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In Sher v. Commissioner, 861 F.2d 131, 134-135 (5th Cir.
1988), affg. 89 T.C. 79 (1987), the Court of Appeals for the
Fifth Circuit held that respondent's position was substantially
justified where respondent relied upon apparently credible third
party payment information that had not been refuted by the
taxpayers.7 Even in the wake of its decisions in Portillo I and
Portillo II, the Court of Appeals for the Fifth Circuit continues
to cite Sher v. Commissioner, supra, for this proposition. See,
e.g., Nalle v. Commissioner, supra at 192.8 Furthermore, other
Court of Appeals for the Fifth Circuit cases suggest that
respondent's duty to investigate information provided by a third
party payor is not absolute. See, e.g., Parker v. Commissioner,
117 F.3d 785, 787 (5th Cir. 1997) (in context of a motion to
dismiss for failure to state a claim, the court noted that
respondent has no duty to investigate a third-party payment
report that is not disputed by the taxpayer).
7 We recognize that Sher v. Commissioner, 861 F.2d 131 (5th
Cir. 1988), affg. 89 T.C. 79 (1987), arose in the context of a
motion for litigation costs; hence the focal point of the
analysis was respondent's position in the answer. Moreover, we
note that in dicta, the Court of Appeals for the Fifth Circuit
stated that respondent's reliance upon the information from the
third party payor "would not have been sufficient if the petition
and the documents in the file demonstrated the need for further
investigation." Id. at 135.
8 The opinion in Sher v. Commissioner, supra, was superseded
by statute on other grounds. See Hanson v. Commissioner, 975
F.2d 1150, 1152 n.2 (5th Cir. 1992), revg. an unpublished order
of this Court.
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