Marshall Naify Revocable Trust v. United States

• Decision Date: 15 February 2012
• Docket Number: No. 10–17358.,10–17358.
• Citation: 12 Cal. Daily Op. Serv. 1917,672 F.3d 620,2012 USTC P 60639,2012 Daily Journal D.A.R. 2080,109 A.F.T.R.2d 2012
• Parties: MARSHALL NAIFY REVOCABLE TRUST; Michael Naify, Trustee, successor in interest to the Estate of Marshall Naify, Plaintiffs–Appellants, v. UNITED STATES of America, Defendant–Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

109 A.F.T.R.2d 2012-969

12 Cal. Daily Op. Serv. 1917

2012 Daily Journal D.A.R. 2080

2012-1 USTC P 60,639

672 F.3d 620

MARSHALL NAIFY REVOCABLE TRUST; Michael Naify, Trustee, successor in interest to the Estate of Marshall Naify, Plaintiffs–Appellants,

v.UNITED STATES of America, Defendant–Appellee.

No. 10–17358.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Dec. 9, 2011.Filed Feb. 15, 2012.

G. Michael Halfenger (argued), Foley & Lardner LLP, Milwaukee, WI; Thomas F. Carlucci, Foley & Lardner LLP, San Francisco, CA; Joseph G. Wolberg, Kentfield, CA, for the appellants.

Jennifer M. Rubin, United States Department of Justice, Tax Division/Appellate Section, Washington, D.C., for the appellee.

Appeal from the United States District Court for the Northern District of California, Charles R. Breyer, District Judge, Presiding. D.C. No. 3:09–cv–01604–CRB.Before: ARTHUR L. ALARCÓN, CONSUELO M. CALLAHAN, and N. RANDY SMITH, Circuit Judges.

OPINION

ALARCÓN, Senior Circuit Judge:

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.¹ 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.

I

Naify was a longtime California resident until his death in April 2000. ² In December 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 became its sole shareholder, and took steps to ensure that Mimosa did not operate in California. Naify then transferred his TCI notes to Mimosa. After TCI merged into AT & T, Mimosa converted the TCI notes into AT & T stock, which led to a gain of $660 million.

After Naify's death, his Estate filed Naify's California personal income tax return for the 1999 tax year. Naify's return did not report the $660 million gain as taxable income. Consequently, his return did not reflect that any California income tax was due on the $660 million gain nor that he had paid California income tax on that gain.

Nearly a year later, in July 2001, Naify's Estate filed its federal estate tax return. At the time the Estate filed its return, the California Franchise Tax Board (“FTB”) had not asserted a claim against the Estate for California income tax on the $660 million gain. In its return, however, the Estate deducted, as a claim against the estate, $62 million for the estimated amount of California income tax that Naify might owe if his California tax avoidance plan failed.

Three months later, the FTB initiated an audit of Naify's California personal income tax return for the 1999 tax year. In July 2003, the FTB issued a notice of proposed assessment in which it asserted that Naify's Estate owed $58 million, plus interest and penalties, for California income tax on the $660 million gain. Naify's Estate disputed that it owed California income tax on the $660 million gain. After lengthy negotiations, in 2004, the Estate settled the California income tax claim for $26 million, $7 million of which was interest.

Meanwhile, in early 2003, the IRS had initiated an audit of the Estate's federal estate tax return. The IRS disallowed the Estate's deduction of $62 million for the estimated amount of California income tax that Naify's Estate might owe if his California tax avoidance plan failed. After the Estate settled with the FTB, however, the IRS allowed the Estate to deduct the $26 million it paid to settle the California income tax claim. As a result of the adjusted deduction, the Estate paid a federal estate tax deficiency of $11 million.

In March 2006, the Estate filed a claim with the IRS for a refund of the $11 million tax deficiency it paid when the IRS adjusted its deduction for the California income tax claim. In its claim, the Estate sought to adjust the deduction from $26 million to $47 million. In order to arrive at the $47 million value, the Estate discounted the $62 million that it believed that Naify owed in California income tax on the $660 million by 67%, which was the probability, according to the Trust's expert, that Naify's tax plan would fail. ³ The IRS rejected the Estate's claim: it concluded that the California income tax claim was contingent and disputed and, thus, the amount of the deduction for the claim was limited to the $26 million the Estate paid post-death to settle the claim.

