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We are persuaded that Ms. Walters did not know that Mr.
Gherman was embezzling money from FIP's clients until 1988, after
he fled the country and after the returns for the applicable
years were filed. Mr. Gherman did not tell Ms. Walter that he
was embezzling money from the accounts of FIP's clients. The
embezzled funds, furthermore, did not go into the Joan Gherman
No. 1 account, over which she had control, but into the FIP
account, over which she exercised no supervision. Although Ms.
Walters attended monthly board meetings of FIP, it is unlikely
that the embezzlement of funds from accounts of FIP's clients was
a topic of discussion at those meetings. Even Mr. Feltman, the
trustee for the 1988 bankruptcy, became convinced after a lengthy
investigation of the CD scheme that Ms. Walters was unaware of
the embezzlement until after Mr. Gherman fled the country.
Accordingly, we conclude that at the time the tax returns for the
applicable years were filed, Ms. Walters had no actual knowledge
of the transaction giving rise to the unreported income--the
embezzlement of funds from the accounts of FIP's clients.
Additionally, we are persuaded that Ms. Walters had no
reason to know that Mr. Gherman was embezzling money from the
accounts of FIP's clients. Ms. Walters was a high school
graduate and was basically ignorant of tax, financial, and
accounting principles. Mr. Gherman's financial affairs were
complex, and Ms. Walters had very little to do with them. The CD
scheme continued over a number of years and deceived many
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