                         117 T.C. No. 5



                     UNITED STATES TAX COURT



    HAAS & ASSOCIATES ACCOUNTANCY CORPORATION, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent*

       MICHAEL A. HAAS AND ANGELA M. HAAS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 16486-98, 16487-98.   Filed August 10, 2001.



          Held: Evidence excluded at trial may be
     considered by the Court in ruling under sec. 7430,
     I.R.C., on a motion for litigation costs.

         Held, further, a “qualified offer” made under sec.
    7430(c)(4)(E) and (g), I.R.C., does not satisfy the
    requirement under sec. 7430(b)(1), I.R.C., that in
    order to qualify for an award of litigation costs a
    taxpayer is required to exhaust available
    administrative remedies.

         Held, further, under the facts of these cases,
    petitioners did not exhaust their administrative

*
     This opinion supplements our prior Memorandum Opinion, Haas
& Associates Accountancy Corp. v. Commissioner, T.C. Memo. 2000-
183.
                                 - 2 -

     remedies and are not eligible for an award of
     litigation costs under sec. 7430, I.R.C.



William Edward Taggart, Jr., for petitioners.

Kathryn K. Vetter, for respondent.



            SUPPLEMENTAL FINDINGS OF FACT AND OPINION

     SWIFT, Judge:   This matter is before us on petitioners’

motion under Rule 231 for an award of $44,559 in litigation costs

and fees under the general provisions of section 7430 and under

the qualified offer rule of section 7430(c)(4)(E) and (g).

     In these consolidated cases, respondent determined

deficiencies in petitioners’ Federal income taxes and accuracy-

related penalties as follows:


                                  1993          1994       1995
Michael and Angela Haas
  Tax Deficiency                $34,416          --         –-
  Sec. 6662(a) Accuracy-
    Related Penalty               6,883          --        --

Haas & Associates
  Accountancy Corp.
  Tax Deficiency                   --       $10,833       $7,457
  Sec. 6662(a) Accuracy-
    Related Penalty                --           2,167      1,491


     Unless otherwise indicated, all section references are to

the Internal Revenue Code, and all Rule references are to the Tax

Court Rules of Practice and Procedure.
                              - 3 -

     In connection with petitioners’ motion for litigation costs

and fees, the primary issues that we address are as follows:

(1) Whether evidence excluded at trial may be considered by the

Court in ruling under section 7430 on a motion for litigation

costs; (2) whether a qualified offer petitioners made under

section 7430(c)(4)(E) and (g) satisfies the requirement under

section 7430(b)(1) that in order to qualify for an award of

litigation costs a taxpayer is required to exhaust available

administrative remedies; and (3) whether, under the facts of

these cases, petitioners have exhausted their administrative

remedies and are eligible for an award of litigation costs under

section 7430.


                        FINDINGS OF FACT

     An explanation and an analysis of the underlying facts and

substantive tax issues that were involved herein are set forth in

Haas & Associates Accountancy Corp. v. Commissioner, T.C. Memo.

2000-183, and are not generally restated herein.

     Some of the facts relating to petitioners’ motion for

litigation costs and fees have been stipulated and are so found.

Additional evidence material to petitioners’ motion for

litigation costs is set forth in affidavits and attachments filed

by the parties as part of their motion papers.   Included among

respondent’s motion papers are copies of correspondence between
                               - 4 -

the parties that were excluded from admission at the trial on the

grounds of irrelevancy.

     In early 1993, petitioner Michael A. Haas (Haas) severed his

employment as a certified public accountant with Dean, Petrie &

Haas, an Accountancy Corp. (DPH).   Haas purchased from DPH the

right thereafter to render accounting services to a number of

former clients of DPH.

     Haas then began practicing accounting in his individual

capacity and through Haas & Associates Accountancy Corp. (Haas &

Associates), a new accounting firm that Haas owned and

incorporated as a closely held professional corporation.   The

former clients of DPH that Haas “took with him” from DPH were

divided between Haas’ individual accounting practice and the

corporate accounting practice of Haas & Associates.

