Joseph F. and Camille T. Uddo - Page 11

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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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