Contents | Summary | A | B | C | D | E | F | G | H Comments on the Voluntary Fiduciary Correction Program - Example 6. Section 7430(c)(4)(E)(ii)(I) provides that qualified offers do not apply to "any judgment issued pursuant to a settlement." Example 6 of Treas. Reg. § 301.7430-7(e) (which builds on fact patterns set forth in Example 4 and 5 of Treas. Reg. § 301.7430-7(e)) essentially involves the following situation: the taxpayer makes a qualified offer which covers the three unresolved issues in the case. The government rejects the offer. The taxpayer and the government ultimately settle issues one and two; issue three is tried. The aggregate liability for these three issues from the settlement and the litigation is less than the liability offered in the qualified offer. Example 6 provides that the only reimbursable costs are those incurred with respect to issue 3 after the qualified offer was made. None of the costs associated with issues 1 and 2 are reimbursable. While the example does not explicitly so state, it appears clear that this would be the case even if the settlement were a complete concession by the government and even if it took place "on the courthouse steps" after all of the cost and expense of trial preparation had occurred.
We believe that the policy of encouraging settlements supports the reimbursement of expenses for issues 1 and 2, and is consistent with the statute. If the taxpayer makes an offer which ultimately results in the settlement of some of the issues, early settlement should be promoted by subjecting costs to reimbursement. This would put an incentive on the government to settle at an earlier time, rather than later, after the trial preparation costs had been incurred. In order for the government to be at jeopardy for these costs, it must have determined that the taxpayer’s offer was inadequate and taken at least some of the case through trial; thus, not only could it have avoided the costs entirely if it had initially recognized that the offer was adequate, it still had the opportunity to avoid the costs entirely by settling all the issues (at any time prior to a judgment being issued). If all issues are settled, then no expenses would be reimbursed under the qualified offer provisions, because the judgment would have resulted from a settlement. However, if one issue is tried, we believe that the judgment was not "issued pursuant to a settlement." We do not believe the statutory language dictates that the approach of the regulations be followed: that the judgment be divided between the portion attributable to the settled issues (which expenses are not reimbursable) and the portion attributable to the tried issues (which expenses are reimbursable.) We believe that the statutory language supports the interpretation that a judgment is not "issued pursuant to a settlement" unless all issues are settled. The purpose of the statute is to eliminate litigation. If one or more issues have been tried, then litigation has not been eliminated. Under those circumstances there has not been a settlement and the judgment has not been issued pursuant to a settlement. The regulations are clear that even if a taxpayer does not receive reimbursement from a qualified offer, it may qualify for reimbursement under other provisions of section 7430. We believe that this may not adequately address the issue. Assume that all three contested issues in our example are true "50/50" issues. It is unlikely that attorney fees will be reimbursable when all the issues are toss-ups. Accordingly, if the taxpayer did not receive reimbursement on issues 1 and 2 from its qualified offer because those issues were settled, it is unlikely that it would receive attorneys fees from any other source in Section 7430.
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