Hurst v. Commissioner

Richard Hurst owned Hurst Mechanical, Inc. (HMI), and Richard and his wife Mary Ann Hurst (plaintiffs) owned R. H., Inc. (RHI) together. Both corporations were in the business of repairing heating and air-conditioning systems, and both operated out of a single building (the company building) the Hursts owned. In 1997, the Hursts retired and sold RHI to HMI, and Richard sold all of HMI’s stock to three employees of HMI, which included the Hursts’ son, Todd Hurst. The Hursts essentially financed the sale by having Richard sell all of his HMI stock to HMI and the new owners in exchange for promissory notes. As part of the deal, HMI leased the company building from the Hursts through an arm’s-length transaction and signed a 10-year employment contract with Mary Ann under which she would receive a salary and benefits. The deal also included default provisions in which a default on any one note would be considered default on all notes held by Richard, which would immediately grant Richard the ability to take back the HMI stock. The Hursts reported the sales of the HMI and RHI stock on their 1997 return as producing long-term capital gains. However, the Commissioner of Internal Revenue (the Commissioner) (defendant) assessed a deficiency and treated the sales of stock as producing dividends and capital gains to be recognized immediately. The Hursts filed suit.