Mickey gave Sumner, his elder son, the more public and glamorous job of working with movie studios and acquiring new theaters. Edward had principal responsibility for operational and back-office functions. His duties included maintaining existing properties and developing new properties.

About this time Edward began to feel marginalized, not only within his extended family, but also within the family business. He became dissatisfied with his role at NAI, with certain business decisions that Mickey and Sumner had made, and with what he regarded as a lack of respect for his views. He began to discuss, in general terms, the possibility that he might leave the family business. This possibility became more concrete when Sumner, without first discussing the matter with Edward, hired Jerry Swedrow to take over Edward’s responsibilities for NAI operations. When Edward learned of this he became incensed. In June 1971 he abruptly quit the family business.

Mickey and his attorneys also developed an argument that a portion of Edward’s stock, though registered in his name, had actually been held since NAI’s inception in an “oral trust” for the benefit of Edward’s children. This argument built on the fact that Mickey in 1959 had contributed 48% of NAI’s capital yet had received only 33.33% of its stock. In effect, Mickey contended that he had gratuitously accorded Edward more stock than he was entitled to, and that, to effectuate Mickey’s intent in 1959, the “extra” shares should be regarded as being held in trust for Edward’s children. Mickey initially insisted that at least half of Edward’s shares were covered by this alleged oral trust.
The parties negotiated for six months in search of a resolution. They explored, without success, various options whereby Edward would remain in the business as an employee or consultant. Edward offered to sell his 100 shares back to NAI, and the parties explored various pricing scenarios under which this might occur. As the family patriarch, however, Mickey had most of the leverage, and he insisted that Edward acknowledge the existence of an oral trust for the benefit of Edward’s children. Mickey’s insistence on an oral trust was a “line in the sand” and a “deal breaker.”

Edward’s agreement to release his claim to 33 1/3 shares of NAI stock represented a bona fide settlement of this dispute. Although Edward had a reasonable claim to all 100 shares registered in his name, Mickey had possession of these shares and refused to disgorge them, forcing Edward to commence litigation. The “oral trust” theory on which Mickey relied was evidently a theory in which he passionately believed. And it had some link to historical fact: at NAI’s inception, Edward was listed as a registered owner of 33.33% of NAI’s shares even though he had contributed only 25.6% of its assets.

All the elements of arm’s-length bargaining existed here. There was a genuine controversy among Edward, Mickey, and Sumner; they were represented by and acted upon the advice of counsel; they engaged in adversarial negotiations for a protracted period; the compromise they reached was motivated by their desire to avoid the uncertainty and embarrassment of public litigation; and their settlement was incorporated in a judicial decree that terminated the lawsuits.

Edward’s objective throughout the 1971-1972 dispute was to obtain for himself ownership of (or full payment for) the 100 NAI shares originally registered in his name. Mickey floated in late 1971 the concept that Edward had held a portion of these shares since 1959 in trust for his children. If Edward had been motivated by donative intent toward his children, he could have embraced Mickey’s concept at once and resolved the dispute without the expense and family disharmony generated by filing two lawsuits. Edward filed these lawsuits because he refused to embrace the “oral trust” theory and wished to obtain possession, in his own name, of all 100 shares

 On another topic, Peter Reilly, CPA, Forbes’ formidable blogger, asked if I had any comment on Estate of Edward S. Redstone, Deceased, Madeline M. Redstone, Executrix, 145 T. C. 11, filed 10/26/15. ….
Reflecting, it might just be that Edward’s favorable result might bail out Sumner as well, as IRS’s case depends upon various stock transfers being gifts, and Edward beat that one. But I’d need to see more facts before coming to that conclusion. And that’s why I’m reserving comment at this time.

The Moral?

 First, there’s no gift to the thief who points a gun at you, and there’s no gift when you transfer shares because you have to.

Perhaps more importantly, gift tax can be assessed forever if you don’t file a gift tax return. If there is any question on whether a gift might have happened, or realistic risk that the IRS will challenge the amount of a gift, it’s wise to file a gift tax return even when it doesn’t appear gift tax is owed. Otherwise the statute of limitations never starts running, and you might be fighting a forty-years war with the tax man.

In my opinion, the tax court is correct. The transfer of stock to the trust for the children is not a gift. The taxpayer met the standards for the exemption to the gift tax as in the due course of settlement of a business dispute. The father was not going to be able to get anything if he did not settle the dispute on the “oral trust” for his children. Looking at the totality of the transaction, it is apparent it is not a gift.

This is a case where, again, the IRS is taking a highly technical approach of compliance with nuances of the code and blowing them up into fatal flaws when in fact they never had a case on the facts in the first place.

This is an example of one of the greatest dangers, in fact the greatest danger, for a family controlled company – nothing is written down.