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Respondent has the burden of proving fraud by clear and
convincing evidence. Sec. 7454(a); Rule 142(b); Parks v.
Commissioner, 94 T.C. 654, 660 (1990). First, respondent must
prove that there is an underpayment. Parks v. Commissioner,
supra. Respondent may not rely on the taxpayer's failure to
carry the burden of proving the underlying deficiency. Parks v.
Commissioner, supra at 660-661. Second, respondent must show
that the taxpayer intended to evade taxes by conduct intended to
conceal, mislead, or otherwise prevent tax collection. Stoltzfus
v. United States, 398 F.2d 1002, 1004 (3d Cir. 1968); Parks v.
Commissioner, supra at 661; Rowlee v. Commissioner, 80 T.C. 1111,
1123 (1983).
1. Underpayment
Respondent may prove that the taxpayer underpaid tax by
proving that the taxpayer had a likely source of the unreported
income, Holland v. United States, 348 U.S. 121 (1954); Parks v.
Commissioner, supra; Nicholas v. Commissioner, 70 T.C. 1057
(1978), or, where the taxpayer alleges a nontaxable source, by
disproving the alleged nontaxable source; United States v.
Massei, 355 U.S. 595 (1958); Kramer v. Commissioner, 389 F.2d
236, 239 (7th Cir. 1968), affg. T.C. Memo. 1966-234; Parks v.
Commissioner, supra. Petitioner does not allege that he had
nontaxable sources of income. His only known source of legal
income was the motel. Petitioner's illegal drug trafficking
activities were a likely source of his unreported income.
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