*242 Decisions will be entered for the petitioners.
During the period from 1932 to 1937 petitioners, as senior executives, made transfers of their common stock in a corporation to certain junior executives, in accordance with a plan for changing proportionate stockholdings among the management group from time to time as responsibilities were gradually shifted from the seniors to the juniors. The transfers were made at a price determined pursuant to written agreement among the common stockholders, all of whom were actively engaged in the business. Under the agreement no party could sell his stock without the consent of the holders of 75 per cent of the common stock, and the holders of 75 per cent could direct any party to sell all or any part of his stock. Held, even assuming that the value of the stock was in excess of the consideration, the transfers were made in the ordinary course of business and are not subject to gift tax.
*706 In these proceedings, duly consolidated for hearing and disposition, the respondent determined the following gift tax deficiencies:
| Taxpayer | Year | Amount |
| Estate of Monroe D. Anderson | 1932 | $ 38,000.00 |
| 1933 | 124,125.00 | |
| 1934 | 178,687.50 | |
| W. L. Clayton | 1934 | 46,671.75 |
| 1937 | 218,037.47 | |
| Susan V. Clayton | 1934 | 46,671.75 |
| 1937 | 218,037.47 |
In Anderson's case, the 1933 and 1934 deficiencies are based upon the same transfer, there being a question as to the year in which the transfer was effected.
Deficiencies in like amounts were determined against W. L. Clayton and Susan V. Clayton because the transfers involved were of their community property.
The issues presented are:
1. Whether the transfers of common stock here involved are subject to gift tax *244 under sections 501 and 503 of the Revenue Act of 1932.
*707 2. The value of the stock at the respective dates of transfer.
3. In which taxable years certain of the transfers were effected, that is, whether in 1933 or 1934 and whether in 1936 or 1937.
FINDINGS OF FACT.
Petitioners W. L. Clayton and Susan V. Clayton, during the years involved, were husband and wife, residing in Houston, Texas. Monroe D. Anderson was an individual, residing at Houston, Texas, until his death on August 6, 1939. The State National Bank of Houston, James E. Anderson, William Leland Anderson, and Thomas D. Anderson are the duly qualified executors of his estate.
Delinquent gift tax returns for the years involved and covering the transfers in question were filed by the Claytons and the executors of Anderson's estate with the collector of internal revenue for the first district of Texas in 1940 and 1941, after notice from the internal revenue agent in charge to the effect that the transfers were subject to gift tax. In these returns it was denied that, by the transfers involved, gifts had been made; and it was explained that the transfers were made pursuant to the managerial policies and program of *245 the Anderson-Clayton business enterprise. In each return the amount of gift was stated as zero.
In 1904 Frank E. Anderson, Monroe D. Anderson, William L. Clayton, and Benjamin Clayton organized a partnership, each with a one-fourth interest, under the name "Anderson, Clayton & Company," to engage in the business of cotton merchandising, cotton ginning, cotton seed oil milling, and related activities. The paid-in capital of the partnership was nominal.
By 1920 the assets of the partnership had increased to slightly less than $ 7,000,000. On May 31, 1920, the business was converted into a joint stock association (hereinafter called association) under the laws of Texas, and, in addition to the four partners, six employees were brought into the business by subscription for small amounts of stock in association. Thereafter, the cotton business was conducted through association and its subsidiaries. The two Andersons and the two Claytons, who were the directors and principal shareholders of association, agreed that any one of them could request a dissolution and all would so vote. Likewise, they agreed that association should purchase the interest of any member on his death at the *246 book value thereof as determined by the directors, exclusive of any value for name, good will, trade-marks, or trade names.
Frank E. Anderson died in December 1924, and during the fiscal year ended May 31, 1926, association purchased and retired all of its stock which had been held by Frank, 16,392 shares, for the payment of $ 5,663,638.56.
*708 In March 1929, because of continued ill health, Benjamin Clayton, who owned approximately one-third of the stock of association, requested according to his contractual right, that he be paid the approximately $ 12,000,000 which his stock represented.
Investment bankers were consulted in an attempt to raise ten or twelve million dollars through the sale of debentures or preferred stock; but, after a careful study, the bankers advised, following the October 1929 stock market break, that no such issue could be sold at any reasonable rate.
