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William & Mary Annual Tax Conference Conferences, Events, and Lectures

1990

IRS Controversies at Audit and BeyondCharles W. Hall

Copyright c 1990 by the authors. This article is brought to you by the William & Mary Law School Scholarship Repository.https://scholarship.law.wm.edu/tax

Repository CitationHall, Charles W., "IRS Controversies at Audit and Beyond" (1990). William & Mary Annual Tax Conference. 210.https://scholarship.law.wm.edu/tax/210

IRS CONTROVERSIES AT AUDIT AND BEYOND

Charles W. HallFulbright & Jaworski

Houston, Texas

December 1, 1990

1990 William and Mary Tax Conference

IRS CONTROVERSIES AT AUDIT AND BEYOND

Charles W. HallFulbright & Jaworski

Houston, Texas

TABLE OF CONTENTS

Page

INTRODUCTION 1

I. PROCESSING AND AUDIT OF TAX RETURNS. 1

A. Processing and Selection of Returns 1for Examination.

I. An Overview of the Return 1Selection Process.

2. The Industry Specialization 2Program ("ISP").

3. Coordinated Examination 3Program ("CEP").

B. Audit Procedure. 6

1. Types of Audits. 6

2. Scope of Audit. 6

3. Technical Advice and Other 6Assistance Available to Agents.

4. Conferences With the Agent. 7

5. Settlement With the Agent. 11

6. Procedure if the Case is Settled. 12

7. Revenue Agent's Report ("RAR"). 14

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8. Review of Agent's Recommendation. 14

9. Post-Review at Regional Level. 15

II. A STRATEGIC DECISION -- WHETHER OR NOT 15TO VISIT APPEALS BEFORE GOING TO COURT.

A. Nature of the IRS Appeals Function. 15

B. The Options Available to the Taxpayer 16

Upon Conclusion of the Audit.

1. The 30-day Letter. 16

2. Options of the Taxpayer Upon Receipt 16of the 30-day Letter.

3. Factors that Favor Filing a 17Written Protest.

4. Factors That Favor Bypassing Appeals. 18

III. DEALING WITH THE APPEALS OFFICE. 19

A. Authority to Settle in Non-Docketed 19and Docketed Cases.

B. The Purpose of Appeals. 20

C. Before Suit Filed -- The Non-Docketed 20Case in Appeals.

1. When Protest is Required to Request 20a Conference in Appeals.

2. The Appeals Conference. 22

D. After Suit Filed in the Tax Court -- 23A Docketed Case.

E. Achieving Settlement in Appeals. 26

1. Types of Settlements. 26

2. The Raising of New Issues or 26Reopening Closed Issues.

3. Offers in Compromise. 27

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IV. SETTLEMENT NEGOTIATIONS WITH DISTRICT COUNSEL. 29

A. Litigation Philosophy of Counsel. 29

B. Request for Technical Advice. 30

C. General Principles of Settlement. 31

D. Collection Aspects. 32

E. Other Years of Other Taxpayers. 32

F. Tax Court Cases Having Criminal 33(Fraud) Aspects.

G. Settlement Memoranda. 33

H. Settlement After Trial. 34

I. Collateral and Closing Agreements. 35

J. Administrative Processin. 36

K. Practical Suggestions/Discussion Points. 37

V. CONSIDERATIONS IN SELECTING THE CHOICE 37OF FORUM.

A. The Taxpayer's Alternatives in Contesting 37a Federal Tax Deficiency.

B. Jurisdictional Prerequisites to Access 38

Among the Forums.

1. Access to the Tax Court. 38

2. Prerequisites to the Commencement of 39a Tax Refund Suit.

C. Preemptive and Predominant Factors to 41be Considered in Selecting the Choiceof Forum.

D. Other Factors For Consideration in 42*Selecting a Redetermination Actionin Tax Court Versus a RefundProceeding.

E. Factors to Consider in Selecting a Choice 46of Refund Forum.

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December 1, 1990

1990 William and Mary Tax Conference

IRS CONTROVERSIES AT AUDIT AND BEYOND

Charles W. HallFulbright & Jaworski

Houston, Texas

INTRODUCTION

Dealing with the IRS can be fraught with controversy. Itcan occur as early as the audit phase of a taxpayer'sreturn, during which the IRS and taxpayer disagree on theamount owed, and can continue on through eventualresolution in litigation. A tax professional can besthandle controversy if he knows something of the process ofthe audit and the appeal. He must also understand theconsiderations in choosing whether or not to appealadministratively before going to court and whether or notto settle with District Counsel. There are alsu forumchoices in going to court which must be considered. Thispaper will describe the audit process, consider some of thecontroversies that can arise in the audit and beyond, anddiscuss factors that must be considered in making decisionsduring the controversy.

I. PROCESSING AND AUDIT OF TAX RETURNS.

A. Processing and Selection of Returns for Examination.

1. An Overview of the Return Selection Process.

a. The IRS processes all returns at IRS ServiceCenters. It generally selects returns forexamination on the basis of National Officeexamination guidelines.

b. The IRS makes an initial selection ofreturns for audit on the basis of a formulathat scores the returns. If returns deviatesubstantially from the norm of similartaxpayers, the IRS will make an initialselection for examination.

c. The IRS's Returns Program Manager makesfinal selection of the formula-selectedreturns, choosing those that the ReturnsProgram Manager thinks have the greatestpotential for adjustment.

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d. In recent years, the IRS has selected fewerreturns based on the formula in many IRSDistricts because of the need to commit theIRS's limited examination resources tospecial compliance programs (e.g., theabusive tax shelter program). However, thatsituation is changing, and every indicationis that the attention of the IRS is turningto the traditional tax issues. Severalofficials have stated that audits of largecorporations and wealthy individuals willincrease, that the Industry SpecializationProgram ("ISP") system will be emphasizedand expanded, and that valuation issues(including actuarial analysis of pensionplans) and international issues wili expand.

2. The Industry Specialization Program ("ISP").

a. The Industry Specialization Program isdesigned to develop specialists in specificindustries in Chief Counsel, the NationalOffice, and Appeals as well as Examination.The goal is to identify important industryissues and to assure uniform and consistenttreatment nationwide in auditing taxpayersengaged in those industries. The followingindustry groups have been established:

AerospaceCommercial BankingCommodities and Financial ProductsConstructionData ProcessingElectronic ComponentsFarmers' CooperativesFinancial ServicesFoodForest ProductsHealth CareLeveraged Buy-OutsLife InsuranceMedia/CommunicationsMiningMotor VehiclesPetroleumProperty and Casualty Insurance

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Railroad IndustryRetail IndustrySavings and LoansUtilities

A listing of the IRS groups and the membersand addresses of the members of each groupappears in "The Tax Directory" (Summer1989), pp. 223-225.

b. The ISP focuses on coordinated industryissues. These issues are of such importanceto a particular industry that they have beendesignated for special treatment. Indeciding to make an issue a coordinatedindustry issue, the Ladustry specialistsurveys case managers involved in theexamination of taxpayers in that particularindustry. From the issues identified in thesurvey, the industry specialist selectsissues that are unusual or complex anddeserve coordination due to their widegeographic impact. After selection of anissue, the industry specialist prepares aposition paper which includes a descriptionof the general manner in which industrytaxpayers are treating the issue.

c. Early recognition of the presence ofindustry coordinated issues, andunderstanding the IRS examination and appealprocedures in connection with these matters,can help to deflect or resolve theseissues. Industry coordinated issue papersmay be obtained from the designated industryspecialist or, if necessary, under theFreedom of Information Act.

d. With respect to a coordinated examinationprogram ("CEP") case in one of the specifiedindustries, the case manager must includecoordinated issues in the examination andinform the taxpayers that they are part ofthe ISP.

3. Coordinated Examination Program ("CEP").

a. The Decision to Make Changes to theCoordinated Examination Program.

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On December 1, 1989, the IRS QualityImprovement Program (QIP) Team issued itsreport on the Coordinated ExaminationProgram (CEP). The QIP team's overallconclusions were that potential tax dollarsare lost because issues are not being raisedand the sustention rate needs improvement.The team identified problems in numerousareas and recommended a new organizationstructure to solve these problems. In viewof the QIP team's recommendations, the IRSBoard of Directors during the January 1990meeting requested that the AssistantCommissioner (Examination) and Acting ChiefCounsel develop a proposal for changes tothe CEP.

The QIP team developed the proposedobjectives to improve program efficiency andeffectiveness, thereby increasing revenue tothe Treasury, improving sustention rates,and increasing timeliness (reduce lapse timeand improve currency of examination cycles).

b. Overview of Proposal Recommendations.

