Richard and Rebecca Adair - Page 10




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          relating to the deposits to the checking account, one-half of               
          which is then charged to petitioners.                                       

        Bank Deposits                  Net Income                                     
        Identified as                  of Roofing                                     
        Gross Receipts    Average      Business on    Unidentified              One-half
        of Roofing     Net Profit    Identified         Bank      Taxable    Charged to
        Year      Business        Margin     Bank Deposits     Deposits    Income*   Petitioners
        1993      $490,009         20%         $ 98,002       $ 17,727    $115,875     $57,938
        1994       426,843         25%          106,711         51,061     157,939      78,970
        1995       197,965         18%           35,634        133,369     169,032      84,516
             *  As indicated, also included in the taxable income for each year is interest
             income relating to the checking account in the respective amounts of $146,
             $167, and $29.                                                           

             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, supra                 
        at 661.                                                                       








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