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Respondent has the burden of proving fraud by clear and
convincing evidence. Sec. 7454(a); Rule 142(b); Bagby v.
Commissioner, 102 T.C. 596, 607 (1994).
As we have found, the evidence establishes that Cal Ben's
sales were significantly underreported for each year at issue and
that as a result petitioner's share of Cal Ben's sales income was
underreported on petitioners' joint Federal income tax returns.
Petitioners contend, however, that Cal Ben's unreported
sales for each year should be offset by additional deductible
business expenses of Cal Ben that allegedly were paid out of the
Lloyds/Sanwa account, that were not properly recorded as expenses
in Cal Ben’s cash disbursements journal, and that were not
claimed on Cal Ben's partnership tax returns. Petitioners
contend that the additional expenses, if allowed, would greatly
reduce the unreported net income of Cal Ben and the unreported
taxable income of Cal Ben chargeable to petitioner. In support
of the claimed additional business expenses, petitioners offer
evidence of net profit margins of other wholesale businesses.
Petitioners note that without allowance of the claimed additional
business expenses, net profit margins of Cal Ben would far exceed
average net profit margins relating to wholesale businesses, as
set forth in government and business survey data. Further,
petitioners claim that funds used to purchase bonds, a yacht, and
other expensive items for personal use constituted accumulated
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