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petitioner can show the specific portion of the underpayment that
is not due to fraud.
2. Portion of Underpayment Not Attributable to Fraud
Petitioner contends, generally, that he understood that, in
dealings in real estate (and exotic cars), receipts from sales or
mortgage payments related to the real estate business “were not
taxable, but were a tax free exception”, but that “Payments taken
for living and personal expenses were taxable.” Petitioner is
correct that the fraud penalty cannot be imposed on the basis of
an “honest mistake” regarding taxability. Indeed, the “due to
fraud” language in section 6653(b) requires a specific intent to
evade a tax owing, and “a good-faith misunderstanding of the tax
laws could negate fraud”. Niedringhaus v. Commissioner, 99 T.C.
202, 217 (1992). However, considering all the facts and
circumstances on the record, we find petitioner’s alleged
misunderstanding of the law on tax free exchanges incredible.94
Petitioner was an experienced real estate developer and
dealer for many years. He was involved in a considerable number
of real estate transactions during the years at issue and in
prior years. Mr. Kelly testified that petitioner appeared
94It appears that petitioner raised this explanation of his
failure to report income from his real estate transactions for
the first time at trial. The record shows that he did not
present this purported “misunderstanding” of tax free exchanges
to respondent’s revenue agent during the examination of his 1985-
1988 returns, and his petition does not provide any allegation of
a misunderstanding of the tax laws.
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