(1) Establish a multi-functional NationalPolicy Board.

(2) Establish a National Director for CEP,and Regional CEP Managers with supportorganizations.

(3) Bring top IRS management officials intothe planning process and improve themanner in which IRS monitors andcontrols examinations.

(4) Increase managerial oversight and theuse of available procedures to ensuretaxpayer cooperation.

(5) Expand/create industry and issuespecialization and establish expertsfor examination of highly complex issueareas.

(6) Establish a training program.

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(7) Develop effective communication systemsto move technical information to frontline examination personnel.

(8) Establish a program to provide legaland technical assistance to examinationpersonnel on an expedited basis.

(9) Implement and carry out a qualityassurance and quality measurementsystem using the "peer review" concept.

(10) Improve sustention rates and reducelapse time on unagreed cases by earlysettlement offers and coordinationbetween examination, Appeals andcounsel.

c. Cost Analysis and Targeted Improvements.

1. The cost of implementing the aboveproposals for examination isapproximately $4.6 million

2. For FY 1991 a large revenue increase isprojected as a result of the proposalsdelegating settlement authority to case.managers, strengthening specializationprograms, improving the use of outsideexperts, increasing legal and technicalassistance to examination personnel andstrengthening management controls andaccountability.

3. Specific goals for FY 1991 and beyondare improvements to yield, timeliness,sustention rates, taxpayer cooperationand other critical success factors.These will be developed with input fromIRS and taxpayers. During FY 1991,baselines will be established formeasuring and assessing qualityefficiency and timelines.

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d. The CEP program is now being implemented.

B. Audit Procedure.

1. Types of Audits

a. Correspondence - an examination conductedexclusively by correspondence.

b. Office - an examination in the agent'soffice.

c. Field - an examination at the taxpayer'shome or at his (or his representative's)office. In many cases a field audit may bepreferable, because field auditors have moreexperience. However, field audits aregenerally more thorough and involve greaterburdens on the taxpayer than office audits.

2. Scope of Audit.

a. The agent has the statutory power to summonsall books and records and compel theattendance and testimony under oath ofwitnesses. § 7602.

b. Every figure on the return is potentiallysubject to audit and, therefore, tosubstantiation both in fact and in law.Ordinarily, in the examination of anindividual's return an agent will look intounusually large items, items such ascasualty losses and other losses, largecharitable contributions (especially giftsin kind like art objects), and substantialtravel and entertainment expenses. Agentsare also likely to want to see cancelledchecks or other substantiation ofdeductions, and documents regarding incomeitems.

3. Technical Advice and Other Assistance Available

to Agents.

a. Engineering and Valuation.

When any engineering or valuation item (e.g.useful life of machinery and equipment or

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valuation of property) appears questionablethe examining agent is supposed to requestassistance from an engineer agent. Bothrevenue agents and Appeals Officers can alsoget assistance on such matters from theEngineering and Evaluation Branch in theNational Office.

b. Advice from the National Office.

(1) Request By Agent

The decision to request technicaladvice is substantially within theagent's discretion, but the agent isencouraged to seek advice from theNational Office on any problem notcovered by the law or any clearlyapplicable precedent. Corporatereorganizations, exchanges, and otherdistributions are frequent subjects oftechnical advice.

(2) Request By Taxpayer.

A taxpayer may request that an issue bereferred to the National Office fortechnical advice on the grounds that alack of uniformity exists as to thedisposition of the issue, or that theissue is unusual or complex. If theexamining agent finds that suchreferral is not warranted, the taxpayermay appeal the decision by submittingto the agent a statement of supportingfacts, law, and arguments. The agentthen should submit taxpayer's statementto the Chief, Examination Division,accompanied by a statement of theagent's reasons against referral. Ifthe taxpayer still disagrees with theproposed denial, all data relating tothe issue should be submitted to theNational Office for approval ordisapproval.

4. Conferences with the Agent.

a. Because the taxpayer may in an interviewsupply the IRS unnecessary and

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possible harmful facts, it is best for thetaxpayer to consult his representative at anearly stage. Then an informed decision maybe made concerning the timing of therepresentative's appearance in the case.Occasionally, it may be desirable to "lowkey" the situation and have the taxpayerdeal with the agent.

b. A letter to the agent may be helpful inproviding an overall picture of thesituation and answers to the agent'squestions.

c. Absent such an introductory letter, in somecases the agent may be misled by impressionsgained at the conference and by the agent'sown investigation. Considerable care mustbe exercised with any written submission tothe agent, because the taxpayer willgenerally be bound by his statements.

d. Consider meeting with the agent to establishthe "ground rules" for the audit.

(1) Attempt to establish a "timetable" withthe agent.

(a) In general, it is in thetaxpayer's interest to encouragethe agent to work quickly tocomplete the examination. A quickconclusion to the examination willreduce the likelihood of the agentbecoming aware of all possibleissues and exposure areas.

(b) Concluding the examination quicklywill also limit the taxpayer'sfinancial exposure to the timesensitive penalties, otherpenalties where interest "runs"from the date the return is due(rather than from the date ofassessment, notice, and demand),and from interest on any taxdeficiencies. The civil penaltystructure and the interestprovisions have been substantiallyrevised in recent years, and the

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changes have a major impact on theway taxpayers should approachcivil tax disputes. Whilepreviously it was frequently inthe taxpayer's interest to delayresolution of a civil tax dispute(at least where all issues likelyto produce liability had beenidentified), that is frequently nolonger the case.

(2) Consider the agent's need forinformation and whether, how, and whenthe taxpayer can meet them.

(a) It may be advisable in the case ofan examination involving multiplerequests from the agent forinformation to require that theagent provide the taxpayer withwritten requests (i.e., throughinformation document requests or"IDR's"). Some audits may callfor less formality, but alwaysdocument submission of informationto the agent by use of transmittalletters, and always retain filecopies of the transmittal lettersand the documents submitted to theagent. Always consider sendingthe agent a confirming letterstating your understanding of theagent's oral commitments andyours, e.g., a commitment by theagent to review information andrespond by a certain date, or yourcommitment to submit to the agentinformation, documents, or a legalanalysis relevant to an issue.

(b) Discuss information needs with theagent to provide the opportunityfor negotiation with the agentconcerning the scope of therequest, thus lessening the burdenon the taxpayer and therepresentative.

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(3) In general, to the extent you can do soin a manner consistent with assuringthe accuracy of the response, attemptto be prompt in responding to theagent's requests.

(4) The statute of limitations onassessment is one of the few "clubs"the taxpayer has to avoid undue delaysin completing the examination. Yetthere is a real exposure for taxpayersin resisting extensions of thestatute: the agent may simply issue a30-day letter (or a 90-day letter)resolving all issues identified to thatpoint against the taxpayer

As an almost inviolate rule, refuse toexecute a Special Consent to Extend theTime to Assess Tax, Form 872-A, whichextends the period of assessment until90 days after (i) the IRS receives aNotice of Termination of SpecialConsent to Extend the Time to AssessTax, Form 872-T from the taxpayer,(ii) the IRS mails Form 872-T to thetaxpayer, or (iii) the IRS sends thetaxpayer a Notice of Deficiency.

Instead of Form 872-A, provide theagent a Consent to Extend the Time toAssess Tax, Form 872, extending theperiod of assessment for a reasonabletime to a specified date certain.

(5) Consider suggesting a timetable forcompleting the examination within thestatute of limitations and indicatingto the agent that no extensions will begranted unless the taxpayer isresponsible for delays or unless therequest for extension is solely topermit Appeals Office consideration ofthe case.

(6) Consider also limiting extensions toparticular issues that the IRS feelsare not yet

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adequately developed. The IRS issupposed to consider so limitingconsents, except when it may jeopardizethe revenue. IRM 8233.(12).

(7) Determine, as early as possible, theareas of likely inquiry and becomefamiliar with the factual and legalmerits, as well as the significance ofthe issue in both the years in issueand other open tax years.

5. Settlement with the Agent.

a. The agent's examination provides the firstopportunity to dispose of the case and isthe best level at which to settle any taxissue. With regard to the year or yearsunder examination, the agent is the originalfact finder. There is no record against thetaxpayer, and no one with the IRS would havealready suggested that any disallowance orother adjustment be made or that anydeficiency be proposed. The examination isthe taxpayer's opportunity to convince thefact finder that the facts are accuratelyand completely reported on the return. Theagent does not have a written record made bysomeone else and does not have the problemof justifying a change in someone else'srecommendation. If the agent is convincedby the taxpayer's argument, the point is won.

b. Also, the next level of IRS review maydiscover areas of adjustments that the agenteither did not see or believed were properlyreported on the return. The longer thehistory of a case in the IRS, the greaterthe chance that issues will be developed.This is a risk common to a number oftactical decisions faced by the taxpayer andthe taxpayer's representative; e., whetherto seek review by the Appeals Office,whether to recommend that the agent requesttechnical advice, whether to suggestinformal assistance from Chief Counsel, andwhether to seek a Closing Agreement in lieuof a Form 870 or 870-AD.

