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alternative, negligence. The addition to tax in the case of
fraud is a civil sanction provided primarily as a safeguard for
the protection of the revenue and to reimburse the Government for
the heavy expense of investigation and the loss resulting from
the taxpayer's fraud. Helvering v. Mitchell, 303 U.S. 391, 401
(1938).
Respondent has the burden of proving fraud by clear and
convincing evidence. Sec. 7454(a); Rule 142(b). Specifically,
respondent must prove (1) an underpayment of tax and
(2) fraudulent intent. Respondent cannot rely on petitioners'
failure to overcome the normal presumption of correctness of the
notice of deficiency as to any of the elements necessary to
proving fraud. Otsuki v. Commissioner, 53 T.C. 96, 106 (1969);
Klein v. Commissioner, T.C. Memo. 1984-392, affd. 880 F.2d 260
(10th Cir. 1989). Thus our disallowance of various disputed
deductions does not satisfy respondent's burden of proving, by
clear and convincing evidence, an underpayment to which the
addition to tax for fraud applies.
Fraudulent intent may be inferred from various kinds of
circumstantial evidence, or "badges of fraud", including
understatement of income, inadequate records, implausible or
inconsistent explanations of behavior, concealing assets, or
failure to cooperate with tax authorities. Spies v.
Commissioner, 317 U.S. 492, 499 (1943); Bradford v. Commissioner,
796 F.2d 303, 307 (9th Cir. 1986), affg. T.C. Memo. 1984-601.
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