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the corporation is the majority shareholder, the terms of their
agreement may be examined to see whether the amounts to be paid
may fairly be regarded as compensation for the use of the patent
or represent, to some extent, dividends in disguise. See id.
Lea was the majority shareholder of Cascade at the time the
parties entered into the 1982 agreement. Transactions between
related parties invite close scrutiny. See Differential Steel
Car Co. v. Commissioner, 16 T.C. 413, 424 (1951). Lea's majority
interest alone, however, does not make the patent payments
unreasonable. The agreements under which they were paid will be
given effect "if the arrangement is fair and reasonable, judged
by the standards of a transaction entered into by parties dealing
at arm's length." Sterns Magnetic Manufacturing Co. v.
Commissioner, 208 F.2d 849, 852 (7th Cir. 1954); Differential
Steel Car Co. v. Commissioner, T.C. Memo. 1966-65. We must
assess the reasonableness of the agreement at the time it was
entered into without the benefit of hindsight. See Speer v.
Commissioner, T.C. Memo. 1996-323 (citing Brown Printing Co. v.
Commissioner, 255 F.2d 436, 440 (5th Cir. 1958), revg. T.C. Memo.
1957-37); see also sec. 1.482-2(d)(2)(ii), Income Tax Regs. ("In
determining the amount of an arm's length consideration, the
standard to be applied is the amount that would have been paid by
an unrelated party for the same intangible property under the
same circumstances.").
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