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proceeding.” S. Rept. 94-938, at 365 (1976), 1976-3 C.B. (Vol.
3) 57, 403.
III. Deductions
Respondent determined that ZMDI claimed deductions for
expenses in 1991 through 1994 that exceeded its payments.
Petitioners failed to present evidence establishing its
entitlement to these deductions. See Welch v. Helvering, supra
at 115. Accordingly, respondent’s determination is sustained.
IV. Fraud Penalty
Respondent determined that petitioners were liable, pursuant
to section 6663(a), for fraud penalties. Respondent must
establish by clear and convincing evidence that for each year in
issue an underpayment of tax exists and some portion of the
underpayment is due to fraud. See Petzoldt v. Commissioner, 92
T.C. 661, 699 (1989). After respondent has established that any
portion of the underpayment is due to fraud, the entire
underpayment is treated as attributable to fraud, unless
petitioner establishes that any portion is not attributable to
fraud. See sec. 6663(b).
Fraud is established by proof of intent to evade tax
believed to be owing. See Clayton v. Commissioner, 102 T.C. 632
(1994). Respondent may prove intent to evade tax by
circumstantial evidence, see Davis v. Commissioner, T.C. Memo.
1991-603, which may include substantial understatement of income,
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