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6. Procedure If the Case Is Settled.

a. If agreement is reached with the agent, theagent may prepare a Form 870, Waiver ofRestrictions on Assessment and Collection ofDeficiency in Tax and Acceptance of ProposedOverassessment.

The Form 870 is required because of theprohibition under § 6213(a) against theassessment and collection of tax withoutfirst sending the taxpayer a formalStatutory Notice of Deficiency and allowinghim 90 days within which to file a Petitionin the Tax Court. By Form 870, the taxpayerwaives his right to (i) a Notice ofDeficiency (and therefore his right tolitigate the deficiency in the Tax Court),and (ii) the 90-day period before thedeficiency may be assessed.

The Form 870 generally used for settlementsis not legally binding on either thegovernment or the taxpayer. The taxpayerwho has paid a deficiency pursuant to a Form870 may sue for refund of the same money ata later time (within the period of thestatute of limitations), and a taxpayer whohas accepted an overassessment in an agreedamount following execution of a Form 870 maysue for an additional refund arising out ofthe same year's return. The government isalso free (within the statutory period ofassessment) to assess an additionaldeficiency, and to sue for repayment of anoverassessment despite the execution of aForm 870.

b. In lieu of a Form 870, the agent couldprepare an Offer of Waiver of Restrictionson Assessment and Collection of Deficiencyin Tax and of Acceptance of Overassessment,Form 870-AD. The Form 870-AD states that:

If this offer is accepted for theCommissioner, the case shall not be reopenedin the absence of fraud, malfeasance,concealment or misrepresentation of materialfact, an important mistake in mathematicalcalculation, deficiencies or overassessments

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resulting from adjustments made underSubchapters C and D of Chapter 63 concerningthe tax treatment of partnership andSubchapter S items determined at thepartnership and corporate level, orexcessive tentative allowances of carrybacksprovided by law; and no claim for refund orcredit shall be filed or prosecuted for theyear (s) stated above other than for amountsattributed to carrybacks provided by law.(Emphasis added.)

If a taxpayer executes a Form 870-AD, theIRS takes the position that the taxpayer'sagreement not to file and prosecute a refundclaim is binding, even if there is aretroactive change in the Code or asubsequent court decision favorable to thetaxpayer. There is a split in the circuitsas to whether a Form 870-AD is so binding.Compare Uinta Livestock Corp. v. UnitedStates, 355 F.2d 761 (10th Cir. 1966) andWhitney v. United States, 60 AFTR 2dIf 875148 (9th Cir. 1987) (not binding), withKretchmar v. United States, 57 AFTR 2d[ 86-306 (Ct. Cl. 1985) and Cain v. UnitedStates, 255 F.2d 193 (8th Cir. 1958)(binding). The courts have appliedprinciples of equitable estoppel todetermine whether the Form 870-AD is binding.

c. When the issue carries over to future yearsfor which returns are not yet filed, acomprehensive settlement may be reached byuse of a Closing Agreement. Under § 7121,the IRS and a taxpayer may agree to close amatter, and the case will not be reopenedconcerning the agreed upon matters "exceptupon a showing of fraud or malfeasance, ormisrepresentation of a material fact."§ 7121(b).

In general, the use of a Closing Agreementwill cause the settlement to be reviewed byDistrict Counsel, because it is a bindingcontractual agreement between the taxpayerand the IRS. Even if the Supreme Court ofthe United States declares a section of theCode unconstitutional or interprets thesection favorably to the taxpayer after a

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Closing Agreement based upon the Codesection has been executed, the ClosingAgreement stands. Wolverine Petroleum Corp.v. Commissioner, 75 F.2d 593 (8th Cir.1935), cert. denied, 295 U.S. 743 (1935);Aetna Life Insurance Company v. Eaton, 43F.2d 711 (2d Cir. 1930), cert. denied, 282U.S. 887 (1930); Bankers Reserve Life Co. v.United States, 42 F.2d 313 (Ct. Cl. 1930),cert. denied, 282 U.S. 871 (1930).

7. Revenue Agent's Report ("RAR").

Whether or not agreement is reached with theagent, the agent must write a two-part reportregarding the case. The first is sent to thetaxpayer and consists of (1) computations showinghow the proposed deficiencies were determined,and (2) a brief explanation of the agent's basisfor the proposed adjustments that result in thedeficiency. The second part of the report is amemorandum that in unagreed cases is designed totransmit to the next level in the IRS the part ofthe report sent to the taxpayer.

The agent's transmittal letter is not privilegedand may be obtained in discovery if the casewinds up in court.

8. Review of Agent's Recommendation.

a. The RAR is reviewed first by the agent'simmediate superior, the group supervisor.From the group supervisor, the entire RAR issent to the Review Staff, to check it forcompleteness and accuracy. In unagreedcases, the Review Staff also must comparethe RAR with the taxpayer's Protest to checkthe issues raised in the RAR addressed bythe Protest and to check for discrepanciesin the facts as stated in the RAR and thefacts per the Protest.

b. Special rules are established by § 6405 inthe case of refunds of more than $200,000 ofincome, estate, gift, and certain othertaxes. The procedure requires specialhandling and ultimate reporting by the ChiefCounsel to the Joint Committee on Taxation.

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The report must state the person to whom therefund is to be made, the amount of therefund, a-summary of the relevant facts, alegal analysis of the issues, and the IRS'sdecision. The Joint Committee on Taxationis composed of ten members of Congress, fiveselected from the House Ways and MeansCommittee and five from the Senate FinanceCommittee, and it employs a full-timestaff. When the Joint Committee has aquestion concerning the proposed refund oradvises the IRS that it does not approve therefund, the case is sent back to the IRS,further investigation is made, and no refundis actually paid until agreement with theJoint Committee is reached.

9. Post-Review at Regional Level.

a. Post-audit review consists of a review bythe IRS at the regional level.

b. Regional analysts are permitted to reversefield settlements only in specifiedinstances, e.g., in the event of substantialerror, fraud, malfeasance, collusion,concealment or misrepresentation of amaterial fact, or other such circumstances.

II. A STRATEGIC DECISION -- WHETHER OR NOT TO VISIT APPEALS

BEFORE GOING TO COURT.

A. Nature of the IRS Appeals Function.

1. The appeals function is a nonstatutoryalternative dispute resolution mechanism forresolving tax controversies.

2. It was created and developed by the IRS and isoffered as a service to taxpayers.

3. For FY 1988, Appeals closed 93,000 cases, ofwhich 90% were agreed.

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4. If the IRS did not have the appeals function,court dockets would be overwhelmed by a huge flowof unresolved tax cases.

B. The Options Available to the Taxpayer Upon Conclusionof the Audit.

1. The 30-day letter.

a. The beginning of any tax appeal process,whether administrative or judicial istriggered by a "30-day letter."This is a form letter to the taxpayer fromthe District Director enclosing a copy ofthe RAR and repeating the agent's offer tosettle the case on the basis of theadjustments proposed in the RAR. Form 870is enclosed in case the taxpayer changes hismind and agrees to settle the case on thatbasis. The letter states that if a taxpayerdoes not agree to the adjustments, he mayfile a protest and request a conference withthe-Appeals Office. This letter ordinarilyallows the taxpayer 30 days to file hisprotest. Extensions of the 30-day periodmay sometimes but not always be obtained.

b. The letter states that if the taxpayer doesnot either sign the Form 870 or file aprotest, a Notice of Deficiency will beissued.

