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Although the two formulas have many similarities, their
differences are distinct. The principal difference stems from
each proponent's treatment of the cashier's checks purchased by
petitioner. Respondent's formula has as its basis the theory
that petitioner purchased the cashier's checks with embezzled
funds, and therefore all funds are attributable to petitioners as
embezzlement income. In contrast, petitioners argue that the
cashier's checks remained partnership property, belonging equally
to petitioner and Carlton, and therefore, pursuant to section
702, only one-half of the funds is attributable to petitioners.
Respondent also contends that the deficiencies resulting
from petitioners' unreported income are subject to the civil
fraud penalty. Petitioners disagree and maintain that respondent
has failed to carry her burden of establishing fraud on the part
of either Anthony Walters or Linda Walters with respect to
taxable years 1987 and 1988. Petitioners further maintain that
respondent has failed to establish fraud on the part of Linda
Walters with respect to taxable year 1989. In light of
petitioner's guilty plea to criminal tax fraud with regard to his
1989 return, petitioners recognize the doctrine of collateral
estoppel and concede that the deficiency resulting from their
unreported income for taxable year 1989 is subject to the civil
fraud penalty. Petitioners contend, however, that only Anthony
Walters is liable for the civil fraud penalty for taxable year
1989.
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