasonable administrative costs. This information will be used

to determine if a taxpayer is entitled to an award of reasonable

administrative costs. The collection of information is required to

obtain the award. The likely respondents are individuals, business or

other for-profit institutions, nonprofit institutions, and small

businesses or organizations.

Estimated total annual reporting burden: 10 hours.

The estimated annual burden per respondent: 15 minutes.

Estimated number of respondents: 38.

Estimated annual frequency of responses: On occasion.

An agency may not conduct or sponsor, and a person is not required

to respond to, a collection of information unless it displays a valid

control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be

retained as long as their contents may become material in the

administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Background

This document contains proposed amendments to the Income Tax

Regulations and the Regulations on Procedure and Administration (26 CFR

parts 1 and 301, respectively) relating to joint returns under section

6013, levy under section 6334, interest under section 6601, the failure

to file penalty under section 6651, the failure to deposit penalty

under section 6656, compromise under section 7122, and awards of costs

and certain fees under section 7430. These sections were amended by the

Taxpayer Bill of Rights 2 (TBOR2) (Pub. L. 104-168, 110 Stat. 1452

(1996)) and the Personal Responsibility and Work Opportunity

Reconciliation Act of 1996 (Pub. L. 104-193, 110 Stat. 2105 (1996)).

The changes made by TBOR2 and the Personal Responsibility and Work

Opportunity Reconciliation Act of 1996 are reflected in the proposed

regulations.

Explanation of Provisions

Interest and Penalties

Section 6601 requires a taxpayer to pay interest on late payments

of tax. However, sections 6601(e)(2) and 6601(e)(3) provide an

interest-free period if a taxpayer pays the tax due within a certain

number of days after the date of the notice and demand for payment.

Sections 303(a) and 303(b)(1) of TBOR2 amended sections 6601(e)(2) and

6601(e)(3) to extend this interest-free period. Therefore,

Sec. 301.6601-1(f) of the proposed regulations extends the interest-

free period from 10 days to 21 calendar days after the date of the

notice and demand (10 business days if the amount for which the notice

and demand is made equals or exceeds $100,000) with respect to any

notice and demand made after December 31, 1996. The proposed

regulations also define business day and calendar day for purposes of

Sec. 301.6601-1(f).

Section 6651(a)(3) imposes a penalty on any person who fails to pay

the amount of tax that is required to be shown on a return but that is

not so shown. However, a penalty-free period is provided if a taxpayer

pays the tax due within a certain number of days after the date of the

notice and demand for payment. Section 303(b)(2) of TBOR2 amended

section 6651(a)(3) to extend the penalty-free period. Therefore,

proposed Sec. 301.6651-1(a)(3) extends the penalty-free period from 10

[[Page 78]]

days to 21 calendar days after the date of the notice and demand (10

business days if the amount for which the notice and demand is made

equals or exceeds $100,000) with respect to any notice and demand made

after December 31, 1996. In addition, the proposed regulations amend

section 301.6651-1(a)(3) to conform with changes made by section

1502(b) of the Tax Reform Act of 1986 (Pub. L. 99-514, 100 Stat. 2085

(1986)) to repeal the special coordination rule under section

6651(c)(1)(B).

Section 6651(a)(2) imposes a penalty on any person who fails to pay

the amount of tax shown on a return by the payment due date (including

extensions). Pursuant to section 6020(b), if a taxpayer does not file a

tax return, the Secretary can make a substitute return for the

taxpayer. Prior to TBOR2, a taxpayer with a substitute return was not

subject to a section 6651(a)(2) penalty because the substitute return

was not treated as a return for purposes of the penalty. See Rev. Rul.

76-562, 1976-2 C.B. 430. Section 1301 of TBOR2 amended section 6651 to

apply the section 6651(a)(2) failure to pay penalty to returns prepared

by the Secretary pursuant to section 6020(b). Thus, for returns due

(determined without regard to extensions) after July 30, 1996, proposed

Sec. 301.6651-1(g) provides that a taxpayer with a substitute return

may be subject to a failure to pay penalty under section 6651(a)(2).

