Ron Aucutt's 'Top Ten' Estate Planning And Estate Tax Developments Of 2015

In an ever eagerly anticipated annual tradition, Ronald Aucutt, a McGuireWoods partner and co-chair of the firm's private wealth services group, has identified the following as the top ten estate planning and estate tax developments of 2015. Ron is a past president of The American College of Trust and Estate Counsel, an observer and frequent participant in the formation of tax policy and regulatory and interpretive guidance in Washington, D.C., and the editor of the Recent Developments materials that are presented each year at the Heckerling Institute on Estate Planning.

Number Ten: Redstone Cases: The Media Industry and Family Discord Drama

In 1959, to consolidate their family businesses and make it easier to obtain financing, Michael (“Mickey”) Redstone and his two sons, Sumner and Edward, formed National Amusements, Inc. (NAI). They each contributed to NAI their stock in predecessor entities, and Mickey also contributed $3,000 in cash. Taking the stock contributions into account at their book values, the contributions totaled $33,328 (47.88%) from Mickey, $18,445 (26.49%) from Sumner, and $17,845 (25.63%) from Edward, but 100 shares of NAI common stock was issued to each of them. They all worked in NAI; Mickey was the president, Sumner was the vice president, and Edward was the secretary-treasurer. As the Tax Court described it, “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.” (Today Sumner is the executive chairman of Viacom and CBS.)

In the late 1960s, Edward began to feel marginalized within both his extended family and the business. When he and his wife concluded that it was necessary to have their son admitted to a hospital as a psychiatric patient, Mickey, Mickey's wife, and Sumner opposed that action, “in part” as the court put it “because they feared it reflected badly on the Redstone family name.” Edward also became dissatisfied with his role at NAI and with what he viewed as Mickey's and Sumner's disregard for his views in making certain business decisions. He quit the business, demanded possession of the 100 shares of common stock registered in his name, and threatened to sell that stock to an outsider if NAI did not redeem the shares at an appropriate price. Mickey refused to give Edward his stock certificates, contending that NAI had a right of first refusal to buy them back. Mickey also claimed that at least half of the stock registered in Edward's name was actually held under an “oral trust” for the benefit of Edward's children, representing the “extra” shares he accorded to Edward in 1959 when he had contributed 48 percent of NAI's capital but received only 33.33 percent of its stock.

After the parties negotiated for six months, Edward filed suit, and the public nature of the very adversarial litigation was extremely distressing to the Redstone family. Finally, in 1972, they reached a settlement whereby Edward would separate from NAI, one-third of the stock registered in his name (33⅓ shares) would be treated as having always been held in trust for his children, and NAI would buy his remaining 66⅔ shares for $5 million.

As required by the settlement agreement, Edward contemporaneously executed two irrevocable declarations of trust for the benefit of each of his two children and transferred 16⅔ shares of NAI stock to each of the trusts. Three weeks later, Sumner similarly executed irrevocable declarations of trust for the benefit of each of his two children and transferred 16⅔ shares of NAI stock to each of the trusts. Neither of them filed gift tax returns for the taxable periods (the calendar quarters) in which they made these 1972 transfers.

In 2006, Mickey and the trustees of certain Redstone family trusts sued Sumner, Edward, and NAI in a Massachusetts court, arguing that additional stock should have been transferred to the trusts in 1972 on the basis of the existence of a prior “oral trust.” In that litigation, Edward testified that he firmly believed that he was entitled to all 100 shares of NAI stock that were originally registered in his name, but that he had accepted his lawyer's advice that it was in his best interest to agree to the oral trust for his children that Mickey had insisted on, in order to settle the earlier litigation and obtain payment for his remaining 66⅔ shares. Sumner testified that Mickey had never asserted such an oral trust in his case and that he had placed one-third of his stock in trust for his children “voluntarily, not as the result of a lawsuit,” stating that “I just made an outright gift.” In O'Connor v. Redstone, 896 N.E.2d 595 (Mass. 2008), the court held that the plaintiffs had failed to prove that any oral trust ever existed.

