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874 (1991), affd. 959 F.2d 16 (2d Cir. 1992); Rowlee v.
Commissioner, 80 T.C. 1111, 1123 (1983).
To satisfy the first prong, there must be clear and
convincing evidence to support respondent’s determination of an
underpayment; i.e., clear and convincing evidence that JJH was a
sham and that the income generated from petitioner’s accounting
services belonged to him. This prong must be satisfied with
affirmative proof, and a taxpayer’s failure to meet his or her
burden of proof alone will not suffice. We find such clear and
convincing evidence here. Much of this evidence came directly
from petitioner’s own testimony, including petitioner’s
admissions that: He was not an employee of JJH; he paid his
personal expenses from JJH’s account; the purported officers of
JJH, Charlene and Craig, knew nothing about JJH; he moved funds
in a circular manner among the accounts of JJH, CCA, and Coastal;
and he fabricated the numbers and categories on his 1994 return
(see discussion of fraud below). These admissions together with
the other evidence detailed under our discussion of the
deficiency are clear and convincing affirmative evidence that
petitioner underpaid his 1994 taxes.
With respect to the second prong of the fraud test; i.e.,
that petitioner had the requisite fraudulent intent, fraud may be
proven by circumstantial evidence because fraud can rarely be
established by direct proof of the taxpayer’s intention. See
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