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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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