Commissioner v. Brown

Brown (plaintiff) and other shareholders sold their closely held corporation to a tax-exempt charitable institute for $1.3 million, secured by a 10-year promissory note; the institute then leased the corporation's assets to a new company formed and run by the shareholders' own attorneys, with the vast majority of that company's profits flowing back through the institute (tax-free, given its exempt status) to pay off the note to the former shareholders. The Commissioner (defendant) argued the transaction wasn't a genuine sale — since the shareholders' underlying business risk and income stream were essentially unchanged — and should be taxed as ordinary income rather than capital gain; the Tax Court and court of appeals both ruled for Brown.