Association required all of its working capital for use in its business and customarily was a heavy borrower in banks. The remaining principal shareholders were unwilling that it undertake the large liquidation of assets that would have been required, and they believed it necessary to make provision for*247 continuation of the business in the event of further withdrawals or deaths.
Finally, in November 1929 a plan was formulated to organize a holding corporation to acquire all the stock of association, except for a few shares retained by the managing directors, and to purchase Benjamin Clayton's stock in association, giving its installment notes for most of the purchase price. Accordingly, on December 31, 1929, Anderson-Clayton Securities Corporation (hereinafter called corporation) was organized under the laws of Delaware.
Cotton merchandising is primarily a management business and is regarded as one of the most difficult and complex merchandising operations in the world. The results of a whole year's business depend upon difficult day-to-day decisions by top executives as to the purchase and sale of spot cotton and the placement of hedges upon domestic and foreign futures exchanges. Long experience in all phases of the cotton business is almost essential to the success of a top cotton executive. It is difficult to obtain executives from other fields who can capably manage a cotton business.
W. L. Clayton, one of the founding partners, was a dominant member in the enterprise and*248 was recognized as one of the outstanding men in the cotton merchandising business. Monroe D. Anderson, another founding partner, had been a banker prior to the organization of the original partnership, and he supervised the accounting and handling of cash and looked after the financing through southern banks. Following Benjamin Clayton's illness, the responsibility for the major policy decisions on which the success of the business depended fell largely upon W. L. Clayton.
Prior to the organization of corporation, the essentially one- or two-man nature of the business was criticized by the bankers who were financing it; and W. L. Clayton was told that in the event of his death, which would remove the managing director who made the *709 big policy decisions, essential credit would not be extended on anything like the previous scale.
In order to perpetuate the large and growing business and in order to preserve and protect their interests, Clayton and Anderson recognized that it was desirable to transfer more and more responsibility to the younger executives who had grown up with the business and that, to make the transition of management and responsibility effective, the junior*249 management should acquire a proprietary interest in the business.
The withdrawal of Benjamin Clayton and the creation of the holding corporation made it possible to put into effect a plan to bring in the junior executives who had started with the business in their youth and who were gradually taking more responsibility. The plan evolved in connection with the formation of corporation was to permit the junior executives to subscribe to common stock in corporation in order to give them in time, in case the business was successful, a proprietary interest and gradually work them into the position of top management. The senior executives, in turn, would gradually shift some of their responsibilities to the junior executives. According to the plan, the common stock was to have only a nominal book value, since the entire tangible net worth of the business would be turned into preferred stock and notes to Benjamin Clayton.
The original authorized capital of corporation consisted of 300,000 shares of $ 100 par value cumulative preferred stock and 100,000 shares of no par common stock. Dividends on the preferred were at the rate of 6 1/2 per cent per annum, payable January 1 and July 1, *250 and dividends accrued but unpaid bore interest at the rate of 6 1/2 per cent, compounded semiannually. The preferred stock could be redeemed at par value, plus accrued dividends and interest, at the option of the directors, and had equal voting rights with the common stock.
On March 8, 1930, all the outstanding capital stock of association, 51,300 shares, was owned by 11 individuals as follows:
| Shares | |
| Benjamin Clayton | 16,400 |
| W. L. Clayton | 16,400 |
| M. D. Anderson | 16,400 |
| Lamar Fleming, Jr | 700 |
| C. O. Lamberth | 400 |
| H. Whittington | 400 |
| D. Sumners | 200 |
| E. A. Naman | 100 |
| Fred Cockrell | 100 |
| J. M. Caine | 100 |
| J. P. Fuesler | 100 |
| 51,300 |
On March 8, 1930, 34,875 shares of association (which were all the outstanding shares except those owned by Benjamin Clayton and except for 5 shares each retained by W. L. Clayton, M. D. Anderson, Lamar Fleming, Jr., Harmon Whittington, and J. P. Fuesler, to maintain their personal liability for association's debts and obligations) were transferred to corporation in exchange for $ 25,842,375 *710 of its 6 1/2 per cent preferred and 52,312 1/2 shares of its common stock, the capital value of which was fixed at $ 1 per share. The exchange was*251 at the rate of 1 share of association for 7.41 shares of $ 100 par preferred of corporation and 1 1/2 shares of no par common of corporation. Monroe D. Anderson and W. L. Clayton each received $ 12,148,695 par value of preferred stock; and they continued, together with trusts subsequently set up by Clayton for his wife, daughters, and others, to be the chief holders of the preferred stock of corporation.