In April 2009, the Trust, as successor in interest to Naify's Estate, filed a complaint against the Government in district court. The Trust's complaint asserted a single claim for refund of federal estate taxes based on its allegation that the value of the FTB's claim against the Estate for California income tax, as of the date of Naify's death, was $47 million. After the Government filed its answer, it moved for judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil Procedure. The district court granted the Government's Rule 12(c) motion because, inter alia, the Trust's complaint did not show that the estimated amount of the deduction for the California income tax claim was ascertainable with reasonable certainty as of the date of Naify's death and, as a result, the Trust's deduction was limited to the $26 million it paid to settle the claim.

The district court entered judgment against the Trust on September 15, 2010. The Trust filed its timely Notice of Appeal on October 15, 2010. The district court had jurisdiction pursuant to 28 U.S.C. § 1346(a)(1). This Court has jurisdiction pursuant to 28 U.S.C. § 1291.

II

We review de novo a district court's order granting a Rule 12(c) motion for judgment on the pleadings. Gearhart v. Thorne, 768 F.2d 1072, 1073 (9th Cir.1985). “A judgment on the pleadings is properly granted when, taking all the allegations in the non-moving party's pleadings as true, the moving party is entitled to judgment as a matter of law.” Fajardo v. Cnty. of L.A., 179 F.3d 698, 699 (9th Cir.1999).

III

We begin our discussion with a brief overview of federal estate tax deductions for claims against an estate. We then turn to the merits of the Government's motion.⁴

A

The federal “estate tax is a tax on the privilege of transferring property upon one's death....” Propstra v. United States, 680 F.2d 1248, 1250 (9th Cir.1982). The federal estate tax is imposed on the decedent's taxable estate. 26 U.S.C. §§ 2001(a), 2053(a). The taxable estate is determined by reducing the gross estate by deductions allowable under the Internal Revenue Code. 26 U.S.C. § 2053(a). Claims against the estate are one type of deduction allowable under the Internal Revenue Code. 26 U.S.C. § 2053(a)(3).

Claims against the estate are “personal obligations of the decedent existing at the time of his death, whether or not then matured, and interest thereon which had accrued at the time of death.” Treas. Reg. § 20.2053–4. ⁵ Only claims that are “enforceable against the decedent's estate may be deducted.” Id.; see Estate of DuVal v. Comm'r, 4 T.C. 722, 725 (1945) (recognizing that a claim is an assertion of a right and if there is no assertion of a right, there is no claim to deduct), aff'd, 152 F.2d 103 (9th Cir.1945). Tax obligations are deductible, if at all, as claims against the estate. Treas. Reg. § 20.2053–6(a).

B

The Trust contends 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 and, as a result, its deduction was limited to the $26 million it paid to settle the claim.

The Treasury Regulations mandate that, in order to deduct the estimated amount of a claim against the estate, the estate must show that it is, inter alia, “ascertainable with reasonable certainty.” ⁶ Treas. Reg. § 20.2053–1(b)(3). An estate cannot deduct a claim based on a vague or uncertain estimate. Id.; see, e.g., Estate of Saunders v. Comm'r, 136 T.C. 406, 422 (2011) (explaining that “stating and supporting a value is not equivalent to ascertaining a value with reasonable certainty”). If a claim's value is not ascertainable with reasonable certainty, but later becomes certain, an estate may petition the tax court or file a claim for a refund. Treas. Reg. § 20.2053–1(b)(3).

Here, the Trust's pleading demonstrates that the estimated amount of the California income tax claim was not ascertainable with reasonable certainty as of the date of Naify's death. The Trust cannot rely on its allegation that “[o]n the date of Marshall Naify's death, April 19, 2000, the amount of Plaintiff's California tax liability was ascertainable with reasonable certainty” because that is not a factual allegation. Rather, it is a legal conclusion that we need not accept as true. See W. Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir.1981) (“We do not, however, necessarily assume the truth of legal conclusions merely because they are cast in the form of factual allegations.”).

As for the Trust's other allegations in its pleading, they show that the FTB had not asserted, nor assigned a value to, the California income tax claim as of the date of Naify's death. As the district court recognized, several post-death events would need to have...