percent of the portion of any underpayment attributable to fraud, plus 50
percent of the interest due on this portion. If respondent establishes that
any portion of an underpayment for 1986 and 1987 is attributable to fraud,
then the entire underpayment is to be treated as attributable to fraud, except
with respect to any portion of the underpayment that the taxpayer establishes
is not attributable to fraud. Sec. 6653(b)(1)(A) and (B).
In order to discharge her burden, respondent must prove that: (1) An
underpayment exists for the years in issue; and (2) that the underpayment is
due to fraud. Sec. 7454(a); Rule 142(b); Petzoldt v. Commissioner, 92 T.C.
661, 699 (1989); Hebrank v. Commissioner, 81 T.C. 640, 642 (1983); Habersham-
Bey v. Commissioner, 78 T.C. 304, 311 (1982).
Respondent's income determination is based on the diversion of funds
from the MPC premium account for Mr. Burke's personal benefit. Mr. Burke does
not deny that funds belonging to U.S. Life were taken from the MPC premium
account. Instead, Mr. Burke claims that funds, which were in excess of what
was properly due to the Burke Agencies as commissions, were either loans from
U.S. Life or were funds embezzled by several of Mr. Burke's employees.
We have previously found that none of the withdrawn funds that should
have been paid to U.S. Life constituted loans. U.S. Life neither explicitly
nor implicitly consented to lend Mr. Burke any of the funds withdrawn from the
MPC premium account. Mr. Burke could not have misapprehended this situation.
He neither sought nor received U.S. Life's permission to borrow money. U.S.
Life continuously requested payment of amounts to which it was entitled. In
response, Mr. Burke provided numerous false explanations to U.S. Life.
Finally, in 1987, U.S. Life brought suit and obtained a judgment against Mr.
Burke for the unpaid premiums.
With respect to Mr. Burke's claim that his employees embezzled funds, we
have already explained why we reject this claim. The evidence clearly
demonstrates that Mr. Burke used his employees to divert funds from the MPC
premium account by instructing them to move money out of that account and give
it to him or transfer it to Ard Rhei and others for his benefit.
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