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respect to a spouse unless some part of the underpayment is due
to fraud of such spouse. See secs. 6653(b)(3) for 1988 and
6663(c) for the years 1989, 1990, and 1991.
Respondent has the burden of proving by clear and convincing
evidence that an underpayment exists for the years in issue and
that some portion of the underpayment is due to fraud. See sec.
7454(a); Rule 142(b); Niedringhaus v. Commissioner, 99 T.C. 202,
210 (1992). Consequently, respondent must establish: (1)
Petitioners have underpaid their taxes for each year, and (2)
some part of the underpayment is due to fraud. See DiLeo v.
Commissioner, 96 T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir.
1992).
Respondent need not prove the precise amount of the
underpayment resulting from fraud but only that some portion of
the underpayment of tax for each year is due to fraud. See
Niedringhaus v. Commissioner, supra at 210.
A. Understatement of Income
Where allegations of fraud are intertwined with unreported
and indirectly reconstructed income, respondent is required to
establish a likely taxable source for alleged unreported income
or to disprove nontaxable sources alleged by the taxpayer. See
DiLeo v. Commissioner, supra at 873.
The evidence clearly establishes that the Jug Handle Inn was
a likely source of unreported income. The evidence also
establishes that petitioners had no nontaxable sources that could
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