On March 15, 1930, Benjamin Clayton sold to corporation his 16,400 shares in association for a total consideration of $ 12,175,777.06, corporation paying therefor $ 1,110,523.36 in cash (borrowed on open account from association) and 7 6 1/2 per cent interest-bearing promissory notes, totaling $ 11,065,253.70 and maturing serially in the years 1930 through 1935. Pursuant to agreement the aggregate face value of the notes was later reduced to $ 10,692,125.85. The sale of Benjamin Clayton's stock was made to corporation under an agreement between the two which, inter alia, placed restrictions on the payment of dividends (except stock dividends) by corporation, and on the issuance of bonds or other evidences of indebtedness except such as were expressly made junior to the notes*252 to Benjamin Clayton.
After March 15, 1930, corporation was the owner of about 99.95 per cent of the outstanding shares of association, that is, all except a few shares retained by the directors of association for the purpose of making them personally liable for all the debts and obligations of association. On April 21, 1930, an additional 47,687 1/2 shares of corporation common stock were allotted by the executive committee of corporation, consisting of Clayton, Anderson, Lamar Fleming, Jr., Harmon Whittington, and D. B. Cannafax, for subscription at $ 1 per share. The following table shows the names of the persons to whom these shares were allotted, together with the shares previously issued to them in the exchange and their total proposed holdings:
| Shares | Shares | Total | |
| Name | allotted for | previously | proposed |
| subscription | issued | holdings | |
| M. D. Anderson | 6,407 1/2 | 24,592 1/2 | 31,000 |
| W. L. Clayton | 20,207 1/2 | 24,592 1/2 | 44,800 |
| Lamar Fleming, Jr | 10,957 1/2 | 1,042 1/2 | 12,000 |
| Harmon Whittington | 4,407 1/2 | 592 1/2 | 5,000 |
| J. P. Fuesler | 52 1/2 | 142 1/2 | 195 |
| C. O. Lamberth | 180 | 600 | 780 |
| D. Sumners | 90 | 300 | 390 |
| E. A. Naman | 45 | 150 | 195 |
| Fred Cockrell | 45 | 150 | 195 |
| J. M. Caine * | 45 | 150 | 195 |
| L. L. Fleming | 2,500 | None. | 2,500 |
| D. B. Cannafax | 2,750 | None. | 2,750 |
| Total | 47,687 1/2 | 52,312 1/2 | 100,000 |
*711 The allocation of common stock as in the above table was discussed considerably. Prior to the organization of corporation, W. L. Clayton, Lamar Fleming, Jr., and Harmon Whittington, as managing executives of association, held contracts providing for a share in the profits of the business. Under such contracts commissions drawn by these three amounted to approximately $ 647,000 in 1927 and approximately $ 238,000 in 1929. Division of profits among active management after some stated return on capital invested was a common practice in the cotton merchandising business generally.
The ownership of common stock in corporation was to be substituted for these profit-sharing contracts for the purpose of keeping cash in the business and of compelling the executives to acquire the proprietary interest deemed essential. Fleming's and Whittington's profit-sharing contracts were canceled, effective as*254 of August 1, 1929. Certain other branch and departmental heads held commission contracts which were not canceled, but they did not become entitled to acquire common stock of corporation in substantial amounts.
The ownership of the common stock was surrounded with restrictions which were designed to insure its holding and use as a method of rewarding management. From the beginning it was understood by the common stockholders, all of whom were active in the business, that the stock was not salable outside the managing directors of the business, and that even within that group the disposition was to be made in accordance with the responsibilities of and contributions to management by the different executives as determined by the holders of at least 75 per cent of the common stock. It was understood that no stockholder was entitled to sell his stock and none could keep it unless the others wanted him to. It was likewise understood from the beginning that the respective interests in the common stock would be adjusted among the managerial group as responsibility changed. Clayton and Anderson told the junior managers that as they themselves grew older and relinquished responsibilities*255 they would sell some of their common stock to those juniors taking on additional responsibilities and to new men brought into the category of top management. The several stockholders understood that there would be a shift of the ownership of the shares as the present and future junior executives took a more important part in the business; and it was also contemplated that the junior executive would transfer stock to others if his services were unsatisfactory or as he in turn passed the peak of responsibilities.
