All recommendations regarding settlement must accord with the Principles of Litigation set forth at CCDM 31.1.1.3. The principles embodied in the Settlement Policy with regard to Tax Court cases, see CCDM 31.1.1.3.1, apply equally to recommendations to settle cases referred to DJ, except that consideration of collectibility may play a greater role, particularly in collection cases.

Cases in Litigation. Pursuant to section 7122, the Secretary of the Treasury may compromise any civil or criminal case arising under the internal revenue laws prior to referral to DJ for prosecution or defense. After referral to DJ, however, only the Attorney General or delegate may compromise the case. Accordingly, in all non-Tax Court litigation cases handled by the Office of Chief Counsel, DJ has complete settlement authority. While the views of Counsel are sought in the most significant cases (e.g., those classified Standard), DJ has authority to settle matters in litigation whether or not the views of Counsel are sought. See CCDM 34.8.1.2.1. As a practical matter, however, DJ will not settle significant cases without eliciting Counsel’s views. Furthermore, because of internal delegations of authority within DJ, the views of the Chief Counsel will generally be given great weight. See Tax Division Directive No. 54, 28 C.F.R., Part O, Appendix to Subpart Y, which explains the settlement authority of the various units of the Tax Division. Neither the Trial Sections nor the Office of Review in the Tax Division, Department of Justice, has been delegated authority to approve settlements that are opposed by the Office of Chief Counsel. Such settlements must be approved at a higher level.

Taxpayers and Taxable Periods Not in Suit. Section 5 of Executive Order No. 6166, Organization of Executive Agencies, issued June 10, 1933, transferred from all federal agencies to DJ the functions of prosecuting and defending all claims by and against the United States. Thus, the conduct and control of all federal tax litigation, except that in the Tax Court, is vested in DJ, and the authority to compromise or settle any civil or criminal tax case referred to DJ is codified in section 7122(a) of the Code. Moreover, the question of whether DJ is authorized to compromise or settle years not in suit was answered by the Attorney General in 1934 when he determined: that the effect of Executive Order No. 6166 is to vest in the Attorney General exclusive control of any case after it has been referred to his department; that the Executive Order did not in any way curtail the Attorney General’s prior and plenary power which is in part inherent, appertaining to the office, and in part derived from the various statutes and decisions; and that DJ may compromise non-suit years if they are germane to the matters in suit. 38 Op. Att’y Gen. 98, 124, XIII-2 C.B. 445 (1934), and XIV-1 C.B. 442 (1935).

Even though DJ has concluded that it does not need the Service’s consent to settle periods not in suit, DJ nevertheless refers all such settlement proposals to the Service for recommendation in accordance with the agreement of July 28, 1981, between the Service and DJ. See Exhibit 35.11.1-26.

The authority to sign recommendation letters to DJ concerning settlement offers related to pending refund cases or any other cases or matters referred to DJ for prosecution or defense with respect to persons or periods not in suit, is delegated to Associate Chief Counsel. Additionally, authority is delegated to Associate Chief Counsel to sign recommendation letters concerning settlement offers related to pending refund cases or any other cases or matters referred to DJ for prosecution or defense with respect to:

Generally, matters not in suit are settled by DJ upon approval of the Service. Occasionally, however, a nunc pro tunc concurrence of Counsel will be sought for settled matters.

The Service and DJ have agreed, most recently in the year 2000, that if a proposed settlement offer for persons or periods not in suit provides for the execution of a closing agreement as part of the settlement, the closing agreement must be reviewed only on behalf of the appropriate Division Commissioner or the local Appeals Office or Examination Office (in a field case) prior to the Government’s acceptance of the offer.

Receipt by Tax Division. Offers to settle are normally submitted by taxpayers to the Tax Division of DJ. This is appropriate because DJ possesses the final authority to accept or reject such offers. See CCDM 34.8.1.1.2(1). Often the terms of settlement offers received by the Tax Division have been carefully negotiated by taxpayer’s counsel and the Tax Division trial attorney prior to their submission. However, there are a substantial number of cases in which settlement offers have not been negotiated or even discussed with the Tax Division trial attorney. Accordingly, when an offer is received by a Chief Counsel attorney, it cannot be assumed it was negotiated by or meets with the approval of the Tax Division trial attorney. See CCDM 34.8.1.3.5, Offer Submitted to Field Office, for procedures to be used when a taxpayer submits a settlement offer to Field Counsel.

Processing Offers by Tax Division. Generally, settlement offers submitted to the Tax Division have been negotiated by the trial attorney and the taxpayer’s attorney after completion of pretrial discovery.

Submission of Offers by Tax Division to Counsel. Whether an offer received by DJ will be submitted to the Field Counsel depends largely upon the case classification. Accordingly, where a case has been classified Standard, DJ must submit the settlement offer to Counsel. The only exception to this rule is where DJ summarily rejects the settlement offer. The summary rejection procedure is only used when the settlement offer is obviously unacceptable. When a case is classified S.O.P., Counsel’s recommendation is not sought, even if the case involves a Joint Committee settlement, unless the settlement proposal covers years of the taxpayer not in suit. DJ generally will not refer a settlement offer for Counsel’s views if one of the exceptions in the agreement dated July 28, 1981, between DJ and the Office of the Chief Counsel is applicable. Furthermore, DJ may seek Counsel’s views on the settlement of S.O.P. cases if it decides such coordination would be desirable. Finally, on occasion DJ will request that a case be reclassified to the S.O.P. category in order to avoid referral of a settlement offer for Counsel’s views.