2. Options of the Taxpayer Upon Receipt of the30-day letter. At this point the taxpayer can:

a. Protest the 30-day letter and ask forfurther administrative proceedings in thehope of settling the case with the AppealsOffice.

b. Ignore the letter and petition the Tax Courtfollowing the issuance of a Statutory Noticeof Deficiency, or

c. Bypass the appeals process by paying thedeficiency and later contesting thedetermination in a district court or theClaims Court;

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3. Factors that Favor Filing a Written Protest,

a. A protest may avoid the expense oflitigation through settlement. AppealsOfficers will weigh the hazards oflitigation even when no case is actuallypending. Hazards of litigation includecosts involved both in financial terms andin manpower and the possibility of settingunfavorable precedent.

b. The appeals process allows the taxpayer tokeep open the option of filing a Tax Courtpetition, or seeking district court orClaims Court review. This permits thetaxpayer to determine the relevant authorityin the different forums so that the mostfavorable route can be followed.

c. Protesting a 30-day letter allows forextended negotiations. When a case isdocketed, and a trial status order has beenissued by the Tax Court, Appeals sometimesmay not consider the case without theDistrict Counsel's consent.

d. Protesting allows the taxpayer to deferpayment of the deficiency for a longer time.

e. The taxpayer may use the appeals process toassess the IRS's position on a matter. Thetaxpayer may be able to prove the agent waswrong, and avoid a court case entirely.

f. An informal opportunity for discovery isinherent in the appeals process, which mightnot be available under the limited discoveryrules of the Tax Court. But this may be atwo edged sword.

g. Protesting allows the taxpayer more time toprepare a case before the suit is started,and provides an opportunity to judge thereactions of the Appeals Officer to evaluatewhich arguments are strongest.

h. In whipsaw cases there is more flexibilityin resolving the issue with the AppealsOfficer if none of the taxpayers is in court.

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i. Section 7430 may preclude a taxpayer fromreceiving attorney's fees if the taxpayerhas failed to exhaust his administrativeappeals.

j. Bypassing Appeals may subject a taxpayer tothe risk of a penalty of as much as $5,000if it appears to the tax court "that thetaxpayer unreasonably failed to pursueavailable administrative remedies." § 6673.

4. Factors That Favor Bypassing Appeals.

a. New issues and grounds are less likely to beraised if the taxpayer goes directly tocourt. Appeals Officers have more taxexpertise than revenue agents and anadministrative appeal gives the IRS moretime to find new arguments.

b. If new issues are raised after the 90-dayletter has been issued, the burden is on theIRS to prove those issues. Therefore, ifthere is substantial likelihood that newissues may be raised, the taxpayer may wantto go to Tax Court where the IRS bears theburden on new issues or, instead, pursuerefund litigation where new issues cannot beused affirmatively to collect additional taxbut only to offset.

c. Delay in closing administrativeconsideration of the case may increase thetaxpayer's exposure to civil tax liabilitieseven if no additional tax issues areidentified, particularly if the taxpayer (1)is potentially subject to civil penalties(including the substantial understatementpenalty) on which interest runs from the duedate of the return (2) has a largepotential deficiency on which interest willbe due (particularly if computed at thespecial interest rate for tax motivatedtransactions), or (3) is potentiallysubject to the time sensitive negligence andfraud penalties. However, consideration byAppeals may offer the taxpayer anopportunity to mitigate or eliminateexposure to civil penalties.

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d. In smaller cases, the fact that a taxpayerhas filed in Tax Court may indicate to theAppeals Officer that the taxpayer isconvinced he is right. Psychologically,this may facilitate settlement. In casesinvolving larger amounts, however, this ismore questionable.

e. The taxpayer may wish to speed thedisposition of the case. IRS proceduresseem to encourage more expedited casehearings for docketed cases.

f. Settlements in docketed cases may have morefinality than settlements in nondocketedcases. Docketed case agreements arereflected in a Tax Court decision.Nondocketed settlement agreements are not.

g. Taxpayers should also be aware of possibletrends that may arise by virtue of who isrepresenting them in their appeals.Accountants sometimes settle with lessexpense than attorneys. Attorneys may bemore prone to consider litigation.

h. When the IRS is locked into a position on aparticular matter that might precludesettlement, it may be better to fight theissue out in court if the practitionerbelieves the IRS's position is incorrect.

i. The Appeals Officer's settlement authoritymay be constrained on issues designated as"Appeals Coordinated Issues," casesdesignated as "key" or "coordinated cases,"or cases which involve IRS-wide litigationpositions.

III. DEALING WITH THE APPEALS OFFICE.

A. Authority to Settle in Non-Docketed and Docketed Cases.

In 1978, the IRS amended its procedures to providethat if a taxpayer cannot settle his case with the

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agent, then the taxpayer has a single administrativeappeal to the Regional Appeals Office. Changes werealso made in the settlement jurisdiction of theAppeals office and Chief Counsel's Office. Thosechanges were first embodied in Rev. Proc. 78-9,1978-1 C.B. 563, as later modified and superseded byRev. Proc. 79-2 C.B. 573, Rev. Proc. 82-42, 1982-2C.B. 761, and Rev. Proc. 87-24, 1987-22 I.R.B. 22.

B. The Purpose of Appeals.

1. Appeals' objective is to resolve taxcontroversies without litigation, on a basiswhich is fair and impartial to both theGovernment and the taxpayer and in a manner thatwill enhance voluntary compliance and publicconfidence in the integrity and efficiency of theIRS. IRM 8631(1).

2. A fair and impartial resolution is one whichreflects on an issue-by-issue basis the probableresult in the event of litigation, or one whichreflects mutual concessions for the purpose ofsettlement based on the relative strength ofopposing positions where there is substantialuncertainty of the result in event oflitigation. IRM 8631(2).

C. Before Suit Filed -- The Non-Docketed Case inA-Ppeals.

1. When Protest is Required to Request a Conferencein Appeals.

a. If the adjustments arise as a consequence ofeither an office audit or correspondencewith the taxpayer, or if the amount at issuedoes not exceed $2,500, the taxpayer needonly notify the District Director that aconference in Appeals is desired. If theaudit was a field audit and the amount atissue exceeds $2,500 but does not exceed$10,000 only a brief written statement ofthe issues need be submitted to the districtoffice. In other circumstances, a written"protest" must be filed with the DistrictDirector.

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b. The purpose of the protest is to communicateto Appeals the grounds upon which thetaxpayer contests the adjustments.

c. The protest is in the form of a letter tothe District Director and should include:

(1) A statement that consideration of thecase by the Appeals Office is requested,

(2) The taxpayer's name and address,

(3) The identification symbols and date ofthe 30-day letter,

(4) The tax periods involved,

(5) The adjustments that are not accepted,

(6) A statement of facts for each issue, and

(7) A statement of law for each issue.

d. The protest will be more persuasive if thestatement of facts is supported byaffidavits, documentary exhibits, and thelike.

e. The more the Appeals Officer considering theprotest knows about the nature of thetaxpayer's argument, the greater thelikelihood, if the protest is sound, that hewill be persuaded the taxpayer's position iscorrect.

f. The protest must be prepared with extremecare. It contains a signed declarationunder penalties of perjury that the statedfacts are true.

g. The protest should be written with theAppeals Officer (and government attorneys,if the case is not settled with Appeals) inmind. The Appeals Officer will appreciateshort, clear arguments. Often, the AppealsOfficer is not an attorney, and lengthyquotations and repetitive citations ofauthority may not be persuasive. If theprotest can be written in a readable,convincing manner, the taxpayer will gain

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the advantage of a favorable firstimpression.

h. Since Appeals Officers are employees of theIRS, they may be more impressed by IRSpositions than by court opinions, especiallywhen the court opinion is not one thatshould be viewed as controlling.Controlling opinions are those decided bythe Supreme Court or the Appeals Court towhich the taxpayer's case would be appealed.

2. The Appeals Conference.

a. It is ordinarily not helpful to have anindividual taxpayer attend the AppealsConference. Taxpayers may not understandthe legal ramifications of certainarguments, and because of self-interest maybe overly contentious.

b. Under some circumstances, however, thetaxpayer's presence may be helpful,particularly if the facts are especiallycomplex or if the issue involves knowledgeor intentions solely within the province ofthe taxpayer. Usually, however, the bestdecision is to permit the taxpayer to answerquestions in writing. An exception may becases in which conduct-based civil penaltieshave been .proposed and the taxpayer'sstatements would be more credible if made inperson.

c. The Appeals Officer has the authority tosettle substantially all of the cases beforehim, either on his own authority or with theagreement of his supervisor. However, thereare a number of circumstances in whichDistrict Counsel can require that theproposed disposition by Appeals of a case(such as concession of a fraud penalty) bereviewed by District Counsel. A list of thecircumstances in which Counsel review isrequired in statutory notice cases appearsat IRM 8294.(10) and includes:

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(1) Cases in which there is a substantialchance that a regulation, revenueruling, or revenue procedure will beinvalidated,

(2) Cases in which the IRS has not won theissue in any circuit and has lost theissue in one or more circuits,

(3) Cases presenting unique issues,

(4) Cases in which Appeals proposes toreduce a recommended fraud penalty,

(5) Cases in which there is a substantialrisk that attorney's fees will beawarded, and

(6) Any case in which the government hasthe burden of proof on any issue.

