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redemption of 90 percent (900 of 1000) of his HMI shares. Mr.
Hurst also received three 15-year notes payable in quarterly in-
stallments for the remaining 100 HMI shares that he sold to Todd
Hurst, Dixon, and Tuori. All these notes called for periodic
payments of principal and interest on a fixed schedule. Neither
the amount nor the timing of payments was tied to the financial
performance of HMI. Although the notes were subordinate to HMI’s
obligation to its bank, they were not subordinate to general
creditors, nor was the amount or certainty of the payments under
them dependent on HMI’s earnings. See Dunn v. Commissioner, 615
F.2d 578, 582-583 (2d Cir. 1980), affg. 70 T.C. 715, 726-727
(1978); Estate of Lennard v. Commissioner, 61 T.C. 554, 563 & n.7
(1974). All of these contractual arrangements had cross-default
clauses and were secured by the buyers’ stock. This meant that
should any of the notes go into default, Mr. Hurst would have the
right to seize the stock and sell it. The parties agree that the
probable outcome of such a sale would be that Mr. Hurst would
once again be in control of HMI.
Respondent questions the cross-default clauses of the vari-
ous contractual obligations, and interprets them as an effective
retention of control by Mr. Hurst. But in Lynch v. Commissioner,
83 T.C. 597 (1984), revd. on other grounds 801 F.2d 1176 (9th
Cir. 1986), we held that a security interest in redeemed stock
does not constitute a prohibited interest under section 302. We
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