A wealthy Californian went to great lengths to avoid paying taxes on $660 million in capital gains, largely by transferring the source of the gain to an out-of-state company shortly before his death. Not only did his estate not report the $660 million on his state income tax return, it also deducted $62 million on his estate tax return for the estimated amount that the decedent might owe if his tax-avoidance scheme failed. The IRS at first disallowed the entire deduction, and then, after the estate settled the taxpayer’s claims with California for $26 million, permitted a deduction for that amount.
The estate sued for a refund of the resulting deficiency ($11 million) in federal district court, which granted summary judgment on behalf of the IRS, finding that the amount of California’s tax claim was not ascertainable with reasonable certainty as of the date of death. The taxpayer appealed, and just last week the 9th Circuit rendered its decision in Marshall Naify Revocable Trust v. United States, No. 10-17358 (Feb. 15, 2012). After acknowledging the split of authority among federal circuits, the court found that, in its jurisdiction, “the law is clear that post-death events are relevant when computing the deduction to be taken for disputed or contingent claims.” Notably, in this case the taxpayer’s expert didn’t necessarily help the taxpayer’s arguments by showing that the claim could support a range of possible values, from $0 to $62 million, with a 67% likelihood of success. We’ll have a complete digest of the Marshall Naify decision in the April 2012 Business Valuation Update; email the editor if you’d like a copy of the 9th Circuit opinion.
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