Originally published on Forbes.com.
So the Tax Court has dropped the other shoe in its consideration of the Redstone family’s gifts. Although they let him off on any penalties, the Court sustained a gift tax assessment of $737,625 against Sumner Redstone. Mr. Redstone stands at number 94 on the Forbes 400 list with a net worth of $5 billion, so three-quarters of a million in tax is probably not that disturbing other than the principle of the thing and all. Even a billionaire might notice the $15.5 million in interest on the tax, though. To rub salt in the wound, a nearly identical transfer by his brother Edward was found by the Tax Court to not be a taxable gift.
Where Were You In 72?
The transfer that was considered a taxable gift took place in 1972. It has its roots in an earlier deal. I’m going to touch lightly on the details, because I went into them at some length in a piece about the favorable decision in the case of Edward Redstone. So briefly to put the case in context, you need to know that the Redstone media empire starts with movie screens. You can see that on the Showcase Cinema website.
National Amusements, Inc. is a world leader in the motion picture exhibition industry. It operates movie screens in Connecticut, Massachusetts, New Jersey, New York, Rhode Island, Ohio, Argentina, Brazil, and the United Kingdom. It owns the Showcase SuperLux, Cinema de Lux, Showcase Cinemas, and Multiplex Cinemas brands.
Based in Norwood, Massachusetts, National Amusements is a closely held company operating under the third generation of leadership by the Redstone family. National Amusements is also an equal partner in the online ticketing service MovieTickets.com, and is the parent company of both Viacom and CBS Corporation.
The expansion to entities like Viacom and CBS relates to Sumner’s famous insight that “Content is king“.
The founder Mickey Redstone, Sumner and Edward’s father, would set up three corporations for each screen, one for the theater operation, one to own the real estate and one for the snacks. That got really complicated, even though it was great tax planning prior to the Tax Reform Act of 1969. So in 1959, National Amusements was formed as a holding company with Mickey, Sumner and Edward trading their disparate interests in the various companies for one-third interests in National Amusements, Inc.
Let’s skip over the drama in the sixties that ended with Edward being redeemed in 1972. Even though there were stock certificates indicating that Mickey, Sumner and Edward owned the company equally, Mickey insisted that some of the shares issued to Edward were subject to an “oral trust” for Edward’s children. The basis for this argument was a disparity in the initial capital contributions to NAI. There was intense negotiations which ended with Edward agreeing to accept $5 million for 66 2/3rds shares of NAI and agreeing that the other 33 1/3 he thought he owned were to be held in trust for his children. Consistent with the “oral trust” theory, Sumner transferred 33 1/3 shares to trusts for his own children.
Same Gift Different Reasons
As noted, the Tax Court earlier this autumn ruled that Edward’s transfer to his children was not as a taxable gift. There was some speculation that the same logic might apply to Sumner, but that is not how it worked out.
Sumner’s transfers of NAI stock to the Brent and Shari Trusts were voluntary. Each transfer was motivated by donative intent toward the natural objects of Sumner’s affection. By creating these trusts and transferring 33 1/3 shares of NAI stock to them, Sumner made a gesture of goodwill toward his father, who desired to ensure the financial security of his four grandchildren on equal terms. However, ] Sumner was not required to take these actions by the Settlement Agreement that resolved Edward’s lawsuits. The only obligation that the Settlement Agreement imposed on Sumner was the requirement that he execute certain releases in consideration of mutual releases executed by the other contracting parties.
The voluntary nature of Sumner’s transfer was emphasized in testimony he gave in 2006 litigation that was instituted by Edward’s son Michael and the trustee of certain family trusts.
I voluntarily set up an arrangement—call it what you will—where my own children would get a third of the stock. *** I wanted to do the same thing that my brother did, only he did it as a result of litigation. I did it voluntarily.
Nobody sued me. I gave my kids a third of the stock voluntarily, not as the result of a lawsuit. In o doing, I did what I wanted and appeased my father too.” …here was a big difference between Eddie’s position and mine” because Edward “was resisting doing what my father wanted,”
What About The Statute Of Limitations?