     To effect the above separation of Haas’ accounting practice

from DPH, various parties including Haas signed various written

contracts, a separation agreement, and covenants not to compete

(the transaction documents).

     In June of 1996, respondent initiated an audit of Haas and

his wife’s joint individual Federal income tax return for 1993.

Later, respondent’s audit was expanded to include Haas &

Associates’ corporate Federal income tax returns for 1994 and

1995.   Respondent’s audit related to the income tax treatment of
                               - 5 -

the above separation agreements between Haas, DPH, and the other

affected parties.

     During the audit, respondent’s revenue agent requested, on a

number of occasions and in writing, petitioners and/or

petitioners’ prior counsel to provide to respondent complete

copies of all of the schedules and exhibits referred to in the

transaction documents relating to the above separation agreement.

     During respondent’s audit, neither petitioners nor

petitioners’ prior counsel provided respondent’s representatives

copies of certain schedules of assets and clients that were

identified and referenced in the transaction documents.

     On October 21, 1997, respondent’s revenue agent mailed to

petitioners copies of the revenue agent’s reports relating to

Haas and his wife’s 1993 joint Federal income tax liability and

to Haas & Associates’ 1994 and 1995 Federal income tax

liabilities, which reports proposed the underlying tax

adjustments that were decided in our Memorandum Opinion, Haas &

Associates Accountancy Corp. v. Commissioner, supra.

     By letter of October 28, 1997, Haas notified respondent’s

revenue agent that he did not agree with the adjustments proposed

in the above revenue agent’s reports, that the audit should be

closed by respondent as unagreed, and that Haas would appeal the

adjustments in court.   The relevant portion of Haas’ October 28,

1997, letter to respondent is set forth below:
                                - 6 -


     I received your revenue agent’s report and cover letter
     dated October 21, 1997. As we discussed, I do not
     agree with your audit report and its findings. I
     believe the tax returns in question were filed
     accurately. As per your letter, you may then close the
     case as unagreed and I will appeal the findings in
     court.


     On March 18, 1998, respondent mailed to Haas and his wife

and to Haas & Associates 30-day letters that reflected the same

adjustments that were reflected in the above revenue agent’s

reports.    Respondent’s 30-day letters explained the protest

rights available to Haas and his wife and to Haas & Associates to

administratively appeal the proposed adjustments.1

     Haas and his wife and Haas & Associates did not file a

protest or request a conference with respondent’s Appeals Office

with regard to the above proposed adjustments in their Federal

income tax liabilities.

     On June 10, 1998, respondent closed his audit regarding Haas

and his wife for 1993 and regarding Haas & Associates for 1994

and 1995.




1
     Although respondent at trial could not locate a copy of the
30-day letter mailed to Haas and his wife, and although
petitioners did not produce a copy thereof, the limited evidence
in the record on this point indicates that on Mar. 18, 1998,
respondent mailed a 30-day letter to Haas and his wife that
reflected the same adjustments that were reflected in the revenue
agent’s report that had been mailed to Haas and his wife on
Oct. 21, 1997.
                                - 7 -

     On July 17, 1998, respondent mailed to Haas and his wife and

to Haas & Associates the notices of deficiency reflecting the

individual and corporate adjustments set forth in the above

revenue agents’ reports and 30-day letters and reflecting the tax

deficiencies set forth above.

     On September 15, 1998, the period of limitation was

scheduled to expire with respect to respondent’s authority under

section 6501(a) to assess a deficiency in Haas & Associates’ 1994

corporate Federal income tax liability.

     On September 30, 1998, under an extension which Haas and his

wife had signed, the period of limitation was scheduled to expire

with respect to respondent’s authority under section 6501(a) to

assess a deficiency in Haas and his wife’s 1993 joint Federal

income tax liability.

     On October 9, 1998, petitioners, through new counsel, timely

filed their separate Tax Court petitions –- Haas and his wife’s

petition with regard to the 1993 joint Federal income tax

deficiency determined by respondent and Haas & Associates’

petition with regard to the 1994 and 1995 corporate Federal

income tax deficiencies determined by respondent.

