I am still looking into the issue. I need to speak with another developer who is out today in order to get a better understanding of how things should behave.
I would suggest using the GetUserIdentities method to determine if a user already exists. You will want to search on the UniqueIdentifier field and use the username as the search value.
string[] userIdentities = wsProxy.GetUserIdentities(contextToken, "UniqueIdentifier", userName);
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