Mark N. Wright and Erica Y. Wright - Page 31

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          to fraud, the entire underpayment shall be treated as                       
          attributable thereto except to the extent the taxpayer                      
          establishes, by a preponderance of the evidence, that some part             
          is not due to fraud.  Where taxpayers file a joint return,                  
          section 6663 does not apply to a spouse unless some part of the             
          underpayment is due to the fraud of the spouse.  Sec. 6663(c).              
               Respondent must prove on a year-by-year basis by clear and             
          convincing evidence that (1) Mr. Wright underpaid his taxes for             
          that year, and (2) that some part of that underpayment was due to           
          fraud.  Parks v. Commissioner, 94 T.C. 654, 660-661 (1990);                 
          Hebrank v. Commissioner, 81 T.C. 640, 642 (1983).                           
                    1. Underpayment of Tax                                            
               In satisfying the first prong of the fraud test, the                   
          Commissioner cannot discharge his burden by simply relying on the           
          taxpayer’s failure to prove error in his determination of the               
          deficiency.  Petzoldt v. Commissioner, 92 T.C. 661, 700 (1989);             
          Otsuki v. Commissioner, 53 T.C. 96, 106 (1969).  The                        
          Commissioner’s burden of proving an underpayment of tax                     
          attributable to unreported and indirectly reconstructed income              
          may be satisfied in either of two ways:  (1) By proving a likely            
          source of the unreported income, or (2) by disproving any alleged           
          nontaxable source.  DiLeo v. Commissioner, 96 T.C. at 873-874.              
               Respondent has met his burden for all of the years in issue.           
          Petitioners and respondent stipulated the amount and source of              

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