     After respondent on November 24, 1998, filed his answers,

respondent’s administrative files were forwarded to respondent’s

San Francisco, California, Appeals Office for possible settlement

discussions and negotiations with petitioners’ counsel.
                               - 8 -

     On January 8, 1999, these consolidated cases were set for

trial on June 14, 1999, in San Francisco, California.

     On a number of occasions from January through April of 1999,

two of respondent’s Appeals officers contacted petitioners and/or

petitioners’ counsel, requested a meeting, and requested that

copies of certain documents relating to the separation agreement

(and that during respondent’s audit had not been provided to

respondent’s representatives) be provided to respondent’s Appeals

Office representatives for review and consideration in connection

with possible settlement discussions.   Neither Haas nor

petitioners’ counsel met with respondent’s Appeals Office

representatives, and respondent’s Appeals Office representatives

did not receive copies of the requested documents from

petitioners or from petitioners’ counsel.

     By letter of May 3, 1999, petitioners’ counsel prepared and

forwarded to respondent’s trial counsel a stipulation of facts

for trial.   At that point, respondent’s Appeals Office returned

the administrative files relating to these cases to respondent’s

District Counsel for trial preparation.

     On May 5, 1999, 6 weeks before the scheduled trial date,

petitioners’ counsel sent to respondent’s trial counsel a written

qualified offer to settle the underlying tax issues involved in

these cases.
                               - 9 -

     On May 15, 1999, respondent’s trial counsel requested

petitioners’ counsel to provide complete copies of portions of

the transaction documents that previously had not been provided

to respondent’s representatives.

     On June 3, 1999, respondent rejected petitioners’ qualified

offer.

     On June 16, 1999, the trial of the underlying substantive

tax issues in these consolidated cases was held in San Francisco,

California.

     On June 21, 2000, we filed our Memorandum Opinion in Haas &

Associates Accountancy Corp. v. Commissioner, T.C. Memo. 2000-

183, and we held as follows:


     (1) The $190,000 paid by Haas in connection with the
     separation of the accounting practice and a covenant not to
     compete was amortizable as an ordinary business expense
     deduction over 3 years as claimed by petitioners on their
     respective Federal income tax returns;

     (2) The $63,500 paid by Haas allegedly for consulting
     services represented a nondeductible startup expense that
     required capitalization; and

     (3) Because petitioners prevailed entirely on the treatment
     of the $190,000 and because petitioners had a reasonable
     basis for their claimed deduction for the $63,500 relating
     to the consulting services, no accuracy-related penalties
     were imposed on petitioners in connection with the above
     Federal income tax returns that petitioners had filed.


     In their motion for litigation costs, petitioners seek the

recovery of the following fees and costs incurred after the
                              - 10 -

mailing by respondent to petitioners of the notices of

deficiency:


                 Type of Fees
                   and Costs              Total
                Attorney’s Fees          $43,892
                Filing Fees                  120
                Transcript Fees              500
                Miscellaneous                167
                     Total               $44,679


     Petitioners have submitted billing statements from

petitioners’ counsel regarding the above litigation costs.    With

one exception, the client identified on such statements and to

whom the billings were mailed was “Haas & Associates” or “Haas &

Associates c/o Michael A. Haas”.2   The evidence does not indicate

who, as between Haas and his wife and Haas & Associates, paid

these bills.

     Before respondent’s mailing to petitioners of the notices of

deficiency, petitioners also incurred attorney’s fees and other

costs.   Petitioners, however, in the instant motion for

litigation costs and fees are not seeking recovery of any costs

incurred before the mailing by respondent of the notices of

deficiency.




2
     One billing statement dated Oct. 2, 1998, for $59 is
directed to “Michael A. Haas & Angela M. Haas”.
                                - 11 -

     Of the total $44,559 in litigation fees and costs for which

petitioners seek recovery, petitioners calculate that $39,648 was

incurred after petitioners made their qualified offer.


