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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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