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notice of deficiency claiming that the taxpayer had underreported
his income by $24,505 (i.e., the difference between the $35,305
the contractor reported to the IRS and the $10,800 reported on
the taxpayer's return).
The U.S. Court of Appeals for the Fifth Circuit held for the
taxpayer and stated that the notice of deficiency issued on the
basis of the Form 1099 was "arbitrary and erroneous". Id. at
1134. Thus, the Commissioner was not entitled to the presumption
of correctness ordinarily applicable to her determinations. Id.
The rationale for the Court of Appeals' holding is to prevent
taxpayers from having to bear the unreasonable burden of proving
the nonreceipt of income. Id. at 1133.
In Portillo v. Commissioner, 988 F.2d 27 (5th Cir. 1993)
(Portillo II), revg. T.C. Memo. 1992-99, the taxpayer appealed
our denial of administrative and litigation costs. The U.S.
Court of Appeals for the Fifth Circuit held that the
Commissioner's position was not substantially justified. The
court noted that "one person's word, i.e. 'a naked assertion,' is
not sufficient support for a notice of deficiency" and that the
notice of deficiency was arbitrary and erroneous. Id. at 29. As
a result, the court concluded that the Commissioner's position
was not substantially justified. Id.
In the present case, respondent took a position in her
notice of deficiency and answer based on a Form 1099-MISC from
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