                                OPINION

     Under the general provisions of section 7430, based on the

contention that respondent’s position was not substantially

justified, petitioners seek recovery of the $44,559 in litigation

costs they incurred after respondent’s July 17, 1998, notices of

deficiency were mailed to them.        Alternatively, based on their

May 5, 1999, qualified offer, petitioners seek recovery of the

$39,648 in litigation costs incurred after petitioners made their

qualified offer.    We have not previously considered the qualified

offer rule of section 7430(c)(4)(E) and (g).3


3
     Sec. 7430(c)(4)(E) and (g), provides in part as follows:

     SEC. 7430.    AWARDING OF COSTS AND CERTAIN FEES.

          (c) Definitions.--For purposes of this section--

     *        *           *        *          *        *        *

                  (4) Prevailing party.

     *        *           *        *          *        *        *

                       (E) Special rules where judgment less than
                  taxpayer’s offer.

                            (i) In general.--A party to a court
                       proceeding meeting the requirements of
                       subparagraph (A)(ii) shall be treated as the
                       prevailing party if the liability of the
                                                       (continued...)
                                - 12 -

     With regard to our prior opinion herein, respondent


3
 (...continued)
                       taxpayer pursuant to the judgment in the
                       proceeding (determined without regard to
                       interest) is equal to or less than the
                       liability of the taxpayer which would have
                       been so determined if the United States had
                       accepted a qualified offer of the party under
                       subsection (g).

     *        *          *        *        *        *        *

          (g) Qualified Offer.--For purposes of subsection
     (c)(4)--

               (1) In general.--The term “qualified offer” means
          a written offer which--

                       (A) is made by the taxpayer to the United
                  States during the qualified offer period;

                       (B) specifies the offered amount of the
                  taxpayer’s liability (determined without regard to
                  interest);

                       (C) is designated at the time it is made as a
                  qualified offer for purposes of this section; and

                       (D) remains open during the period beginning
                  on the date it is made and ending on the earliest
                  of the date the offer is rejected, the date the
                  trial begins, or the 90th day after the date the
                  offer is made.

               (2) Qualified offer period.--For purposes of this
          subsection, the term “qualified offer period” means the
          period--

                       (A) beginning on the date on which the 1st
                  letter of proposed deficiency which allows the
                  taxpayer an opportunity for administrative review
                  in the Internal Revenue Service Office of Appeals
                  is sent, and

                       (B) ending on the date which is 30 days
                  before the date the case is first set for trial.
                                - 13 -

acknowledges that petitioners substantially prevailed both with

respect to the amounts in controversy and with respect to the

most significant issues, sec. 7430(c)(4)(A)(i), and respondent

acknowledges that Haas and his wife’s 1993 joint Federal income

tax liability is less than what it would have been under

petitioners’ qualified offer.    Further, respondent acknowledges

that each petitioner meets the net-worth and number-of-employee

limitations of the Equal Access to Justice Act (EAJA), 28 U.S.C.

sec. 2412(d)(1) and (2)(B) (1994).       Sec. 7430(c)(4)(A)(ii).

     Respondent contends, however, that because petitioners did

not request an Appeals Office conference petitioners did not

exhaust their available administrative remedies and that

petitioners protracted the proceedings herein.       Respondent also

contends that the litigation costs claimed by petitioners are

unreasonable and that Haas and his wife did not incur any

litigation costs (i.e., that essentially all litigation costs for

which recovery is sought were billed to Haas & Associates, not to

Haas and his wife).

     Petitioners respond that during respondent’s audit

examination they did not provide respondent’s representatives

certain requested transaction documents because the documents did

not exist and that they did not protest respondent’s audit

adjustments and did not seek a conference with respondent’s

Appeals Office because there was insufficient time to do so under
                             - 14 -

the assessment periods of limitations that were about to expire.

Further, petitioners contend that in light of the qualified offer

they made and regardless of the fact that they did not

participate in an Appeals Office conference, they should be

regarded as having exhausted their available administrative

remedies.

