- 5 -
service.4 At no time during those years did ETS submit invoices
directly to FIG for the services that it provided to DCI in
connection with DCI's work for FIG. Rather, DCI billed FIG for
those services, charging FIG the same amount that ETS had charged
it.
The Diamonds reported the financial results of ETS in
Schedule C of the Federal income tax return (return) that they
filed for each of the years 1983, 1984, and 1985, as follows:
1983 1984 1985
Gross receipts $180,787 $199,355 $39,875
Less: Cost of goods sold 62,201 -- --
Plus: Other income 2,312 -- --
Gross income 120,898 199,355 39,875
Less: Expenses 23,945 92,537 --
Net profit 96,953 106,818 39,875
The Farmers Lawsuit
The Parties and Their Claims
In September 1984, DCI and the Diamonds, who were repre-
sented by the law firm of Markowitz & Herbold (Markowitz &
Herbold), commenced a lawsuit (Farmers lawsuit) against FIG in
the District Court. The plaintiffs named in the Farmers lawsuit
were "DIAMOND CLAIMS & INVESTIGATION SERVICES, INC., an Oregon
corporation, and PETER J. DIAMOND and SHIRLEY DIAMOND, husband
and wife" (plaintiffs). The plaintiffs filed an initial com-
4 The particular information that ETS included in the invoices
that it submitted to DCI during the years 1983 and 1984 was based
on certain requirements specified by FIG in order to enable FIG
to identify the costs associated with the particular investiga-
tive projects that it had assigned to DCI.
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