Portillo I v. IRS

932 F2d 1128 (CA5, 1991)

Summary of Case

We are presumed innocent until proven guilty, in a criminal case. But in a tax case the opposite is true, the IRS has long been presumed to be correct. Mr. Portillo changed all of that. Today, the IRS must prove unreported income.

1. Facts

Mr. Portillo was a 70-year- old house painter. He spoke broken English and had an eighth-grade education. In 1997 the IRS received a form 1099 claiming Mr. Portillo was paid $17,000 by a contractor.

However the contractor did not have any checks written to Mr. Portillo, no receipts for payments to Mr. Portillo nor any checks to cash with which to pay Mr. Portillo. At trial the IRS simply argue it was presumed correct and Mr. Portillo had a burden to overcome that presumption. Mr. Portillo argued that the government had no evidence in its file and therefore should not be entitled to receive the presumption that it was correct – having abused that presumption.

2. Law

The United States Tax Court determined that the Internal Revenue Service was presumed correct and that Mr. Portillo owed those taxes.

On appeal the Fifth Circuit Court of Appeals determined that the government lacked any evidence that Mr. Portillo received that money and therefore was no longer entitled to rely on its presumption of correctness. Further, the Court determined that in the future the IRS would not receive the benefit of presumption of correctness in unreported income cases unless it first produced evidence that the taxpayer had actually received the money.

This was an astonishing determination by the Circuit Court of Appeals.

3. Congress

The case was reported all over the United States, including on the front page of the Wall Street Journal, Newsweek, Readers Digest, AP wire, all of the major national law journals, etc. Congress saw the case in the national tax journals and held hearings before the Senate Finance Committee in Washington DC while enacting the Taxpayer Bill of Rights. Mr. Portillo, an uneducated elderly man speaking broken English testified that he didn’t receive the money from the contractor, that the IRS had no evidence otherwise, that he didn’t owe $8300 in tax arising therefrom, and that he was impoverished and couldn’t pay anyway.

Congress determined the Portillo case should be codified and it was – in the new statute 26 USC 6201(d) making Mr. Portillo’s case the law of the land. The IRS has privately advised that Mr. Portillo’s case saved taxpayers as much as $600 million in that year alone. The Service further advised it had to fundamentally change the way it conducts an income audit due to this case and the statute that arose therefrom.

Today, Taxpayers all over the United States, especially the poor, benefit from the courage and stamina of this elderly, infirm, impoverished and uneducated man who stood up to the IRS and said no – and won.