     Petitioners also contend that respondent’s objection to

their motion for litigation costs improperly relies on evidence

excluded by the Court at the trial of these cases (nontrial

evidence), and petitioners ask that we strike from consideration

of their motion for litigation costs such nontrial evidence.4


4
     In connection with petitioners’ motion for litigation costs,
petitioners and respondent raise and address the following
additional issues that we do not decide:

     (1) Whether a recovery by petitioners herein of litigation
     costs under sec. 7430 should be limited to the particular
     petitioner who was billed for the costs;

     (2) Whether the experience of petitioners’ counsel with
     complex business transactions would justify an enhanced
     rate of recovery for attorney’s fees;

     (3) Whether, under the qualified offer provisions of sec.
     7430(c)(4)(E) and in analyzing whether the tax liabilities
     of petitioners pursuant to our prior opinion are equal to or
     less that what their tax liabilities would have been under
     their qualified offer, in consolidated cases involving
     multiple petitioners, each petitioner’s respective separate
     portion of the tax liability under the qualified offer is to
     be compared with each petitioner’s respective separate
     portion of the tax liability under the decision to be
     entered by the Court or is the comparison to be made as if
     the multiple petitioners constituted a single taxpayer; and

                                                   (continued...)
                              - 15 -

     We first address petitioners’ contention with regard to

respondent’s alleged improper use of nontrial evidence in

opposing petitioners’ motion for litigation costs.


Nontrial Evidence

     Rules 231 and 232 anticipate that evidence may be considered

in the context of a motion for litigation costs that was not part

of the trial of the underlying substantive tax issues.   For

example, evidence regarding the nature and amount of the fees for

which recovery is sought (Rule 231(d)), the specific legal

services rendered (Rule 232(d)(1)), the net worth of the taxpayer

(Rule 231(b)(4)), the administrative remedies sought by the party

(Rule 231(b)(5)), and delays in the proceeding (Rule 231(b)(6)),

constitute evidence that would not typically have been admitted

as part of a trial of the underlying substantive tax issues.

     Court opinions involving claims for litigation costs often

consider evidence not previously offered into evidence at the

trial of the underlying substantive tax issues.   E.g., O’Bryon v.

Commissioner, T.C. Memo. 2000-379 (new evidence considered



4
 (...continued)
     (4) Whether, under the qualified offer provisions of sec.
     7430(c)(4)(E) and in analyzing whether petitioners’ tax
     liabilities under our prior opinion were equal to or less
     than what their tax liabilities would have been under the
     qualified offer, the time value of money should be taken
     into account.
                              - 16 -

regarding billing statements, services rendered, and time involved).

     With regard to petitioners’ instant motion, we have

identified no documents or other evidence that respondent has

submitted to us in objecting to petitioners’ motion for

litigation costs that are inappropriate or inadmissible for this

limited purpose.   Petitioners’ request that we strike certain

correspondence and other evidence that was excluded at the trial

is denied.


Exhaustion of Administrative Remedies and Qualified Offer

     Section 7430(b)(1) provides that in order to be eligible for

an award of litigation costs a taxpayer must take advantage of

“available” administrative remedies.   Section 7430(b)(1) provides

as follows:


     SEC. 7430(b). Limitations.--

          (1) Requirement that administrative remedies be
     exhausted.--A judgment for reasonable litigation costs
     shall not be awarded under subsection (a) in any court
     proceeding unless the court determines that the
     prevailing party has exhausted the administrative
     remedies available to such party within the Internal
     Revenue Service. Any failure to agree to an extension
     of the time for the assessment of any tax shall not be
     taken into account for purposes of determining whether
     the prevailing party meets the requirements of the
     preceding sentence.


     The regulations under section 7430(b)(1) explain that

taxpayers generally are not to be regarded as having exhausted
                             - 17 -

available administrative remedies where the taxpayers fail to

participate in a conference with respondent’s Appeals Office

regarding the underlying substantive tax adjustments.    The

portions of respondent’s regulations under section 7430 that

establish this requirement generally to participate in an Appeals

Office conference are set forth below:


          Sec. 301.7430-1. Exhaustion of administrative
     remedies.–-(a) In general. Section 7430(b)(1) provides
     that a court shall not award reasonable litigation
     costs in any civil tax proceeding under section 7430(a)
     unless the court determines that the prevailing party
     has exhausted the administrative remedies available to
     the party within the Internal Revenue Service. This
     section sets forth the circumstances in which such
     administrative remedies shall be deemed to have been
     exhausted.

