In a recent federal case, the U.S. Tax Court held that Sumner Redstone, the former head of CBS and Viacom, owed nearly $750,000 in gift tax on 1972 gifts to his children of stock in a family corporation (“Gift Tax Shares”). Furthermore, because the tax was due in 1972, the interest on this judgment will dwarf the actual taxes due.
Many of the details of this case are beyond the scope of this article. We want to focus on how the IRS determined that a gift tax was due.
Sumner Redstone’s 1972 gift of the Gift Tax Shares was similar to a transfer made by Sumner Redstone’s brother, Edward Redstone, to Edward’s children in trust. In another case, Edward Redstone’s son, Michael, sued both Sumner and Edward, alleging that Sumner improperly caused the corporation to redeem the shares in Michael’s trust and that Edward should have transferred additional shares to Michael’s trust.
In testimony presented in Michael’s lawsuit, Sumner Redstone stated that he voluntarily transferred the Gift Tax Shares into a trust for Sumner’s children. Based on Sumner Redstone’s testimony in Michael’s lawsuit, the IRS opened an investigation into Sumner Redstone’s 1972 gift. Imagine getting notice that you were being audited by the IRS for a business transaction that had occurred 40 years prior to that audit.
This was possible because the statute of limitations on Sumner Redstone’s 1972 gift of the Gift Tax Shares never started to run. The statute of limitations never started to run because Sumner Redstone never reported the transfer of the Gift Tax Shares to the IRS.
In most cases, we recommend that transactions which could be deemed a gift be reported to the IRS in order to begin the statute of limitations running on an assessment of gift tax. This case illustrates why. The IRS clearly has no problem with going back 40 years to assess gift tax. Without reporting, your potential liability for gift tax will not end.
Feel free to contact any member of the McGrath North Tax Group if you or your client intend to make a significant gift, or have possibly made a transfer which could be deemed a gift. We would be happy to discuss how best to handle this transfer for tax reporting purposes.