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A. Complete Termination of Interest in HMI
The Hursts’ argument is simple--they say that Richard (who
had owned all the HMI stock) walked completely away from the com-
pany, and has no interest in it other than making sure that the
new owners keep current on their notes and rent. The Commission-
er’s argument is more complicated. While acknowledging that each
relationship between the Hursts and their old company--creditor
under the notes, landlord under the lease, employment of a non-
owning family member--passes muster, he argues that the total
number of related obligations resulting from the transaction gave
the Hursts a prohibited interest in the corporation by giving
Richard Hurst a financial stake in the company’s continued
success.
In analyzing whether this holistic view is to prevail, we
look at the different types of ongoing economic benefits that the
Hursts were to receive from HMI: (a) The debt obligations in the
form of promissory notes issued to the Hursts by HMI and the new
owners, (b) their lease of the Safety Drive building to HMI; and
(c) the employment contract between HMI and Mrs. Hurst.
1. Promissory Notes
There were several notes trading hands at the deal’s clos-
ing. One was the $250,000 note issued by HMI to the Hursts for
their RHI stock. The second was the $2 million, 15-year note,
payable in quarterly installments, issued to Mr. Hurst by HMI in
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