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and (2) some part of the underpayment was due to fraud."
Recklitis v. Commissioner, 91 T.C. 874, 909 (1988) (citations
omitted); see also Hebrank v. Commissioner, 81 T.C. 640, 642
(1983).
Although respondent need not prove the precise amount of the
underpayment resulting from fraud, respondent may not carry his
burden by merely relying on a taxpayer's failure to carry the
burden of proof on the underlying deficiency. DiLeo v.
Commissioner, 96 T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d Cir.
1992); Otsuki v. Commissioner, 53 T.C. 96, 106 (1969).
A. Underreporting of Tax
Respondent asserts that petitioners had unreported income
arising from the checks issued by J.C. Penney for delivery
services rendered by AJF to Custom Decorating and fuel
reimbursements for fuel expenses incurred by AJF.
Petitioner AJF concedes that checks which were cashed by
Ferrentino, received from Custom Decorating for delivery
services, should have been included in AJF's gross income.
However, petitioners argue that the fuel reimbursements are not
includable in gross receipts of AJF, and the proceeds from
Ferrentino's check cashing are not includable in his gross income
because he used the proceeds to pay "casual labor" for
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