Section 6656 imposes a penalty for failure to deposit taxes with a

government depository by the prescribed due date. Section 304 of TBOR2

amended section 6656 to provide exceptions to the failure to deposit

penalty for first time depositors of employment taxes. Accordingly,

Sec. 301.6656-3(a) of the proposed regulations provides that in the

case of first time depositors of employment taxes, the Secretary will

generally waive the penalty for failure to deposit if (1) the failure

to deposit is inadvertent based on all the facts and circumstances, (2)

the depositing entity meets certain net worth requirements, (3) the

failure to deposit occurs during the first quarter the depositing

entity is required to deposit any employment tax, and (4) the return

for the employment tax is filed on time.

In addition, proposed Sec. 301.6656-3(b) provides that the

Secretary may abate any penalty for failure to make deposits if the

first time a depositor is required to make a deposit, the amount

required to be deposited is inadvertently sent to the Secretary instead

of to the appropriate government depository. Proposed Sec. 301.6656-3

applies to deposits required to be made after July 30, 1996.

Joint Returns

Prior to TBOR2, married individuals making an election under

section 6013(b) to file a joint return after filing a separate return

for the same taxable year were required to pay the full amount of the

tax shown on the joint return at or before the time of filing the joint

return. With respect to taxable years beginning after July 30, 1996,

section 402 of TBOR2 amended section 6013(b) to permit married

individuals who previously filed separate returns to file joint returns

for the same taxable year without paying the full amount of tax shown

on the joint return. Accordingly, Sec. 1.6013-2(b)(1) of the proposed

regulations provides that the full payment requirement applies only to

taxable years beginning on or before July 30, 1996.

Levy and Compromise

Section 6334 lists the items of property that are exempt from levy

by the IRS. Section 502 of TBOR2 amended section 6334 to (1) increase

the dollar amount exempt from levy under section 6334(a)(2) and provide

that this exemption amount applies to all taxpayers, not just heads of

a family; (2) increase the dollar amount exempt from levy under section

6334(a)(3); and (3) provide a yearly inflation adjustment for the

dollar amounts exempt from levy. In addition, section 110(l)(6) of the

Personal Responsibility and Work Opportunity Reconciliation Act of

1996, in a conforming amendment, amended section 6334(a)(11)(A) to

delete the language ``(relating to aid to families with dependent

children)''.

Accordingly, Sec. 301.6334-1(a)(2) of the proposed regulations

increases from $1,650 ($1,550 in the case of levies issued during 1989)

to $2,500 the amount exempt from levy for fuel, provisions, furniture,

and personal effects, and makes this exemption applicable to all

taxpayers, not just taxpayers who are heads of a family. The proposed

regulations also increase from $1,100 ($1,050 in the case of levies

issued during 1989) to $1,250 the amount exempt from levy for books and

tools of a trade, business, or profession. These changes are effective

with respect to levies issued after December 31, 1996. In addition, for

calendar years beginning after 1997, Sec. 301.6334-1(e) of the proposed

regulations provides an inflation adjustment for the exemption amounts

described above and for rounding to the nearest multiple of $10.

Prior to the enactment of TBOR2, section 7122(b) required the

General Counsel of the Treasury or his delegate to file an opinion with

the Secretary whenever the Secretary compromised a case, unless the

compromise involved a civil case in which the unpaid amount of the tax

assessed (including any interest, additional amount, addition to the

tax, or assessable penalty) was less than $500. Effective July 30,

1996, section 503 of TBOR2 amended section 7122 to raise the dollar

threshold for mandatory review of compromises of civil cases by the

General Counsel of the Department of Treasury or his delegate from $500

to $50,000. Accordingly, Sec. 301.7122-1(e) of the proposed regulations

provides that for compromises accepted on or after July 30, 1996, no

opinion is required if the unpaid amount of tax is less than $50,000.

Awarding of Costs and Certain Fees

In general, under section 7430 a prevailing party may recover the

reasonable administrative or litigation costs incurred in an

administrative or a civil proceeding if the proceeding relates to the

determination, collection, or refund of any tax, interest, or penalty.

Prior to TBOR2, the taxpayer had the burden of proving that the

position of the United States was not substantially justified. Section

701 of TBOR2 amended section 7430(c)(4) to place on the government the

burden of proving that the position of the United States is

substantially justified. Under TBOR2, the position of the government

will be presumed not to be substantially justified if the IRS did not

follow its applicable published guidance. Section 701 defines

applicable published guidance.