In the case of proposed settlements,Section 2.08 of Rev. Proc. 87-24 providesthe Assistant Chief Counsel for TaxLitigation (or the Deputy Associate ChiefCounsel (International) with respect tointernational issues) with authority, afterconsultation with the Director of theAppeals Division and Regional Counsel, todetermine issues or cases which Appealsshould not consider.

d. It is usually not desirable for thetaxpayer's representative to agree to settlethe case by himself. Even if he hassettlement authority, it is usually betternot to exercise it. What strikes therepresentative as a good settlement may notbe acceptable to his client.

D. After Suit Filed in the Tax Court -- A Docketed Case.

1. The IRS procedural rules with respect tosettlement authority in docketed Tax Court casesare stated in Rev. Proc. 87-24:

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a. After a case is docketed in the Tax Court,District Counsel will transfer the case toAppeals for settlement consideration, unlessAppeals issued the Notice of Deficiency.

However, District Counsel may refer the caseto Appeals even if the Notice of Deficiencywas issued by Appeals, unless DistrictCounsel decides that there is littlelikelihood the case can be settled.

b. If the case involves a tax deficiency ofmore than $10,000, counting tax andpenalties, Appeals will return the case toDistrict Counsel (unless District Counselagrees to extend the period of Appeal'sconsideration of the case):

(1) If no progress toward settling all orpart of the case is made, or

(2) When the case appears on a trialcalendar (unless District Counselagrees to extend the period for Appealsconsideration).

c. If the case involves a tax deficiency of$10,000 or less (including a case classifiedas an "S case" by the Tax Court), countingtax and penalties, the case will be referredto Appeals:

(1) For a period of six months, or

(2) Until one month before the call of thetrial calendar if the case wasclassified by the Tax Court as aregular case or in an "S case," 15 daysbefore the call of the trial calendar.At the end of the applicable period,the case will be returned to DistrictCounsel unless both Appeals andDistrict Counsel agree that the periodof Appeals consideration should beextended.

d. When a case is in Appeals or in the DistrictCounsel's office, that office has solesettlement authority. However, if DistrictCounsel requests the case file to prepare

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for trial, or if the case file has beenreturned under the above time rules,District Counsel and Appeals may agree thatAppeals should continue to attempt to settlethe case while trial preparation is takingplace.

e. District Counsel and Appeals may agree thata case should be transferred from one to theother, despite the fact that the transfereeoffice has already considered the case.

f. After an Answer has been filed, DistrictCounsel and Appeals may agree to work on thecase jointly, with Appeals having settlementjurisdiction and District Counsel acting asadvisor, which may entail attendingconferences. This "joint consultation" cantake place in appropriate cases, such asthose involving "significant issues or largedeficiencies."

g. At the request of District Counsel and withthe agreement of Appeals, when DistrictCounsel has jurisdiction over a case,Appeals is permitted to assist DistrictCounsel in settlement negotiations, trialpreparation, or even at the trial of thecase.

h. Appeals settlement authority over a case orcertain issues in a case may be revoked ifthe Director of the Tax Litigation Division(or the Deputy Associate Chief Counsel,International) so decides after consultingwith the Director of the Appeals Divisionand Regional Counsel.

i. When a case is received by either DistrictCounsel or Appeals, the taxpayer, therepresentative, or both are to be notified"promptly." The notice should state thatthe office in possession of the case hassole authority to settle the case and, whenDistrict Counsel sends the notice, to trythe case as well. If a case is going to beprepared for trial or if Appeals settlementauthority has been revoked, the noticeshould so state.

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E. Achieving Settlement in Appeals.

1. Types of Settlements.

a. A "mutual concession" settlement occurs whenboth parties make concessions to reflectuncertainty in event of litigation as to thelikely outcome on the law or facts.IRM 8632.

b. A "split-issue" settlement occurs when it isnot likely that, in event of litigation, thedecision would go completely in favor of oneparty. The basis for a split issuesettlement is an agreed percentage of theamount at issue. IRM 8633

c. A "nuisance value" settlement will not beaccepted by Appeals because "Appeals neitherexacts a concession nor grants a concessionto relieve either party ofinconvenience or cost." IRM 8634.

d. The term "partial settlement" is used torefer to the settlement of some but not allof the issues in dispute. While Appealsattempts to achieve resolution of allissues, that frequently is not possible.IRM 8643.

2. The Raising of New Issues or Reopening ClosedIssues.

a. The IRS's stated policy is not to reopen anissue on which the taxpayer and the districtare in agreement, and not to raise a newissue, unless the grounds for the action are"substantial" and the potential effect upontax liability is "material."

b. This policy does not apply to new issuesraised by or for taxpayers. If a new issueis raised by a taxpayer, the evidence is tobe considered and, if necessary, referred tothe district for verification.

c. A new issue is anything new to the return,statutory notice, or RAR which was notcovered in the protest or petition and whichis being discussed by Appeals. IRM 8652(4).

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d. The grounds for raising the new issue mustbe substantial and the potential effect onrevenue must be material. "Substantial"means that the Appeals Officer should be"quite certain" that the IRS would prevailin litigation. "Material" refers to theamount of tax at issue, viewed from the IRSperspective. IRM 8653(6).

e. Although these rules tend to limit theraising of new issues, in the last analysis,the Appeals Officer determines whether thecriteria are satisfied, and the taxpayer mayhave no effective way to counter thatdecision.

3. Offers in Compromise.

a. The source of the IRS authority tocompromise a tax is § 7122. The compromiseof a tax liability rests upon either doubtas to liability, doubt as to collectibility,or both.

b. Hardship in paying a delinquent taxassessment is not a basis for compromise inthe IRS's eyes. A type of insolvency isgenerally required by the IRS to compromisea tax based upon doubt as to collectibility.

c. The doubt as to liability or collectibilitymust be supported by evidence. When doubtexists, the amount acceptable will dependupon the degree of doubt found in theparticular case.

d. § 7122 imposes the following limitations andrequirements for a compromise of a tax caseby the IRS:

(1) The IRS may compromise a tax caseonly if it has not already beenreferred to the Department ofJustice for prosecution ordefense. § 7122(a). After a casehas been referred to theDepartment of Justice, theAttorney General (or his delegate)

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has authority to compromise.

(2) Only an official of the IRS whohas been "duly authorized by theSecretary of the Treasury directlyor indirectly by one or moredelegations or redelegations ofauthority" may compromise a taxcase., § 7122(a); § 7701(a)(12).For example, an Offer inCompromise based upon doubt as toliability of tax of $100,000 ormore must be executed by aRegional Commissioner, while aService Center Director orAssistant Director may execute anOffer in Compromise based upondoubt as to liability of tax lessthan $100,000.

(3) In all cases where the assessedtax, interest, additions to tax,and assessable penalties are $500or more a legal opinion must beobtained from the District Counselstating (a) the reasons for thesettlement, (b) the amount of theassessed tax, additional amounts,and assessable penalties, and(c) the amount actually to be paidunder the terms of thecompromise. § 7122(b). Thesestatutory requirements arejurisdictional prerequisites to avalid compromise. Botany WorstedMills v. United States, 278 U.S.282 (1939).

e. The IRS authority to enter into a validcompromise agreement only exists when § 7122has been strictly complied with and, in theevent of a failure to comply, neither thetaxpayer nor the IRS is bound. A revenueagent has no authority to bind the IRS to aCompromise Agreement. Reimer v. UnitedStates, 441 F.2d 1129 (5th Cir. 1971);Country Gas Service, Inc. v. United States,405 F.2d 1417 (1st Cir. 1969).

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f. An Offer in Compromise is accepted only whenthe taxpayer is notified of the acceptancein writing. Treas. Reg.301.7122-1(d)(3).

g. Once the compromise is entered into, neitherthe taxpayer nor the IRS may re-open thecase, except where grounds for rescission ofa contract between the parties exist--thatis, where there has been either (1) amisrepresentation of the assets of thetaxpayer by falsification or concealment, or(2) mutual mistake of a material factsufficient to cause a contract to be setaside. Treas. Reg. § 301.7122-1(c); Ely &Walker Dry Goods Co. v. United States, 34F.2d 429 (8th Cir. 1929), cert. denied, 281U.S. 755 (1930).

IV. SETTLEMENT NEGOTIATIONS WITH DISTRICT COUNSEL.

A. Litigation Philosophy of Counsel.

1. Counsel's position is that the importance oflitigation to the administration of the tax lawis not measured by the amount of taxes collectedthrough litigation, but rather by the effect thata position taken by the IRS in litigation has onthe shape and development of the tax law.Accordingly, it is Counsel's position that theposition taken in a case must be one that isreasonable on the facts in the case and one whichmakes the maximum contribution to a sound taxsystem. A secondary consideration in the mindsof many Counsel attorneys is the encouragement ofcompliance by other taxpayers.