          (b) Requirements.--(1) In general. A party has
     not exhausted the administrative remedies available
     within the Internal Revenue Service with respect to any
     tax matter for which an Appeals office conference is
     available under sections 601.105 and 601.106 of this
     chapter * * * unless--

               (i) The party, prior to filing a petition in
     the Tax Court or a civil action for refund in a court
     of the United States * * * participates * * * in an
     Appeals office conference; or

               (ii) If no Appeals office conference is
     granted, the party, prior to the issuance of a
     statutory notice * * *

                    (A) Requests an Appeals office
     conference in accordance with sections 601.105 and
     601.106 of this chapter; and

                    (B) Files a written protest if a written
     protest is required to obtain an Appeals office
     conference. [Emphasis added.]
                             - 18 -

     The regulations under section 7430 provide limited

exceptions (not applicable here) to the requirement that

taxpayers participate in an Appeals Office conference in order to

be treated as having exhausted available administrative remedies.

Sec. 301.7430-1(e), Proced. & Admin. Regs.; sec. 301.7430-1(f),

Examples (1), (4), (6), (9), Proced. & Admin. Regs.; see also

Kaufman v. Egger, 758 F.2d 1, 3 (1st Cir. 1985); Burke v.

Commissioner, T.C. Memo. 1997-127.

     The recently issued temporary regulations under the

qualified offer provisions of section 7430(c)(4)(E) and (g) do

not provide any additional exceptions to the exhaustion-of-

administrative-remedies requirement.   Sec. 301.7430-7T, Temporary

Proced. & Admin. Regs., 66 Fed. Reg. 726 (Jan. 4, 2001).

     The legislative history of section 7430 suggests that in

certain circumstances taxpayers may be relieved entirely from the

exhaustion-of-administrative-remedies requirement.   It states

that taxpayers “are required to exhaust available administrative

remedies unless the court determines that, under the

circumstances of the case, such requirement is unnecessary.”

H. Rept. 97-404, at 13 (1982); Senate Comm. on Finance, Technical

Explanation of Committee Amendment, 127 Cong. Rec. 32070

(Dec. 16, 1981).

     Petitioners contend that, to the extent the above

regulations make the requirement that taxpayers participate in an

Appeals Office conference an absolute condition for an award of
                              - 19 -

litigation costs, the regulations exceed the statutory

requirements of section 7430(b)(1).    Clearly, the regulations do

not impose any such absolute condition, and we have not so held.

     In 1998, Congress provided under the qualified offer rule of

sections 7430(c)(4)(E) and (g) that a taxpayer may be deemed to

qualify as a prevailing party under section 7430(a) and (c)(4)

regardless of whether the taxpayer substantially prevailed in the

proceeding or of whether the position of respondent in the

proceeding was substantially justified.    Internal Revenue Service

Restructuring and Reform Act of 1998 (RRA 1998), Pub. L. 105-206,

sec. 3101(e)(1) and (2), 112 Stat. 728.5

     The qualified offer provisions apparently arose not from any

concern with the exhaustion-of-administrative-remedies

requirement but with the frequent controversy over whether a

party qualifies as a prevailing party under section

7430(c)(4)(A).   E.g., Corkrey v. Commissioner, 115 T.C. 366, 372-

373 (2000); McIntosh v. Commissioner, T.C. Memo. 2001-144; Gibson

v. Commissioner, T.C. Memo. 2001-74; Nguyen v. Commissioner, T.C.

