Redstone v. Comm'r
| Decision Date | 09 December 2015 |
| Docket Number | T.C. Memo. 2015-237,Docket No. 8097-13. |
| Parties | SUMNER REDSTONE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
David R. Andelman, Juliette M. Galicia, Lawrence Michael Hill, and Richard A. Nessler, for petitioner.
Carina J. Campobasso and Janet F. Appel, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
The Internal Revenue Service (IRS or respondent) determined against petitioner a gift tax deficiency of $737,625 for the calendar quarter ending September 30, 1972. Respondent also determined an addition to tax of $368,813 under section 6653(b) for fraud and (alternatively) an addition to tax of $36,881 under section 6653(a) for negligence and an addition to tax of $184,406 under section 6651(a)(1) for failure to file a timely gift tax return.1 The focus of the parties' dispute is whether petitioner's 1972 transfer of stock to his children was a "gift" for Federal gift tax purposes or was (as petitioner contends) a transfer for an "adequate and full consideration in money or money's worth." See sec. 2512(b). We find that this transfer was a taxable gift and determine its value on the transfer date. We conclude that petitioner is not liable for any additions to tax.
Some of the facts have been stipulated and are so found. The stipulations of facts and the attached exhibits are incorporated by this reference. When he petitioned this Court, Sumner Redstone (Sumner or petitioner) resided in California.
Michael "Mickey" Redstone was born on April 11, 1902. He married Belle Redstone, and the couple had two children, Sumner and Edward. Sumner graduated from Harvard College in 1944 and Harvard Law School in 1947. He practicedlaw for several years, including a stint in the Tax Division of the U.S. Department of Justice, before starting work in 1954 for the family business. Sumner married Phyllis, and they had two children, Brent and Shari. Edward attended college and business school before joining the family business in 1952. He married Leila, and they likewise had two children, Michael and Ruth Ann.2
Mickey entered the drive-in movie theater business in 1936. Between 1936 and 1954, Mickey bought real estate throughout the Northeast and built numerous drive-in theaters. He incorporated Northeast Theatre Corporation (Northeast) in 1954, and it became the management company for the Redstone family business. For each drive-in theater, Mickey typically incorporated three separate entities: one to own the real estate, one to operate the theater, and one to manage refreshments. Mickey, Edward, and Sumner eventually came to own various percentages of these various corporations, with Mickey's aggregate share being the largest.
As the family business grew, this complex corporate structure made it cumbersome to obtain financing. To solve this problem and to consolidate the interests of Mickey, Edward, and Sumner in a single entity, National Amusements, Inc.(NAI) was incorporated as a holding company on August 28, 1959. Its articles of incorporation named Mickey, Edward, and Sumner as the original directors; Mickey was elected president, Sumner vice president, and Edward secretary-treasurer. At the time of trial, NAI was a closely held corporation headquartered in Norwood, Massachusetts.
Upon NAI's incorporation, Mickey, Edward, and Sumner each contributed to it their stock in the pre-existing movie companies. The book value of the stock that each contributed was $30,328, $17,845, and $18,445, respectively. Mickey also contributed $3,000 in cash. According to the minutes of the first meeting of directors dated September 1, 1959, a total of 300 shares of class A voting common stock were to be issued: 100 shares each to Mickey, Edward, and Sumner. It was Mickey's decision to divide the shares evenly. Consistently with these decisions, the stock certificates indicated that Mickey, Edward, and Sumner were each registered owners of 100 unrestricted shares of NAI common stock. All of the physical stock certificates were retained in NAI's corporate office.
The decisions taken at NAI's organizational meeting contained the seeds of the problem that would blossom into the tax dispute now before us. Whereas Mickey, Edward, and Sumner were each registered owners of 33.33% of NAI's stock, the values of their contributions to NAI were disproportionate to their shareholdings, as follows:
Item Mickey Sumner Edward Total Cash contributed $3,000 -0- -0- $3,000 Property contributed 30,328 $18,445 $17,845 66,618 Total 33,328 18,445 17,845 69,618 Percentage 47.88% 26.49% 25.63% 100%
As he approached age 70, Mickey developed a plan to retire gradually from active involvement in NAI's operations. To implement this plan, he decided to transfer a portion of his common stock to his grandchildren and to exchange the balance of his shares for preferred stock.
On May 6, 1968, Mickey as settlor executed an agreement of trust for the benefit of his four grandchildren (Grandchildren's Trust). The three trustees were Belle, Edward, and Sumner. That same day, Mickey transferred 50 shares of NAI common stock to the Grandchildren's Trust. His accountants at J.K. Lasser & Company (J.K. Lasser) prepared and filed on his behalf a timely Federal gift tax return valuing these shares at $564,075, and Mickey paid the resulting gift tax due. Belle likewise filed a Federal gift tax return consenting to have Mickey's gift treated as having been made one-half by her.
Mickey then exchanged his remaining 50 shares of NAI common stock for preferred stock. In December 1968 NAI's charter was amended to provide for a class of preferred stock, and in March 1969 Mickey's 50 shares of common stock were redeemed in exchange for 86,780 shares of NAI preferred stock. Thus, as of March 31, 1969, NAI had outstanding 250 shares of voting common stock that were owned by Sumner (100 shares), Edward (100 shares), and the Grandchildren's Trust (50 shares).
As time went on Edward became increasingly dissatisfied with his role at NAI and with certain decisions that Mickey and Sumner had made. Also during this period, one of Edward's children was experiencing serious problems that were a source of frustration and distraction to him. For a variety of reasons, he decided in June 1971 to terminate his employment with NAI.
Upon leaving, Edward demanded but did not receive possession of the 100 shares of common stock registered in his name. To help secure possession of these shares, Edward hired attorney James R. DeGiacomo. Edward took the position that he was legally entitled to, and had an unrestricted right to sell, the shares registered in his name. He threatened to sell the shares to an outsider if NAI did not redeem them at an appropriate price.
Edward's threat to sell his shares to an outsider was anathema to Mickey and Sumner because they wished to keep control of the Redstone businesses within the family. Mickey refused to give Edward his stock certificates, contending that NAI had a right of first refusal to repurchase the shares. 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 took the position 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 two children. Mickey's insistence on an oral trust was a "line in the sand" and a "deal breaker."
Upon reaching an impasse, Edward authorized Mr. DeGiacomo to file in Massachusetts Superior Court two lawsuits against Mickey, Sumner, and the Redstone family companies: Redstone v. Nat'l Amusements, Inc., No. 94575 EQ (NAI Action), and Redstone v. Northeast Theatre Com., No. 94576 EQ (Northeast Action). The NAI Action, filed in December 1971, alleged that Edward owned 100 shares of voting common stock, that these shares were "unencumbered and unrestricted as to their transferability," and that the 100 shares should be delivered immediately to Edward. Mickey answered that he had possession of all the stock registered in Edward's name and that a portion of the shares so registered were "held in trust for the benefit of * * * [Edward's] children."
This litigation became quite adversarial, and its public nature was extremely distressing to the Redstone family, especially Mickey's wife, Belle. She implored Edward to reach some accommodation with his father. In the course of negotiations, it became apparent to Mr. DeGiacomo that Edward had to separate com- pletely from NAI and that Mickey would not be satisfied unless some of Edward's disputed shares were placed in trust for his children, Michael and Ruth Ann.
A settlement was ultimately reached along these lines. Notwithstanding that 100 shares of NAI voting common stock were registered in Edward's name, the parties agreed that Edward was the owner "free and clear of all trusts, restrictions and encumbrances" of only 66 2/3 shares of such stock. They further agreed that the remaining 33 1/3 shares of NAI...
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