2. Line attorneys, as well as their supervisors, areaware that a position taken solely to win a caseagainst one taxpayer may in the future be used byother taxpayers against the IRS. The developmentof the litigation position of Counsel is,therefore, intended to take into consideration abroad effect of that position as it affects alltaxpayers in the administration of the tax laws.

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3. It is the litigation and settlement policy ofCounsel, unless there are compelling reasonsotherwise, to settle or eliminate as many issuesas is feasible and justifiable before thesubmission of the case for decision by theCourt. In particular, Counsel attorneys areinstructed to make every effort to settle theissue or issues on which there are no real basicdifferences between the parties, especially wherethe amounts involved are small. Moreover, it isCounsel's policy that no issue should be raisedin a case solely or primarily for settlementnegotiation purposes when there is no substantialbasis in fact and in law to support it, or which,if the government is sustained, would result in"bad law."

B. Request for Technical Advice.

1. Field attorneys are encouraged to requesttechnical advice from the Assistant Chief Counsel(Tax Litigation) if, after having fullyresearched an issue through all regional sourcematerial, there remains a substantial question asto what the IRS position is or should be. Therequest for technical advice may be oral orwritten.

2. The National Office, Tax Litigation Division, hassupplied each region with a list of taxlitigation experts in the national office,relative to most issues, from whom the fieldattorney can receive oral technical advice. Sucha request is particularly encouraged if the fieldattorney has some questions which arise at thelast minute or if the attorney has anyuncertainty as to the current litigationposition. Also, if the field attorney intends torequest written technical advice, as will bediscussed later, it may be advisable orally tocontact the national office attorney, since thelatter may be aware of some development whichwould obviate the necessity for a writtentechnical advice request.

3. Counsel attorneys are advised that the taxpayeror taxpayer's counsel should not be advised ofthe request for advice from the National Office,since

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conferences with the taxpayer are generally notheld in the National Office.

4. Requests for technical advice are often usedduring settlement negotiations. However, fieldattorneys are requested to make such requests asfar in advance of settlement conferences asfeasible, and not later than the issuance by theCourt of the trial status request.

C. General Principles of Settlement.

I. Counsel is supposed to settle cases and issues onthe merits. Lump sum or blanket settlementswhich include tax, penalty, and interest are tobe avoided, and generally should not beentertained or accepted. In particular, the IRShas a policy against settlements withoutstatutory interest on the deficiency. Inextraordinary circumstances, a lump sumsettlement may be justified; but in such casesthere is to be an allocation between tax,penalty, and interest.

2. No case is to be settled on a so-called "nuisancebasis," either for or against the IRS. As a ruleof thumb, 10% for either side is considered a"nuisance settlement" and would be rejected bythe government.

3. It is Counsel's general attitude to settle onlythe years and parties before the Tax Court, andnot to tie-in either the settlement of otheryears or a settlement with respect to relatedtaxpayers as a part of the settlement of thedocketed case. If such a tie-in is necessary,Counsel will try to confine the expansion of thesettlement documents to include only a collateralagreement. If such an agreement is executed, itis expected to speak for itself, with nocommitment by the field office as to the positionof the IRS for future years.

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D. Collection Aspects.

1. The collection aspects of an agreed deficiencyare normally not considered in the disposal ofthe case. Even though there may be a substantialbasis for concluding that the taxpayer may not beable to pay the agreed deficiency, the case isstill settled on its merits. If the taxpayer isunable to pay the deficiency, the offer incompromise procedure may be used.

2. If an agreement on a settlement stipulationcannot be reached due to the taxpayer's intent tofile an offer in compromise, and it is concludedby Counsel that due to unusual circumstances theoffer in compromise should be processed beforethe filing of the settlement stipulation, escrowprocedures are followed. However, unreasonabledelay is not permitted to occur due to filing bythe petitioner of a series of offers incompromise, and judgment must be used in agreeingto a continuance of the calendared case due tothe filing of an offer.

E. Other Years of Other Taxpayers.

1. A settlement of a pending case is not necessarilydeterminative of the action the IRS may take onsimilar issues for years not before the Court orwith respect to related taxpayers. However,there are issues and factual situations which areclassified as continuing issues, and thedisposition of the Court years may have a directeffect upon the disposition of other years.

2. The IRS normally will follow a settlementeffectuated by Counsel and the basis thereof whenappropriate with respect to non-docketed years ofthe same taxpayer or related taxpayers. Wherefeasible, an overall settlement of all pendingcases, both docketed and non-docketed, should beaccomplished at the same time.

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F. Tax Court Cases Having Criminal (Fraud) Aspects.

1. It is IRS policy not to hold settlementconferences in Tax Court cases which have opencriminal aspects, except at the request of orwith the concurrence of the Department ofJustice. The basic principle involved is that incriminal cases referred to the Department ofJustice for prosecution, Chief Counsel, or hisdelegate, should not, without a basis in thefacts or law, recommend criminal prosecution onthe one hand while on the other hand admit orconcede there is no civil fraud penalty. Norshould Counsel allow evidence to be prematurelydiscovered in the civil proceeding that would notbe readily available in a criminal case. As apractical matter, if Counsel has sufficientevidence to recommend criminal prosecution, orthe Department of Justice determines that thereis sufficient evidence to warrant an indictment,there should be sufficient evidence to supportthe IRS burden on the civil fraud penalty. Thisattitude prevails even if prosecution wasdeclined in the strongest terms by the U.S.Attorney's office, a problem exacerbated by thelack of access to the U.S. Attorney's report tothe Department of Justice, Tax Division.

2. If settlement discussions are to be entertainedin an extraordinary case, the flexibility ofCounsel depends on several factors, includingwhether the taxpayer is a fugitive, the status ofthe criminal case, and the existence of facts notpreviously known to the IRS or the Department ofJustice.

G. Settlement Memoranda.

1. If, after receiving jurisdiction of a docketedcase, Counsel proposes to settle or concede anissue or issues, Counsel immediately prepares aCounsel settlement memorandum setting forth theissues and the basis for the settlement orconcession. The memorandum is intended to beconcise, but is required to set forth sufficientfacts and law to make clear the basis ofsettlement on each issue settled.

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2. If the action taken by Counsel is on an issue notpreviously considered by Appeals, the memorandummust set forth the essential facts and theapplicable law. If the issue was previouslyconsidered by Appeals, the memorandum is toinclude at least the following:

a. A brief summary of the essential facts uponwhich the decision is based, including anynew facts not previously considered byAppeals.

b. An appraisal of facts previously consideredif it differs from that of Appeals.

c. A discussion of the applicable law.

d. An enumeration and explanation of litigationhazards if the hazards are an essentialfactor in the settlement.

3. If the settlement will affect other years of thesame taxpayer not before the Court, or the taxliabilities of other taxpayers, the memorandummust discuss the effect on those related matters.

H. Settlement After Trial.'

1. After the trial of the case and receipt of thetranscript, and before briefs are filed, Counselis required to examine the transcripts and theexhibits in evidence to determine whether thecase, or any issue litigated, should be conceded,or whether upon the basis of the record beforethe Court further settlement conferences shouldbe held with the taxpayer, or taxpayer'scounsel. This is considered particularlyimportant in cases in which the IRS was not awareof all of the facts or evidence to be introducedbefore the trial of the case. Another reason toexamine the record is to determine whether, inwinning the issues, the IRS would create "badlaw," or whether there is some other reason theissues ought not to be further litigated.

2. If the field office concludes, after trial andbefore briefs are filed, that one or more of the

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issues should be settled or conceded, but not thewhole case, such settlement or concession will bedisclosed in the IRS brief or other appropriatedocument to be filed with the Court. In such aninstance, Counsel is required to prepare apost-trial action memorandum on the settlement orconcession. This memorandum, approved byDistrict Counsel, will set forth the issues to besettled or conceded, the terms or the settlementor concession, and the facts and law in support.If the issue is one on which briefs are to bereviewed in the National Office, care will betaken to make the taxpayer aware that thesettlement or concession is subject to review andfinal approval in the National Office.

3. District Counsel, or his delegate, still hasauthority to settle or concede issues in a caseeven after briefs have been filed, as long as anopinion has not yet been issued by the Court.However, if briefs in the case were reviewed inthe National Office, the field office will notexercise this authority without first inquiringof the National Office whether there is anyobjection to the proposed settlement orconcession. Settlements or concessions at thisstage are carefully monitored to avoid conflictwith the Court, which may have already donesubstantial work on an opinion.

