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dividend income during the taxable years 1988 through 1990, as a
result of payments made by HSN to Pioneer pursuant to the License
Agreement. Respondent argues that the License Agreement was a
sham designed to distribute profits of HSN to Mr. Speer.
Respondent contends that Mr. Speer essentially controlled Pioneer
and that the payment of 1 percent of HSN’s gross profits for the
ostensible purpose of licensing software from Pioneer constituted
a constructive dividend to Mr. Speer. Moreover, respondent
contends that the transfer of the constructive dividend amounts
to Pioneer resulted in a gift to Richard M. Speer, petitioners’
son, who was the sole shareholder of Pioneer. Petitioners, on
the other hand, argue that the License Agreement was an arm’s-
length agreement, agreed to by parties independent of, and whose
interests were adverse to, Mr. Speer. Alternatively, petitioners
argue that even if the License Agreement were found not to be
arm’s length, the terms of the agreement were fair and reasonable
when judged by standards applicable to parties dealing at arm’s
length, and thus cannot be recharacterized as a constructive
dividend to Mr. Speer.
It is well established that transfers between related
corporations may result in constructive dividends to a common
shareholder. Joseph Lupowitz Sons, Inc. v. Commissioner, 497
F.2d 862, 868 (3d Cir. 1974), affg. in part, revg. in part and
remanding T.C. Memo. 1972-238; Gilbert v. Commissioner, 74 T.C.
60, 64 (1980). However, transfers between related corporations
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