Overton v. Commissioner

In 1936, an amendment was made to the certificate of incorporation for Castle & Overton, Inc. (Castle). The amendment created 1,000 shares in addition to Castle’s already existing 1,000 shares. One thousand shares were designated as Class A stock and the other 1,000 were designated as Class B stock. The original shareholders held Class A stock but transferred the Class B stock to their wives. Class B stock was restricted to having no more than a one dollar value per share. Dividends of up to $10 per share were to be paid to Class A shareholders. Any dividends in excess of $10 per share were to be shared, with Class A shareholders receiving one-fifth of the excess and Class B shareholders receiving four-fifths. From 1936–1941, dividends paid to Class B shareholders amounted to $150.40 per share and dividends paid to Class A shareholders amounted to $77.60 per share. Because Class B stock was limited to $1,000 of corporate assets, the large amount of dividends received by Class B shareholders primarily accrued from the assets represented by Class A stock. The Commissioner (defendant) determined that Overton and Oliphant (plaintiffs), who both held Class A Castle stock, were liable for the dividends received by their wives, who held Class B Castle stock. The Tax Court held that the dividends received by the wives were, for tax purposes, income to Overton and Oliphant.