Source of Consideration for Transfer Not Relevant in Gift Analysis

By By James A. Beavers, J.D., LL.M., CPA, CGMA

The Tax Court held that a transfer for adequate consideration was not a gift, regardless of whether the consideration received by the transferor was provided by the transferee.


Edward Redstone was the son of Mickey Redstone and the brother of Sumner Redstone (who eventually became the majority owner of CBS and Viacom). In 1936, Mickey started a movie-theater business, which Edward and Sumner both eventually joined. The business was extremely successful and was run through multiple corporations. Mickey, Edward, and Sumner owned various percentages of these corporations, with Mickey owning the largest aggregate share.

In 1959, the existing corporations that made up the family business were consolidated into a new holding company, National Amusements Inc. (NAI). Mickey, Edward, and Sumner each contributed their shares in the preexisting corporations to NAI. However, although the value of Mickey's contribution to NAI was substantially greater than Edward's and Sumner's (47.88% versus 25.63% and 26.49% of the property contributed, respectively), each received 100 shares of NAI stock. Each man's stock was registered in his name, but the physical certificates for the stock were held at NAI's corporate office.

Over the years, all was not well in the Redstone family. Because of their troubled son's problems, Edward and his wife had him committed to a psychiatric hospital. Mickey and Sumner, who worried about how this reflected on the family name, insisted that Edward take his son out of the facility, which Edward eventually did, though he resented the interference in his personal affairs. Edward also came to feel that his father and brother did not respect his views regarding NAI, and he became dissatisfied with his position in the company.

Things came to a head in 1971, when Sumner, without informing Edward, hired another man to perform Edward's duties. Edward quit the business and demanded possession of his 100 shares of NAI stock. He contended that he had an unrestricted legal right to sell the stock and threatened to sell it to an outsider unless NAI redeemed it for an appropriate price.

Mickey and Sumner wanted to keep control of the business within the family and were vehemently opposed to Edward's selling stock. Mickey refused to turn over the stock certificates, claiming that NAI had a right of first refusal to buy the shares. In addition, Mickey and his attorney cooked up 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 because Mickey had contributed almost half of NAI's capital but received only one-third 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, the "extra" shares should be regarded as being held in trust for Edward's children. Mickey initially insisted that this alleged oral trust covered at least half of Edward's shares.

In negotiations over a settlement to the dispute, it became apparent that Mickey would not agree to a settlement unless Edward acknowledged the alleged oral trust and agreed to have some of his stock put in trust for his children. Although Edward did not believe he had held any of his stock under an oral trust for his children, on the advice of his attorney, he agreed to a settlement where he received two-thirds of his NAI stock, which NAI redeemed for $5 million, and one-third of the stock was placed in trust for his children.

Tax Treatment of Transfer to Trusts

Edward did not file a gift tax return reporting the transfer of his NAI stock to his children's trusts as a gift because, as far as he was concerned, he had not made a gift. Rather, he believed that he had been forced to renounce ownership in the stock transferred to the trusts to obtain payment for his remaining stock.

There the matter remained undisturbed for over 30 years, until 2006, when Edward's son and the trustees of certain other Redstone family trusts filed suit against Edward, Sumner, and NAI, claiming, based on the alleged oral trust, that they should have received additional NAI stock. During this litigation, the oral trust issue was the subject of extensive deposition and trial testimony. In the end the court ruled that the plaintiffs had failed to prove that an oral trust ever existed.

The IRS Gets Involved

Unfortunately for Edward, the troubles caused by his separation from the family business were not over. The lawsuit by his son and the trustees was highly publicized, and it brought the 1972 transfer of stock to his children's trusts to the IRS's attention. Adding new meaning to the saying "better late than never," the IRS opened an examination in 2010 and issued a notice of deficiency in 2013—more than four decades after the transfer. The IRS deemed that this was only proper because Edward had never filed a return reporting the transfer as a gift, so the statute of limitation on assessment under Sec. 6501(c)(3) was still open. In addition to assessing tax of over $700,000, the IRS imposed almost $600,000 in failure-to-file, fraud, and negligence penalties.

Edward filed a petition in Tax Court challenging the IRS's determination.

The Tax Court's Decision

The Tax Court found that Edward made the transfer to his children's trusts in the ordinary course of business and for full and adequate consideration in money or money's worth, so the transfer was not a gift. In making the overall determination of whether the transfer was a gift, the court for the first time addressed whether a transfer is for full and adequate consideration if the consideration received by the transferor did not come from the transferee, i.e., the consideration came from a third party to the transaction.

As the Tax Court explained, a transfer of property that occurs "in the ordinary course of business" is considered to have been made "for an adequate and full consideration in money or money's worth." To be in the ordinary course of business, a transfer must satisfy the three requirements specified in Regs. Sec. 25.2512-8, i.e., that the transfer was (1) bona fide, (2) transacted at arm's length, and (3) free of donative intent. The court analyzed the transfer by Edward to his children's trusts and concluded that it met all three requirements. However, the IRS did not base its challenge on whether the transfer met these requirements. Instead, the IRS argued that the children provided no consideration for the transfer to their trusts and, because no consideration flowed from them, Edward's transfer was necessarily a gift.

The Tax Court found that the regulations did not support the IRS's argument. As the court pointed out, Regs. Sec. 25.2511-1(g)(1) states that "the gift tax is not applicable to a transfer for a full and adequate consideration in money or money's worth." Accordingly, the question the regulation asks to determine if a transfer is a gift is whether the transferor received consideration, not whether the transferee provided consideration. As the court had previously determined, Edward's transfer met the requirements in the regulations to be considered as made in the ordinary course of business and, consequently, under the regulations, Edward had received full and adequate consideration for the transfer. It made no difference if the consideration came from the transferees or a third party.

The Tax Court noted that it had not previously ruled on this issue. However, it had been addressed in a district court case, Shelton v. Lockhart, 154 F. Supp. 244 (W.D. Mo. 1957), in what the Tax Court found to be an analogous situation. In that case, the Bureau of Indian Affairs (BIA) had held $600,000 in trust for the taxpayer, an Osage Indian. The taxpayer applied to have the funds released to her, but the BIA refused to do so unless the taxpayer agreed to put some of the money in trust for her children. After negotiations, the taxpayer agreed to put $200,000 in trust for her children in order to receive the remaining $400,000.

As in Edward's case, the IRS characterized the transfer to the trust as a gift on which the taxpayer owed gift tax. The district court disagreed, concluding that because the transfer qualified as a transaction in the ordinary course of business under Regs. Sec. 25.2512-8, it was not a gift. The court found it was irrelevant whether the taxpayer's children were parties to the dispute between the taxpayer and the BIA or its settlement. In its opinion, the court described the transaction as in essence simply representing a business venture between the taxpayer and the BIA.


As this issue went to press, Sumner Redstone had a case based on the same factual background decided in the Tax Court (Redstone, T.C. Memo. 2015-237). In that case, Sumner Redstone's 1972 transfer of NAI stock to his children was held to be a taxable gift.

Estate of Redstone, 145 T.C. No. 11 (2015)

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