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The Commissioner nevertheless points to the lease to bolster
his claim that Mr. Hurst kept too much control, noting that in
2003 he was able to persuade the buyers to surrender HMI’s option
to buy the property. Exercising this option would have let HMI
end its rent expense at a time of low mortgage interest rates,
perhaps improving its cashflow--and so might well have been in
the new owners’ interest. But the Hursts paid a price when the
new owners gave it up. Not only did the deal cancel the option,
but it also cut the interest rate on the various promissory notes
owed to the Hursts from eight to six percent. So we think the
Commissioner is wrong in implicitly asserting that the buyers
should have engaged in every behavior possible that would be
adverse to the elder Hursts’ interest, and focus on whether the
elder Hursts kept “a financial stake in the corporation or con-
tinued to control the corporation and benefit by its operations.”
Lynch, 83 T.C. at 604. Ample and entirely credible testimony
showed that the discussions about HMI’s potential purchase of the
Safety Drive location were adversarial: The Hursts as landlords
wanted to keep the rent flowing, and the new owners wanted to
reduce HMI’s cash outlays. Though the Hursts kept their rents,
the new owners did not give up the option gratuitously--making
this a negotiation rather than a collusion.
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