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Friday, December 25, 2015

2013 Gift Tax Assessment for 1972 Gift Upheld by Tax Court - 41 Years of Separation

The IRS has 3 years to assess gift taxes for gifts disclosed in a gift tax return. If a gift tax return is not filed, the statute of limitations never begins to run. Nonetheless, it is rare for the IRS to assess gift taxes relating to gifts that occurred many years in the past.

A recent Tax Court case confirms that the IRS is not legally barred from assessing gift taxes many, many years after the gift when no gift tax return is filed, if it so desires. Here, Sumner Redstone gifted shares of stock in a closely held entity to two trusts for his children in 1972. Due to litigation commencing in 2006, the IRS became knowledgeable of the gifts, and ultimately assessed gift taxes in 2013 for the 1972 tax year.

The Tax Court found that such assessment was valid, despite the 41 year spread between the taxable gift and the tax assessment.

Mr. Redstone argued that the doctrine of laches should bar the assessment. Laches is an equitable concept that will bar actions after an extended period of time, even if a legal statute of limitations is still open. The Tax Court noted that the U.S. is not subject to the defense of laches in enforcing its rights. Further, it found the facts supporting the application of laches are not present here - it would have required that the IRS had been aware of the 1972 gifts but sat on its rights and that the taxpayer suffered undue prejudice as a result. Here, the IRS did not become aware of the gift transfers until 2010.

Interestingly, back in the 1970's the IRS made inquiries of Mr. Redstone relating to gifts made in 1972 in context of political contributions that Congress was investingating. Mr. Redstone argued that this review was an examination, so that a second examination in 2011-2013 violated the one examination rule of Section 7605(b). The Tax Court rejected this, finding that the review in the 1970's did not give rise to an examination. Further, a violation's effect is limited to giving rise to procedural obstacles to the conduct of the second examination, such as blocking the exam or the enforcement of summons. Such a violation does not invalidate a deficiency coming from that second examination.

Note that we first discussed these issues in a posting here back in 2013.

Sumner Redstone v. Commissioner, TC Memo 2015-237
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