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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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