Pursuant to the plan and the general understanding, W. L. Clayton on October 25, 1930, transferred 4,000 shares of his common stock for a cash consideration of $ 1 per share, 2,000 shares to Lamar Fleming, Jr., and 1,000 shares each to Harmon Whittington and D. B. Cannafax. The consideration of $ 1 per share was credited to Clayton's account *712 and charged to the purchasers' accounts on the books of association on October 31, 1930.
On February 14, 1931, an agreement in writing was entered into between corporation and the holders of all its common stock, all of whom were actively engaged in the business. This instrument embodied, among other things, the provisions *256 of the general understanding theretofore existing among the common stockholders with reference to the restrictions upon the holding of the stock and the plan for its use as a method of rewarding management. The agreement provided, in substance, that:
1. All the common stockholders of corporation agreed to endorse their common stock to Monroe D. Anderson as trustee for a period of 10 years.
2. The stockholders retained the right to vote their stock.
3. The stockholders agreed that they could not assign, transfer, or otherwise dispose of their common stock without the written consent of the holders of 75 per cent of the stock.
4. On the death of any party to the agreement, corporation agreed to purchase the common stock of the deceased party at the value determined as of July 31, immediately preceding the death, according to the provisions made in the contract for the annual determination of value by the executive committee of corporation, but in no event less than $ 1 per share, plus 6 per cent interest from such date to the date of death.
5. A consolidated balance sheet for corporation and all its subsidiaries was to be prepared as of July 31 of each year (the end of its fiscal year); *257 and, in addition, for the private use of the individual parties to the agreement, a supplementary balance sheet, adjusted on account of appreciation and depreciation of the value of properties held by corporation and its subsidiaries so as to reflect the true net worth of corporation (without any allowance for good will), was also to be prepared and approved by the executive committee of corporation as soon after the end of each fiscal year as practicable. The value of the common stock as shown in the supplementary balance sheet was to be fixed as the value of that stock for purposes of the contract.
6. The owners of 75 per cent of the common stock could at any time in writing request any party to the agreement to sell all or any part of his common stock to corporation, or to such person as they might designate, upon terms agreeable to seller and buyer; and if seller and buyer could not agree, then according to the value fixed for the common stock in the annual supplementary balance sheet approved by the executive committee, as in the case of the death of any party to the contract. In addition, corporation was required to purchase the preferred stock held by such party at the value*258 reflected in the supplementary balance sheet, but not in excess of the par value.
7. Any owner of common stock held by the trustee under the agreement *713 could elect at any time to withdraw and sell his common stock to corporation upon terms mutually agreeable by giving written notice of his desire to the trustee. If corporation and the party could not agree upon the selling price, then the value fixed in the annual supplementary balance sheet was to be used, substantially in the same way as in the case of the death of a party.
8. No dividends could be paid on common stock so long as corporation was indebted in any sum whatever, nor in any event if the dividend would have the effect of lowering the book value of the stock below five million dollars as reflected in the consolidated balance sheet of corporation, nor unless an amount of preferred stock equal to the dividend was retired at the same time.
9. Any common stock purchased by corporation under the terms of the agreement could be sold to the remaining parties to the agreement or to any other person whom the owners of 75 per cent of the remaining stock might designate in writing.
10. Any future holder of common stock *259 could become a party to the agreement merely by signing it or giving his consent to its provisions in writing.
11. All the parties to the agreement agreed that any common stock thereafter acquired by any of them, in whatever manner, should automatically be subject to all the terms of the agreement and should be endorsed to the trustee.
12. The agreement could be amended, altered, revised, or canceled at any time by an instrument in writing signed by the owners of 75 per cent or more of the common stock.
On March 20, 1933, the agreement was amended so as to permit the payment of dividends on the common stock in second preferred stock (see item 8 above), and the $ 5,000,000 figure was changed to $ 7,500,000. The term of the agreement was extended to August 1, 1943. On October 20, 1933, the agreement was further amended to provide that all interest should be calculated at the rate of 5 per cent instead of 6 per cent; that any second preferred stock received as a dividend on common stock could, at the option of the holder, be endorsed to the trustee and be subject to liquidation under the terms of the agreement; and that the liquidating value of common stock as shown by the latest approved*260 supplementary balance sheet should be reduced by the par value of any second preferred stock issued as a dividend thereon since such date.
