Sumner Redstone Owes the Gift Tax from 1972 But Not the Civil Fraud or Negligence Penalties (12/13/15)

In Redstone v. Commissioner, T.C. Memo. 2015-237, here, Sumner Redstone was found liable for "a gift tax deficiency of $737,625 for the calendar quarter ending September 30, 1972."  That's right 1972.  The interest alone on that deficiency will be several, perhaps many times the principal amount of the tax.  (But astute readers will know that Sumner Redstone, a media mogul (see Wikipedia entry here), can pay all of it with little difficulty.)  That was the bad news for Mr. Redstone.  The good news is that the Tax Court relieved him from the civil fraud penalty (then 50%) and the accuracy related penalty (then 5%).  (I am not sure if, for the period in question, these civil penalties drew interest from the due date of the return as they do now.)  The disposition of the penalty issues makes the case interesting, for the determination of the substantive gift tax liability seemed to be relative straight-forward despite the passage of time since 1972.

I will refer to the players involved in the drama by their first names to distinguish them.  The father was Michael "Mickey" Redstone.  I'll call him Mickey, as does the Court.  There were two sons relevant here -- Edward and Sumner.  This opinion does not say a whole lot about Edward's education and experience, but it does say some things about Sumner's because, presumably, that is relevant to what he knew or should have known about the substantive tax liability back in 1972 and hence liability for the penalties.  The Court says cryptically:

Sumner graduated from Harvard College in 1944 and Harvard Law School in 1947. He practiced law for several years, including a stint in the Tax Division of the U.S. Department of Justice, before starting work in 1954 for the family business.

The Wikipedia entry fleshes this out just a bit:

After completing law school, Redstone served as special assistant to U.S. Attorney General Tom C. Clark (who later served as Associate Justice of the Supreme Court of the United States from 1949 to 1967)[3] and then worked for the United States Department of Justice Tax Division in Washington, D.C. and San Francisco, and thereafter entered private practice. 

From just these bare facts, one might surmise that Sumner was familiar with the tax law and the basic tax concepts that the Tax Court applied to determine that, on the facts, Sumner was liable for the gift tax in question.  One of those concepts is surely that transfers of value with a donative intent is a gift, potentially subject to gift reporting and tax.  But, Sumner pleaded ignorance -- certainly lack of intent in avoiding the civil fraud and negligence penalties.  Not only did he not have an intent to evade his tax liability, but he also was not negligent because he relied on this tax advisers and a memorandum from one tax adviser, which Sumner could not produce.

Well, let's get into the fact to set this up.  At some point, after Sumner left the practice of law to join the family business, the three created a corporation in which the three of them were nominal equal shareholders - 100 shares each.  The father contributed to that corporation disproportionately to the two sons, contributing almost 48%, with each son contributing around 26%.  (OK, there might have been a gift at that time from Mickey to the two sons or at least to someone; read on.)