## Facts

- Clay B. Brown, his family, and others owned substantially all stock of a California lumber milling company.
- A tax-exempt charity agreed to buy all stock for $1,300,000, with $5,000 down and the balance payable within 10 years from business earnings.
- Upon transfer, the charity liquidated the company and leased the assets for five years to a new corporation formed and owned by the sellers’ attorneys.
- The lessee agreed to pay the charity 80% of operating profits before taxes and depreciation; the charity agreed to apply 90% of those payments to a non-interest-bearing $1,300,000 note issued to the sellers.
- The note was secured by mortgages and assignments of the leased assets, and the unpaid balance became due if payments failed to total $250,000 over any consecutive two years.
- The lessee continued the same business with substantially the same personnel; Brown served as general manager for a period.
- When the lumber market declined and operations ended, the assets were sold; the charity received 10% of the sale proceeds and the sellers received the remainder.
- The sellers reported amounts received as long-term capital gain; the Commissioner asserted the arrangement produced ordinary income because it was not a true sale.

## Issues

1. Whether the stock transfer, liquidation, and lease arrangement constituted a bona fide sale under applicable local law.
2. Whether the transaction was a “sale” under I.R.C. § 1222(3) so that the sellers’ gain qualified as long-term capital gain rather than ordinary income.

## Decision

- The Supreme Court affirmed the Ninth Circuit (which had affirmed the Tax Court).
- The Court held the transaction was a bona fide sale: the charity obtained title to the stock and, through liquidation, the assets, in exchange for a binding obligation to pay a fixed price.
- The Court held the transaction was a “sale” under § 1222(3) even though the price was paid from future business profits and not from the buyer’s independent funds.
- The Court rejected the Commissioner’s claim that tax motivation, profit-based payments, or the leaseback structure converted the arrangement into ordinary income to the sellers.

## Legal Principles

- A “sale” for capital-gain purposes is a transfer of property for a fixed monetary price or its equivalent; the method or source of payment, including payment from future earnings, does not alone defeat sale characterization.
- Where legal title and incidents of ownership pass to the buyer and the buyer undertakes a real, enforceable obligation to pay a fixed price, the seller’s retained rights as a secured creditor do not by themselves convert the transaction into something other than a sale.
- Tax planning motives do not permit recharacterization when the transaction effects an actual transfer of ownership and allocates real risk and obligation to the buyer; further limits on such arrangements are for Congress to enact.

## Conclusion

The Court held that selling stock to a tax-exempt organization for a fixed price payable from future profits, coupled with liquidation and a short-term lease of the assets, remained a genuine “sale” producing long-term capital gain because ownership transferred and the buyer assumed an enforceable payment obligation.


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