During all the years here involved some of the notes to Benjamin Clayton were still outstanding, continued beyond maturity date with the consent of the holders, so that the payment of any cash dividend on the common stock of the corporation was prevented.
In 1931 and 1932, as a result of adverse business conditions and in fairness to the common stockholders, the dividend rate on preferred *714 stock was twice reduced by agreement of the preferred stockholders, first from 6 1/2 per cent to 6 per cent and later to 5 per cent, with a contingent additional dividend of 1 per cent a year. The supplementary balance sheet of corporation for the year ended July 31, 1932, showed that without any provision for cumulative dividends on preferred stock the common stock had a book value of $ 1. As of August 1, 1932, the preferred stockholders waived and disclaimed all claims for preferred stock dividends, plus interest, for the two-year period beginning July 1, 1931, and ending June 30, 1933. Also, by agreement with the holders, the interest rate on some*261 of the outstanding notes to Benjamin Clayton was reduced from 6 1/2 per cent to 4 per cent.
Discussions regarding the respective holdings of common stock and the participations of the various executives usually occurred soon after the beginning of each cotton season, i. e., on August 1, and took place in Clayton's office in more or less continuous conferences.
The transfers of common stock upon which the deficiencies were based and which the Commissioner here asserts are taxable may be classified into three groups, according to the respective periods in which they were effected. The transferors, transferees, amounts of shares transferred, and the cash consideration paid are as shown in the following chart:
| Transferor | Transferee | Shares |
| I | ||
| Transfers on December 31, 1932 | ||
| Cash consideration, $ 1 per share | ||
| M. D. Anderson | Lamar Fleming, Jr | 1,000 |
| Harmon Whittington | 1,000 | |
| D. B. Cannafax | 1,000 | |
| Total | 3,000 | |
| II | ||
| Transfers during fiscal year ended July 31, 1934 | ||
| Cash consideration, $ 1 per share | ||
| M. D. Anderson | Lamar Fleming, Jr | 1,500 |
| Harmon Whittington | 1,500 | |
| D. B. Cannafax | 1,500 | |
| Total | 4,500 | |
| W. L. Clayton | Lamar Fleming, Jr | 1,000 |
| Harmon Whittington | 1,000 | |
| D. B. Cannafax | 1,000 | |
| S. M. McAshan, Jr | 500 | |
| D. Sumners | 200 | |
| Total | 3,700 | |
| III | ||
| Transfers during fiscal year ended July 31, 1937 | ||
| Cash consideration, $ 1.12 per share | ||
| W. L. Clayton | Harmon Whittington | 1,808.32 |
| D. B. Cannafax | 994.58 | |
| S. M. McAshan, Jr | 1,657.63 | |
| D. Sumners | 764.92 | |
| Sydnor Oden | 2,249.55 | |
| Total | 7,475.00 |
*262 *715 At the same time as the transfers in group I, W. L. Clayton made transfers of common stock totaling 1,441 shares to several other persons actively engaged in the business; and at the same time as the transfers in group III, Monroe D. Anderson made transfers totaling 4,926 shares of common stock to the same individuals as shown in group III and in approximately the same proportions. The Commissioner has not determined deficiencies with respect to these transfers, apparently for the reason that as to the respective taxpayers the particular year happened to be barred by the statute of limitations.
All of the transfers of corporation's common stock involved in these proceedings were made only to persons who occupied positions of managerial responsibility in the business and were made pursuant to the provisions of the agreement between corporation and its common stockholders dated February 14, 1931, as amended. In each instance the necessary written consents, signed by holders of 75 per cent of the common stock, were filed. By such transfers to younger members of the management the ownership of corporation common stock by Clayton and Anderson was reduced from 75 per cent in*263 1930 to approximately 45 per cent in 1938.