The proposed regulations reflect these changes. Further,

Sec. 301.7430-5(c)(3) of the proposed regulations clarifies that in the

definition of applicable published guidance, ``regulations'' means

final and temporary regulations. The proposed regulations also clarify

the period during which and the issues upon which the position of the

United States is presumed to be not substantially justified.

Section 702 of TBOR2 amended section 7430(c)(1) to increase the

allowable hourly rate of an award of attorney's fees and provide for a

yearly inflation adjustment and rounding. Sections 301.7430-2 and

301.7430-4 of the proposed regulations reflect these changes.

Finally, section 703 of TBOR2 amended section 7430(b)(1) to clarify

that any failure to agree to an extension of the statute of limitations

will not affect the determination of whether a taxpayer has exhausted

administrative

[[Page 79]]

remedies as a prerequisite to recovery of attorney's fees. Although

this is consistent with an example in the prior regulations (Example 4,

Sec. 301.7430-1(f)), the proposed regulations add Sec. 301.7430-1(b)(4)

to reflect the statutory language.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. Therefore,

a regulatory assessment is not required.

It is hereby certified that the regulations in this document will

not have a significant economic impact on a substantial number of small

entities. This certification is based on a determination that in the

past only an average of 38 taxpayers per year, the majority of whom

were individuals, have filed a request to recover administrative costs.

Accordingly, a Regulatory Flexibility Analysis under the Regulatory

Flexibility Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Internal Revenue Code, this

notice of proposed rulemaking will be submitted to the Chief Counsel

for Advocacy of the Small Business Administration for comment on its

impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (a signed original

and eight (8) copies) or electronic comments that are submitted timely

to the IRS. All comments will be available for public inspection and

copying. A public hearing may be scheduled if requested in writing by

any person that timely submits written comments. If a public hearing is

scheduled, notice of the date, time, and place for the hearing will be

published in the Federal Register.

Drafting Information

The principal authors of these regulations are Beverly A. Baughman

and Donna J. Welch, Office of Assistant Chief Counsel (Income Tax and

Accounting), Robert A. Miller and Kevin B. Connelly, Office of

Assistant Chief Counsel (General Litigation), and Thomas D. Moffitt,

Office of Assistant Chief Counsel (Field Service). However, other

personnel from the IRS and Treasury Department participated in their

development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

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

taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as

follows:

PART 1--INCOME TAXES

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

part as follows:

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

Sec. 1.6013-2 [Amended]

Par. 2. Section 1.6013-2(b)(1) is amended by removing the language

``Unless'' and adding ``Beginning on or before July 30, 1996, unless''

in its place.

PART 301--PROCEDURE AND ADMINISTRATION

Par. 3. The authority citation for part 301 continues to read in

part as follows:

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

Par. 4. Section 301.6334-1 is amended by:

1. Revising paragraph (a)(2).

2. Removing the language ``$1,100 ($1,050 for levies issued prior

to January 1, 1990)'' from paragraph (a)(3) and adding ``$1,250'' in

its place.

3. Removing the language ``(relating to aid to families with

dependent children)'' from paragraph (a)(11)(i).

4. Redesignating paragraph (e) as paragraph (f) and adding a new

paragraph (e).

5. Revising newly designated paragraph (f).

The additions and revisions read as follows:

Sec. 301.6334-1 Property exempt from levy.

(a) * * *

(2) Fuel, provisions, furniture, and personal effects. So much of

the fuel, provisions, furniture, and personal effects in the taxpayer's

household, and of the arms for personal use, livestock, and poultry of

the taxpayer, that does not exceed $2,500 in value.

* * * * *

(e) Inflation adjustment. For any calendar year beginning after

December 31, 1997, each dollar amount referred to in paragraphs (a)(2)

and (a)(3) of this section will be increased by an amount equal to the

dollar amount multiplied by the cost-of-living adjustment determined

under section 1(f)(3) for the calendar year (substituting ``calendar

year 1996'' for ``calendar year 1992'' in section 1(f)(3)(B)). If any

dollar amount as adjusted is not a multiple of $10, the dollar amount

will be rounded to the nearest multiple of $10 (rounding up if the

amount is a multiple of $5).

