Document: 380 U.S. 563 85 S.Ct. 1162 14 L.Ed.2d 75 COMMISSIONER OF INTERNAL REVENUE, Petitioner,v.Clay B. BROWN et al. No. 63. Argued March 3, 1965. Decided April 27, [Syllabus from pages 563-565 intentionally omitted] Wayne G. Barnett, Washington, D.C., for petitioner. William H. Kinsey, Portland, Or., respondents. Mr. Justice WHITE delivered the opinion of Court. 1 In 1950, when Congress addressed itself to problem direct or indirect acquisition and operation going businesses by charities other taxexempt entities, it was recognized that in many typical sale lease-back transactions, exempt organization trading on perhaps selling part its exemption. H.R.Rep. 2319, 81st Cong., 2d Sess., pp. 38—39; S.Rep. 2375, 31—32, U.S.Code Congressional Service p. 3053. For this reasons Internal Revenue Code accordingly amended several respects, principal importance our purposes taxing as 'unrelated business income' profits earned a charity business, well income long-term leases business.1 The short-term lease, however, five years less, not affected fact has moulded transactions field since time, including one involved case.2 2 Commissioner, 1954, announced an purchased leased another corporation, investing own funds but paying off purchase price with rental income, purchasing danger losing exemption; any event would be taxable income; might unreasonably accumulating finally, most important case, payments received seller entitled capital gains treatment. Rev.Rul. 54—420, 1954—2 Cum.Bull. 128. 3 This case is course which Commissioner questioned concern organization.3 basic facts are undisputed. Clay Brown, members his family three persons owned substantially all stock Brown & Company, sawmills lumber interests near Fortuna, California. president company spokesman group, approached representative California Institute Cancer Research 1952, after considerable negotiation stockholders agreed sell their $1,300,000, payable $5,000 down assets balance within 10 earnings company's assets. It provided simultaneously transfer stock, liquidate lease new Fortuna Sawmills, Inc., formed wholly attorneys sellers.4 pay 80% operating profit without allowance depreciation taxes, 90% such paid over apply $1,300,000 note. note noninterest bearing, had no obligation except secured mortgages assignments transferred Fortuna. If failed total $250,000 two consecutive years, sellers could declare entire due payable. were neither nor directors have management contract at annual salary right name successor manager if he himself resigned.5 4 transaction closed February 4, 1953. immediately took operations under same premises practically personnel been employed Company. Effective October 31, resigned general waived successor. 1957, because rapidly declining market, suffered severe reverses terminated. Respondent did repossess properties they should sold latter retaining 10% proceeds. Accordingly, property $300,000. rentals totaled $936,131.85. Respondents returned gain asserted ordinary meaning I.R.C.1939, § 117(a)(4) I.R.C.1954, 1222(3). These sections provide '(t)he term 'long-term gain' means exchange asset held more than 6 months * *.' 5 Tax Court, sham respondents retained economic interest control treated resulting gain. A divided 37 T.C. 461, found there goodfaith bargaining arm's length between Institute, upon reasonable range light history corporation adjusted net worth assets, primary motivation prospect ending up free clear fully paid, then permit convert money use cancer research, real change benefit transaction.6 Its conclusion respondents' Company bona fide arrived arm's-length amounts proceeds treatment Code. Court Appeals affirmed, 9 Cir., 325 F.2d 313, we granted certiorari, 377 962, 84 1647, 12 734. Having abandoned argument sham, now admits substance what occurred family. local law. acquired title and, liquidation, company, return promise company. stipulated forever lose rights Prior transfer, these access company; 28% remained Institute. Any limited relinquished 1954. 7 Whatever had, claims His invested nothing, assumed independent liability promised only percentage risk sellers. Apparently, qualify sale, must financially responsible buyer who undertakes themselves substantial payment shifts least furnishes some cushion against loss seller. 8 To say risk-shifting produced sold, very little different saying usually subject tax property. rationality places unwarranted construction 'sale,' contrary policy provisions Code, support cases. We reject it. 