Marshall Naify Revocable Trust v. United States

This is a federal estate tax refund action. Before his death in 2000, Marshall Naify (“Naify”) took considerable steps to avoid paying California income tax on $660 million in capital gains. After his death, the estate of Marshall 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 Naify’s California tax avoidance plan failed. The IRS disallowed the deduction. The Marshall Naify Revocable Trust (“Trust”), successor in interest to Naify’s Estate, sued for a refund. The district court granted the Government’s motion for judgment on the pleadings pursuant to Federal Rule of Civil Procedure 12(c). The Trust appeals that decision. After reviewing the record and briefs, we affirm.

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Naify was a longtime California resident until his death in April 2000. In Decem ber 1998, Naify began implementing a plan to avoid paying California income tax on gains he expected to realize from converting his Telecommunications Inc. (“TCI”) notes into AT & T stock after TCI merged into AT & T. As part of the plan, Naify formed Mimosa, Inc. (“Mimosa”) as a Delaware corporation. He…