(f) Effective date. Generally, these provisions are applicable with

respect to levies made on or after July 1, 1989. However, any

reasonable attempt by a taxpayer to comply with the statutory

amendments addressed by the regulations in this section prior to

February 21, 1995, will be considered as meeting the requirements of

the regulations in this section. In addition, paragraphs (a)(2),

(a)(3), (a)(11)(i) and (e) of this section are applicable with respect

to levies issued after December 31, 1996.

Par. 5. Section 301.6601-1 is amended by:

1. Revising paragraphs (f)(3) and (f)(4).

2. Redesignating paragraph (f)(5) as paragraph (f)(6) and adding

new paragraph (f)(5).

The additions and revisions read as follows:

Sec. 301.6601-1 Interest on underpayments.

* * * * *

(f) * * *

(3) Interest will not be imposed on any assessable penalty,

addition to the tax, or additional amount if the amount is paid within

21 calendar days (10 business days if the amount stated in the notice

and demand equals or exceeds $100,000) from the date of the notice and

demand. If interest is imposed, it will be imposed only for the period

from the date of the notice and demand to the date on which payment is

received. This paragraph (f)(3) is applicable with respect to any

notice and demand made after December 31, 1996.

(4) If notice and demand is made after December 31, 1996, for any

amount and the amount is paid within 21 calendar days (10 business days

if the amount equals or exceeds $100,000) from the date of the notice

and demand, interest will not be imposed for the period after the date

of the notice and demand.

(5) For purposes of paragraphs (f)(3) and (f)(4) of this section--

(i) The term business day means any day other than a Saturday,

Sunday, legal holiday in the District of Columbia, or a statewide legal

holiday in the state where the taxpayer resides or where the taxpayer's

principal place of business is located. With respect to the tenth

[[Page 80]]

business day (after taking into account the first sentence of this

paragraph (f)(5)(i)), see section 7503 relating to time for performance

of acts where the last day falls on a statewide legal holiday in the

state where the act is required to be performed.

(ii) The term calendar day means any day. With respect to the

twenty-first calendar day, see section 7503 relating to time for

performance of acts where the last day falls on a Saturday, Sunday, or

legal holiday.

* * * * *

Par. 6. Section 301.6651-1 is amended by:

1. Revising paragraph (a)(3).

2. Adding paragraph (g).

The additions and revisions read as follows:

Sec. 301.6651-1 Failure to file tax return or to pay tax.

(a) * * *

(3) Failure to pay tax not shown on return. In the case of failure

to pay any amount of any tax required to be shown on a return specified

in paragraph (a)(1) of this section that is not so shown (including an

assessment made pursuant to section 6213(b)) within 21 calendar days

from the date of the notice and demand (10 business days if the amount

for which the notice and demand is made equals or exceeds $100,000)

with respect to any notice and demand made after December 31, 1996,

there will be added to the amount stated in the notice and demand the

amount specified below unless the failure to pay the tax within the

prescribed time is shown to the satisfaction of the district director

or the director of the service center to be due to reasonable cause and

not to willful neglect. The amount added to the tax is 0.5 percent of

the amount stated in the notice and demand if the failure is for not

more than 1 month, with an additional 0.5 percent for each additional

month or fraction thereof during which the failure continues, but not

to exceed 25 percent in the aggregate.

* * * * *

(g) Treatment of returns prepared by the Secretary--(1) In general.

A return prepared by the Secretary under section 6020(b) will be

disregarded for purposes of determining the amount of the addition to

tax for failure to file any return pursuant to paragraph (a)(1) of this

section. However, the return prepared by the Secretary will be treated

as a return filed by the taxpayer for purposes of determining the

amount of the addition to tax for failure to pay the tax shown on any

return and for failure to pay the tax required to be shown on a return

that is not so shown pursuant to paragraphs (a)(2) and (a)(3) of this

section, respectively.

(2) Effective date. This paragraph (g) applies to returns the due

date for which (determined without regard to extensions) is after July

30, 1996.

Par. 7. Section 301.6656-3 is added to read as follows:

Sec. 301.6656-3 Abatement of penalty.

