## Facts

- Marshall Naify, a California resident, implemented a plan intended to avoid California income tax on a large capital gain by transferring assets to a Delaware corporation he controlled.
- The transaction produced approximately a $660 million gain, which was not reported as taxable income on Naify’s California income tax return for the relevant year.
- After Naify’s death (April 2000), the Estate filed a federal estate tax return (July 2001) claiming a $62 million deduction as a “claim against the estate” for estimated California income tax exposure, even though California had not yet asserted a claim.
- California later challenged the return, and the Estate resolved the dispute by settlement and paid approximately $26 million in California tax.
- The IRS disallowed the larger estimated deduction and allowed only the amount corresponding to the actual payment.
- The Trust, as successor to the Estate, filed a federal refund suit; the district court granted judgment on the pleadings for the United States, and the Trust appealed.

## Issues

1. For an estate tax deduction under 26 U.S.C. § 2053 for a contested or contingent state tax liability, must the deductible amount be based on a date-of-death probabilistic estimate, or on the later amount actually paid/finally determined by settlement?

## Decision

- The Ninth Circuit affirmed judgment for the United States.
- The deductible amount under § 2053 for the California tax claim was limited to the amount fixed by the post-death settlement (about $26 million), not the Estate’s $62 million estimate or a probability-weighted figure.
- The settlement was treated as the point at which the claim’s value became certain and thus provided the controlling measure of the deduction.

## Legal Principles

- Under 26 U.S.C. § 2053 and Treasury regulations addressing claims against an estate, contingent or disputed claims may be adjusted based on post-death events that fix the claim’s amount.
- Where a disputed tax liability is later resolved by settlement or payment, that resolution provides the best evidence of the claim’s value for § 2053 deduction purposes.
- A probability-based, date-of-death valuation is not required (and may be improper) when a later post-death event definitively determines the amount of the claim.

## Conclusion

The court held that the estate tax deduction for a contested state income tax liability was limited to the amount ultimately established and paid through post-death settlement, rejecting a larger deduction based on an estimated or probabilistic valuation at the time of death.


Marshall Naify Revocable Tr. v. United States, 672 F.3d 620 (9th Cir. 2012)