In cases in which DJ seeks Counsel’s views on settlement offers, DJ will send Counsel the following material:

Examination of Settlement Offer. Upon receiving a Department of Justice letter seeking Counsel’s views with respect to a proposed settlement, the terms of the proposed settlement should be carefully examined. The attorney should make sure the settlement proposal does not have any ambiguities before consideration is given to the proposal. It would be undesirable to prepare a recommendation only to find the provisions of the taxpayer’s settlement proposal have been misapprehended.

Clarification of Offer. If the terms of the settlement proposal are unclear, it is helpful to examine the letter from DJ to the taxpayer or opposing counsel acknowledging the terms of the offer. If the terms of the offer remain unclear after the acknowledgment letter is examined, steps should be taken to have a clarified offer submitted. This can be done formally by letter to DJ, or informally through contact with the Tax Division trial attorney.

If a settlement offer contemplates the settlement of years not in suit or the settlement includes taxpayers not in suit, the offer must be coordinated with either the Appeals office or Division Commissioner’s office which has under consideration the matter or period not in suit. Where coordination is necessary, it should be done as quickly as possible and should not be delayed while the recommendation is being prepared. Accordingly, as soon as a settlement proposal is received, a determination regarding the necessity of coordination must be made.

Counsel should refer proposed settlements involving non-suit periods or non-suit parties to the Examination or Appeals office which has jurisdiction. If both Appeals and an Examination office are involved, referral should be to Appeals.

It is a simple matter to determine whether the settlement involves a taxpayer not in suit. It is more difficult to determine whether a year not in suit is sufficiently affected to warrant referral of the settlement proposal to Appeals. For example, if the issues in suit involve the basis of an asset for purposes of depreciation as well as its useful life, where the life of the asset extends beyond the years in suit, a settlement will have an impact on post-suit years. However, disposing of these questions is logically necessary to determine how much depreciation should be allowed in the suit years. The depreciation issue could have been settled on a percentage basis (for example, 50 percent allowed, 50 percent disallowed), but behind such percentages there would have to be an understanding as to basis and useful life. If the settlement is limited to disposing of the issue in suit, the settlement does not have to be coordinated with Appeals even though the settlement has an impact on non-suit years. In the basis-useful life case described, the settlement would be considered to encompass non-suit years if a specific depreciation schedule was agreed to for post-suit years. This type of settlement could resolve other issues, such as whether the asset remained in service, whether it remained the property of the taxpayer, whether capital improvements or repairs were made, etc. In this context, the settlement would not be strictly limited to the questions in suit, and would, therefore, require coordination with Appeals.

If the issue in question is factual, and the facts vary with each transaction, disposing of the issue for years not in suit requires coordination. For example, the question of whether real estate is held for sale to customers in the ordinary course of trade or business is factual, and each sale must be viewed separately. If this question is disposed of for non-suit years, coordination would be necessary.

When a settlement proposal is coordinated with Appeals, Appeals is not advised of Counsel’s views since to do so would unduly delay coordination. Since any settlement must be handled expeditiously, a deadline should be set for receiving the views of Appeals on the settlement proposal.

Frequently, refund litigation cases are related to Tax Court cases. Settlement offers in such cases must be coordinated.

When a case is related to a criminal matter, it is important that settlement of the case be properly coordinated. When an offer is received to dispose of a case with a related criminal matter, the appropriate Area Counsel (CT), should be sent an information copy of the offer letter. Subsequently, when the proposed settlement letter is sent to the Area Counsel (CT) office with jurisdiction over the case, that office will then decide whether further coordination with the Division Counsel/Associate Chief Counsel (Criminal Tax) is necessary.

Normally settlement offers are not coordinated with other divisions or offices within the Office of Chief Counsel. The appropriate time to coordinate a case with other divisions and offices is when the referral letter is being prepared setting forth Service position or shortly thereafter. Where there is no initial coordination, coordination may later prove necessary because of developments in the law or a position DJ wishes to take. Formal coordination with other divisions and offices should only be done through the Office of the Associate Chief Counsel (Procedure and Administration). Field Counsel should send all requests for advice concerning settlement to the Associate Chief Counsel (Procedure and Administration), who will forward the request to the appropriate division.

Cases on appeal to the United States Courts of Appeal are subject to settlement. These settlements involve the Appellate Section of the Tax Division and the Associate Chief Counsel office with jurisdiction over the case. The same considerations and standards applicable to the settlement of cases in the trial courts pertain to this type of settlement. A particularly important factor in determining whether to accept such a settlement is the precedential effect of an appellate decision as well as any potential for seeking Supreme Court review.

All settlement letters prepared in Field Counsel offices may be mailed directly to DJ with the exception of the letters involving issues in tax shelter cases, other novel or important issues, or significant cases.

Notwithstanding the above, Division Counsel, in their discretion, may send any letter to the Associate Chief Counsel (Procedure and Administration) for review.

The Associate Chief Counsel (Procedure and Administration) will monitor the direct mailing procedure to ensure cases warranting Associate Chief Counsel review are receiving it, and to determine whether categories of cases should be added or deleted. A copy of each settlement letter, mailed directly to DJ, shall be sent to the Associate Chief Counsel (Procedure and Administration).