Ellwest Stereo Theatres of Memphis, Inc., et al. - Page 7

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            European Investments, N.A., whose residence for Federal income                                 
            tax purposes was the Netherlands Antilles, and Petro Land                                      
            Drilling & Development, whose residence for Federal income tax                                 
            purposes was the Cayman Islands.                                                               
                  At various times between 1980 and 1991 petitioners made                                  
            payments to Fun Films, Caribbean Films, European Investments, and                              
            Petro Land Drilling & Development.  Eight petitioners made only a                              
            single payment during this period.  Each of the eight transferred                              
            funds to Fun Films in January 1985.  Canceled checks for these                                 
            payments to Fun Films bear the word "loan", and the payments were                              
            characterized as loans on petitioners' books.  There is no                                     
            documentation, however, that confirms the existence of a                                       
            debtor-creditor relationship between any of petitioners and                                    
            Fun Films.  Moreover, Fun Films has never paid interest on the                                 
            "loans" or repaid the principal.  Petitioners did not file                                     
            Forms 1042, Annual Withholding Tax Return for U.S. Source Income                               
            of Foreign Persons, for any year in which the payments were made                               
            to the foreign corporations, as required by section 1.1461-2,                                  
            Income Tax Regs.  Nor did petitioners withhold and deposit                                     
            Federal income tax with respect to these payments, as required by                              
            sections 1442(a) and 6302.                                                                     
                  During the years at issue, petitioners engaged Modern                                    
            Bookkeeping, Inc. (Modern), to provide bookkeeping services and                                
            prepare their tax returns.  Modern employed a number of                                        
            accountants, one of whom was Tom Tompkins (Tompkins).  Tompkins                                

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