Richard E. and Mary Ann Hurst - Page 14

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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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