I. Collateral and Closing Agreements.

1. It occasionally is necessary as a part of thesettlement of the case either to obtain acollateral agreement from the taxpayer or toenter into a closing agreement to cover aspectsof the settlement which will not be disposed ofby the decision entered by the Court. Acollateral agreement is a unilateral agreement onthe part of the taxpayer in consideration of theIRS acceptance of the settlement offered. Thecase law is divided as to whether a collateralagreement legally binds the parties. A closingagreement and a compromise are absolutely bindingupon both the taxpayer and the IRS for years notin litigation.

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2. A closing agreement is normally prepared byeither the District Director or Appeals.However, in settlements by Counsel, the closingagreement normally will be prepared by the trialattorney since he is in a better position to knowthe intent and effect of the settlement. Sincethe open years to which the agreement will applymay be pending investigation by the DistrictDirector, appropriate coordination is required tobe made with that office and Appeals.

3. Counsel are encouraged to make settlementswithout closing agreements whenever a collateralagreement will be sufficient. If closingagreements are to be used, every effort is to bemade to expedite the processing of the agreementso that the time necessarily involved in theadditional review and consideration will resultin as little delay as possible in the dispositionof the case.

4. A closing agreement must be specific in its termsand not contain collateral matters which are nota part of the agreement. Matters outside of theagreement itself, or which pertain to a taxpayernot a party to the agreement, but which should beconsidered in review of the agreement, are to becontained in an accompanying memorandum. Theclosing agreement will not include an agreementas to the amount of tax liability or deficiencyfor any year over which the Tax Court hasjurisdiction, since the liability for thedocketed year will be fixed by the decision ofthe Tax Court.

J. Administrative Processing.

1. Appeals prepares all necessary computations andsettlements or concessions.

2. In addition to the preparation of necessarycomputations, Appeals processes necessarycollateral agreements, closing agreements, jointcommittee memoranda, the rejection or approval ofoutstanding claims for refunds of related taxes,and any other matters affected by the settlement.

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K. Practical Suggestions/Discussion Points.

1. Find out early if the issues or case can besettled at all. For example, an issue may be a"litigation issue", which will preclude anysettlement except concession on the part of thetaxpayer. In addition, one may not be obtaininga fresh look at settlement if the case has beenpreviously considered by Appeals and the dynamicsbetween the Counsel attorney and Appeals Officerare such as to foreclose a change in IRS position.

2. Start settlement negotiations early -- theshorter the time period before trial, the moretime and money has been spent on the IRS case,building up some momentum and "sunk costs".

3. Know your case and the dollars riding on eachissue for all open years, not just the years thatare docketed. Computations are frequently notdone by the IRS until very late in the process,and the bottom line for the taxpayer will almostalways be measured by dollars.

4. Narrow the issues as early as possible, makingsure that there' really is a disagreement on eachadjustment or ground raised in the petition.After narrowing the issues, determine what factswould lead to a settlement or concession byCounsel, and then set out to obtain proof ofthose facts.

5. If technical issues are involved, requiring theuse of experts, consider getting the taxpayer'sexpert and the IRS's expert in a room bythemselves to discuss the technical aspects ofthe case. Of course, you should ensure that the"settlement privilege" applies to all suchdiscussions.

V. CONSIDERATIONS IN SELECTING THE CHOICE OF FORUM

A. The Taxpayer's Alternatives in Contesting a FederalTax Deficiency.

1. The taxpayer may contest the deficiency by filinga petition in the United States Tax Court. TheTax Court is available as a forum for adeficiency proposed in income taxes, estate

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taxes, gift taxes, or some excise taxes.

2. The taxpayer may pay the amount stated in thedeficiency notice, file a claim for a refund, andif the claim is not allowed, sue for a refund ina district court or the Claims Court.

B. Jurisdictional Prerequisites to Access Among theForums.

1. Access to the Tax Court.

a. Jurisdiction is dependent upon the issuanceof a statutory notice of deficiency. § 6212.

b. A notice of deficiency must be issued withinthree years after an income tax return isfiled. § 6501(a). However, the period oflimitation may be extended by mutual writtenconsent of the taxpayer and the IRS.§ 6501(c)(4).

c. A notice of deficiency need not be in anyparticular form but must be sent to thetaxpayer's last known address.

.d. Petitions to the Tax Court requesting aredetermination of deficiencies must befiled with the court within ninety days (150days if the notice of deficiency isaddressed to a person outside of the UnitedStates) after the notice of deficiency ismailed.

e. Timely mailing of a petition or otherdocument is treated as timely filing so longas mailing is by the United States PostalService. § 7502. Postal delivery servicesother than the United States Post Office donot fall under this rule, and in those casesfiling is the date of receipt.

f. At the time of filing of a petition a fee of$60.00 shall be paid unless the taxpayer haselected to have the case treated as a "smalltax case" as defined in Rule 171, in whichevent the fee is $10.00. The Tax Court maywaive any filing fee if, based

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on an affidavit containing specificfinancial information filed by a taxpayer,it concludes that he is unable to make suchpayment. § 7451; T. C. Rule 20 (b).

2. Prerequisites to the Commencement of a Tax Refund

Suit.

a. Full payment of the tax assessed.

(1) The taxpayer must pay in full all taxesfor the taxable period before bringingsuit. Flora v. United States,362 U.S. 145 (1960).

(2) Payments in anticipation of taxliability become tax payments only whenthe tax liability is assessed by theIRS.

b. Filing a timely claim for refund.

(1) No suit for refund of tax or penaltiesmay be maintained in any court until aclaim for refund has been filed.I.R.C. § 7422(a).

(2) When filing a claim for refund, anindividual taxpayer is required to useamended return Form 1040X and acorporation, amended returnForm 1120X. Claims for other taxesmust be filed on Form 843.

(3) A claim must set forth in detail,verified under penalties of perjury,each ground upon which a credit orrefund is claimed, and the factssufficient to apprise the IRS of theexact basis thereof. A taxpayer maynot assert grounds for recovery in hisrefund suit different from those whichwere asserted in his claim for refund.

(4) A claim is filed with the servicecenter serving the Internal RevenueDistrict in which the tax is paid.

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(5) A claim must be filed within threeyears from the time the return wasfiled or within two years from the timethe tax was paid, whichever is later.If no return is filed, the claim mustbe filed within two years from the timethe tax was paid. I.R.C. § 6511(a).

(6) If the taxpayer executes a waiverextending the time for assessment ofthe tax (Form 872 or Form 872-A), thisextends the period for filing refundclaims until six months after theextended assessment period hasterminated.

c. Timely Commencement of a Tax Refund Suit.

(1) No suit may be commenced within sixmonths of the filing of the claim forrefund unless the IRS has rendered adecision on the claim within thattime. § 6532(a).

(2) A suit is barred unless it is commencedwithin two years from the date ofmailing of a notice of disallowance.§ 6532(a)(1)'. When a person files awritten waiver of the requirement of anotice of disallowance, the two-yearperiod begins on the date the waiver isfiled.

(3) A suit for refund is commenced byfiling a complaint in the districtcourt or the Claims Court. F.R.C.P. 3.

(4) The district courts have originaljurisdiction, concurrent with theClaims Court, of suits to recoverinternal revenue taxes alleged to havebeen erroneously or illegally assessedor collected. 28 U.S.C. §§ 1346(a)(1);1491. Note that a prior claim forrefund is a condition precedent to suit.

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C. Preemptive and Predominant Factors to be Considered inSelecting the Choice of Forum.

1. Jurisdictional Prerequisites. The inability tosatisfy the jurisdictional prerequisites of aparticular class of action preempts theopportunity to choose among the forums. Forexample, a taxpayer who is unable to satisfy theFlora prior- payment doctrine will have no choicebut to litigate in the Tax Court in aredetermination proceeding, if the tax inquestion is otherwise within the Tax Court'sjurisdiction. Similarly, a taxpayer who has notreceived a statutory notice of deficiency becauseof express waiver or payment of the tax beforesuch notice can be issued has no choice but topursue refund litigation.

2. Applicable Precedent. The existence of precedentis one of the more important factors in choosinga forum and necessitates thorough research of thelegal issues before instituting suit. Anyevaluation of precedent must take intoconsideration the decisions of the Court ofAppeals to which an appeal may lie from thedecisions of the district court or Tax Court. Adecision by the Claims Court may be appealed tothe Federal Circuit.

