Gift tax may be assessed 41 years after the gift

Sumner Redstone v. Comm’r, T.C. Memo. 2015-237 

 A conflict broke out in the Redstone family in 1971.  Patriarch Mickey Redstone and his two sons, Edward and Sumner, were co-owners of the family business, each owning 100 shares.

However, when the business was incorporated Mickey put up 48% of the capital, and the boys each contributed roughly 26%.  In 1971 Edward decided to leave the business, and demanded that his 100 shares be redeemed or he would sell them to outsiders.

In the squabble that ensued, Mickey claimed that a portion of Edward’s shares were subject to an oral trust in favor of Edward’s children, the amount in excess of Edward’s capital contribution.  The same conditions applied to Sumner’s share, in Mickey’s eyes.

A lawsuit was filed, and a settlement was reached in 1972.  Under the terms of the settlement, 33 1/3 of Edward’s shares were transferred to a trust for his children, and his remaining shares were redeemed by the company.  Three weeks later, Sumner transferred a third of his shares to an irrevocable trust for his children.  He was not required to do so by the terms of the settlement, but it seems likely that Mickey insisted upon the equal treatment.

Upon advice of counsel, neither brother filed a gift tax return reporting the transfers to the trusts.  Nearly 40 years later, the IRS became aware of the transfers as a result of publicity from other litigation.  Gift taxes were assessed against Edward’s estate and Sumner.

In Edward’s case, the Tax Court held because the transfers were the result of a bona fide settlement reached at arm’s length, there was no taxable gift [Estate of Edward S. Redstone v. Comm’r, 145 T.C. No. 11 (2015)].  Although Sumner was a party to the settlement, it imposed no similar duty upon him.  Accordingly, his transfer was not protected from gift tax.

Sumner’s attorneys argued that imposing a gift tax 41 years late, was an “unprecedented abuse” of the rule that the statute of limitations remains open if no gift tax return has been filed.  The Tax Court disagreed.  However, the Court negated the penalties that the IRS had assessed for failure to file, given Sumner’s reliance on counsel at the time.  Still, the gift tax deficiency was $737,625, plus 40 years worth of interest.

Should you need any further information, please do not hesitate to contact one of our experienced trust officers.

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