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should be considered a bad debt and give rise to an offsetting
deduction from PCTI’s income.
Trial was held in San Francisco, and the Chens were
California residents when they filed their petition.
Discussion
I. Fraud
We first consider whether the Commissioner has proven that
the Chens committed fraud, because this will resolve the
threshold question of the statute-of-limitations defense. A
fraud penalty under section 6663(a) requires proof that there is
an underpayment of tax required to be shown on a return that the
underpayment is due to fraud. Miller v. Commissioner, T.C. Memo.
1989-461. The Commissioner has the burden of proving fraud by
clear and convincing evidence. Sec. 7454(a); Rule 142(b).
The Commissioner shoulders the first part of his burden with
a stipulation--the parties agree that the Chens underpaid their
1998 taxes: “The $287,000 [of insurance proceeds] * * * was not
reported as income on Petitioners’ 1998 Form 1040.” The second
part of the Commissioner’s burden is to show that the Chens’
underpayment was due to fraud. We define fraud as the “willful
attempt to evade tax”, and look at the entire record of a case to
see if it exists. Beaver v. Commissioner, 55 T.C. 85, 92 (1970).
The indicia of fraud are numerous and varied, and can include
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