MAKE A QUALIFIED OFFER

On the issue of litigating hazards, estates have additional leverage in Appeals because of a greater threat that the IRS will have to pay attorney fees and costs. This provision applies only to estates with a net worth not exceeding $2 million. In the past, awards of attorney fees have been rare, particularly because there was no award if the IRS position was Asubstantially justified.@ Although fees still generally are limited to far below market rates, a new provision provides that if beginning during Appeals negotiations, the IRS turns down a settlement proposal and then does not do better in court, the IRS pays attorney fees.

1. 1998 Act. The 1998 Act provides that an estate otherwise meeting the requirements for entitlement to fees or costs will be treated as a Aprevailing party@ if the liability determined in a court proceeding is equal to or less than what the estate=s liability would have been had the United States accepted a Aqualified offer.@ 1998 Act ' 3101(e), amending IRC ' 7430(c)(4)(E)(i).

a) Definition. AQualified offer@ is defined as a written offer which:

(i) Is made by the estate during the Aqualified offer period.@

(ii) Specifies the amount of the estate=s liability without interest.

(iii) Is designated as a qualified offer.

(iv) Remains open during the period beginning on the date on which it is made, and ending on the earliest of the date on which the offer is rejected,

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the date on which trial begins, or the 90th day after the offer is made.

b) Qualified Offer Period. Defined as the period that begins on the date the IRS sends the first letter of proposed deficiency which affords the opportunity for administrative review with Appeals, and which ends 30 days before the date set for trial.

c) Result. Offers made by estates during consideration of their cases by Appeals could provide a basis for an award of attorney=s fees and costs, if a court judgment determines a liability equal to or less than that of the liability which would have resulted had Appeals accepted the estate=s offer.

d) Subsequent Costs Only. Reasonable administrative and litigation costs paid by the government shall include only costs incurred on and after the date of the qualified offer. Thus, the earlier the offer is made, the larger

the potential recovery of costs.

e) Last Offer Controls. If more than one qualified offer is made, it is the last one which controls.

f) Prevailing Party. The qualified offer rule allows the estate to qualify as a Aprevailing party@ without

substantially prevailing on the amount in controversy or the most significant issue. Estates also will not have to argue about whether the position of the Service was substantially justified.

g) Legislative History. The Committee Reports state: AThe Committee believes that settlement of tax cases should be encouraged whenever possible.@ This

provision should provide incentive to both the taxpayer and the IRS to get cases settled.

h) Limitations. The provision does not provide for

payment of fees and costs in a case which is settled

nor does it cover cases in which no tax liability is in controversy (e.g., declaratory judgment and summons enforcement proceedings).

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i) Old Rules. The Aqualified offer@ provision does not prevent an estate from qualifying as a Aprevailing party@ under the old rules.

j) Disclosure. Estates need to consider the amount of disclosure that they make in connection with a qualified offer so as not to run afoul of the exhaustion of

administrative remedies rule or the prohibition on protracting the proceedings.

EXAMPLE: A fee award could be denied if the IRS were able to argue successfully that it would have settled the case for the qualified offer amount had the taxpayer disclosed certain information in its possession.

k) Federal Rules. The provision is patterned after Rule 68 of the Federal Rules of Civil Procedure. l) Favorable Provision. It is the estate which

controls the timing and the amount of the

qualified offer. It is the IRS that has a downside in rejecting an offer.

m) Timing of Offer. The pros and cons of whether to make a qualified offer in a particular case should be discussed with any client who does not exceed the net worth limitations anytime a matter goes to the IRS Appeals Office. As a practical matter, there may be a reluctance to make a qualified offer prior to sizing up, for example, the IRS Appeals Officer=s view of the issue. In other words, the Appeals Officer may not share the practitioner=s pessimistic view of the estate=s litigating hazards.

n) Net Worth Limitation. For both trusts and estates the $2 million net worth limitation for individuals is applicable. The net worth of an estate for purposes of applying the limitation is determined as of the date of death; the net worth of a trust is determined as of the end of the last day of the trust=s taxable year which is at issue.

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2. Practical Effect. IRS employees have lived in an environment in which the payment of attorney fees by the IRS is abhorrent because it suggests that an IRS employee did something wrong. The threat of fees and costs being paid by the IRS should help keep IRS settlement offers realistic. The provision could be particularly useful when an Appeals Officer is taking an unrealistic position on a matter. More tax cases are likely to be settled as a result of this provision.

3. Effective Date. This provision applies to costs incurred after January 18, 1999.

O. REFER UNRESOLVED ISSUES FROM THE