All 6 transferees of the stock in question became connected with the business in their youth. Fleming started in 1911, Sumners in 1916, Whittington in 1917, Cannafax and McAshan in 1927, and Oden in about 1921 or 1922, when he was 18 or 19 years old. Oden acted as representative of the company in Italy for about 11 years. Fleming became a managing director of association in 1925; Whittington and Cannafax in 1931; and Sumners, McAshan, and Oden in 1936. Fleming and Whittington were responsible for trading policies and the cotton merchandising activities. Cannafax had charge of the warehousing, ginning, and cotton seed oil milling activities and, since 1931, has been the chief financial officer of the business. Sumners was the head of the accounting and auditing departments. McAshan was responsible for activities in South America and Oden for dealings in United States and foreign cotton. The transferees have likewise held offices in corporation.
*716 In addition to the transfers in question, corporation in 1932, and again in 1933, purchased common stock from the estates of deceased stockholders, pursuant to the stockholders' agreement*264 of February 14, 1931, at or about $ 1 per share according to the value fixed in the supplementary balance sheet. These shares, 2,795 in all, were subsequently resold by corporation at $ 1 per share to other persons actively engaged in the business. The necessary consents signed by 75 per cent of the stockholders were filed. In 1935 corporation likewise issued 1,950 newly authorized shares of common stock at a cash consideration of $ 1 per share to Cannafax, Sumners, and 2 other individuals actively engaged in the business.
The charter of corporation was amended on October 14, 1933, to authorize the issuance of 5 per cent cumulative voting second preferred stock, junior to the first preferred. On November 1, 1933, a dividend of second preferred stock in the total amount of $ 4,500,407.60 par value was paid on common stock at the rate of $ 44.60 per share. On October 11, 1934, $ 3,553,093.60 par value of second preferred was paid as a dividend on common stock at the rate of $ 35.60 per share. These dividends in second preferred were intended to keep the book value of the stock at approximately $ 1 per share.
The values of the common stock as fixed by the executive committee pursuant*265 to the stockholders' agreement were as follows:
| Date | Value |
| July 31, 1931 | $ 1.00 |
| July 31, 1932 | 1.00 |
| July 31, 1933 | * 45.636 |
| July 31, 1934 | * 1.0402 |
| July 31, 1935 | $ 1.00 |
| July 31, 1936 | 1.12 |
| July 31, 1937 | 13.02 |
| July 31, 1938 | 54.22 |
Each supplementary balance sheet was prepared in accordance with the stockholders' contract provision that it should show the consolidated net worth of corporation and its subsidiaries, with adjustments in values to give effect to appreciation or depreciation of properties and as might be necessary to reflect the true net worth of corporation, without allowances for good will. These balance sheets were not used in the commercial end of the business, but were solely for the private use of the stockholders and had the object of fixing the value of the common stock for purposes of the stockholders' agreement. The values were*266 not raised or lowered arbitrarily in order to enable transfers of stock under the stockholders' agreement at a value different from its true net worth.
On or about December 20, 1935, M. D. Anderson and W. L. Clayton each transferred, without consideration, 8,087 shares of second preferred *717 stock to a large number of employees of the Anderson-Clayton enterprise who had completed 10 years of service in the business; and during the period from October 20 to December 14, 1936, each transferred 1,218 shares of second preferred, without consideration, to certain employees who had then completed 10 years of service in the business. These transfers are not in issue here.
The sales of common stock here involved were bona fide transactions, made at arm's length in the ordinary course of business, free from any donative intent.
OPINION.
At the threshold we are met with the question of whether the sales of stock by Anderson and Clayton to the six individuals actively engaged in the Anderson-Clayton business enterprise are in any event subject to gift tax. Respondent concedes that these sales were bona fide and at arm's length; but he contends that they were not made in the ordinary*267 course of business, that the value of the stock was greater than the value of the consideration received, and that the excess is therefore taxable as a gift under section 503 of the Revenue Act of 1932. 1 He relies primarily upon Commissioner v. Wemyss, 324 U.S. 303">324 U.S. 303, for the proposition that the absence of donative intent is immaterial.
It is quite true that in Wemyss the Supreme Court held that Congress in section 503 had dispensed with the subjective test of donative intent and substituted the more workable external or objective test of whether the consideration*268 for the transfer is full and adequate in money or money's worth. It must not be overlooked, however, that at the same time the Court was careful to point out that genuine business transactions -- "business transactions within the meaning of ordinary speech" -- are not within the scope of the gift tax. Citing Treasury Regulations 79 (1936 Ed.), art. 8, 2 it said that:
* * * the Treasury Regulations make clear that no genuine business transaction comes within the purport of the gift tax by excluding "a sale, exchange, *718 or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm's length, and free from any donative intent)." * * * Thus on finding that a transfer in the circumstances of a particular case is not made in the ordinary course of business, the transfer becomes subject to the gift tax to the extent that it is not made "for an adequate and full consideration in money or money's worth."
