## Facts

- Monroe D. Anderson and W. L. Clayton were senior executives of Anderson, Clayton & Co., a closely held company whose common stock was not actively traded and was largely held by company executives.
- The company used common stock as part of an internal profit-sharing and management-succession program for developing and retaining key employees.
- Under the program, senior executives sold shares to junior executives at prices below the Commissioner’s asserted fair market value, reflecting business considerations tied to employee retention, increased responsibility, and limited marketability.
- The Commissioner determined gift-tax deficiencies, asserting the bargain element (difference between asserted fair market value and sale price) constituted taxable gifts under §§ 501 and 503 of the Revenue Act of 1932.
- Deficiencies were determined against the Estate of Monroe D. Anderson for 1932, 1933, and 1934, and against W. L. Clayton and Susan V. Clayton for 1934 and 1937; identical deficiencies were asserted against both Claytons because the transfers involved community property under Texas law.
- Certain deficiencies were alternatively asserted for different years based on disputes over when particular transfers were effected.
- Delinquent gift-tax returns were filed after an internal revenue agent advised that the transfers were being treated as subject to gift tax.
- The consolidated cases were tried in the United States Tax Court.

## Issues

1. Whether intra-company sales of closely held corporate stock at prices below the Commissioner’s asserted fair market value were taxable gifts under §§ 501 and 503 of the Revenue Act of 1932.
2. If gift tax applied, what the stock’s value was on the respective transfer dates.
3. In which taxable year certain transfers occurred.

## Decision

- The Tax Court entered decisions for the petitioners and rejected all asserted gift-tax deficiencies.
- The court held the discounted intra-company stock sales were not taxable gifts under the federal gift-tax provisions.
- Because no taxable gifts occurred, valuation and timing disputes did not affect the outcome.

## Legal Principles

- A bargain sale does not, by itself, establish a taxable gift; gift-tax liability depends on whether the transfer is gratuitous in character and lacks adequate and full consideration in money or money’s worth.
- In assessing consideration, the court may consider the overall business arrangement, including non-cash components tied to employment, such as continued services, increased managerial responsibility, and assumption of risk in a closely held enterprise.
- Transfers made pursuant to a bona fide, business-motivated internal program, treated as an arm’s-length arrangement rather than a donative transfer, may fall outside the gift-tax definition even when the price is below an asserted fair market value.

## Conclusion

The Tax Court held that discounted sales of closely held corporate stock to junior executives under a bona fide profit-sharing and management-succession plan were not taxable gifts, and it entered decisions for the estate and the Claytons on all asserted deficiencies.


Estate of Anderson v. Commissioner, 8 T.C. 706 (1947)