- 8 -
of default. To reduce these risks, the parties agreed to a
complicated series of cross-default and cross-collateralization
provisions, the net result of which was that a default on any one
of the promissory notes or the Safety Drive lease or Mrs. Hurst’s
employment contract would constitute a default on them all.
Since the promissory notes were secured by the HMI and RHI stock
which the Hursts had sold, a default on any of the obligations
would have allowed Mr. Hurst to step in and seize the HMI stock
to satisfy any unpaid debt.
As it turned out, these protective measures were never used,
and the prospect of their use seemed increasingly remote. Under
the management of Todd Hurst, Dixon, and Tuori, HMI boomed. The
company’s revenue increased from approximately $4 million
annually at the time of the sale to over $12 million by 2003.
Not once after the sale did any of the new owners miss a payment
on their notes or the lease.
The Hursts reported the dispositions of both the HMI and RHI
stock on their 1997 tax return as installment sales of long-term
capital assets. The Commissioner disagreed, and recharacterized
these dispositions as producing over $400,000 in dividends and
over $1.8 million in immediately recognized capital gains. In
the resulting notice of deficiency for the Hursts’ 1997 tax year,
he determined that this (and a few much smaller adjustments) led
to a total deficiency of $538,114, and imposed an accuracy-
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011