Sam and Anna Zhadanov, et al. - Page 16




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          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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