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Respondent must provide a factual foundation for its
assessments and has an obligation to substantiate its claim
that an expenditure has been improperly deducted. Portillo
v. Commissioner, 91-2 USTC �50,304 (5th Cir. 1991),
indicates that Respondent's failure to properly investigate
the claimed deduction results in an arbitrary and capricious
notice of deficiency.
The facts of this case are distinguishable from the facts of
Portillo v. Commissioner, supra. In the Portillo case, the IRS,
based upon an information return filed by a payer, determined a
deficiency against the taxpayer for the difference in the amount
reported as income by the taxpayer on his return and the amount
reported by the payer on the information return. That case,
therefore, dealt with unreported income rather than deductions as
reported and claimed by petitioner in this case. In the Portillo
case, the taxpayer was unable to present any books and records to
prove a negative (unreported income); consequently, the Court of
Appeals for the Fifth Circuit held that, before the
Commissioner's determination could be accorded the presumption of
correctness, it was necessary, under the facts presented to the
Court, that the Commissioner "must engage in one final foray for
truth in order to provide the Court with some indicia that the
taxpayer received unreported income." Portillo v. Commissioner,
supra at 1133.6 Under the facts of the Portillo case, the Court
6
In Portillo v. Commissioner, 932 F.2d 1128 (5th Cir. 1991),
affg. in part and revg. in part T.C. Memo. 1990-68, the taxpayer
reported on his income tax return $10,800 income received from
(continued...)
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