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of his notes to the bank, there was complete circularity of
funds, and his status was in substance not that of the
corporation’s creditor but of guarantor of the corporation’s debt
to the bank.
We hold petitioner is not entitled to basis under section 1366(d)
for his participation interests in the Schanno note and the
credit note totaling $1.2 million.
We turn to the additions to tax for failure to file timely.
Section 6651(a)(1) reads in pertinent part:
In case of failure * * * to file any return * * * on
the date prescribed therefor * * *, unless it is shown
that such failure is due to reasonable cause and not
due to willful neglect, there shall be added to the
amount required to be shown as tax on such return 5
percent of the amount of such tax if the failure is for
not more than 1 month, with an additional 5 percent for
each additional month or fraction thereof during which
such failure continues, not exceeding 25 percent in the
aggregate.
To escape the addition to tax for filing the 1989 and 1990
returns untimely, petitioners must prove that (1) their failure
to file timely did not result from willful neglect, and (2) this
failure was due to reasonable cause. On brief, respondent
proposed the following finding of fact: “Petitioners failed to
file timely income tax returns for 1989 and 1990, and their
failure was due to willful neglect and not due to reasonable
cause.” Petitioners did not object to this proposed finding of
fact, nor did they proffer any evidence that would suggest that
reasonable cause existed. We hold petitioners are liable for the
additions to tax under section 6651(a)(1) as determined by
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