-30-
Our conclusions regarding fraud are also sufficient under
section 6501(c)(1) to overcome the bar of the statute of
limitations for that year. See Stone v. Commissioner, 56 T.C.
213, 228 (1971). Therefore, it is not necessary for us to
discuss whether respondent has proven a substantial omission of
income for purposes of section 6501(e)(1).
For 1990 and 1991, respondent bases her determination of
fraud on petitioners' failure to report income allegedly
embezzled from Kortava and on postponement of reporting income
from the vehicle resale business. Respondent has not proven by
clear and convincing evidence that petitioner embezzled money
from Kortava or that petitioners failed to report money received
from Kortava as income with knowledge that the funds were
taxable. Although petitioner exercised control over the funds
and was high-handed in his use of them, leading to a dispute with
Kortava, it is not clear that petitioner intended permanently to
deprive Kortava of his funds. Respondent has not disproved
petitioners' explanation that they were investing money in real
estate and in other businesses in accordance with an agreement
with Kortava, as demonstrated by their return of $165,000 of
Kortava's money on his demand. See, e.g., Baumgardner v.
Commissioner, 251 F.2d 311, 322 (9th Cir. 1957), affg. T.C. Memo.
1956-112; Ishijima v. Commissioner, T.C. Memo. 1994-353. We are
not convinced that reporting income in 1991 instead of 1990 was
due to fraud.
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