Portillo II v IRS

988 F2d 27 (1993, CA5)

Summary of Case

In order to collect attorney fees from the Internal Revenue Service, a taxpayer had to prove the IRS was acting in an unreasonable manner. Ramon Portillo changed that — today, the IRS must prove its actions were reasonable.

1. Introduction

It’s possible for a prevailing party to receive an award of attorney fees from the IRS, however, these cases had previously been rare. One of the greatest hurdles in obtaining attorney fees was to prove that the government’s position was unreasonable, or not substantially justified. Few taxpayers could overcome this burden.

2. Law

Mr. Portillo argued that he should be awarded attorney fees because the government’s position was not substantially justified. The Fifth Circuit agreed that the IRS simply relying upon its presumption of correctness was not a reasonable position to take in a federal court proceeding, and awarded him attorney fees.

3. Congress

Mr. Portillo testified before the Senate Finance Committee, which was in the process of enacting the Taxpayer Bill of Rights. Congress determined that having to prove that the IRS was unreasonable was an excessive burden for a taxpayer to bear. Instead, it determined, the IRS should have to bear the burden of proving that its position was reasonable. Congress then enacted a new statute — Section 26 USC 7430(c)(4)(B) — codifying this position.

That’s right — the presumption of correctness no longer applies to the IRS in attorney fees cases either. This case removed one of the greatest single obstacles to innocent taxpayers receiving an award of attorney fees from the IRS. Many innocent taxpayers have benefited from this new federal tax statute.

See also: Images In Motion of El Paso Inc, (2006) TC Memo 2006-19