Memo. 2001-41; Livingston v. Commissioner, T.C. Memo. 2000-387

(each of which involves the “no substantial justification”

5
     The qualified offer rules of sec. 7430(c)(4)(E) and (g) were
made effective for costs incurred after Jan. 22, 1999, 180 days
after July 22, 1998. Internal Revenue Service Restructuring and
Reform Act of 1998 (RRA 1998), Pub. L. 105-206, sec. 3101(g),
112 Stat. 729. Respondent does not contend that any of the
litigation costs for which petitioners herein seek recovery were
incurred before the Jan. 22, 1999, effective date of the
qualified offer rule.
                             - 20 -

requirement of sec. 7430(c)(4)(B)); and Barbour v. Commissioner,

T.C. Memo. 2000-256; Marten v. Commissioner, T.C. Memo. 2000-186;

Johnson v. Commissioner, T.C. Memo. 1999-127; Miller v.

Commissioner, T.C. Memo. 1999-55; Bowden v. Commissioner, T.C.

Memo. 1999-30 (each of which involves the “substantially

prevailed” requirement); and Barford v. Commissioner, T.C. Memo.

1998-26 (involving the net worth requirement of sec.

7430(c)(4)(A)(ii)).

     Petitioners contend that submission of their qualified offer

itself constituted a part of respondent’s administrative process,

that their qualified offer demonstrates their good-faith

participation in that process, and that at the least with respect

to the $39,648 in litigation costs incurred after the date on

which they submitted their qualified offer, their earlier failure

to ask for an Appeals Office conference should not be fatal.

     Petitioners have cited no persuasive authority in support of

the contention that the existence of their qualified offer makes

up for their failure to take advantage of significant

administrative remedies available to them, and we have found

nothing in the statutory provisions or elsewhere that suggests

that the exhaustion-of-administrative-remedies requirement is to

be regarded as fully satisfied because a taxpayer, 6 weeks before

trial, makes a qualified offer.

     Regardless of whether petitioners’ qualified offer may be

regarded as some level of participation by petitioners in
                             - 21 -

respondent’s administrative appeal process, the fact that

petitioners made a qualified offer does not excuse or make up for

petitioners’ failure in these cases to participate in an Appeals

Office conference.

     Petitioners refer us to respondent’s Internal Revenue

Manual, 4 Audit, Internal Revenue Manual (CCH), sec. 4461.8:(2),

at 14.044, and allege that because of the imminent lapse of the

assessment period of limitations (on September 15, 1998, for Haas

& Associates for 1994 and on September 30, 1998, for Haas and his

wife for 1993), a protest and a request by petitioners, in the

spring of 1998, for an Appeals Office conference either would

have been rejected by respondent or approval by respondent of the

request would have been contingent on the signing by each

petitioner of a further consent to an extension of the assessment

periods of limitations.6

     The record is not completely clear as to exactly what was or

was not said, done, provided, and explained, and the reasons

therefor, as between petitioners’ and respondent’s

representatives during the audit of petitioners’ income tax

6
     Sec. 4461.8 of respondent’s Manual provides in part as
follows:

     (2) No income * * * tax case in which * * * [the
     statutory period for assessment] will expire in less
     than 120 days * * * will be transmitted to Appeals by
     the District Director unless a consent sufficiently
     extending the statutory period has been filed. * * *
     [4 Audit, Internal Revenue Manual (CCH), sec. 4461.8,
     at 14,044.]
                              - 22 -

returns for 1993, 1994, and 1995.   Further, the record is not

completely clear as to what petitioners’ legal strategy was in

not participating in an Appeals Office conference.   The affidavit

of petitioners’ counsel alleges generally that petitioners at all

times cooperated with respondent’s representatives and, at each

administrative level, pursued in good faith the resolution of the

issues in these cases.

     The fact, however, is established that no Appeals Office

conference was requested on behalf of petitioners, and no

affidavit has been provided (by petitioners, by petitioners’

prior counsel, or by petitioners’ counsel) that provides any

explanation as to why an Appeals Office conference was not

requested.   Statements in petitioners’ legal memoranda as to why

an Appeals Office conference was not requested by petitioners or

by petitioners’ prior counsel (without a supporting affidavit

from petitioners or from petitioners’ prior counsel explaining

the reason therefor) constitute mere argument.

