Gregory H. and Elizabeth A. Price - Page 18




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               For 1989, respondent determined that petitioner is liable for          
          fraud and that the fraud is attributable to the taxable income              
          relating to the unexplained bank deposits and the reimbursements            
          for leasehold improvements.  For 1990, respondent determined that           
          petitioner is liable for fraud and that the fraud is attributable           
          to the taxable income relating to the unexplained bank deposits,            
          the reimbursements for leasehold improvements, and the $359 of              
          claimed depreciation expense.                                               
               For the years in issue, under section 6663(a), a penalty of 75         
          percent applies to the portion of an understatement of tax that is          
          attributable to fraud.  To establish fraud, respondent is required          
          to prove that the understatement is due to fraudulent intent.  See          
          sec. 7454(a); Rule 142(b); DiLeo v. Commissioner, 959 F.2d 16 (2d           
          Cir. 1992), affg. 96 T.C. 858, 873 (1991).  Respondent has the              
          burden of proving fraud by clear and convincing evidence.  See sec.         
          7454(a); Rule 142(b); Bagby v. Commissioner, 102 T.C. 596, 607              
          (1994).                                                                     
               Where allegations of fraud are intertwined with unreported and         
          indirectly reconstructed income, respondent is required to                  
          establish a likely taxable source for alleged unreported income or          
          to disprove nontaxable sources alleged by the taxpayer.  See DiLeo          
          v. Commissioner, 96 T.C. at 873; Parks v. Commissioner, 94 T.C.             
          654, 661 (1990).                                                            







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