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the high amount of gross income reported on the returns caused
Ms. Walters to assume that their reported income was sufficient
to support their standard of living.
Furthermore, petitioners began moving up into better homes
and neighborhoods, had household help, threw elaborate parties,
and otherwise enjoyed a fairly high, and generally improving,
standard of living years before Mr. Gherman began embezzling
money from FIP's clients. The house in which petitioners lived
during the years in issue was purchased in 1981 or 1982, before
that Mr. Gherman began embezzling money from FIP's clients. Mr.
Gherman made all decisions relating to financial matters that
affected both FIP and petitioners. Except for some minor
household expenditures that were paid out of the Joan Gherman No.
1 account, Mr. Gherman or a member of his office staff paid
petitioners' personal bills from the FIP account or the Joan
Gherman No. 2 account. Ms. Walters signed checks drawn on those
accounts in blank. Furthermore, she did not balance any of the
checking account statements. Consequently, we are persuaded that
Ms. Walters had no reason to suspect that their lifestyle
exceeded their reported income, if it did. See Sanders v. United
States, 509 F.2d at 168.
Respondent contends further that Ms. Walters' show business
activities demonstrate that she lived extravagantly during 1984
through 1986. The show business activities addressed at trial,
e.g., her producing "Purlie" and "Bubbling Brown Sugar" and her
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