Joan Walters, f.k.a. Joan Gherman, and Henry Gherman - Page 39

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          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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