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was $136,184. Petitioners omitted embezzlement income of $38,200
from their 1994 return. Petitioners did not inform Ms. Witt
about any of the embezzlement income.
OPINION
We must decide whether petitioner is liable for the fraud
penalty pursuant to section 6663 for taxable years 1992, 1993,
and 1994. Section 6663 provides:
SEC. 6663. IMPOSITION OF FRAUD PENALTY.
(a) Imposition of Penalty.--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.
(b) Determination of Portion Attributable to
Fraud.--If the Secretary establishes that any portion
of an underpayment is attributable to fraud, the entire
underpayment shall be treated as attributable to fraud,
except with respect to any portion of the underpayment
which the taxpayer establishes (by a preponderance of
the evidence) is not attributable to fraud.
(c) Special Rule for Joint Returns.--In the case
of joint return, this section shall not apply with
respect to a spouse unless some part of the
underpayment is due to fraud of such spouse.
The burden of proof in respect of the issue of fraud must be
carried by the Commissioner by clear and convincing evidence.
See sec. 7454(a); Rule 142(b). To establish the existence of
fraud, respondent must prove by clear and convincing evidence
that petitioner underpaid his income tax and that some part of
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