In the absence of clear precedent at theappellate court level, precedent at the trialcourt level becomes controlling. However, ifthere is a split of trial court authorities, thenthe precedents must be weighted in terms ofprobable outcome from an appeal. In this regard,some practitioners view an unappealed "regular"Tax Court decision as stronger precedent than anunappealed district court decision, and anunappealed Claims Court decision falls somewherein between.

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D. Other Factors For Consideration In Selecting ARedetermination Action In Tax Court Versus A RefundProceeding.

1. Payment of Tax Deficiency. The taxpayer'sfinancial situation will influence the choice offorum. If he is not in a position to pay thefull amount of the tax deficiency proposed by theIRS, he can sue only in the Tax Court.

2. Jury Trial. A jury trial is not available in theTax Court or the Claims Court. A taxpayer whowants a jury trial must bring suit in a districtcourt. Many practitioners favor a jury trialwhen a nontechnical issue involves questions ofintent or equitable considerations.

3. Judges. The Tax Court judges are tax specialistswho come from a background of tax practice andhear only federal tax cases, giving them anexpertise and technical outlook rarely foundamong district court and Claims Court judges.The district court judges are the generalistspresiding at criminal trials as well as thewidest range of civil jury and non-jury cases.Claims Court judges are experts in claims againstthe government and may be most sympathetic to thetaxpayer in instances of IRS overreaching.Claims Court judges tend to be more tolerant ofinexperienced trial counsel and more flexiblethan their district court counterparts.

4. Burden of Proof. The taxpayer's burden of proofis substantially the same in any of the threeforums. In a suit for refund, the taxpayer mustprove that the tax was overpaid and the amount ofthe overpayment. In a Tax Court proceeding, thetaxpayer must prove that the Commissioner'sdeficiency determination was erroneous.

5. Government Counsel. In the Tax Court, thegovernment is represented by attorneys in 49District Counsel offices located in major citiesthroughout the country. In the district courtsand the Claims Court, the government is generallyrepresented by attorneys in the Tax Division ofthe Department of Justice. Some practitionersfeel the Justice Department defense attorneyshave less of the institutional loyalty which isoften felt by District Counsel attorneys, and so

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they may be more willing to concede a weak caseor evaluate the case differently for purposes ofsettlement.

6. Availability of Discovery. In the Tax Courtdiscovery is more restricted than that in thedistrict court and the Claims Court. The TaxCourt rules normally permit use of discoverytools only upon a showing that the partiesattempted to exchange facts, documents, orinformation through informal consultation orcommunication. T.C. Rule 70(a)(1). There is anew rule concerning the nonconsensual depositionof an expert - Rule 76. Extraordinarycircumstances must be involved before thesedepositions are taken. These depositions arewithin the Court's discretion and will be allowedonly within a discretionary period after the caseis assigned to a trial calendar. The rule allowsthe Court 15 days to resolve the motion to takedeposition and also allows the opposing party torespond to the motion in writing. A hearing maybe allowed at the Court's discretion. Thedeposition questions may be written or oral. TheCourt may order a deposition on its own motion.The transcript may be used for impeachment, andmaybe instead of (or in addition to) an expert'sreport. The deposing party bears the costsunless the parties agree to share the costs.Parties must now exchange expert's reports30 days before trial. These changes shouldencourage attorneys to obtain experts early andmay increase settlements. The bench and bar areboth waiting to see the impact of this new rule.In the Claims Court, discovery is allowed withinthe discretion of the court. In the districtcourt, it is allowed as a matter of right.

7. Limitations. Filing a Tax Court petition tollsthe statute of limitations for years at issue.Thus, through additional issues in answer andlimited types of additional statutory notices ofdeficiency, the IRS can raise the taxpayer'smonetary exposure. Filing of a refund actionafter the expiration of the'statute oflimitations limits the IRS to offsettingadditional tax liability against refund otherwise

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due.. The Claims Court's broad offsetcounterclaim jurisdiction exposes the taxpayeragainst-whom the government has an unliquidatedor unsatisfied non-tax claim to defense of thatclaim and to monetary exposure in the event theamount of the government claim exceeds taxoverpayment.

8. Service of Process. The Tax Court has similarpower to a district court and the Claims Court inregard to punishment for contempt and enforcementof subpoenas, orders, and writs. The Tax Courtand the Claims Court may authorize servicenationwide. A district court, on the other hand,may issue a subpoena only to a witness within thedistrict or within 100 miles of the courtroom ifoutside the district. The Claims Court mayauthorize service nationwide upon properapplication and showing of good cause.Otherwise, service must be within 100 miles ofthe hearing or trial.

9. Pretrial Conference. In the Tax Court, acomprehensive pretrial conference is unusual,while it is routine in the district court and theClaims Court. The prospects for judicialintervention to narrow the issues and streamlinethe trial may thus be greater in a district courtand the Claims Court, but the Tax Court is nowpaying more attention to pretrial.

10. Place of Trial. In the Tax Court, a taxpayer mayrequest a convenient place of trial. Districtcourt trials are held in local district courts.Claims Court trials are held before trial judgesin virtually any location convenient to theparties. However, note that sometimes a finaldecision necessitates a hearing in Washington,D.C.

11. Time of and to Trial. Tax Court stipulationprocess and Claims Court pretrial orderprocedures may tend to lessen time required fortrial in many cases as compared to comparabletrial in district court. The Tax Court is makingmajor effort to bring trial calendars current,resulting in the possibility of trial within 12months after the petition is filed. Districtcourt calendars are backlogged with criminalcases, thus increasing the delay in hearing civilcases.

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12. Settlement. Settlement in the Tax Court willinvolve the Appeals Division, initially, unlessthe case was previously fully considered byAppeals before docketing in the Tax Court.District Counsel is not bound by the Appealsoffer and may not be inclined to settle.Settlement in refund cases is usually notseriously considered by the trial attorney untilafter discovery is substantially complete, andthen the trial attorney is subject to review.The Justice Department in Washington controls thefinal decision to settle.

13. Costs. A case can be litigated in the Tax Courtat a cost which generally is less than would beincurred in a district court or Claims Court.

14. Publicity. Avoidance of publicity through thenews media is sometimes sought by a taxpayer.The requirement that the taxpayer file a petitionwith the Tax Court or the Claims Court inWashington, D.C. minimizes the possibility oflocal publicity. The trial of a Tax Court casegenerally receives less publicity in a localnewspaper than a district court trial.

15. Finality of Decisions. All three courts'decisions may be reviewed by a Court of Appealsas a matter of right. Supreme Court review isavailable only upon the granting of a petitionfor certiorari.

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E. Factors to Consider in Selectin' a Choice of RefundForuml

1. Jurisdiction. The district courts have originaljurisdiction, concurrent with the Claims Court,of refund suits. The difference between the twocourts is that the district bourt hasjurisdiction to hear offset counterclaims,whereas the"Claims Court has broader jurisdictionand may heat and determine any counterclaim

2. Venue. Refund suits in district courts must bebrought in the judicial district where thetaxpayer resides. 28 U.S-C. § 1402(a)(1). Suchvenue requirement is not applicable to actionsbrought in the Claims Court.

3. Jury Trial. A jury trial is only available in adistrict court.

4. Judges. District court judges hear the broadrange of diversity and Federal question cases andmay or may not have a background in tax. Assuch, they may or may not be less inclined tohear complex tax arguments. District courtjudges tend to be extremely impatient withinexperienced trial counsel. The Claims Courtsometimes has few, if any, judges with taxpractice backgrounds. Claims Court judges seemto be more tolerant of inexperienced trialcounsel and more sympathetic to "equity" issues.

5. Place of Trial. District court trials are heldin the local district court. The Claims Courtfrequently sits anywhere necessary in theinterests of resolution of the controversy and isvery flexible in this regard.

6. Taxpayer Counsel. In district court, localcounsel may be required, but this is not arequirement to an action in Claims Court.

7. Government Counsel. In the district courts andthe Claims Court, the government is generallyrepresented by attorneys in the Tax Division ofthe Department of Justice. Tax cases in theSouthern District of New York and the Central andNorthern Districts of California are handled byattorneys in the office of the U.S. Attorney.Tax cases in the southwestern part of the UnitedStates are handled by the Dallas field office ofthe Tax Division.

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8. Service of Process. The Claiis Court mayauthorize -s-ervice nationwide.- A distri-ct courtis geographically limited to the applicabledistrict,.or within 100 miles-of the courtroom ifoutside the district.

9. Trial Time. Claims Court pretrial orderprocedures tend to lessen time required for trialin many cases as compared tQ. comparable trial indistrict court. District court calendars becomebacklogged with criminal cases, delaying trialsettings in many areas.

10. Appeals. Appeals in the district court are tothe local circuit. Claims Court appeals are tothe Federal Circuit.

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