IRS not substantially justified in basing deficiency on unreliable Form 1099

In Portillo v. Comr., No. 92-4526 (5th Cir. 4/13/93), the Fifth Circuit held that the IRS' position in issuing a deficiency notice based on an unsubstantiated Form 1099 was not substantially justified, and that, therefore, the taxpayer is entitled to recover litigation costs.

In 1984, the taxpayer (T) reported receiving about $10,000 for his painting work for a general contractor. T arrived at this figure using his receipt books. The general contractor, however, filed a Form 1099 with the government, showing that he had paid over $35,000 to T. During...