'Capital 'capital asset' creatures law inclined give terms narrow, rather broad, construction. Corn Products Co. v. 350 46, 52, 76 20, 24, 100 L.Ed. 29. common non-tax world; used limiting definition legislative indicating result, persuasive 'Generally speaking, language Act, just statute, given meaning, words 'sale' 'exchange' read differently.' Helvering Flaccus Oak Leather Co., 313 247, 249, 61 878, 880, 1310; Hanover Bank 369 672, 687, 82 1080, 1088, 187; Korell, 339 619, 627—628, 70 905, 909—910, 94 1108; Crane 331 1, 6, 67 1047, 1050, 91 1301; Lang 289 109, 111, 53 534, 535, 77 1066; Old Colony R. 284 552, 560, 52 211, 213, 484. 'A sense word, fixed equivalent,' State Iowa McFarland, 110 471, 478, 210, 214, 28 198; 'to pass money,—which pays promises *,' Williamson Berry, How. 495, 544, 1170. Compare 1(2) Uniform Sales Act 2—106(1) Commercial obviously money. 11 Unquestionably courts, interpreting 'scope adopting restricted literal usual where acceptance lead absurd results thwart obvious purpose statute.' Hammel, 311 504, 510—511, 368, 371, 303; cf. Gillette Motor Transport, 364 130, 134, 80 1497, 1500, 1617; P. Lake, 356 260, 265, 78 691, 694, 743. But otherwise 'where consequences (would) follow appears consonant supra, 511, 371; Takao Ozawa United States, 260 178, 194, 43 65, 67, 199. find nothing construed too broadly manner intended afford situatons 'typically involving realization appreciation value accrued period thus ameliorate hardship taxation year.' 1500. 'relieve taxpayer excessive burdens conversion investments' taxed differently Congress. Burnet Harmel, 287 103, 106, 74, 75, 199; 13 As January 1953, revealed books $619,457.63. figure included accumulated $448,471.63, surplus, notes appraised date, relied sellers, was.$1,064,877, figuring deferred balances. Under plan 6% figure, placed $1,301,989. transaction, result negotiating 'within corporate assets.' 486. Obviously, facts, accruing 'increase income-producing property.' 266, 695. increase taxpayers realize rates cash stock; likewise taking installement mortgage security. Further, less 30% (the 1954 requires all) satisfied 44, reported installment basis. 15 actual basis Eventually $936,131.85 realized think, so treating consistent allow enhanced asset. 16 embellishes argument. Purporting probe realities continues bear none, collecting risk-bearing form future above fair market Since bears risk, so-called simply device collect rates. 17 hesitate discount unduly power pure reason force. does present difficulties. first place, denies court expressly found—that limits based evidence record finding. do have, therefore, excessive. 18 Secondly, inevitable lack risk-shifting, seem impossible task demonstrate fact. However, offered whatsoever effect; good cases similar reasonableness actually contested, limits, case.7 19 Thirdly, ignores rents deductible considerably faster rate matter wants can get 30, 1955, closing $412,595.77 year collected $238,498.80, $651,094.57. 20 Furthermore, kind insisted heretofore considered essential ingredient purposes. LeTulle Scofield, 308 415, 60 355, bonds transferred. 'a reckoned accordance revenue act dealing recognition exchange,' id., 421, 316, creditor's proprietary one. '(T)hat solely default, bonholder retake (did change) status creditor having stake.' Ibid. Marr 268 536, 45 575, 69 1079. require sources make seems us odds commercial practice understanding constitutes sale. great times wide variety hinge occurrence 'sale.' accept Commissioner's ramifications prepared visit taxpayers, absent congressional guidance direction. 21 relies heavily mineral interests, transferor receiving bonus royalty production. Palmer Bender, 551, 225, 489; Thomas Perkins, 301 655, 57 911, 81 1324; Kirby Petroleum 326 599, 66 409, 90 343; Burton-Sutton Oil 328 25, 861, 1062; Southwest Exploration 308, 395, 347. Perkins deemed particularly pertinent. There leasehold sum certain oil includable transferee transferor. not, deem either controlling. 22 First, 'Congress peculiar character extracting natural resources,' 33, 866; see Stratton's Independence Ltd. Howbert, 231 399, 413 414, 34 136, 138—139, 58 285, viewed investment, Anderson Helvering, 310 404, 407, 952, 953, 1277, built-in method allowing through depletion tax-free consumed production gross severance,' 408, 954, cost depends production, Burton-Sutton, 34, 866. Percentage allows arbitrary deduction compensate exhaustion asset, regardless incurred investment may made. assess amount made values reflected regard appreciated 23 Second, unlimited sweep. pointed out still possible owner working divest finally completely effecting interest, fee contracted convey them $160,000 $50,000 one-half derived gas lands conveyed. refused extend beyond case. gas, 'the reservation additional type security serve(d) distinguish Perkins. together personal guarantee lessee shall events equal specified sum.' 412—413, 956. Hence, outright properties, therefrom being notwithstanding course, declared due, lien company.8 24 disturb ruling Appeals. 