(a) Exception for first time depositors of employment taxes--(1)

Waiver. The Secretary will generally waive the penalty imposed by

section 6656(a) on a person's failure to deposit any employment tax

under subtitle C of the Internal Revenue Code if--

(i) The failure is inadvertent;

(ii) The person meets the requirements referred to in section

7430(c)(4)(A)(ii) (relating to the net worth requirements applicable

for awards of attorney's fees);

(iii) The failure occurs during the first quarter that the person

is required to deposit any employment tax; and

(iv) The return of the tax is filed on or before the due date.

(2) Inadvertent failure. For purposes of paragraph (a)(1)(i) of

this section, the Secretary will determine if a failure to deposit is

inadvertent based on all the facts and circumstances.

(b) Deposit sent to Secretary. The Secretary may abate the penalty

imposed by section 6656(a) if the first time a depositor is required to

make a deposit, the amount required to be deposited is inadvertently

sent to the Secretary instead of to the appropriate government

depository.

(c) Effective date. This section applies to deposits required to be

made after July 30, 1996.

Par. 8. Paragraph (e) of Sec. 301.7122-1 is revised to read as

follows:

Sec. 301.7122-1 Compromises.

* * * * *

(e) Record--(1) In general. If an offer in compromise is accepted,

there will be placed on file the opinion of the Chief Counsel of the

IRS with respect to the compromise, with the reasons for the opinion,

and including a statement of--

(i) The amount of tax assessed;

(ii) The amount of interest, additional amount, addition to the

tax, or assessable penalty, imposed by law on the person against whom

the tax is assessed; and

(iii) The amount actually paid in accordance with the terms of the

compromise.

(2) Exception. For compromises accepted on or after July 30, 1996,

no opinion will be required with respect to the compromise of any civil

case in which the unpaid amount of tax assessed (including any

interest, additional amount, addition to the tax, or assessable

penalty) is less than $50,000. However, the compromise will be subject

to continuing quality review by the Secretary.

* * * * *

Sec. 301.7430-0 [Amended]

Par 9. Section 301.7430-0 is amended by:

1. Adding under the heading Sec. 301.7430-1, a caption (b)(4) to

read ``(4) Failure to agree to extension of time for assessments.''.

2. Adding under the heading Sec. 301.7430-5, a caption (c)(3) to

read ``(3) Presumption.''.

Par. 10. Section 301.7430-1 is amended by adding paragraph (b)(4)

to read as follows:

Sec. 301.7430-1 Exhaustion of administrative remedies.

* * * * *

(b) * * *

(4) Failure to agree to extension of time for assessments. Any

failure by the prevailing party to agree to an extension of the time

for the assessment of any tax will not be taken into account for

purposes of determining whether the prevailing party has exhausted the

administrative remedies available to the party within the IRS.

* * * * *

Par. 11. Section 301.7430-2 is amended by:

1. Removing the language ``7430(c)(4)(B)(ii)'' from the third

sentence of paragraph (b)(2) and adding ``7430(c)(4)(C)(ii)'' in its

place.

2. Revising paragraph (c)(3)(i)(B).

3. Removing the language ``If more than $75'' from paragraph

(c)(3)(ii)(C) and adding ``In the case of administrative proceedings

commenced after July 30, 1996, if more than $110'' in its place.

The revision reads as follows:

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

administrative costs.

* * * * *

(c) * * *

(3) * * *

(i) * * *

(B) A clear and concise statement of the reasons why the taxpayer

alleges that the position of the IRS in the administrative proceeding

was not substantially justified. For administrative proceedings

commenced after July 30, 1996, if the taxpayer alleges that the IRS did

not follow any applicable published guidance, the statement must

identify all applicable published guidance that the taxpayer

[[Page 81]]

alleges that the IRS did not follow. For purposes of this paragraph

(c)(3)(i)(B), the term applicable published guidance means final or

temporary regulations, revenue rulings, revenue procedures, information

releases, notices, announcements, and, if issued to the taxpayer,

private letter rulings, technical advice memoranda, and determination

letters. Also, for purposes of this paragraph (c)(3)(i)(B), the term

administrative proceeding includes only those administrative

proceedings or portions of administrative proceedings occurring on or

after the administrative proceeding date as defined in Sec. 301.7430-

3(c).

* * * * *

Par. 12. Section 301.7430-4 is amended by:

1. Removing the language ``$75'' from paragraph (b)(3)(i) and

adding ``, in the case of proceedings commenced after July 30, 1996,

$110'' in its place.

