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asserted alternatively, Michael would be liable for all
deficiencies and additions to tax or penalties attributable to
the omitted income from his business. Under this alternative
(which took into account some concessions respondent had already
made), respondent asserted deficiencies and penalties against
Michael totaling almost $70,000.
About 1 month before the trial, petitioners submitted to
respondent an offer to settle for $5,750 both petitioners’
deficiencies, interest, and penalties for both years in issue.
Respondent rejected this offer 1 week after it was submitted.
In Downing I, we concluded that petitioners’ marriage
contract was effective during the years in issue. Accordingly,
we held that Sandra was not liable for any deficiency, addition
to tax, or penalty for any year in issue. We also held that
respondent succeeded in proving by clear and convincing evidence
that Michael’s business produced substantially more income than
Michael reported for the years in issue, resulting in
deficiencies, and that these deficiencies were due to Michael’s
fraud. Our determination on the marriage contract issue mooted
respondent’s determinations of penalties against Sandra, and so
we did not make any finding as to whether Sandra’s actions were
fraudulent or negligent.
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