Paige v. United States

Raymond and Patricia Paige (plaintiffs) acquired stock in a small business called Tackmer in exchange for their rights in an exclusive license agreement. Other Tackmer shareholders, in contrast, acquired their stock by paying cash. Tackmer’s articles of incorporation provided that no distinction would be made between different shares of its stock—a policy explicitly permitted by California law. However, California law also empowered the state department of corporations to impose conditions on corporate entities. Among these conditions were rules that differentiated between shareholders who acquired their shares with cash from shareholders who acquired their shares through some form of noncash property. The cash shareholders were given superior rights in terms of distribution of assets and dividends as well as the ability to control the votes of the noncash shareholders. The Paiges, who had signed an agreement that bound them to the conditions of the state department of corporations, attempted to claim their pro rata share of Tackmer’s profits and losses pursuant to Subchapter S of Chapter 1 of the Internal Revenue Code. The Commissioner of Internal Revenue (the commissioner) disallowed these claims and assessed additional taxes. The Paiges paid the taxes and brought suit for a refund in federal district court. The court entered judgment for the United States government (defendant). The Paiges appealed. The United States Court of Appeals for the Ninth Circuit granted certiorari.