On the heels of its determination that a 44-year-old transfer by Edward Redstone of stock in his family's entertainment business to his children's trusts was not a taxable gift (Estate of Redstone, 145 T.C. No. 11 (2015); see "Tax Matters: Redstone Family Stock Transfer Was Not a Taxable Gift," JofA, Feb. 2016, page 67), the Tax Court held that a similar, nearly contemporaneous transfer by Redstone's brother, Sumner, to his own children was taxable.
Facts: Much of the background is the same as in Estate of Redstone: The two brothers were co-owners with their father, Mickey Redstone, in a drive-in movie theater business that in 1959 was reorganized as National Amusements Inc. (NAI), a holding company. Business and personal conflicts caused Edward Redstone to resign from the company and demand possession of his NAI stock. After extensive litigation and negotiation, the parties agreed in 1972 that Edward Redstone owned an unrestricted right to two-thirds of the shares registered in his name, which were redeemed by NAI for $5 million. As a concession to Mickey Redstone's insistence that a portion of Edward's shares were subject to an "oral trust" for Edward's children, the remaining one-third was transferred into the trusts. Edward did not file a gift tax return on the transfer to his children. In Estate of Redstone, the Tax Court held that the transfer was not a taxable gift but was a bona fide, arm's-length transaction in settlement of the dispute and free from donative intent.
Three weeks after the settlement agreement was signed, Sumner Redstone transferred one-third of his own NAI shares into trusts for his two children. Although he was not required to make these transfers as Edward had been under the settlement agreement, he did so as a gesture of goodwill toward his father. At the time, Sumner Redstone contacted the Redstone family's accounting firm, which concluded in writing that the transaction was not a taxable gift and no gift tax return was required.
In 1974, after the Watergate investigation, Congress asked the IRS to investigate political campaign donors who might have evaded gift taxes by making multiple donations in support of the same candidate. Sumner Redstone was one of the contributors the Senate directed the IRS to review. Based on the information Sumner provided on transfers he made to political committees from 1970 to 1972, the IRS concluded that there was "no necessity to solicit a gift tax return for 1972."
As a result of more family litigation in 2006, Sumner Redstone was called to testify about the "oral trust" issue and the transfer of stock to the children's trusts in 1972. He testified that he had "voluntarily set up" the transfer to his own children. Unlike his brother, he said, he was just trying to maintain good family relations. "I wasn't sued. I just made an outright gift," he testified.
The 2006 litigation alerted the IRS to the stock transfer, and, after examination, it was determined to be a taxable gift. In 2013, the IRS issued a notice of deficiency to Sumner Redstone for gift tax of $737,625 and other penalties exceeding $590,000. He petitioned the Tax Court for relief.
Issues: Before trial, Sumner Redstone presented two arguments regarding threshold issues. First, although under Sec. 6501(c)(3) there is no statute of limitation for unfiled returns, the IRS should be barred by the doctrine of laches, he argued. He described the delay of 40-plus years in determining the deficiency as "an unprecedented abuse ... of the rule that no statute of limitations applies." He noted that he was "now 90 years old; material witnesses have been dead for decades; documents have long since been discarded or have disintegrated; memories have unquestionably eroded." Second, he maintained that the most recent examination was a second inspection prohibited under Sec. 7605(b), since the same tax year had previously been examined as part of the political contributions compliance project.
The primary issue was whether the transfer was a gift under Sec. 2501(a)(1) or was made "in the ordinary course of business" (Regs. Sec. 25.2512-8) and "for a full and adequate consideration in money or money's worth" (Regs. Sec. 25.2511-1(g)(1)). Sumner Redstone contended that the transfer "facilitated the settlement of his brother's litigation" and as such was made in the ordinary course of business.
Holding: The Tax Court denied the motion related to the doctrine of laches because the United States is not subject to the defense of laches in enforcing its rights, and, even if it were, Sumner Redstone had not established at trial the facts necessary to prove that it applied. Additionally, the court determined that he complied with all requests for information during the gift tax examination in 2011—2013, and it construed that as consent to the examination, waiving any rights that Sec. 7605(b) might have afforded. Thus, the court found it unnecessary to decide whether the most recent gift tax examination was a second inspection of Sumner Redstone's books.
The Tax Court held that the transfer was a taxable gift. Although the court stated that Sumner Redstone's transfers to his children's trust "undoubtedly" were prompted by the settlement agreement with Edward Redstone, it found no evidence that the transfers facilitated the settlement. The court also found that Sumner's testimony in the 2006 litigation firmly supported the voluntary nature and donative intent of the transfer.
The court considered several valuation methods put forth by experts and concluded the most reliable measure of fair market value at the time of the transfer was the redemption price NAI paid Edward Redstone in 1972.
The court concluded, however, that Sumner Redstone was not liable for any additions to tax due to fraud, failure to file, or negligence, noting his reliance on competent tax advisers who had told him that no gift return was required.
- Redstone, T.C. Memo. 2015-237
—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.