- 42 -
It is also significant that petitioner did not in any way
participate in Mr. Morris' embezzlement schemes. Mr. Morris went
to great lengths to deceive petitioner into believing that the
funds to which she had access during the years at issue and which
he, unbeknownst to her, had embezzled were from legitimate
sources.
Another important factor under section 6013(e)(1)(D) is that
in August 1991, about six months after petitioner discovered that
Mr. Morris had been embezzling funds, petitioner and Mr. Morris
were divorced. The reason for the divorce was primarily attrib-
utable to Mr. Morris' embezzlement activities.
Based on our review of the entire record before us, we find
that it would be inequitable within the meaning of section
6013(e)(1)(D) to hold petitioner liable for the portion of the
deficiency for each of the years at issue that is attributable to
the unreported embezzlement income.
For the foregoing reasons, we hold that petitioner qualifies
for innocent spouse relief under section 6013(e) with respect to
33(...continued)
the aggregate amount of embezzled funds that respondent deter-
mined had been reported as gross receipts in the Federal income
tax returns filed by Accu-Data and Meadows with respect to each
such year.
It is also noteworthy that John Kenny Company received the
Illinois land in connection with the settlement of the lawsuit
that it instituted against Mr. Morris and petitioner. Thus,
petitioner did not benefit from the embezzled funds to the extent
of the value of that land. See Schwimmer v. Commissioner, T.C.
Memo. 1996-353.
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