Back about a month ago we wrote about the gift tax case of the Estate of Edward Redstone where the Tax Court found that, due to litigation with his father, a transfer in trust for his children was not a taxable gift. The Court found the transfer had been for full and adequate consideration due to the issues related to the litigation and it did not matter the children had not provided such consideration.
Edward's brother Sumner also transferred shares to trust around the same time and, again, the IRS raised the gift issue. But this time the results would be different.
In Sumner’s case (Sumner Redstone v. Commissioner, TC Memo 2015-237) the IRS was again alleging that the Watergate era transfer resulted in a gift for which no gift tax return had been filed.
The Court notes:
Three weeks after Edward's litigation was settled, Sumner likewise transferred 33 1/3 NAI shares to trusts for his own children. In contending that this transfer should also be exempt from gift tax, Sumner seeks to portray it as part of the overall reconfiguration of stock ownership by which the parties brought Edward's litigation to a close. "But for the litigation with Edward and the settlement reached by the parties," Sumner submits that he would not have established trusts for his children in July 1972. "By creating trusts he otherwise would not have established at the time," Sumner allegedly "facilitated the settlement of his brother's litigation," "appeased his father," and "poised himself to become NAI's majority shareholder." He accordingly contends that his transfer, like Edward's, was "made in the ordinary course of business" and for "an adequate and full consideration in money or money's worth." Sec. 25.2512-8, Gift Tax Regs.
However the Court found that this was not the case here—Sumner’s transfer was not being imposed upon him by an adversarial party to terminate litigation against the taxpayer.
As the Court continued:
There is no evidence that any dispute existed in 1971-1972 concerning ownership of Sumner's stock or that Mickey was determined to withhold any of Sumner's shares from him. To the contrary: the evidence showed that Mickey and Sumner were working in concert to drive Edward out of the company and that the "oral trust" theory was a weapon they deployed against Edward in an effort to achieve that goal. Because no demand was ever placed on Sumner's shares, no negotiations ever occurred concerning his ownership of those shares. Sumner never filed a lawsuit, and he received no release of claims from Mickey (or anyone else) upon transferring his stock.
And, in fact, the Court pointed out that Sumner had testified to the fact that his transfer was fully voluntary in other litigation. As the Court noted:
Sumner's testimony in the O'Connor case firmly supports these conclusions. He testified repeatedly, both in deposition and at trial, that his 1972 transfer of stock was completely voluntary. He stated that he "voluntarily went through the same procedure" as his brother and "gave * * * [his] own children" the stock. He explained: "I wanted to do the same thing that my brother did, only he did it as a result of litigation. I did it voluntarily." He testified similarly at trial: "I gave my kids a third of the stock voluntarily, not as a result of a lawsuit. In [s]o doing, I did what I wanted and appeased my father too." He emphasized that his shares, unlike Edward's, were "unencumbered" by any litigation claims: "Eddie was sued. I was not. * * * I just made an outright gift."
So while the two brothers on paper did the same thing, the tax results were radically different. Sumner had not made a transfer for full and adequate consideration—he had made a gift to his children.