David Rendel and Rachel Rendel - Page 3

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                              At the time the petition was filed, petitioners resided in                                                                                   
                    Alameda, California.                                                                                                                                   
                              In 1980, petitioners formed Columbia Cosmetics                                                                                               
                    Manufacturing, Inc. (CCMI), as a California corporation to market                                                                                      
                    and distribute cosmetics.  CCMI was formed and operated as a                                                                                           
                    subchapter C corporation.  Petitioners were the sole shareholders                                                                                      
                    and officers of CCMI.  Petitioner David Rendel (David) was                                                                                             
                    president, and petitioner Rachel Rendel (Rachel) was vice                                                                                              
                    president of CCMI.  The offices and principal place of business                                                                                        
                    of CCMI were located in San Leandro, California.                                                                                                       
                              Petitioners' books and records were maintained on the cash                                                                                   
                    method of accounting.  CCMI's books and records were maintained                                                                                        
                    on the accrual method of accounting.  Both sets of books and                                                                                           
                    records were maintained by Crudup C. Howard (Howard), an                                                                                               
                    accountant petitioners hired for that purpose.  Howard met                                                                                             
                    monthly with Rachel to reconcile CCMI's bank statements and to                                                                                         
                    discuss with Rachel the accounting for various transactions.                                                                                           
                              By late 1981, CCMI was earning a significant profit.  In                                                                                     
                    late 1981, Howard and petitioners consulted with a number of tax                                                                                       
                    shelter promoters (namely, Gil Armstrong (Armstrong) who was a                                                                                         
                    representative of the American Law Association (ALA),1 John Green                                                                                      
                    (Green), and Michael Panatelli (Panatelli)).  These individuals                                                                                        



                    1         The ALA was founded by Karl Dahlstrom for the purpose of                                                                                     
                    promoting offshore trusts.                                                                                                                             




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