1963, Treasury Department, hearings before Congress, noted availability even though Department proposed contingent income. Payments, required lost accompanied were. Hearings House Committee Ways Means, 88th 1st Feb. 7, 18, Pt. I (rev.), President's 1963 Message, 154—156. 25 adopt suggested change9 significant amendment deny those income-contingent years. purchaser approach appropriate safeguards reserving comparison, position here 'overkill' aimed preventing involvement tax-exempt entities enterprises. precise approaches question possibly foundation. And limitation sales generally, represents invasion current policy, think ours. 26 problems dealt Likewise, attention various kinds itself. both situations responded, all, narrow application. consequently wise 'leave fashioning rule which, event, ramifications.' American Automobile Ass'n 367 697, 1727, 1732, 1109. 27 Affirmed. HARLAN, concurring. 29 Were laws, sense, arising charitable impulse. However laws exist reality businessman's world, much like existence competitor. Businessmen affairs around both, dollar source. gives exemption makes capable greater after-tax non-tax-exempt individual corporation. traded residual payout apparently Institute's gave something up; return. 'sale exchange.' 30 Obviously Government exchange, essentially theory put anything risk; unlimited, magic purse always contains penny, 31 One observe preliminarily Government's remedy 'bootstrap' sale—defining shifting risks—would accomplish way future. difficult burdensome users bootstrap technique arrange shift risks. serious abuse, ineffective judicial correctives will postpone day moved deal comprehensively. ask why, sales, proper attack 'real' exchange. 32 force underlying clearly retain business. Instead leaping premise profitably broken into components attempted exchanged. ability produce time. What business' excess necessary transaction. function element producing per year, necessarily Had argued exchanged, extent treatment, 33 mean approach, falls short all-or-nothing specifically petitioner, opposed respondents, accepted decision. On highly complex issue us, vitally illumination briefing directly point particular path irrevocably taken. Where exchange' concerned, proceed slowly stages. convinces me taken unsound warrant reversal judgment below. Therefore concur affirm. GOLDBERG, whom THE CHIEF JUSTICE BLACK join, dissenting. 35 undisputed illuminate nature issue. conveyed almost entirely immediate family, Research, liquidated five-year managed respondent shares Brown's attorneys, also served Fortuna's directors. continued operations. pretax rent until time terminate complete beneficial legal remittances provision agreements violated, recover liability. essence 72% fell behind schedule. 36 At glance appear odd enter prior 100% corporation's boot. afforded advantages. advantage sought gain, share received. Code's exemption1 arrangement Fortuna,2 believed Thus receive taxation, rates, $1,300,000. Without 48% earnings, rest effect exemption, enabling quickly taxes return, nominal while whole debt off. realistic grant allowed buy nothing. cannot believe result. today legitimates permits parties sought. Court's holding, escapes about $60,000 intrinsically important—although every failure progressive system impairs integrity system. broad implications. told interested amici test outcome determine whether scheme already number occasions, become widespread.3 quite decision approving momentum speedy proliferation. my view sanction obtain advantages authorizes. Moreover, holding deviates intent departs decisions. 38 1201 seq., prevent accrue long high inclusion higher brackets. designed, recurrent receipt mere title. supra; 489. Rather, least, meaningful addition See Corliss Bowers, 281 376, 50 336, 74 916. posed Act—we assume does—but, rather, whether, transferred, sufficient I.R.C. 39 purposes, careful look formal arrangements realities. Income extraction 'resemble(s) manufacturing carried soil,' 107, 76, person retains oil. Thus, qualifies purported minerals supra. 40 1324, 'oil payment,' later constituted state law, constitute risk. sold; produced, paid. risks run making shifted slightly 1222(3) existed, once complete, full ownership vest purchaser. 