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We find that petitioners did not receive embezzlement income
and, as a consequence, that their method of computing the amount
of their unreported income is correct. However, while we agree
that respondent has failed to prove fraud on the part of Linda
Walters for any taxable year at issue, we disagree with
petitioners' contention that respondent has failed to establish
fraud on the part of Anthony Walters with respect to the taxable
years at issue.
Issue 1. Embezzlement Income
The first issue for our consideration is whether petitioners
received embezzlement income stemming from petitioner's purchase
and control of the cashier's checks during the taxable years at
issue. It is necessary for us to resolve this issue as its
resolution guides our analysis of how petitioners' unreported
income for each taxable year at issue is to be computed. More
specifically, respondent's computation requires a finding that
petitioner's handling of the cashier's checks gave rise to
embezzlement income. In contrast, petitioners' computation
requires a finding that petitioner's handling of the cashier's
checks did not give rise to embezzlement income.
Respondent's determinations are presumed correct, and
petitioners bear the burden of proving otherwise. Rule 142(a);
Welch v. Helvering, 290 U.S. 111 (1933). Respondent asserts that
petitioner embezzled funds belonging to Fruitland and converted
those funds into cashier's checks for his personal use.
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