Richard E. and Mary Ann Hurst - Page 7

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          ten-year employment contract with Mrs. Hurst, giving her a small            
          salary and fringe benefits that included employee health                    
               If done right, the deal would have beneficial tax and nontax           
          effects for the Hursts.  From a tax perspective, a stock sale               
          would give rise to long-term capital gain, taxed at lower rates             
          than dividends.3  And by taking a 15-year note, rather than a               
          lump sum, they could qualify for installment treatment under                
          section 453, probably letting them enjoy a lower effective tax              
               There were also nontax reasons for structuring the deal this           
          way.  HMI’s regular bank had no interest in financing the deal,             
          and the parties thought that a commercial lender would have                 
          wanted a security interest in the corporations’ assets.  By                 
          taking a security interest only in the stock, the Hursts were               
          allowing the buyers more flexibility should they need to encumber           
          corporate assets to finance the business.                                   
               But this meant that they themselves were financing the sale.           
          And spreading the payments over time meant that they were faced             
          with a lack of diversification in their assets and a larger risk            

               3 This was an important consideration to the Hursts--                  
          although HMI was an S corporation at the time of these transac-             
          tions, and thus subject only to a single tier of tax, secs. 1363,           
          1366, it had been a C corporation until 1989 and still had                  
          $383,000 in accumulated earnings from those years that had not              
          been distributed to Mr. Hurst.  Without careful planning, these             
          earnings might end up taxed as dividends under section 1368(c).             

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