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Korecky v. Commissioner, 781 F.2d 1566, 1568 (11th Cir. 1986),
affg. T.C. Memo. 1985-63. For the addition to tax under section
6653(b)(1) to apply, respondent must establish for each year that
(1) the taxpayer has underpaid the taxes and (2) some part of the
underpayment is due to fraud. Sec. 6653(b)(1); DiLeo v.
Commissioner, 96 T.C. at 873. For the addition to tax under
section 6653(b)(2) to apply, respondent must establish the
portion of the underpayment attributable to fraud. Sec.
6653(b)(2); DiLeo v. Commissioner, supra at 873.
To prove an underpayment of tax, respondent cannot rely on
the taxpayer's failure to satisfy his or her burden of proof as
to the underlying deficiency. Parks v. Commissioner, 94 T.C.
654, 661 (1990). When allegations of fraud are intertwined with
unreported and indirectly reconstructed income, respondent can
prove an underpayment by (1) proving a likely source of the
unreported income or (2) where the taxpayer alleges a nontaxable
source, by disproving the alleged nontaxable source. DiLeo v.
Commissioner, supra at 873-874.
Based on the facts herein, respondent has shown that
petitioners were engaged in a business activity during the years
at issue and failed to report their gross receipts. Unreported
receipts alone, however, do not establish an underpayment of tax,
unless such unreported receipts are greater than the cost of
goods sold plus deductible expenses. See Franklin v.
Commissioner, T.C. Memo. 1993-184. Petitioners have contended
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