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III. Fraud Penalties
Section 6663(a) provides for the imposition of a penalty in
“an amount equal to 75 percent of the portion of the underpayment
which is attributable to fraud.” In addition, section 6663(b)
specifies that, if any portion of the underpayment is
attributable to fraud, the entire underpayment is treated as
attributable thereto, except and to the extent that the taxpayer
establishes some part is not due to fraud.
Respondent bears the burden of proving the applicability of
the civil fraud penalty by clear and convincing evidence. Sec.
7454(a); Rule 142(b). To sustain this burden, respondent must
establish by this level of proof both (1) that there was an
underpayment of tax for the taxable year in issue and (2) that at
least some portion of such underpayment was due to fraud. DiLeo
v. Commissioner, 96 T.C. 858, 873 (1991), affd. 959 F.2d 16 (2d
Cir. 1992); Petzoldt v. Commissioner, supra at 699.
A. Underpayments of Tax
An underpayment will exist in a scenario such as that
presented by the case at bar where unreported gross receipts are
not exceeded by costs of goods sold and deductible expenses. In
establishing the requisite underpayment, the Commissioner may not
simply rely on the taxpayer’s failure to prove error in the
deficiency determination. DiLeo v. Commissioner, supra at 873;
Parks v. Commissioner, 94 T.C. 654, 660-661 (1990); Otsuki v.
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