COMMISSIONER V. BROWN, 380 U. S. 563 (1965)

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U.S. Supreme Court

Commissioner v. Brown, 380 U.S. 563 (1965)

Commissioner of Internal Revenue v. Brown

No. 63

Argued March 3, 1965

Decided April 27, 1965

380 U.S. 563


Respondent Brown, members of his family and three others, who owned substantially all the stock of a lumber milling company, of which Brown was president, sold their stock to a tax-exempt charitable organization (Institute) for $1,300,000. Institute paid $5,000 down from the company's assets. Concomitantly with the transfer, Institute liquidated the company and leased its assets for five years to a new corporation (Fortuna), formed and wholly owned by respondents' attorneys, which agreed to pay Institute 80% of the operating profits before taxes and depreciation, Institute to apply 90% of such payments (amounting to 72% of the net profits of the business) to a $1,300,000 noninterest-bearing note Institute gave the respondents which was secured by mortgages and assignments of the assets leased to Fortuna. The entire balance of the note was payable if payments thereon failed to total $250,000 over any consecutive two years. The foregoing transaction, consummated in February, 1953, was effected pursuant to agreement between respondents, Institute, and other interested parties. Fortuna operated the business with practically the same personnel (including Brown as general manager up to his resignation over a year and a half later) until 1957, when Fortuna's operations ended with a severe decline in the lumber market. Respondents did not repossess under their mortgages, but agreed that the properties be sold, with Institute receiving 10% of the $300,000 proceeds and the respondents the balance. In their federal income tax returns, respondents showed the payments remitted to them out of the profits of the business as capital gains. Petitioner asserted that such payments were taxable as ordinary income under the Internal Revenue Code. The Tax Court upheld respondents' position, concluding that the transfer to the Institute of respondents' stock was a bona fide sale. The Court of Appeals affirmed.


1. The transaction constituted a bona fide sale under local law, the Institute having acquired title to the company stock, and, by

Page 380 U. S. 564

liquidation, to all the assets in return for its promise to pay over money from the operating profits. P. 380 U. S. 569.

2. The transaction also constituted a sale within the meaning of §1222 (3) of the Internal Revenue Code, defining a capital gain as gain from the sale of a capital asset. Pp. 380 U. S. 570-573.

(a) The fact that payment was made from business earnings did not divest the transaction of its status as a sale, which is a transfer of property for a fixed monetary price or its equivalent. Pp. 380 U. S. 570-572.

(b) The sales price in the arm's length transaction between respondents and the Institute, as the Tax Court found, was within a reasonable range in light of the company's earnings history and the adjusted net worth of its assets. P. 380 U. S. 572.

(c) There had been an appreciation in value of the company's property accruing over a period of years which respondents could have realized at capital gains rates on a cash sale of their stock. Pp. 380 U. S. 572-573.

3. It does not follow from the fact that there was no risk-shifting from seller to buyer that the transaction constituted not a sale, but a device to collect future earnings at capital gains rates for which the price set was excessive. Pp. 380 U. S. 573-577.

(a) The Tax Court did not find the price excessive. P. 380 U. S. 573.

(b) The petitioner offered no evidence to show that an excessive price resulted from the lack of risk-shifting. Pp. 380 U. S. 573-574.

(c) Accelerated payment of the purchase price resulted from the deductibility of the rents payable by Fortuna which were not taxable to the Institute, thus constituting an advantage to the seller desiring the balance of the purchase price paid off rapidly. P. 380 U. S. 574.

(d) Risk-shifting has not previously been deemed essential to the concept of sale for tax purposes. Pp. 380 U. S. 574-575.

(e) The transaction here is not analogous to cases involving a transfer of mineral deposits in exchange for a royalty from the minerals produced, the mineral-extracting business being viewed as an income-producing operation, and not as a conversion of capital investment. Thomas v. Perkins, 301 U. S. 655, distinguished. Pp. 380 U. S. 575-577.

4. The Treasury Department itself has noted the availability of capital gains treatment on the sale of capital assets where the seller

Page 380 U. S. 565

retained an interest in the income produced by the assets. Pp. 380 U. S. 578-579.

325 F.2d 313 affirmed.

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