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(A) IN GENERAL
In any administrative or court proceeding which is brought by or
against the United States in connection with the determination,
collection, or refund of any tax, interest, or penalty under this
title, the prevailing party may be awarded a judgment or a
settlement for--
(1) reasonable administrative costs incurred in connection with
such administrative proceeding within the Internal Revenue
Service, and
(2) reasonable litigation costs incurred in connection with such
court proceeding.
(B) LIMITATIONS
(1) Requirement that administrative remedies be exhausted
A judgment for reasonable litigation costs shall not be awarded
under subsection (a) in any court proceeding unless the court
determines that the prevailing party has exhausted the
administrative remedies available to such party within the
Internal Revenue Service. Any failure to agree to an extension of
the time for the assessment of any tax shall not be taken into
account for purposes of determining whether the prevailing party
meets the requirements of the preceding sentence.
(2) Only costs allocable to the United States
An award under subsection (a) shall be made only for reasonable
litigation and administrative costs which are allocable to the
United States and not to any other party.
(3) Costs denied where party prevailing protracts proceedings
No award for reasonable litigation and administrative costs may
be made under subsection (a) with respect to any portion of the
administrative or court proceeding during which the prevailing
party has unreasonably protracted such proceeding.
(4) Period for applying to IRS for administrative costs
An award may be made under subsection (a) by the Internal Revenue
Service for reasonable administrative costs only if the prevailing
party files an application with the Internal Revenue Service for
such costs before the 91st day after the date on which the final
decision of the Internal Revenue Service as to the determination
of the tax, interest, or penalty is mailed to such party.
(C) DEFINITIONS
For purposes of this section--
(1) Reasonable litigation costs
The term "reasonable litigation costs" includes--
(A) reasonable court costs, and
(B) based upon prevailing market rates for the kind or quality of
services furnished--
(i) the reasonable expenses of expert witnesses in connection with
a court proceeding, except that no expert witness shall be
compensated at a rate in excess of the highest rate of
compensation for expert witnesses paid by the United States,
(ii) the reasonable cost of any study, analysis, engineering
report, test, or project which is found by the court to be
necessary for the preparation of the party's case, and
(iii) reasonable fees paid or incurred for the services of
attorneys in connection with the court proceeding, except that
such fees shall not be in excess of $125 per hour unless the court
determines that a special factor, such as the limited availability
of qualified attorneys for such proceeding, the difficulty of the
issues presented in the case, or the local availability of tax
expertise, justifies a higher rate.
In the case of any calendar year beginning after 1996, the dollar amount referred to in clause (iii) shall be increased by an amount equal to such dollar amount multiplied by the cost-of-living adjustment determined under section 1(f)(3) for such calendar year, by substituting "calendar year 1995" for "calendar year 1992" in subparagraph (B) thereof. If any dollar amount after being increased under the preceding sentence is not a multiple of $10, such dollar amount shall be rounded to the nearest multiple of $10.
(2) Reasonable administrative costs
The term "reasonable administrative costs" means--
(A) any administrative fees or similar charges imposed by the
Internal Revenue Service, and
(B) expenses, costs, and fees described in paragraph (1)(B),
except that any determination made by the court under clause (ii)
or (iii) thereof shall be made by the Internal Revenue Service in
cases where the determination under paragraph (4)(C) of the
awarding of reasonable administrative costs is made by the
Internal Revenue Service.
Such term shall only include costs incurred on or after whichever
of the following is the earliest: (i) the date of the receipt by
the taxpayer of the notice of the decision of the Internal Revenue
Service Office of Appeals; (ii) the date of the notice of
deficiency; or (iii) the date on which the first letter of
proposed deficiency which allows the taxpayer an opportunity for
administrative review in the Internal Revenue Service Office of
Appeals is sent.
(3) Attorneys' fees
(A) In general
For purposes of paragraphs (1) and (2), fees for the services of
an individual (whether or not an attorney) who is authorized to
practice before the Tax Court or before the Internal Revenue
Service shall be treated as fees for the services of an attorney.
(B) Pro bono services
The court may award reasonable attorneys' fees under subsection
(a) in excess of the attorneys' fees paid or incurred if such fees
are less than the reasonable attorneys' fees because an individual
is representing the prevailing party for no fee or for a fee which
(taking into account all the facts and circumstances) is no more
than a nominal fee. This subparagraph shall apply only if such
award is paid to such individual or such individual's employer.
(4) Prevailing party
(A) In general
The term "prevailing party" means any party in any proceeding to
which subsection (a) applies (other than the United States or any
creditor of the taxpayer involved)--
(i) which--
(I) has substantially prevailed with respect to the amount in
controversy, or
(II) has substantially prevailed with respect to the most
significant issue or set of issues presented, and
(ii) which meets the requirements of the 1st sentence of section
2412(d)(1)(B) of title 28, United States Code (as in effect on
October 22, 1986) except to the extent differing procedures are
established by rule of court and meets the requirements of section
2412(d)(2)(B) of such title 28 (as so in effect).
(B) Exception if United States establishes that its position was
substantially justified
(i) General rule
A party shall not be treated as the prevailing party in a
proceeding to which subsection (a) applies if the United States
establishes that the position of the United States in the
proceeding was substantially justified.
(ii) Presumption of no justification if Internal Revenue Service
did not follow certain published guidance
For purposes of clause (i), the position of the United States
shall be presumed not to be substantially justified if the
Internal Revenue Service did not follow its applicable published
guidance in the administrative proceeding. Such presumption may be
rebutted.
