Brown family not liable for The Cincinnati Enquirer
Mike Brown secured his family's biggest victory in 51 years of professional football when a federal judge ruled Tuesday the heirs of the late Paul Brown are not liable for an estate tax deficiency of more than $40 million.
U.S. Tax Court Judge John O. Colvin refuted the Internal Revenue Service's principal charge revolving around a 1983 stock option transaction between Bengals founder Paul Brown and major shareholder John Sawyer. The IRS said it ''was a sham'' designed to pass majority ownership of the team to Mr. Brown's sons and elude estate taxes.
A visibly relieved Mike Brown admitted Tuesday that one of the founding families of modern pro football may have had to sell its team if the ruling had gone against him.
''It's difficult to see how we could have worked our way through it,'' said Mr. Brown, the Bengals' president and general manager. ''The amount was very, very large. I don't know that we could have solved our problem without some kind of sale.
''We never had to get to that point, fortunately, because this is what we want to do. That's why it's such a happy day for me and the people in my family.''
The U.S. solicitor general has 90 days to decide whether the government wants to appeal to the U.S. Court of Appeals for the 6th Circuit in Cincinnati. The earliest the case would be heard before a three-judge panel is next spring.
Paul L. Caron, a University of Cincinnati law professor who teaches estate tax, said the government appeals far fewer than half the cases. But it wins more than half the cases it appeals.
''They only do it if they feel they have a strong case, and I still think they have one here,'' Mr. Caron said. ''They've won some appeals in this circuit on these types of cases.''
Tuesday's ruling culminated a six-year odyssey that had all the elements of a made-for-TV miniseries. It began when NFL Hall-of-
Nearly four years later, in the midst of the Bengals' stadium crisis, the IRS sent Mike Brown a notice of the lien on his father's estate for $29,885,493. With interest compounding daily since May 1992 at standard rates of 7 percent to 8 percent, Mr. Brown's lawyer now estimates the bill at more than $40 million.
Judge Colvin believed Paul Brown's wish to give his sons an opportunity to control the team and Mr. Sawyer's desire to get cash to relieve financial problems was ''an arm's length transaction.''
The core of the case goes back 14 years. In 1983, Mr. Sawyer, who already owned 213 shares, bought all but one of Paul Brown's 118 shares at $30,000 each. Paul Brown had just one share, but made sure he signed an agreement with Mr. Sawyer that allowed him to have control of the team, a point the IRS kept pounding on at the June 1996 trial.
Mr. Sawyer then executed a purchase option that gave Mike and Peter Brown the right to buy 329 of Mr. Sawyer's 330 shares for $25,000 per share in March 1993.
The purchase price could be offset by applying amounts due under Mr. Sawyer's promissory note against the payment due. It was estimated that after the $6.7 million offset, Mike and Pete would pay $1.6 million for the 329 shares.
Last year, various publications estimated the club's value at $170 million.
The IRS argued the shares were sold far below market value and Mr. Sawyer really sold his 213 shares to Paul Brown, with Mr. Sawyer retaining a right to income on the stock for 10 years.
But the Brown family argued that it wasn't a certainty the sons would exercise the 1993 option. They point to the three-year window from 1993-96 the family had to decide if they wanted to exercise the option and that Mr. Sawyer hoped they wouldn't exercise it so he could retain majority ownership.
In an NFL rocked by labor unrest and legal quagmires in 1983, Mr. Brown wasn't sure his sons could survive financially in the pro football of the future and wanted to give them the option to decide, his family argued.
On March 1, 1993, the Browns exercised the option with Mr. Sawyer, who was projected to make an estimated $25 million off the shares in 10 years.
''It was two men who did a deal that worked out for both, that's all,'' Mr. Sawyer said Tuesday. ''I thought we made the right move then, and I'm glad the judge saw it our way. It would have been a tremendous blow to Mike. (Losing the team) would have been a real possibility.''
Judge Colvin said in his opinion, ''It was not certain in 1983 that Brown's sons would exercise that option. The parties did not know whether the option price would be less than the value of Bengals' stock in 10 years and could not predict events that would occur in those 10 years that would affect the value of the stock.''
''The bottom line is the judge believed Mike and John Sawyer and the others who testified,'' said James L. Malone III, the Browns' Chicago tax attorney.
At the trial last June in Judge Colvin's courtroom in Chicago, National Football League figures such as Steelers owner Dan Rooney testified for the Browns that the NFL of 1983 was wracked with economic uncertainty. Mr. Malone led them through a narration of Raiders owner Al Davis' successful lawsuit against the league, the 1982 players' strike and rise of the United States Football League.
Estate problems have plagued NFL franchises such as the Chicago Bears and Tampa Bay Buccaneers. When the family of Joe Robbie owed $47 million, it had to sell the Miami Dolphins.
''(The IRS) has immense power, and when you're in their grasp you feel the impact of that power,'' Mr. Brown said. ''But these are people trying to do a job as they see it. I don't think anyone reached out to pick on us. They might have seen something there that we didn't feel existed, but I don't think there was ill will on anyone's part.''
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