The statute of limitations is no help, because no return was filed. Sumner’s attorney tried to argue something called the “doctrine of laches”:
Petitioner moved before trial for judgment on the pleadings. Admitting that the period of limitations on assessment was “technically still open,” he contended that respondent was barred by laches from determining in 2013 a gift tax deficiency for the third quarter of 1972. Petitioner noted that he is “now 90 years old; material [*22] witnesses have been dead for decades; documents have long since been discarded or have disintegrated; memories have unquestionably eroded.” Under these circumstances, petitioner described this case as involving “an unprecedented abuse *** of the rule that no statute of limitations applies.”
It seems like a really good argument, but it went nowhere. What is disturbing about this is that if you have a tax assessed and you don’t pay it, the IRS has ten years to collect it from you and then you are home free. (I don’t recommend that as a strategy, by the way, even though the current disarray at IRS is making it more practical) It does seem that there should be some limit on when they can come after you about an unfiled return.
Repeat Examination
There was another argument that brings back memories. Apparently the IRS had looked into Sumner’s gift taxes back in the seventies, because of Watergate of all things.
During 1974, in the wake of the Watergate investigation, the IRS initiated what was called the Political Campaign Contribution Compliance Project (Compliance Project). A Senate Select Committee on Presidential Campaign Activities had expressed concern that some donors might be evading the law by making donations, in amounts smaller than the $3,000 annual gift tax exclusion, to multiple campaign committees that were nominally separate but in fact supported the same candidate. Congress asked the IRS to investigate these concerns. The Compliance Project sought to determine whether transfers of this type involved taxable “gifts” for Federal gift tax purposes.
That didn’t help.
No Penalties
Back in the day one of my partners swore by JK Lasser. The only names that merited more reverence were Bittker and Eustice. It turns out that Jacob Kay Lasser was an actual accountant born in 1896 in Newark NJ, who’s early success was due in part to his academic achievements that went well beyond the high school diploma required of an accountant back in the day. There is a real good article about him here. He was a towering figure in the tax world. He died in 1954, which is kind of poetic.
Lasser’s guide continues to this day whereas his firm was swallowed by Touche in 1977. Still it was his firm that was advising Sumner Redstone about whether he needed to file a gift tax return
We find that petitioner made the requisite showing of a reasonable cause defense for both additions to tax. Mr. Rosen, Mr. Isenberg, and the tax professionals at J.K. Lasser were competent tax advisers. Collectively, they advised Sumner about his gift tax filing requirements on 34 occasions beginning in 1970. Sumner sought and received their advice concerning the tax consequences of transferring stock to the Brent and Shari Trusts. The evidence established that Mr. Rosen obtained advice from J.K. Lasser’s national office about this transaction; that this advice was memorialized in a letter or memorandum concluding that no gift tax return was required to be filed; that Messrs. Rosen and Isenberg concurred in this conclusion; and that Sumner relied on this advice in good faith
It would have been nice if the decision had included more on that – maybe some anecdotes about old Jacob and Mickey palling around together, but no such luck. It is odd that there is no wikipedia entry on Jacob Kay Lasser. I feel moved to fix that, but so many projects so little time.
Note On The Interest
The $15.5 million in interest is my own computation from a couple of hours fooling with excel, although I did have it confirmed by someone who actually bought some software that does that sort of thing. I still find it a little mind boggling. There is a pretty good chance that Albert Einstein did not actually say that compound interest is the most powerful force in the universe, but he should have.
Other Coverage
As any student of the tax blogosphere would expect Lew Taishoff jumped right on this with a post titled Pardoning The Sumner. I actually picked up on the decision as I was going through Lew’s blog to see if he had covered another case. Lew also noted the Lasser connection
J. K. Lasser was subsequently swallowed by Touche Ross, which in turn was swallowed by Deloitte, but in my young day the J. K. Lasser annual tax guide was the Holy Writ of preparers. Late each Fall, one expected to see J. K. hisself come down from the mountaintop bearing the sacred scriptures for the next tax year, which resembled the Yellow Pages of a medium-sized city.
Lew is even older than I am and probably might not realize that there are people out there that won’t get the “Yellow Pages” reference.
The rest of the media seems more concerned about speculations about Sumner Redstone’s current mental health, which I have to admit is probably more interesting than a long ago gift biting him, but what is a tax blogger to do, but play the cards he is dealt?
Jack Townsend posted on the case. Jack notes that Sumner had worked in the Justice Department Tax Division and perhaps should have been held to a higher standard in the penalty analysis.