The IRS heard about the 2008 case and, in 2010, asserted two $737,625 gift tax deficiencies on the 1972 transfers, one on Edward for the transfers to trusts for his children and one on Sumner for the transfers to trusts for his children.

In Estate of Edward Redstone v. Commissioner, 145 T.C. No. 11 (Oct. 26, 2015), the Tax Court (Judge Lauber) held that Edward's 1972 transfers were not taxable gifts, but rather transfers in the ordinary course of a trade or business, because they were part of the settlement of a claim of an oral trust that “had sufficient plausibility to generate a great deal of litigation over the course of many years,” even though it was rejected by the Massachusetts court 37 years later. The Tax Court stated:

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.

The Tax Court rejected the IRS argument that Edward's two children had not been parties to the litigation and that they had provided no consideration. The court noted that whether the transferees provided consideration is not relevant under Reg. §25.2511-1(g)(1), which looks instead to whether the transfer is made “for a full and adequate consideration,” which the court viewed as the same as whether the transferor received full and adequate consideration, regardless of its source.

In Sumner Redstone v. Commissioner, T.C. Memo 2015-237 (Dec. 9, 2015), Sumner argued that his transfer to the trusts for his children should also escape gift tax. As the court put it:

In contending that this transfer should also be exempt from gift tax, Sumner seeks to portray it as part of the overall reconfiguration of stock ownership by which the parties brought Edward's litigation to a close. “But for the litigation with Edward and the settlement reached by the parties,” Sumner submits that he would not have established trusts for his children in July 1972. “By creating trusts he otherwise would not have established at the time,” Sumner allegedly “facilitated the settlement of his brother's litigation,” “appeased his father,” and “poised himself to become NAI's majority shareholder.” He accordingly contends that his transfer, like Edward's, was “made in the ordinary course of business” and for “an adequate and full consideration in money or money's worth.”

The Tax Court (again Judge Lauber) found Sumner's argument unpersuasive, stating:

There is no evidence that any dispute existed in 1971-1972 concerning ownership of Sumner's stock or that Mickey was determined to withhold any of Sumner's shares from him. To the contrary: the evidence showed that Mickey and Sumner were working in concert to drive Edward out of the company and that the “oral trust” theory was a weapon they deployed against Edward in an effort to achieve that goal. Because no demand was ever placed on Sumner's shares, no negotiations ever occurred concerning his ownership of those shares. Sumner never filed a lawsuit, and he received no release of claims from Mickey (or anyone else) upon transferring his stock.

Despite the differences in motivation between Edward's and Sumner's transfers, the Tax Court found the redemption price paid to Edward for his shares in 1972 to be a reliable index of the value of the stock when Sumner made his gifts. The court also held that Sumner was not liable for the penalties the IRS had asserted.

Comment: Edward reluctantly agreed to his children's trusts to settle litigation, and Sumner's transfers to trusts for his children were admittedly “voluntary.” Nothing more is needed to justify the different outcome in their gift tax cases. But there is still something unsettling about treating these two brothers so differently. Whatever reason there was in 1972 for Edward to accede to, or even for Mickey to assert, an “oral trust” in 1959, it seems that it would have been just as compelling a justification for Sumner to acknowledge such an “oral trust” also, because there is no reason in the Tax Court opinions to assume that in 1959 Mickey did not intend to treat all his grandchildren equally. One can only wonder if the outcome for Sumner would have been different if he had just made other gifts in the third quarter of 1972 and reported those gifts on a gift tax return.

Or one can only wonder what the result would have been if the allegedoral trusts for Mickey's grandchildren had actually been formalized and funded in 1959. The best estate planning is often the planning that is done early. The book values the Tax Court appears to have relied on indicate a total value for NAI in 1959 of about...