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"arbitrarily decided to attribute veracity" to the "naked
assertion" of the third party payor. Without evidence to support
the notice of deficiency, the determination was held to be
arbitrary and erroneous, resulting in a decision in favor of the
taxpayer. Portillo v. Commissioner, 932 F.2d at 1133-1134.
In Portillo II, the taxpayer appealed this Court's denial of
administrative and litigation costs incurred from Portillo I.
The Court of Appeals for the Fifth Circuit relied upon the
conclusion in Portillo I that "the deficiency notice 'lacked any
ligaments of fact' and was 'clearly erroneous' as a matter of
law", and held this to be a clear indication that respondent's
reliance upon such an unsupported notice of deficiency was not
substantially justified. Portillo v. Commissioner, 988 F.2d at
29.
In Portillo I and Portillo II respondent was aware before
sending the notice of deficiency that the payor could not fully
substantiate the amounts reported on the Form 1099. We, however,
do not read Portillo II as holding that the Government may never
be substantially justified in relying upon a third party payment
report (Form 1099) in issuing a notice of deficiency that
determines unreported income. Portillo II does not address the
question presented herein; viz, whether respondent may be
substantially justified in relying upon a third party payment
report when the taxpayer fails to respond to respondent's
inquiries.
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Last modified: May 25, 2011