William T. and Nicole L. Gladden - Page 2

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                                SUPPLEMENTAL OPINION                                  
               SWIFT, Judge:  This matter is before us on petitioners’                
          motion for partial summary judgment as to the applicability of              
          the qualified offer provision of section 7430(c)(4)(E).                     
          Petitioners seek a recovery of litigation costs relating to a               
          Federal income tax deficiency adjustment determined by respondent           
          with respect to income to be charged to petitioners on                      
          termination of water rights (water rights adjustment).                      
               Unless otherwise indicated, all section references are to              
          the Internal Revenue Code in effect for the year in issue.                  
               Under the qualified offer provision of section                         
          7430(c)(4)(E), petitioners seek to obtain an award of litigation            
          costs that they incurred after May 12, 1999, the date on which              
          petitioners made a qualified offer to respondent to settle the              
          water rights adjustment.1                                                   
               Relying on the “settlement limitation” set forth in section            
          7430(c)(4)(E)(ii)(I), respondent argues that the ultimate                   


          1    At this point, it is not clear whether petitioners also (or            
          in the alternative) will be seeking the recovery of litigation              
          costs relating to the water rights adjustment under the general             
          litigation cost recovery provisions of sec. 7430.  In any event,            
          petitioners acknowledge that, under the qualified offer provision           
          of sec. 7430(c)(4)(E), they are entitled to recover only                    
          litigation costs incurred after May 12, 1999, the date on which             
          petitioners made their qualified offer to respondent.  The                  
          parties suggest that once the issue raised in the instant motion            
          is resolved, they likely will be able to settle other aspects of            
          petitioners’ motion for litigation costs.                                   






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