(iii) Effect of losing on substantially similar issues
In determining for purposes of clause (i) whether the position of
the United States was substantially justified, the court shall
take into account whether the United States has lost in courts of
appeal for other circuits on substantially similar issues.
(iv) Applicable published guidance
For purposes of clause (ii), the term "applicable published
guidance" means--
(I) regulations, revenue rulings, revenue procedures, information
releases, notices, and announcements, and
(II) any of the following which are issued to the taxpayer:
private letter rulings, technical advice memoranda, and
determination letters.
(C) Determination as to prevailing party
Any determination under this paragraph as to whether a party is a
prevailing party shall be made by agreement of the parties or--
(i) in the case where the final determination with respect to the
tax, interest, or penalty is made at the administrative level, by
the Internal Revenue Service, or
(ii) in the case where such final determination is made by a
court, the court.
(D) Special rules for applying net worth requirement
In applying the requirements of section 2412(d)(2)(B) of title 28,
United States Code, for purposes of subparagraph (A)(ii) of this
paragraph--
(i) the net worth limitation in clause (i) of such section shall
apply to--
(I) an estate but shall be determined as of the date of the
decedent's death, and
(II) a trust but shall be determined as of the last day of the
taxable year involved in the proceeding, and
(ii) individuals filing a joint return shall be treated as
separate individuals for purposes of clause (i) of such section.
(E) Special rules where judgment less than taxpayer's offer
(i) In general
A party to a court proceeding meeting the requirements of
subparagraph (A)(ii) shall be treated as the prevailing party if
the liability of the taxpayer pursuant to the judgment in the
proceeding (determined without regard to interest) is equal to or
less than the liability of the taxpayer which would have been so
determined if the United States had accepted a qualified offer of
the party under subsection (g).
(ii) Exceptions
This subparagraph shall not apply to--
(I) any judgment issued pursuant to a settlement; or
(II) any proceeding in which the amount of tax liability is not
in issue, including any declaratory judgment proceeding, any
proceeding to enforce or quash any summons issued pursuant to this
title, and any action to restrain disclosure under section
6110(f).
(iii) Special rules
If this subparagraph applies to any court proceeding--
(I) the determination under clause (i) shall be made by reference
to the last qualified offer made with respect to the tax liability
at issue in the proceeding; and
(II) reasonable administrative and litigation costs shall only
include costs incurred on and after the date of such offer.
(iv) Coordination
This subparagraph shall not apply to a party which is a prevailing
party under any other provision of this paragraph.
(5) Administrative proceedings
The term "administrative proceeding" means any procedure or other
action before the Internal Revenue Service.
(6) Court proceedings
The term "court proceeding" means any civil action brought in a
court of the United States (including the Tax Court and the United
States Claims Court).
(7) Position of United States
The term "position of the United States" means--
(A) the position taken by the United States in a judicial
proceeding to which subsection (a) applies, and
(B) the position taken in an administrative proceeding to which
subsection (a) applies as of 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.
(D) SPLLCAL RULES FOR PAYMENT OF COSTS
(1) Reasonable administrative costs
An award for reasonable administrative costs shall be payable out
of funds appropriated under section 1304 of title 31, United
States Code.
(2) Reasonable litigation costs
An award for reasonable litigation costs shall be payable in the
case of the Tax Court in the same manner as such an award by a
district court.
(E) MULTIPLE ACTIONS
For purposes of this section, in the case of--
(1) multiple actions which could have been joined or consolidated,
or
(2) a case or cases involving a return or returns of the same
taxpayer (including joint returns of married individuals) which
could have been joined in a single court proceeding in the same
court,
such actions or cases shall be treated as 1 court proceeding
regardless of whether such joinder or consolidation actually
occurs, unless the court in which such action is brought
determines, in its discretion, that it would be inappropriate to
treat such actions or cases as joined or consolidated.
(F) RIGHT OF APPEAL
(1) Court proceedings
An order granting or denying (in whole or in part) an award for
reasonable litigation or administrative costs under subsection (a)
in a court proceeding, may be incorporated as a part of the
decision or judgment in the court proceeding and shall be subject
to appeal in the same manner as the decision or judgment.
(2) Administrative proceedings
A decision granting or denying (in whole or in part) an award for
reasonable administrative costs under subsection (a) by the
Internal Revenue Service shall be subject to the filing of a
petition for review with the Tax Court under rules similar to the
rules under section 7463 (without regard to the amount in
dispute). If the Secretary sends by certified or registered mail a
notice of such decision to the petitioner, no proceeding in the
Tax Court may be initiated under this paragraph unless such
petition is filed before the 91st day after the date of such
mailing.
(3) Appeal of tax court decision
An order of the Tax Court disposing of a petition under paragraph
(2) shall be reviewable in the same manner as a decision of the
Tax Court, but only with respect to the matters determined in such
order.
(G) QUALIFIED OFFER
For purposes of subsection (c)(4)--
(1) In general
The term "qualified offer" means a written offer which--
(A) is made by the taxpayer to the United States during the
qualified offer period;
(B) specifies the offered amount of the taxpayer's liability
(determined without regard to interest);
(C) is designated at the time it is made as a qualified offer for
purposes of this section; and
(D) remains open during the period beginning on the date it is
made and ending on the earliest of the date the offer is rejected,
the date the trial begins, or the 90th day after the date the
offer is made.
(2) Qualified offer period
For purposes of this subsection, the term "qualified offer period"
means the period--
(A) beginning on the date on which the first letter of proposed
deficiency which allows the taxpayer an opportunity for
administrative review in the Internal Revenue Service Office of
Appeals is sent, and
(B) ending on the date which is 30 days before the date the case
is first set for trial.
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