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managing Barry Smith, the Freeman Sisters, and Patti Jo, took
place during the 1970's. Inasmuch as those show business
activities preceded the embezzlement, they do not support
respondent's position.
Additionally, not all of the embezzled money flowed directly
to Gherman family members. Mr. Gherman used a portion of the
embezzled funds to pay FIP's operating expenses and to make loans
and investments. Mr. Gherman alone controlled FIP's operations.
Large sums of money flowed through the FIP account at any time.
Although Ms. Walters attended board of director meetings, her
role in FIP's operations was to sign checks in blank and to help
entertain clients, not to control how the funds were to be used.
We are persuaded that her minimal participation in the activities
of FIP did not provide her sufficient facts such that a
reasonably prudent taxpayer in her position would be put on
notice of the embezzlement income or of a need to make further
inquiry.
Respondent contends further that Ms. Walters had reason to
inquire as to whether Mr. Gherman was properly reporting all
income because he had been denied a discharge in the 1969
bankruptcy as a result of false statements that he had made to a
lender, Mr. Gherman had been investigated by a Federal grand jury
relating to tax crimes, and Ms. Walters had been involved in Tax
Court litigation relating to the joint tax returns that she had
filed with Mr. Gherman which resulted in a tax liability in
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