41 paid; dubious value. bound whatsoever. fact, channel portion 42 numerous incidents along See, e.g., Sunnen, 333 591, 68 715, 92 898; Clifford, 309 331, 554, 788; Control considered. agreement manage hire employment employees 'if unable unwilling act, majority described Purchase Agreement approve Lessee company.' shareholders assured effective named Board Directors. conclude business; opportunity during normal slightly. money, stood lose; gained faster. merely entity date. established that, despite arrangements, take place business.4 44 hold 1222(3), thereby giving rise received, evasion. Even restricts excessive, latitude Valuation notoriously difficult. represented true value; stated 'was negotiating' T.C., said '(i)t petitioner (Clay Brown) favorable anyone organization.' 485. Indeed, supposition likely, sort quantity. Though negotiated order soon possible, itself, offer attractive decline. anticipate prices upper boundary courts price—at often owners buyers exemptions. Unless repairs damage done corporations, continue necessary, address loophole, rpesent intend accord here. Although implies 'sales' reasonable, logic justify restricting holding. entitling hard negotiating, conveyancing passed, expected recurs, answer, why cease Kolkey 254 51 (C.A.7th Cir.), authority struck Kolkey, anticipated unlikely ever improbable sellers' extinguished. Therefore, court, viewing 'thin capitalization,' equity dividends. Those fashion purchases sophisticated Kolkey; vastly fashioned capitalization' conceptually inapplicable. rationale strike reach Kolkey's dimensions, upholds consideration. Such degree ownership, consideration supplied need 46 avoidance easily structured holder income-earning 'sells' him whatsoever; delighted end of, say, period. see, rationale, And, am wrong reading opinion, ground control, presently nominal. 47 overly conceptual led erosion system, taxpayers. routes opened surely corporations evade resultant large-scale private organizations.5 While justifies purity,6 violates long-standing policies transfers investment-type judged naked form. turning alone certainty stability exacts evasion produced. P.G. 743, "to relieve investments, remove deterrent conversions.' exception narrowly protect artful devices.' keeping 'artful device,' ought legitimate. untoward permitted avoidance; plain simple c. 994, 64 Stat. 906, 101 1939 added §§ 421 424, 3813 3814. 501 504 511 515 leaseback examined. Lanning, Erosion 'Bootstrap Sale' Business—I, 108 U.Pa.L.Rev. 623 (1960); Moore Dohan, Sales, Churches, Monkeyshines, L.Rev. 87 (1956); MacCracken, Selling Business Charitable Foundation, U.So.Cal.Tax Inst. 205; Comment, Three-Party Sale Lease-Back, Mich.L.Rev. 1140 (1963); Alexander, Use Foundations Business, N.Y.U.Tax 591 (1957); New Developments Tax-exempt Institutions, J.Taxation 302 (1963). Stern, Great Raid, 245 (1964). Union 285 126, 152 Ct.Cl. 426; Johnson, 267 382, aff'g Estate Howes 909; 51; Knapp Bros. Shoe Mfg. Corp. 142 F.Supp. 899, 135 797; Oscar C. Stahl, P—H T.C.Mem.Dec. 63,201; Isis Windows, 63,176; Ralph M. Singer, 63,158; Brekke 789; Royal Farms Dairy 172; Dairy, Inc. 1027; Hawthorne, 1960 60,146; Hawley, 1961 61,038; Ohio Furnace 179; Truschel 433. Some pending appeal appeals. liabilities promissory assigned covered remaining capitalized $25,000, funds. indebtedness continued. He personally guaranteed indicate contemplated family's back operate four listed finding permissible limits. exceptions are: grossly sham; Claims referred nevertheless place; twice deductibility organization; express price, reliance applicable patents assigned, assignor interest. 58—353, 1958—2 acquiescence patent assignment granting exclusive license measured use, patented article. says Ruling litigating question, temporarily, principle inconsistent interests. note, 60—226, 1960—1 26, extended copyright field. Secretary inventor asset,' 150, enact changes recommended. developments help Commissioner. Nor 1235, decide irreconcilable instead, each situation characteristics justifying discrete 1222. Whether correct remains involves reflect represents. did, suggestion Department. Section 483, specified. indefinite size, example dependent 830, Administrative News 1964, 1776. section 501(c)(3). designed avoid it, expense, avoiding both. unrelated charities, elase 514; I, Pa.L.Rev. 623, 684—689. denial charity's incentive indication exempt. ante, 565—566. articles cited 566, n. 2. account hands wasting 167, offset Attorneys represent bought corporations. noted, produces unusual results. example, presumably deserves basis, Government, whose acquire

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