Naify Revocable Trust v. United States

The value of a California income tax claim becomes certain when the parties settle the claim and the amount of the settlement is the value of the claim against the estate of a decedent.

Before dying in 2000, Marshall Naify took steps to avoid paying California income tax on $660 million in capital gains. After dying, the Naify Estate deducted $62 million on its federal estate tax return for the "estimated amount" of California income tax that it might owe on the $660 million gain if the avoidance steps failed. The United States Internal Revenue Service ("IRS") disallowed the deduction and the Marshall Naify Revocable Trust ("Trust"), sued for a refund. The district court granted the Government's motion for judgement on the pleadings pursuant to Federal Rule of Civil Procedure 12(c). The Trust contended that the district court erred when it determined that the "estimated amount" of the California income tax claim could not be deducted because it was not ascertainable with reasonable certainty as of the date of Naify's death. The Treasury Regulations mandate the "estimated amounts" must be "ascertainable with reasonable certainty," not vague or uncertain. The Ninth Circuit held that the California income tax claim's value became certain when the Trust settled the claim, and agreed with the district court that the settlement amount was dispositive because it "determined as a factual matter how much the claim against the estate was worth and was the only moment at which the value of the claim became certain." Additionally, the Ninth Circuit held that the district court did not err in granting the Government's Rule 12(c) motion for judgment on the pleadings and dismissing the action. AFFIRMED.