Phillip A. O'Bryon and Cyndie W. O'Bryon - Page 17

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          Fraud Penalty                                                               
               Section 6663(a) provides that "If any part of any                      
          underpayment of tax required to be shown on a return is due to              
          fraud, there shall be added to the tax an amount equal to 75                
          percent of the portion of the underpayment which is attributable            
          to fraud."  In the notice of deficiency, respondent determined              
          section 6663 civil fraud penalties against Phillip, at the                  
          statutory rate of 75 percent of the deficiency attributable to              
          the 1992, 1993, and 1994 embezzlement income.  In entering the              
          March 20, 2000, settlement, the parties agreed that Phillip was             
          liable for the civil fraud penalty under section 6663 at a rate             
          of 37.5 percent, rather than the statutory 75 percent.                      
               Respondent asserts that Phillip conceded the fraud penalty.            
          Petitioners contend that Phillip agreed to permit the assessment            
          of an amount equal to one-half of the amount of the fraud penalty           
          but never conceded that the returns were fraudulent.  We think              
          that by agreeing that Phillip was liable for the fraud penalty,             
          even at the reduced rate, petitioners have conceded that the                
          returns were fraudulent.                                                    
               Furthermore, a review of the record of this case reveals               
          that respondent was reasonable in determining that petitioners'             
          omission of income from the Ponzi scheme was attributable to                

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