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Tax Court rules that Redstone Family Transfer not Subject to Gift Tax
Author: James F. McDonough
Date: January 12, 2016
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Much ado about the Redstone family
In what has been deemed by the tabloids as a family soap opera, the U.S. Tax Court ruled in a recent landmark case of the Redstone family that the transfer of stocks does not qualify as a taxable gift because the transfer was made for full and adequate consideration in money or money’s worth. According to a Law 360 report, this was a significant decision because the ruling drew a distinction between a transfer that is done “in the ordinary course of a business” and gifts made for tax purposes.
The case of Edward Redstone’s estate
The case involved Edward Redstone, the younger brother Sumner Redstone, the media magnate and majority owner of National Amusements Inc. In the initial ruling, the IRS wrote that the transfer of $1.3 million in National Amusement stock to Edward Redstone’s children classified as a taxable gift. The IRS found that because this $5 million in shares was part of a settlement in 1972 to resolve ownership shares in the company, the stocks qualified as a business transaction for federal tax purposes. The court found that the transfer was bona fide, arm’s length and free of donative intent which are the three elements in the regulations that must be satisfied.
In its assessment of the case, the IRS argued that the stock transfer was not an ordinary business use. It also stated that since the Redstone children were not listed as heirs to the ownership shares, this transfer should be considered a taxable gift. The vexing and public nature of the litigation was strong evidence of the absence of donative intent.
The IRS then assessed Edward Redstone’s transfer to have more than $1.2 million in penalties and tax deficiencies as well as interest for the 44 year period after the settlement. Therefore, it argued that Edward Redstone owed $737,625 in federal gift taxes, $368,813 for tax fraud, $184,406 for failure to pay the gift taxes in a timely manner and $36,881 for negligence involved in the 1972 settlement transfer.
The Tax Court’s decision rules in favor of the Redstone family
The Tax Court disagreed with the IRS because the transfer did not have donative intent. In fact, the transfer was ruled to be done in the course of ordinary business because it was classified as a legitimate arm’s-length transaction. Therefore, citing previous rulings on estate and gift tax precedents, the Tax Court found that the stocks were not subject to federal gift taxes.
This was due to the fact that Edward Redstone had been part owner of National Amusements, but was forced out after several problems among family members. The conflicts eventually led to a settlement where Edward Redstone was given ownership shares in the company that were redeemed later for $5 million. In the settlement, Edward Redstone also agreed to transfer $1.3 million of these stocks to his children in a trust. The Tax Court ruled that this transfer was done in exchange for recognition that Edward Redstone was the outright owner of the larger portion of the ownership stakes worth $3.7 million.
Finally, the Tax Court found that the gift tax was not applicable for transfers that are deemed ordinary business transactions. The transaction was for a “full and adequate consideration in money or money’s worth,” and thus not subject to federal gift taxes as part of the 1972 settlement.
- Practices: Tax, Trusts & Estates
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Tax Court rules that Redstone Family Transfer not Subject to Gift Tax
Author: James F. McDonough
Much ado about the Redstone family
In what has been deemed by the tabloids as a family soap opera, the U.S. Tax Court ruled in a recent landmark case of the Redstone family that the transfer of stocks does not qualify as a taxable gift because the transfer was made for full and adequate consideration in money or money’s worth. According to a Law 360 report, this was a significant decision because the ruling drew a distinction between a transfer that is done “in the ordinary course of a business” and gifts made for tax purposes.
The case of Edward Redstone’s estate
The case involved Edward Redstone, the younger brother Sumner Redstone, the media magnate and majority owner of National Amusements Inc. In the initial ruling, the IRS wrote that the transfer of $1.3 million in National Amusement stock to Edward Redstone’s children classified as a taxable gift. The IRS found that because this $5 million in shares was part of a settlement in 1972 to resolve ownership shares in the company, the stocks qualified as a business transaction for federal tax purposes. The court found that the transfer was bona fide, arm’s length and free of donative intent which are the three elements in the regulations that must be satisfied.
In its assessment of the case, the IRS argued that the stock transfer was not an ordinary business use. It also stated that since the Redstone children were not listed as heirs to the ownership shares, this transfer should be considered a taxable gift. The vexing and public nature of the litigation was strong evidence of the absence of donative intent.
The IRS then assessed Edward Redstone’s transfer to have more than $1.2 million in penalties and tax deficiencies as well as interest for the 44 year period after the settlement. Therefore, it argued that Edward Redstone owed $737,625 in federal gift taxes, $368,813 for tax fraud, $184,406 for failure to pay the gift taxes in a timely manner and $36,881 for negligence involved in the 1972 settlement transfer.
The Tax Court’s decision rules in favor of the Redstone family
The Tax Court disagreed with the IRS because the transfer did not have donative intent. In fact, the transfer was ruled to be done in the course of ordinary business because it was classified as a legitimate arm’s-length transaction. Therefore, citing previous rulings on estate and gift tax precedents, the Tax Court found that the stocks were not subject to federal gift taxes.
This was due to the fact that Edward Redstone had been part owner of National Amusements, but was forced out after several problems among family members. The conflicts eventually led to a settlement where Edward Redstone was given ownership shares in the company that were redeemed later for $5 million. In the settlement, Edward Redstone also agreed to transfer $1.3 million of these stocks to his children in a trust. The Tax Court ruled that this transfer was done in exchange for recognition that Edward Redstone was the outright owner of the larger portion of the ownership stakes worth $3.7 million.
Finally, the Tax Court found that the gift tax was not applicable for transfers that are deemed ordinary business transactions. The transaction was for a “full and adequate consideration in money or money’s worth,” and thus not subject to federal gift taxes as part of the 1972 settlement.