- 16 -
under section 6663(b).12 See, e.g., Rhone-Poulenc Surfactants &
Specialties, L.P. v. Commissioner, 114 T.C. 533, 548 (2000),
appeal dismissed and remanded 249 F.3d 175 (3d Cir. 2001).
Because our resolution of the limitations issues depends, at
least initially, upon our resolution of the fraud issues in this
case, we examine first whether, on this record, respondent has
proven that Vortex and/or the Zhadanovs engaged in fraudulent
conduct under section 6663(b).
II. Fraud Penalty In General
In order for the Commissioner to prove that a taxpayer is
liable for a fraud penalty under section 6663(b) or its
predecessor, the Commissioner must prove by clear and convincing
evidence that (1) an underpayment of tax exists, and (2) some
part of the underpayment is due to fraud. Sec. 7454(a); Rule
142(b); DiLeo v. Commissioner, 96 T.C. 858, 873 (1991), affd. 959
F.2d 16 (2d Cir. 1992). The Commissioner may not rely on a
taxpayer’s failure to carry its burden of proof on the underlying
deficiency as proof that the taxpayer underpaid his tax. DiLeo
v. Commissioner, supra.
Fraud is established by showing that the taxpayer intended
“to evade tax believed to be owing by conduct intended to
12Sec. 6663(a) was added to the Code by sec. 7721(a) of the
Omnibus Budget Reconciliation Act of 1989 (OBRA 1989), Pub. L.
101-239, 103 Stat. 2395-2398. Prior to the passage of OBRA 1989,
the fraud penalty (or addition to tax, as it was then known) was
contained in former sec. 6653(b).
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