- 39 -
into the FIP account. The proper focus, however, must be on Mr.
Gherman's unauthorized diversions of funds from the accounts of
FIP's clients into the FIP account. Those unauthorized
diversions constitute the taxable events, and not Mr. Gherman's
subsequent use of the embezzled funds, whatever that use might
have been. See Bailey v. Commissioner, supra; Estate of Geiger
v. Commissioner, supra.
Mr. Gherman admitted during the criminal proceeding that he
had embezzled approximately $9.7 million from FIP's clients. It
is well settled that a judgment of conviction in a criminal
prosecution is admissible in evidence in a subsequent civil
action which is based on the act for which the conviction was
rendered. Fed. R. Evid. 803(22). Mr. Gherman's guilty plea in
the criminal proceeding, furthermore, is a confession of truth to
the charges and is admissible in the instant action as his
admission that he in fact embezzled funds from FIP's clients.
Fed. R. Evid. 801(d)(2).
Additionally, petitioners do not challenge the accuracy of
the amounts listed in the CD schedule, prepared from FIP's books
and records, nor do they deny that Mr. Gherman exercised total
control over the embezzled funds. Petitioners, furthermore, do
not challenge respondent's allegation that Mr. Gherman embezzled
the $9,832,500 reflected on the CD schedule. Rather, petitioners
contend that Mr. Gherman did not receive any unreported income
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