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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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