*269 The first issue therefore reduces itself to the question of whether the sales of common stock of corporation were "made in the ordinary course of business." Petitioners contend that the sales were so made. They argue that, while donative intent may not be material in determining whether a gift has been made, the presence or absence of donative intent is an important circumstance in determining whether a sale or other disposition of property is made in the ordinary course of business. The regulations, they say, define a transfer made in the ordinary course of business as "a transaction which is bona fide, at arm's length, and free from any donative intent."
For the purposes of deciding the first issue thus raised, we shall assume that the stock had a value in excess of the consideration.
All the sales of stock were made pursuant to what was essentially a profit-sharing plan. Profit participation by the active management was a common practice in the cotton merchandising business generally. The evidence makes clear that cotton merchandising is primarily a management business and one of the most difficult and complex merchandising operations in the world, and that the success of the*270 business is dependent, by and large, upon efficient and well trained management having long experience in all phases of cotton merchandising.
Prior to the organization of corporation, Clayton, Fleming, and Whittington held profit sharing or commission contracts with association which yielded them large annual returns and removed considerable cash from the business. When corporation was organized, its common stock was substituted for the profit sharing contracts; and that had the two-fold effect of keeping cash in the business as invested capital and compelling the executives to acquire a proprietary interest in the business. From the beginning, the common stock of corporation was designed to be held only by persons actively engaged in the Anderson-Clayton business enterprise. Clayton and Anderson were the holders of the largest equities in the business, and the real value of their large investments in preferred stock could be maintained and preserved only by a continued efficient management. In order to build up a responsible management which could continue the business in the event of the retirement or death of Anderson or Clayton, they believed it essential that the junior executives*271 acquire proprietary interests in the business and that such proprietary interests should grow in proportion to the shifting of responsibilities from the seniors to the juniors.
*719 And so the plan was put into operation upon the organization of corporation. All the common stockholders understood that the relative proportions of their holdings would change from time to time as responsibilities were shifted from the older to the younger executives. At the beginning of each cotton season it was customary to reexamine the management situation and the relative contributions to management on the part of the several executives and to determine what readjustments, if any, in the relative ownership of common stock should be made. All the sales of common stock here in issue, as well as other sales not in issue, were made pursuant to the agreement between corporation and all the common stockholders, all of whom were actively engaged in the business. Under that agreement a method was provided for determining annually, in accordance with a consolidated balance sheet adjusted so as to reflect the true net worth of the consolidated business enterprise, a price at which transfers of the*272 common stock should be made. The holders of 75 per cent of the common stock could direct any party to sell all or any part of his stock to corporation or to such person as they might designate. No party could sell or otherwise dispose of his common stock without the written consent of 75 per cent of the holders. If any party should elect to withdraw from the business, he had to sell his stock to corporation. If any party should die, his stock was to be purchased by corporation. No cash dividend could be paid on common stock so long as corporation was indebted in any sum whatever. Other provisions of the agreement are set out in our findings and need not be repeated here. It was contemplated not only that Clayton and Anderson would sell some of their common stock from time to time to their juniors, but also that as the latter should pass the peak of responsibility, they in turn would sell part of their holdings to their juniors who were taking on more responsibility. In other words, the common stock was designed not to be marketable, but to be held in direct proportion to the active participation of each stockholder in the business enterprise.
It is obvious from all these circumstances*273 that the sales of common stock were motivated by the peculiar importance of expert and continuous management to the cotton merchandising business. They were intended to preserve or augment the value of the estates of Clayton and Anderson, as well as to relieve them of obligations to corporation. All the vendees of the stock were, either at the time of the sales or shortly thereafter, managing executives in association and held qualifying shares to make them fully liable for the debts of association. Association being a modified form of partnership, the vendees were partners with Anderson and Clayton in the operating entity of the business enterprise. There was no intent on the part of Anderson and Clayton in selling the stock to confer, nor intent on the part of *720 their vendees to receive, gratuitous benefits. Clearly, then, these transactions were not gifts in any ordinary sense of the word.
