Ellwest Stereo Theatres of Memphis, Inc., et al. - Page 8

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            was not a certified public accountant, having failed the C.P.A.                                
            examination at least once.  An attorney named Lee Klein (Klein)                                
            provided legal services for Modern and its clients.  In 1984                                   
            Federal agents seized a large quantity of books and records at                                 
            Modern in connection with a criminal investigation.   In 1987                                  
            Klein retained David Shindel (Shindel), a certified public                                     
            accountant, on behalf of Modern and a number of its clients,                                   
            including two of petitioners.  The purpose of the retainer was to                              
            review corporate books and records for compliance with the tax                                 
            laws.  The scope of Shindel’s retainer subsequently expanded to                                
            include additional petitioners as the extent of noncompliance                                  
            among Modern’s clients became evident.  In 1988 the criminal                                   
            investigation of persons working for, or associated with, Modern                               
            resulted in the indictment of Mohney, Klein, Tompkins, and                                     
            Scribner for conspiracy to defraud the Government by impeding the                              
            Internal Revenue Service (IRS).  Each was subsequently convicted                               
            of this or a related offense.                                                                  
                  In or about 1990 Shindel became aware that several of                                    
            Modern's clients were making payments to foreign companies.                                    
            By 1991 he had uncovered evidence of prior payments extending                                  
            back several years.  Available records concerning these payments                               
            were in some cases incomplete; it is not clear, however, to what                               
            extent this was attributable to the earlier Government seizure.                                
            For example, there were canceled checks payable to Fun Films                                   
            dated January 1985 that bore the word "loan", but Shindel found                                

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