Your client was the beneficiary of an annuity contract purchased by her stepmother. When the stepmother died, the insurance company paid the client $400,000 and sent her a Form 1099 indicating that the taxable portion (i.e., the amount in excess of the investment in the contract) was $50,000. However, according to the client, her father fraudulently convinced her that he was the intended beneficiary. She gave her father a check equal to the amount she had received from the insurance company. She did not report any of the annuity proceeds in her income tax return. She later discovered the fraud and filed a lawsuit to collect from her father. The IRS has examined your client's return and has taken the position that she must include the $50,000 in her gross income.

Evaluate the IRS's position.