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Generally, Section 6501(a) of the Internal Revenue Code provides that the IRS may only make an assessment of tax within 3 years of the filing of a return. Where no return is filed, however, the IRS is not constrained by the 3 year limitations period and can assess a tax at any time. The IRS recently extended this proposition to an extreme, resulting in the case of Redstone v. Commissioner.
At the beginning of this year, the IRS sent a Notice of Deficiency to Sumner Redstone, assessing a deficiency of $737,625 with penalties for failure to file a gift tax return, fraud, and negligence (in the alternate to fraud) for the tax year of 1972. Mr. Redstone filed a Petition with the United States Tax Court disputing the assessment and all penalties.
As a result of a settlement agreement surrounding the ownership of stock in National Amusements, Inc. (“NAI”), trusts were established for the children of Sumner Redstone and for the children of his brother, Edward Redstone. At some time prior to the settlement agreement, Sumner and Edward were issued shares of stock in NAI. However, a dispute arose as to whether some of the shares were held subject to an oral trust for the benefit of Sumer’s and Edward’s children. The parties agreed that some of the shares were issued to Sumner and Edward individually and some as trustees of oral trusts for their children. Simultaneously with the settlement agreement, a separate trust was established for each child of Sumner and Edward to hold his or her interest in NAI. The parties cancelled the old stock certificates and issued new ones to reflect the settlement agreement and new trusts.
Forty-one years later, the IRS now contends that the transfers of NAI stock to the trusts for Sumner’s children were gifts by Sumner. As no return was filed, the limitations period remains open under the statute. Mr. Redstone states that he filed 33 gift tax returns to date and that no return was filed for 1972 under the advice of a tax professional that no gifts were made in that year. Mr. Redstone maintains that position. In addition, the Petition presents interesting arguments of estoppel, laches, and statute of limitations since, in the intervening years, many of the documents have been discarded or destroyed and many relevant witnesses are now dead.
Taxpayers and professionals should watch this case with interest. Not only does it present an interesting case involving oral trusts, but it provides an opportunity for the Tax Court to opine on exactly how long an open limitations period can run. Stay tuned.