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As the 92-year-old billionaire Sumner Redstone witnesses a vicious court fight over his mental condition, the U.S. Tax Court has released a decision that delves into the beginnings of his media empire, his connection to the early-1970s Watergate scandal and four decades of in-fighting in the Redstone family.
The case is extraordinary, to say the least. The core question in Redstone’s dispute with the Internal Revenue Service pertains to whether his 1972 transfer of stock to his children was a taxable “gift” or not. Ultimately, the Tax Court affirms a tax deficiency of $737,625, but lets him off the hook for fraud. The decision (read here in full) would have been appreciated by a much younger Redstone. After graduating Harvard Law School in 1947, Redstone once worked in the Tax Division of the U.S. Department of Justice.
Later, in the mid-1950s, Redstone began working for the family business of drive-in movie theaters. He was there alongside his father, Michael “Mickey” Redstone, and his brother, Edward Redstone. As the company grew, the three decided to consolidate their interests into a single company, National Amusements, which today is the majority stakeholder of CBS and Viacom.
In the late 1960s, Mickey retired and set up a trust to transfer his stock to his grandchildren. Meanwhile, Edward became dissatisfied with his role at the company and would file a lawsuit against his father and his brother. The complaint contended that Edward was free to transfer his stock without restriction — potentially to non-family members. His brother and father didn’t want that to happen.
A settlement was reached in 1972. National Amusements repurchased two-thirds of Edward’s shares at $5 million, with the other third transferred to a trust for the benefit of his children.
That year, Sumner also set up trusts for the benefit of his own two children, Brent and Shari. Although shares of National Amusements were issued to the trusts, Sumner didn’t file a tax return qualifying the transfer as a taxable gift.
Two years later in 1974, in the wake of the Watergate investigation, the IRS began researching political campaign contributions and specifically, whether donors were evading the law by making donations in a small enough amount so as not to be qualified as taxable gifts. The U.S. Senate provided the IRS with a list of contributions to review. Sumner’s name came up repeatedly as a political donor. An IRS agent took note of Sumner’s other gift to his children, but was unsure about his authority to pursue the issue. And so for nearly 40 years, the IRS did nothing about Sumner’s 1972 gifting of stock.
In fact, the IRS might never had made any move had it not been for more litigation in the Redstone family.
In 1984, National Amusements redeemed its shares held in the trusts for Edward’s grandchildren. The company paid $31.4 million.
Two decades later, Edward’s grandson Michael sued over this move, contending that the price paid was less than fair market value and that additional stock should have been transferred based on the existence of a prior “oral trust.” The lawsuit was later determined to have come too late, but before it reached this conclusion, Sumner was forced to testify.
At a deposition, Sumner explained what had happened in 1972. “I voluntarily set up an arrangement — call it what you will — where my own children would get a third of the stock,” he said. “I wanted to do the same thing that my brother did, only he did it as a result of litigation. I did it voluntarily.”
Redstone also testified that he was trying to maintain good family relations. “I wasn’t sued,” he said. “I just made an outright gift.”
The IRS took note of this. In 2011, the tax agency commenced an examination about Redstone’s 1972 tax liability. When it did, an IRS agent had no idea that this subject had already come up during Watergate.
Once Redstone’s tax dispute went to court, he argued that the IRS was barred through the doctrine of laches from pursuing a four-decade old tax claim. He cited dead witnesses, discarded documents and eroded memories for the proposition that he would experience unfair prejudice from such an untimely claim. At trial, though, Redstone apparently didn’t advance arguments on the subject. The Tax Court thus shrugs it off.
Redstone had another argument. He contended that according to the tax code, a taxpayer should only be subjected to “only one inspection … for each taxable year,” and since the IRS had examined him in the mid-’70s, what the IRS was doing now qualified as an impermissible “second inspection.”
In a decision on Dec. 9, the U.S. Tax Court considered the IRS’ own argument that what the agency did in the ‘70s at the behest of Congress didn’t amount to an “inspection,” but ultimately decides that Redstone should have raised the issue during the IRS’ examination between 2011 and 2013. Since he didn’t, only bringing it up for trial, the Tax Court concludes that Redstone “consented” to the examination and “waived any rights” with respect to the the “one inspection” issue.
As for the primary issue of whether Redstone’s transfer of stock qualified as a taxable gift, the Tax Court considered whether his transfer was made “in the ordinary course of business,” which might have gone his way had his transfer of stock been to resolve a lawsuit brought against National Amusements. But that’s not what occurred.
“[Redstone’s] transfer of stock to his children was undoubtedly prompted by the Settlement Agreement, both as to its timing and its terms, and this transfer surely pleased Mickey by ensuring the financial security of his four grandchildren on equal terms,” states the opinion written by Judge Albert Lauber. “But this is not enough to make it a transaction ‘in the ordinary course of business.’ Pleasing parents, like pleasing children, is presumptively a family motivation, and we discern no evidence tending to rebut that presumption here. There was no claim against Sumner; there were no arm’s-length negotiations; and he received no consideration from anyone in exchange for his transfer.”
The Tax Court decides that Redstone’s gifting of stock to his children Brent and Shari was motivated by “kinship” and “actuated by love and affection,” which is actually a nice sentiment afforded to the billionaire media mogul who has repeatedly fought family and companions in court. Unfortunately, it also makes him $737,625 poorer.
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