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The first prong of the above fraud test mandates that
respondent prove the existence of an underpayment of tax for each
year. In doing so, respondent may not simply rely on the
taxpayer’s failure to prove error in the deficiency
determination. DiLeo v. Commissioner, supra at 873; Otsuki v.
Commissioner, 53 T.C. 96, 106 (1969). Here, the evidence leaves
no doubt that substantial taxable income was generated through
Mr. Richardson’s efforts in selling Aegis trusts. The totality
of the record also clearly establishes that the entities that
petitioners attempted to interpose between themselves and those
receipts were not worthy of credence. Petitioners failed to
include that income on their 1996 and 1997 returns and, as a
result, underpaid their taxes. Petitioners’ quibbles over
various details and amounts notwithstanding, respondent has in
any event shown by clear and convincing evidence the essential
elements of the scenario which led to underpayments of tax.
B. Fraudulent Intent
The second prong of the fraud test requires respondent to
show that a portion of the underpayment is attributable to fraud.
Fraud for this purpose is defined as intentional wrongdoing on
the part of the taxpayer, with the specific purpose of avoiding a
tax believed to be owed. Stoltzfus v. United States, 398 F.2d
1002, 1004 (3d Cir. 1968); Webb v. Commissioner, 394 F.2d 366,
377 (5th Cir. 1968), affg. T.C. Memo. 1966-81; Powell v.
Granquist, 252 F.2d 56, 60 (9th Cir. 1958). Stated differently,
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