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301.7430-7T(a), Temporary Proced. & Admin. Regs., 66 Fed. Reg.
726 (Jan. 4, 2001), provides, in part, as follows:
The provisions of the qualified offer rule do not apply
if the taxpayer’s liability under the judgment * * * is
determined exclusively pursuant to a settlement * * *
[Emphasis supplied.]
We agree with petitioners. The purpose underlying the
qualified offer provision of section 7430(c)(4)(E), like that of
rule 68 of the Federal Rules of Civil Procedure, is to encourage
settlements by imposing litigation costs on the party not willing
to settle. Herein, legal issues integral to the water rights
adjustment were litigated and decided by this Court and by the
Court of Appeals for the Ninth Circuit. Only after those legal
issues were litigated and decided was the bottom-line substantive
tax adjustment resolved by way of settlement between the parties.
The ultimate settlement entered into by the parties herein can in
no way be viewed as entered into exclusively pursuant to a
settlement.
To treat the instant water rights adjustment as resolved
pursuant to the parties’ settlement would require us to ignore
the threshold legal issues relating thereto that were resolved by
way of litigation, not settlement, and would require us to treat
the related factual allocation issue eventually settled by the
parties as controlling for purposes of the settlement limitation
of section 7430(c)(4)(E)(ii)(I). Further, it would require us
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