In contending that the sales of stock were not "made in the ordinary course of business," respondent's position appears to be that it was neither ordinary for Anderson and Clayton nor ordinary for business men in general to enter into transactions of the type here involved. We do*274 not agree. On the contrary, it is apparent from the numerous occasions on which Clayton and Anderson sold common stock to their junior executives, both those in issue and others not in issue, that it was a quite customary and ordinary thing for them to do. The record also proves that profit sharing or participation among the active management was quite the ordinary and customary practice in the cotton merchandising business generally. Furthermore, from facts within the range of judicial knowledge, we know that nothing is more ordinary, as business is conducted in this country, than profit-sharing arrangements and plans for the acquisition of proprietary interests by junior executives or junior partners, often for inadequate consideration, if consideration is to be measured solely in terms of money or something reducible to a money value.
The cases of Deputy v. DuPont, 308 U.S. 488">308 U.S. 488, and Welch v. Helvering, 290 U.S. 111">290 U.S. 111, relied on by respondent, have little if any bearing on the problem here presented. Both cases deal with expense deductions for income tax purposes under a statute providing for the allowance of*275 "ordinary and necessary expenses paid or incurred * * * in carrying on any trade or business." (Italics supplied.) It does not follow that considerations which are relevant in determining whether an item of expense is an "ordinary and necessary" business expense for purposes of income tax deduction are relevant in determining whether a transfer of property is made "in the ordinary course of business" for purposes of the gift tax.
The pertinent inquiry for gift tax purposes is whether the transaction is a genuine business transaction, as distinguished, for example, from the marital or family type of transaction involved in Wemyss and its companion case, Merrill v. Fahs, 324 U.S. 308">324 U.S. 308. Surely it will not be said that there may not be a genuine business transaction not directly connected with the taxpayer's trade or business or even though the taxpayer be not engaged in "carrying on any trade or business," within the scope of that term as limited by Higgins v. Commissioner, 312 U.S. 212">312 U.S. 212. Bad bargains, sales for less than market, sales for less than adequate consideration in money or money's worth are made*276 every day in the business world, for one reason or another; but no one would think for a moment that any gift is involved, even in the broadest possible sense of the term "gift."
It appears that this is the first attempt on the part of the respondent to apply the gift tax to transactions such as those presented here. *721 To sustain the attempt, in our judgment, would be to work a perversion of the whole purpose and spirit of the gift tax law. However broadly Congress may have used the term "gifts" in the gift tax law, and however much it may have dispensed with common law concepts of gifts, we are certain that that law was neither designed nor intended in its operation to hamper or strait-jacket the ordinary conduct of business.
We have found that the sales of stock in issue were bona fide and made at arm's length, in the ordinary course of business. Therefore, assuming, without deciding, that the value of the stock was greater than the value of the consideration, we hold that the transfers are not subject to gift tax. This makes it unnecessary to decide the question of value or to determine in which calendar years certain of the transfers were effected, and we have accordingly*277 made no findings of fact with respect to these questions.
Decisions will be entered for the petitioners.
Footnotes
*. Caine apparently died shortly after receiving the 150 shares in the exchange on March 8, and the 45 shares issued on April 21 were issued to his estate. The estate sold all 195 shares on October 25, 1930, at 25 cents a share to others who were actively engaged in the business.↩
*. The 1933 value of $ 45.636 was reduced to approximately $ 1 by the dividend in second preferred stock on November 1, 1933, at the rate of $ 44.60 per share of common. The 1934 value of $ 1.0402 was after the payment of the dividend in second perferred on October 11, 1934, at the rate of $ 35.60 per share of common.↩
1. SEC. 503. TRANSFER FOR LESS THAN ADEQUATE AND FULL CONSIDERATION.
Where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this title, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.↩
2. Art. 8. Transfers for a consideration in money or money's worth↩. -- Transfers reached by the statute are not confined to those only which, being without a valuable consideration, accord with the common law concept of gifts, but embrace as well sales, exchanges, and other dispositions of property for a consideration in money or money's worth to the extent that the value of the property transferred by the donor exceeds the value of the consideration given therefor. However, a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm's length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money's worth. A consideration not reducible to a money value, as love and affection, promise of marriage, etc., is to be wholly disregarded, and the entire value of the property transferred constitutes the amount of the gift.