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Because petitioners used a modified accrual accounting method,
Ms. Bellamy used the same method to calculate petitioners' income.
She reconstructed petitioners' income and expenses using the
information she possessed.
Petitioners failed to present evidence to refute respondent's
income determinations and to substantiate the deductions claimed.
In contrast, respondent has established that the underpayments
determined in the statutory notice of deficiency are correct.
Accordingly, we sustain respondent's determination both as to the
amounts of unreported income and the denial of Schedule C
deductions for each of the years under consideration.
Issue 2. Fraud Additions to Tax
Respondent determined that petitioners are liable for the
additions to tax for fraud under section 6653(b)(1) and (2) for
1984 and 1985 and under section 6653(b)(1)(A) and (B) for 1986.
For 1984 and 1985, section 6653(b)(1) provides that if any
part of any underpayment of tax required to be shown on a return is
due to fraud, there shall be added to the tax an amount equal to 50
percent of the underpayment. Section 6653(b)(2) provides for
additional interest with respect to the portion of underpayment
attributable to fraud. For 1986, section 6653(b)(1)(A) imposes an
addition to tax equal to 75 percent of the portion of the
underpayment which is attributable to fraud, and section
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