Bill McDonald - Page 27

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          during the period in question.  The outcome of that case, along             
          with the holdings herein regarding the amount of unreported                 
          income, will dictate the amount of McDonald’s taxable Social                
          Security benefits.                                                          
               Fraud Penalty--Respondent determined, pursuant to section              
          6663, that each petitioner is liable for a fraud penalty with               
          respect to the entire income tax deficiency determined for their            
          respective 1989 tax years.  Section 6663(a) imposes a 75-percent            
          addition to tax on any portion of an underpayment attributable to           
          fraud.  Under section 6663(b), if the Commissioner establishes              
          that any portion of an underpayment is attributable to fraud,               
          then the entire underpayment is treated as attributable to fraud,           
          except to the extent that a taxpayer can establish by a                     
          preponderance of the evidence that any portion of the                       
          underpayment is not due to fraud.                                           
               Respondent has the burden of proving, by clear and                     
          convincing evidence, that each petitioner fraudulently intended             
          to evade his tax.  Sec. 7454(a); Rule 142(b).  To meet this                 
          burden, respondent must show that there was intent to evade taxes           
          known to be owing by conduct intended to mislead, conceal, or               
          prevent tax collection.  Rowlee v. Commissioner, 80 T.C. 1111,              
          1123 (1983).  Respondent must also show (1) that there is an                
          underpayment of tax, and (2) that part of such underpayment is              
          due to fraud.  Hebrank v. Commissioner, 81 T.C. 640, 642 (1983).            
               Based on our holdings regarding respondent’s reconstruction            
          of partnership income, miscellaneous items of income, and several           



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