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Because transactions between shareholders and their closely held
corporations are easily manipulated, we examine such a
transaction with special scrutiny. See Electric & Neon, Inc. v.
Commissioner, 56 T.C. 1324, 1339 (1971), affd. without published
opinion 496 F.2d 876 (5th Cir. 1974). We evaluate the realities
or substance of the transaction and are not bound by the form the
transaction may take. Commissioner v. Court Holding Co., supra;
Higgins v. Smith, 308 U.S. 473 (1940). Specifically, when
evaluating a lease arrangement between a taxpayer and his wholly
owned corporation, we consider not only the lease itself, but
also the testimony of witnesses and the surrounding
circumstances. See Weigel v. Commissioner, supra.
Based on our detailed review of the record, we conclude that
there was no economic reality behind petitioners' and GRC's lease
agreement and that section 109 and M.E. Blatt Co. v. United
States, supra, are inapposite. First, we find that the terms of
the lease are not commercially reasonable. We do not believe
that a lessee dealing at arm's length would agree to rent
property worth approximately $4,000 for 50 years of equal
payments totaling $60,000. Indeed, such a stream of payments
would constitute a 30-percent annual return to the lessor over
the 50 years, exclusive of any appreciation on the underlying
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