- 57 -
Consequently, we conclude that Ms. Walters had not been put
on notice that embezzlement income was being unreported or that
further inquiry was needed.
As we stated earlier, we are not faced with a situation
where income earned by FIP was understated or deductions claimed
by FIP were overstated on its tax returns. If we were, we agree
that Mr. Gherman's prior activities and difficulties might have
put Ms. Walters on notice that further inquiry as to unreported
income was necessary. But FIP's income and deductions are not
the issue. In our view, under the circumstance of the instant
case, Mr. Gherman's prior activities are not relevant to the
issue of whether Ms. Walters had reason to know that Mr. Gherman
was stealing money from accounts of FIP's clients.
On the basis of the foregoing, we conclude that Ms. Walters
had neither actual nor constructive knowledge of the
embezzlement. See Park v. Commissioner, 25 F.3d at 1293-1294.
Accordingly, we hold that Ms. Walters did not know, nor did she
have reason to know, about the unreported income.
Inequitable To Hold Liable for Tax
Petitioners contend that it would be inequitable to hold Ms.
Walters liable for the deficiencies in tax and additions to tax.
Respondent disagrees.
Whether it is inequitable to hold a person liable for
additional tax, interest, and additions to tax is to be
determined on the basis of all the facts and circumstances. Sec.
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