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Commissioner, 116 T.C. 79, 85 (2001); Rhone-Poulenc Surfactants &
Specialties v. Commissioner, 114 T.C. 533, 548 (2000).
Mr. Payne’s guilty plea under section 7206(1) for
intentionally filing a false return does not in itself prove that
section 6501(c) applies; respondent must show that petitioners
intended to evade tax. See Wright v. Commissioner, 84 T.C. 636,
643 (1985). For Federal tax purposes, fraud entails intentional
wrongdoing with the purpose of evading a tax believed to be
owing. See Neely v. Commissioner, supra at 86. In order to show
fraud, respondent must prove: (1) An underpayment exists; and
(2) petitioners intended to evade taxes known to be owing by
conduct intended to conceal, mislead, or otherwise prevent the
collection of taxes. See Parks v. Commissioner, 94 T.C. 654,
660-661 (1990).
A. Underpayment of Tax
Respondent must first show by clear and convincing evidence
that petitioners made an underpayment of tax in each of the years
1993, 1994, and 1995. For 1993 and 1995, petitioners have
stipulated that they underreported their income from HRDC by
$64,000 and $42,335, respectively. Petitioners testified that
the payments for extras received by Mr. Payne were not deposited
into HRDC’s bank account, and HRDC’s returns were prepared based
on the deposits to its bank account. Petitioners conceded that
they received at least one-third of the extras performed by other
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