New York Estate Planning & Elder Law Blog
Sumner Redstone is an entertainment business mogul with a majority share ownership of CBS entertainment and Viacom, and through Viacom, BET and Paramount Pictures, all through his majority ownership of his family business, National Amusement, which originally started out in the drive in movie theater business during The Great Depression. In just the last few weeks a case against Mr. Redstone by the IRS presents an oddity in the law, which may make many people shutter. More particularly, the IRS issued a Notice of Deficiency for a taxable event from 1972 – over 40 years later.
The nature of the case revolved around a transfer of shares in National Amusement Corporation in 1972 to separate trusts set up for the grandchildren of the founder, Sumner Redstone’s father Michael Redstone. Sumner set up one trust for his kids while his siblings set up separate trusts for their kids. At the time the transfer of interfamily stock was of a insignificant amount that passing them from personal ownership to a trust did not even require a tax return. One can and should ask about the concept of a statute of limitation.
Apparently, as the case against Mr. Redstone shows, the IRS does not have a statute of limitation for unfiled tax returns. 26 U.S.C. § 6501(c)(1) establishes that when a taxpayer files a fraudulent tax return, (c)(2) otherwise attempts to avoid tax liability, or (c)(3) fails to file a tax return, there is no statute of limitation. Mr. Redstone has an impressive educational pedigree, where he graduated from first in his class from the Boston Latin School and then graduated Harvard in only three years in 1944, which was actually common at the time. After graduation he served as an officer in the United States Army, helping to decode Japanese messages. He attended Georgetown Law School after the war and then received his LL.B. in 1947 from Harvard Law. After working for various governmental departments followed by private practice, Mr. Redstone went to work for the family business, which was booming by then.
STILL OWES TAX FROM OVER 40 YEARS LATER
Mr. Redstone’s background is important because it highlights that he is trained on how to respond to and deal with an investigation by the IRS. The Tax Court noted several noteworthy facts, or material evidence, which speak to the issue of why Mr. Redstone was not found to have acted fraudulently with respect to the failure to file tax returns for a gift that Mr. Redstone gave to his children to set up a trust for their benefit. What mattered to the Tax Court, as noted in its opinion, is that Mr. Redstone did not avoid the efforts of the IRS to investigate his gift of family stock to his children. Indeed, on two separate occasions, Mr. Redstone made himself available for the IRS to investigate the gift. First, in the wake of the Watergate scandal a number of political donors were investigated by the IRS. At this time he fully cooperated and filed all tax returns consistent with his tax advisor’s advice both before the Watergate investigation and following.
OTHER DEFENSES
When Mr. Redstone was once again investigated in 2011 by the IRS for the gift transfer, he cooperated again. At that time, he may have been entitled to refuse this investigation by virtue of 26 U.S.C. § 7605(b), which bars a second investigation by the IRS. Prior to trial, however, Mr. Redstone’s attorneys sought to have the matter dismissed on the doctrine of laches, which is an equitable concept that requires a case to be dismissed if the moving party sits on its rights to the prejudice of the respondent. The Tax Court dismissed this argument. The final outcome is that the valuation of the transfer of stock had to be revalued due to events that occurred subsequent to the 1972 transfer. Consequently, the Tax Court imposed tax liability for the 1972 transfer. It further ruled that Mr. Sumner did not intend to defraud the IRS or act to avoid tax liability with the 1972 transfer.
This case is important, because it speaks to the great importance of planning any gift transfer to a trust. As with any estate planning decision, it is best to consult with an experienced estate planning attorney.