The Tax Court has decided that media mogul Sumner Redstone’s 1972 transfer of stock to a trust set up for his two children was a taxable gift, but declined to impose a penalty for fraud, negligence, or failure to timely file.

Redstone graduated from Harvard Law School in 1947 and spent several years in the practice of law, including a period in the Tax Division of the U.S. Department of Justice. In 1954 he joined his brother and father in the drive-in movie theater business, National Amusements, Inc., which later became the controlling shareholder in CBS and Viacom.

In 1972 Redstone transferred shares of NAI stock to trusts for the benefit of his two children, but did not file a gift tax return. Although the IRS was aware of the transfers due to inquiries connected to the Watergate investigation, nothing was done for 40 years until Redstone testified in a family lawsuit, “I wasn’t sued. I just made on outright gift.”

The testimony came to the attention of the IRS, which began a gift tax examination covering Redstone’s 1972 calendar year.

The IRS determined that the 1972 transfer of stock to his children was a gift, resulting in a deficiency of $737,625, and also determined an addition to tax of $368,813 for fraudulently failure to timely fil a gift tax return. The Tax Court, in Redstone v. Commissioner, T.C. Memo 2015-237, agreed that the transfer was a taxable gift, but concluded that Redstone is not liable for any additions to tax.

Redstone argued that the deficiency should be set aside because the IRS violated the “one examination” rule of section 7605(b), and that the 2011-2013 gift tax examination was an impermissible second inspection. The Tax Court said that since Redstone first raised the issue in 2014, he  in effect consented to the 2011-2013 examination and waived any rights  that the section might have given him. The 1972 transfer was a gift because it was made out of love and affection, and was not made in the ordinary course of business.

No addition to tax, or penalty, was required because Redstone sought and relied on advice concerning the tax consequences of transferring stock to the trusts.

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