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received income from illegal sources in both years. He sought to
conceal that income and its sources by not filing tax returns and
paying taxes for 1986 and 1987. Petitioner presented no evidence
that any portion of the income, and thus of the underpayment in
either year, was not due to fraud. Petitioner is therefore
liable for additions to tax for fraud on the entire underpayments
for both years. Sec. 6653(b)(2).
b. Substantial underpayment of tax--section 6661
For 1986 and 1987, section 6661 authorizes an addition to
tax of 25 percent of any underpayment if there has been a
substantial understatement of income. Pallottini v.
Commissioner, 90 T.C. 498 (1988) (the applicable rate for
assessments made after October 21, 1986, is 25 percent). The
Code defines a substantial understatement as one that exceeds 10
percent of the tax required to be shown on the return or $5,000.
Sec. 6661(b)(1)(A); Tweeddale v. Commissioner, 92 T.C. 501, 505
(1989); Woods v. Commissioner, 91 T.C. 88, 95 (1988). An
understatement is the difference between the tax required to be
shown on the return and the actual amount shown. Since
petitioner failed to file returns for both years, the
understatement for both years is the entire deficiency. Estate
of McClanahan v. Commissioner, 95 T.C. 98, 103 (1990) (section
6661 applies both to taxpayers who fail to disclose adequately
their taxable income and tax due on a return and to taxpayers who
fail to file any return at all). The understatements from both
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