In the case of Commissioner of Internal Revenue v. Brown et al., 1964, the U.S. Supreme Court was tasked with deciding whether or not proceeds from a liquidating dividend could be considered capital gains for tax purposes. The Browns had received such a dividend when their company was dissolved and its assets sold off; they argued that this income should be taxed at the lower rate applied to long-term capital gains rather than as ordinary income. The IRS disagreed, arguing that since the money came from an active business it should be treated as regular income subject to higher rates. The court sided with the Browns in a unanimous decision, ruling that liquidating dividends did indeed qualify as capital gains under existing tax law because they resulted from "the sale or exchange of property". This meant that taxpayers receiving these types of payments were entitled to pay taxes at lower rates reserved for long-term investments rather than having them classified as ordinary income.

In the dissenting opinion for Commissioner of Internal Revenue v. Brown, Justice Harlan argued that the majority's decision to allow a tax-free liquidation was inconsistent with both legislative intent and previous court rulings. He believed that Congress intended for all corporate distributions to be taxable unless explicitly exempted by statute. Furthermore, he pointed out that prior Supreme Court decisions had established this principle as well. According to Justice Harlan, allowing such a distribution without taxation would create an unfair loophole in the tax code and undermine its integrity. He also disagreed with the majority's interpretation of Section 337 of the Internal Revenue Code, arguing it did not support their conclusion about non-recognition of gain or loss on certain liquidations.