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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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