     It is clear that petitioners had an opportunity to protest

and to appeal respondent’s proposed income tax adjustments.    In

the fall of 1997, 11 months before the period of limitations was

scheduled to expire, petitioners notified respondent’s

representatives that they did not wish to protest and participate

in an Appeals Office conference; rather, they expressly and in

writing requested that respondent close the audit so that they

could dispute the adjustments in court.   Thereafter, petitioners’
                              - 23 -

conduct consistently reflected their intent to do just that

(i.e., to resolve the matter in court).   The text and the tone of

the October 28, 1997, letter to respondent reflects defiance of

respondent’s Appeals Office conference procedure, not a

conclusion by petitioners or by petitioners’ prior counsel that

there was inadequate time to be granted an Appeals Office

conference.   We also note that, from the date of respondent’s

March 18, 1998, 30-day letters approximately 6 months actually

remained until the periods of limitations in question were

scheduled to expire in mid- and late September of 1998.    Thus,

petitioners’ argument that respondent’s Manual precluded

petitioners from having an Appeals Office conference is

incorrect.

     During the docketed, pretrial phase of these cases,

petitioners’ representatives chose not to meet with respondent’s

Appeals Office.   Not until shortly before trial did petitioners’

representatives, apparently for the first time, explain that

certain documents referenced and identified in the transaction

documents did not exist.

     Where a taxpayer is offered by respondent the opportunity

for an Appeals Office conference and where a taxpayer wishes to

comply with the exhaustion-of-administrative-remedies requirement

and to preserve his or her right to recover litigation costs, the

taxpayer would be advised to request an Appeals Office

conference.   It is then left with respondent’s Appeals Office to
                               - 24 -

decide whether the taxpayer’s request will be granted in the face

of any assessment period of limitations problem.   If the request

is denied, the taxpayer will be treated as having exhausted his

or her administrative remedies.   Sec. 301.7430-1(f), Example (4),

Proced. & Admin. Regs.

     If, under the above circumstances, a taxpayer requests and

is granted an Appeals Office conference, the taxpayer would be

expected to participate in good faith in the Appeals Office

conference in spite of the imminent running of the period of

limitations.   The possible lapse of the period of limitations on

assessment is respondent’s problem, not the taxpayer’s.

     For years, many tax practitioners, on behalf of their

clients, have adopted a strategy to bypass a protest of

respondent’s proposed audit adjustments to respondent’s Appeals

Office.   This strategy is based on the perceived risk that filing

a protest and “going to” appeals might result in new issues’

being raised by the Appeals Office and on a perceived advantage

of getting into court as soon as possible.   See for explanations

of this strategy, Saltzman, IRS Practice & Procedure, par.

9.04[1] (2d ed. 1991), and Shafiroff, Internal Revenue Service

Practice & Procedure Deskbook, sec. 4.1, at 4-6 (3d ed. 2001).

The possible adoption of such a strategy may explain the

substance and tone of Haas’ letter of October 28, 1997, and the

decision of petitioners’ prior and current counsel to bypass

respondent’s Appeals Office.   In light, however, of the
                             - 25 -

exhaustion-of-administrative-remedies requirement of section

7430, if counsel wish to preserve the opportunity to seek a

recovery of litigation costs, continued use of this strategy

carries with it its own new risks evident in the instant cases.

     We note that under section 7430(b)(1) it is provided that a

taxpayer’s failure to agree to an extension of the assessment

period of limitations is not to be taken into account for

purposes of determining whether a taxpayer exhausted available

administrative remedies, and we have not done so in these cases.

     On the record before us, we conclude that petitioners have

not satisfied the exhaustion-of-administrative-remedies

requirement of section 7430(b)(1).    Accordingly, regardless of

whether petitioners satisfy the other requirements of section

7430 and regardless of petitioners’ qualified offer, petitioners

do not qualify herein for an award of litigation costs and fees.


                              Appropriate orders will be

                         issued.
