By: Suzanne Riopel

A recent decision in the Tax Court is a reminder of the ambiguity in the distinction between “gifts” and “ordinary business transactions” in the context of family-owned businesses.[1] In Estate of Redstone v. C.I.R., the court held that the federal gift tax did not apply to a decedent’s transfer of stock in trust for his children.[2] In 1959, the decedent, Edward Redstone, his father, and his brother each held a one-third ownership interest in their family’s business, National Amusements, Inc. (NAI).[3] In 1972, Edward filed a lawsuit against his father for failure to transfer 100 shares to him, and both parties eventually reached a settlement agreement that allowed NAI to buy back two-thirds of the stock for 5 million with the remaining one-third transferred in trust for the benefit of Edward’s children.[4] During O’Conner v. Redstone in 2006, the IRS discovered this gift tax deficiency on a transfer of stock in trust, and in 2013, it issued a statement of deficiency holding the decedent liable for 1.3 million in federal gift taxes, fraud, and negligence.[5]

A transfer of property “for less than an adequate and full consideration in money or money’s worth” is subject to the federal gift tax[6] unless the transfer was in the ordinary course of business.[7] Courts will determine that a transfer is in the ordinary course of business if it is “bona fide, at arm’s length, and free of any donative intent” under the objective facts and circumstances.[8] In a family business, transactions between relatives are subject to greater scrutiny[9], and courts will additionally consider whether the parties had a genuine controversy and the value of the property involved, whether parties retained legal counsel and engaged in adversarial negotiations, whether the certainty and cost-savings of settlement motivated the parties, and whether the settlement was under judicial supervision.[10]

The court held that the transfer of the decedent’s stock satisfied the above requirements. Although the IRS seeks to prevent taxpayers from advantageously using the provisions of the Internal Revenue Code as tax shelters, this transaction was bona fide because there was no indication that the decedent and his father faked an estrangement between them to avoid tax liability on a gratuitous transfer of stock.[11] Prior to the settlement, the father-son relationship deteriorated when his father favored the oldest son, Sumner, marginalized Edward in the family business, and personally criticized how Edward raised his son.[12] Based on the events leading up to the settlement agreement, the court determined that the transfer was “at arm’s length.” Edward’s interactions with his father were akin to dealings with a stranger: the decedent retained legal counsel, commenced two lawsuits, undertook extensive negotiations, and agreed to settle only when it was economically advantageous.[13] Furthermore, the decedent’s transfer of one-third of his stock in trust for his children was devoid of donative intent.[14] Although the court assumes that children are the objects of a parent’s affection, the decedent repeatedly rejected the offer to place the stocks in trust for the benefit his children.[15] Instead, he conceded to the terms of the settlement agreement when it entitled him to receiving a payment for the majority of the stock.[16]

The circumstances in Estate of Redstone provide a model example of a winning tax case. Family businesses remain the backbone of the U.S. economy with 5.5 million of them contributing to fifty-seven percent of the GDP.[17] Traditionally, owners and managers prefer that his or her descendants retain ownership or control the family business, but issues usually arise over succession, roles and responsibilities, and sibling rivalry, especially in smaller businesses. The presumption that familial transactions have donative intent is problematic because an owner has an opportunity, under the guise of a parental figure, to undercut an employee (and relative) by requiring a transfer of his property to another relative. Estate of Redstone rightfully holds in favor for the defendant, and its clear-cut analysis allows potential complainants to gauge their likelihood of success on the merits. Although this case will likely not affect estate planning, family businesses that are concerned with retaining stock ownership should consider a provision within employment contracts to hold the stock in trust at the onset of employment.

[1]Estate of Redstone v. C.I.R., No. 8401–13, 2015 WL 6458095 (T.C. 2015).


[3]Id. at 3.

[4]Id. at 5.

[5]Id. at 6.

[6]26 U.S.C.A. § 2512 (West 1981).

[7]26 C.F.R. § 25.2511–1(g)(1) (1997).

[8]Weller v. Comm’r, 38 T.C. 790, 806 (1962).


[10]Estate of Noland v. C.I.R., 47 T.C.M. (CCH) 1640, 1644-1645 (1984).

[11]Estate of Redstone v. C.I.R., No. 8401–13, 2015 WL 6458095 (T.C. 2015).

[12]Id. at 4, 9.

[13]Id. at 9.

[14]Id. at 10.


[16]Id. at 10.

[17]Univ. of Vt., Family Business Facts, (last visited Nov. 27, 2015).

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