The Tax Court held that a deceased taxpayer's 1972 transfer of stock to his children's trusts in settlement of a family dispute was not a taxable gift. Evidence indicated that the transfer of stock was made in the ordinary course of business and for full and adequate consideration, even though that consideration was not furnished by his children.
Facts: Beginning in the 1930s, Mickey Redstone established a drive-in theater business with his sons, Sumner Redstone and Edward Redstone. In 1959, the business was reorganized as National Amusements Inc. (NAI), a holding company. Although each of the three contributed different amounts of capital to NAI, with Mickey contributing more than his sons, they each received one-third of its stock, or 100 shares. And although the stock was registered in their names, the certificates for the stock were held at NAI's offices. Currently, NAI is a closely held company operating under the third generation of leadership by the Redstone family and is the parent company of both Viacom and CBS Corp.
During the late 1960s, business and personal conflicts developed between Edward Redstone and his father and brother. Edward Redstone felt he was being forced out of the family business and quit in 1971. He demanded possession of his 100 shares of NAI stock and threatened to sell them to an outsider if NAI did not redeem them at an appropriate price. Mickey Redstone refused to deliver the stock certificates, claiming that due to his disproportionately higher capital contribution in NAI, part of Edward's stock had been held since NAI's inception in an "oral trust" for the benefit of Edward's children. After extensive litigation and negotiation, a settlement was finally reached in 1972. The parties agreed that Edward was the owner of 66⅔ shares, which were redeemed by NAI for $5 million, and the remaining 33⅓ shares were transferred into trusts for his children. Edward did not file a gift tax return for the transfer to his children's trusts since it was a business transaction pursuant to the settlement agreement.
As a result of more family litigation in 2006, the IRS became aware of the 1972 stock transfer to his children and after examination determined it was a taxable gift. In 2013, the IRS issued a notice of deficiency to Edward Redstone's estate (he had died in 2011) for gift tax of $737,625 and other penalties and interest in excess of $590,000. The estate petitioned the Tax Court for relief.
Issues: According to Regs. Sec. 25.2511-1(g)(1), gift tax is not applicable to a "transfer for a full and adequate consideration in money or money's worth, or to ordinary business transactions." A transfer will have occurred "in the ordinary course of business" and therefore will be considered to have been made "for a full and adequate consideration in money or money's worth" if it meets three requirements under Regs. Sec. 25.2512-8: that the transfer be bona fide, at arm's length, and free of donative intent. The IRS did not seriously challenge that the transfer met these requirements, instead principally arguing that since the transferees (the children) did not provide any consideration to Edward Redstone, the transfer must have been a gift. However, the regulation does not discuss the source of the consideration.
Holding: The Tax Court held that the transfer of shares to the children's trusts was not a gift because the requirements in Regs. Sec. 25.2512-8 were met. The court found that the source of the consideration received by Edward Redstone was irrelevant in determining whether the transfer was a gift.
The court reasoned that the transfer was bona fide because Edward Redstone's agreement to transfer the stock to the children's trusts was a bona fide settlement of a real dispute. As the registered owner of 100 shares, he agreed to the settlement terms to end the dispute with his father and receive payment for his remaining shares. There was no indication that this was a sham transaction to avoid gift tax.
The court found that the transfer was made at arm's length because Edward acted "as one would act in the settlement of differences with a stranger" (quoting Beveridge, 10 T.C. 915, 918 (1948)). This transfer was the result of a settlement of a genuine dispute involving lawsuits, lengthy negotiations, and the advice of counsel. The settlement was incorporated into a judicial decree that terminated the lawsuits.
With respect to donative intent, the court found the fact that Edward Redstone filed lawsuits to obtain his 100 shares of stock showed that he did not accept his father's "oral trust" theory and wanted all of the shares. According to the court, the evidence clearly indicated that he had no desire to transfer the stock to his children but was forced to agree to the transfer to settle the dispute and receive payment for his remaining shares.
The court found no merit in the IRS's argument regarding the source of consideration. The court explained that Sec. 2512(b) and its regulations require that the donor receive a full and adequate consideration with no mention of the source of that consideration. Therefore, because it had determined that Edward Redstone received full and adequate consideration for his transfer in the form of Mickey and Sumner Redstone's recognition of Edward's outright ownership of the remaining shares registered in his name and payment for those shares, the transfer was not a gift, regardless of the source of the consideration.
- Estate of Redstone, 145 T.C. No. 11 (2015)
—By Karyn Bybee Friske, CPA, Ph.D., Schaeffer Professor of Business Ethics and professor of accounting, and Darlene Pulliam, CPA, Ph.D., McCray Professor of Business and professor of accounting, both of the College of Business, West Texas A&M University, Canyon, Texas.