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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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