Ellwest Stereo Theatres of Memphis, Inc., et al. - Page 16

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            investigations, or that they were ultimately informed of the tax                               
            attorneys’ advice.                                                                             
                  Moreover, petitioners have not attempted to prove that they                              
            supplied their accounting service with all necessary information                               
            concerning the payments and payees.  Regarding the “loans” to Fun                              
            Films in January 1985, Shindel found at Modern no records besides                              
            the canceled checks.  Moreover, petitioners have not established                               
            that their failure to report and withhold tax was in fact based                                
            on advice from their accounting service.  Petitioners have not                                 
            carried their burden of proving reasonable reliance.                                           
                  3.  Loans                                                                                
                  Petitioners argue that their honest belief that the payments                             
            made to Fun Films in January 1985 were loans establishes                                       
            reasonable cause for failing to file Forms 1042 and withhold and                               
            deposit tax with respect to those payments.  It is true that                                   
            loans would not have been subject to the Form 1042 or withholding                              
            requirements.  Secs. 1442(a), 881(a); sec. 1.1461-2(b)(1) and                                  
            (c)(1), Income Tax Regs.  However, the fact that petitioners                                   
            treated these payments as loans does not establish reasonable                                  
            cause unless this treatment had a reasonable basis.  Petitioners                               
            failed to offer any evidence supporting the loan                                               
            characterization.  They stipulated the absence of any                                          
            documentation confirming the existence of a debtor-creditor                                    
            relationship and to the failure of Fun Films to treat the                                      

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