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markup of inventory, and thus he based the amount of the
percentage markup entirely on interviews with petitioners.
Because of those flaws and weaknesses, we place no reliance
on petitioners’ expert’s opinion. Moreover, respondent’s bank
deposits analysis was properly and conservatively used.
Therefore, petitioners have not shown that the percentage markup
method they used would more accurately reflects Gene’s gross
receipts for the years in issue. Accordingly, respondent’s
determinations with regard to petitioners’ understatements of
income is upheld for 1991 and 1992.
Having decided that there was unreported income for 1991 and
1992, we now consider, for 1991, whether the understatement was
due to fraud within the meaning of section 6663.7 Respondent
determined that petitioner fraudulently and with intent to evade
income tax understated his income by omitting $223,673 and
$161,789 of gross receipts for 1991 and 1992, respectively.
Fraud is defined as an intentional wrongdoing designed to
evade tax believed to be owing. Edelson v. Commissioner, 829
F.2d 828, 833 (9th Cir. 1987), affg. T.C. Memo. 1986-223.
Respondent bears the burden of proving fraud by clear and
convincing evidence. Rule 142(b).
In order to prove fraud, the Commissioner must show the
7 Respondent has conceded that petitioner Jin Y. Choi is not
liable for the fraud penalty for the 1991 tax year.
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