Richard E. and Mary Ann Hurst - Page 20

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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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Last modified: May 25, 2011