2. Revising paragraph (b)(3)(ii).

3. Removing the language ``$75'' from the first, second, and third

sentences of paragraph (b)(3)(iii)(B) and adding ``$110'' in its place.

4. Removing the language ``$75'' from paragraph (b)(3)(iii)(C) and

adding ``$110'' in its place.

5. Removing the language ``$75'' from the third sentence of the

example in paragraph (b)(3)(iii)(D) and adding ``$110'' in its place.

6. Removing the language ``$75'' from the second and third

sentences of paragraph (c)(2)(ii) and adding ``$110'' in its place.

The revision reads as follows:

Sec. 301.7430-4 Reasonable administrative costs.

* * * * *

(b) * * *

(3) * * *

(ii) Cost of living adjustment. The IRS will make a cost of living

adjustment to the $110 per hour limitation for fees incurred in any

calendar year beginning after December 31, 1996. The cost of living

adjustment will be an amount equal to $110 multiplied by the cost-of-

living adjustment determined under section 1(f)(3) for the calendar

year (substituting ``calendar year 1995'' for ``calendar year 1992'' in

section 1(f)(3)(B)). If the dollar limitation as adjusted by this cost-

of-living increase is not a multiple of $10, the dollar amount will be

rounded to the nearest multiple of $10 (rounding up if the amount is a

multiple of $5).

* * * * *

Par. 13. Section 301.7430-5 is amended by:

1. Revising paragraph (a).

2. Adding paragraph (c)(3).

The addition and revision read as follows:

Sec. 301.7430-5 Prevailing party.

(a) In general. For purposes of an award of reasonable

administrative costs under section 7430 in the case of administrative

proceedings commenced after July 30, 1996, a taxpayer is a prevailing

party only if--

(1) The position of the IRS was not substantially justified;

(2) The taxpayer substantially prevails as to the amount in

controversy or with respect to the most significant issue or set of

issues presented; and

(3) The taxpayer satisfies the net worth and size limitations

referenced in paragraph (f) of this section.

* * * * *

(c) * * *

(3) Presumption. If the IRS did not follow any applicable published

guidance in an administrative proceeding commenced after July 30, 1996,

the position of the IRS, on those issues to which the guidance applies

and for all periods during which the guidance was not followed, will be

presumed not to be substantially justified. This presumption may be

rebutted. For purposes of this paragraph (c)(3), the term applicable

published guidance means final or temporary regulations, revenue

rulings, revenue procedures, information releases, notices,

announcements, and, if issued to the taxpayer, private letter rulings,

technical advice memoranda, and determination letters. Also, for

purposes of this paragraph (c)(3), the term administrative proceeding

includes only those administrative proceedings or portions of

administrative proceedings occurring on or after the administrative

proceeding date as defined in Sec. 301.7430-3(c).

* * * * *

Par. 14. Section 301.7430-6 is revised to read as follows:

Sec. 301.7430-6 Effective date.

Sections 301.7430-2 through 301.7430-6, other than Secs. 301.7430-2

(b)(2), (c)(3)(i)(B), (c)(3)(ii)(C), and (c)(5); Secs. 301.7430-4

(b)(3)(i), (b)(3)(ii), (b)(3)(iii)(B), (b)(3)(iii)(C), (b)(3)(iii)(D),

and (c)(2)(ii); and Secs. 301.7430-5 (a) and (c)(3), apply to claims

for reasonable administrative costs filed with the IRS after December

23, 1992, with respect to costs incurred in administrative proceedings

commenced after November 10, 1988. Section 301.7430-2(c)(5) is

applicable March 23, 1993. Section 301.7430-0, Secs. 301.7430-2 (b)(2),

(c)(3)(i)(B), and (c)(3)(ii)(C); Secs. 301.7430-4 (b)(3)(i),

(b)(3)(ii), (b)(3)(iii)(B), (b)(3)(iii)(C), (b)(3)(iii)(D), and

(c)(2)(ii); and Secs. 301.7430-5 (a) and (c)(3) are applicable for

administrative proceedings commenced after July 30, 1996.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 96-32380 Filed 12-31-96; 8:45 am]

BILLING CODE 4830-01-U