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have found that the corporation defaulted on its obligation to
pay Lea for those patents. In exchange for Lea's waiving
Cascade's prior breaches of the original sales agreement and
other consideration, Cascade agreed to modify the terms of the
1979 sales agreement; that is, Cascade promised in the 1982
agreement to pay more for the patents.
In cases like this when the majority shareholder of a
corporation is also holder of the patents which are sold to the
corporation, "it is easy to say that the transactions were not at
arm's length and thus clothe the situation with an aura of
suspicion. But we cannot decide cases on suspicion."
Differential Steel Car Co. v. Commissioner, 16 T.C. at 424.
After closely scrutinizing the transactions at issue, we find the
1982 agreement fair and reasonable, and, therefore, the payments
to Lea are expenditures for the purchase of patents, which are
deductible as patent amortization expenses.
Issue 2. Whether the Leas May Report the Payments as Capital
Gain Income Under Section 1235
The Leas reported the payments Lea received from Cascade as
capital gains from the sale of the patents. Respondent contends
on brief that even if we find that the 1982 agreement is
reasonable, the payments to Lea are ordinary income, not long-
term capital gains under section 1235.
Section 1235(a) provides, in general, that a transfer of all
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