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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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