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This is not the appropriate forum to relitigate Smith. The issue
before us is whether respondent had a reasonable basis in law,
not whether Smith was correctly decided. See Or. Natural Res.
Council v. Madigan, 980 F.2d 1330, 1332 (9th Cir. 1992). Smith
provides a basis in law for respondent’s position,3 especially
because there is no contrary authority. Thus, we conclude that
respondent had a reasonable basis in law for contending that
petitioner was liable for tax on the entire $350,000 lottery
payment in 1995.
2. Whether Respondent Had a Reasonable Basis in Fact
We next consider whether respondent had a reasonable basis
in fact for respondent’s position that petitioner was liable for
tax on the entire $350,000 lottery payment in 1995. When
respondent issued the notice of deficiency, respondent knew that
petitioner had the sole right to receive the $350,000 payment in
1995 until, as part of the divorce settlement, he agreed to give
his wife approximately one-half of that payment in 1995. Those
2(...continued)
(1) for purposes of this subtitle, the
property shall be treated as acquired by the
transferee by gift, and
(2) the basis of the transferee in the
property shall be the adjusted basis of the
transferor.
3 In In re ACME Music Co., 208 Bankr. 838, 843 (Bankr. W.D.
Pa. 1997), the District Court held that the position of the IRS
had a reasonable basis in law because the position was supported
by two Federal District Court cases.
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