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the corporation” as that phrase is used in section 1.302-4(d),
Income Tax Regs.) was realistically contingent upon HMI’s con-
tinued financial health. The buyers likewise had a motivation to
structure the transaction as they did--their inability to obtain
traditional financing without unduly burdening HMI’s potential
for normal business operations. Even one of the IRS witnesses
showed this understanding of Mr. Hurst’s relationship to the new
owners after the redemption--the revenue agent who conducted the
audit accurately testified that Mr. Hurst was “going to be the
banker and wanted his interests protected.”
The number of legal connections between Mr. Hurst and the
buyers that continued after the deal was signed did not change
their character as permissible security interests. Even looked
at all together, they were in no way contingent upon the finan-
cial performance of the company except in the obvious sense that
all creditors have in their debtors’ solvency.
Moreover, despite the Commissioner’s qualms, we find as a
matter of fact that Mr. Hurst has not participated in any manner
in any corporate activity since the redemptions occurred--not
even a Christmas party or summer picnic. His only dealing with
HMI after the sale was when, as noted above, he dickered with the
buyers over their purchase option on the Safety Drive property.
These facts do not show a continuing proprietary stake or control
of corporate management.
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