Marshall Naify Revocable Trust v. United States

In 1999, Marshall Naify’s company, Mimosa, Inc., realized $660 million in capital gains that passed to Naify. Naify took several actions to avoid paying state income tax on those gains. After Naify’s death in early 2000, Naify’s estate (plaintiff) filed a California income tax return for 1999 that excluded the capital gains from Naify’s taxable income. When the estate filed its federal estate tax return, the State of California had not yet responded to the 1999 state income tax return. The estate estimated that it might owe up to $62 million in California state taxes if the state contested the 1999 return. In anticipation of this claim, the estate deducted $62 million from the estate’s gross proceeds before determining its federal estate tax liability. Later, California contested Naify’s 1999 state income tax return, and Naify’s estate paid $26 million in state income taxes. The federal government (defendant) allowed Naify’s estate to deduct only the actual $26 million claim payment from its federal estate tax liability. The estate sued for an estate tax refund, claiming that it was entitled to a larger deduction for the state tax claim. Specifically, the estate argued that its estate tax liability should be measured by what was known at the time of Naify’s death, not by postdeath events. At Naify’s death, there was a 67 percent likelihood of California claiming $62 million in income taxes. The estate contended that the state income tax claim was worth 67 percent of $62 million, or $47 million. Therefore, the estate believed that it should have been allowed to deduct a claim of $47 million. The district court dismissed the lawsuit, and the estate appealed to the Ninth Circuit.