The really rich -- especially the really, really rich -- are indeed different than us. They don't have to pay taxes the rest of us do.
Check it out. Marshall Naify is about to get $660 million in capital gains, and doesn't feel like paying taxes on it in California (even though he lives there), so ostensibly "moves" the stock to Minnesota. So doesn't pay any tax on this gain -- at all -- to Califonria. But at the same time, he deducts on his federal taxes $62 million in purported state taxes that he "might" have to pay if his scheme to cheat California fails. And does so even though California has never even gone after him for the $62 million. Neat trick, eh? Don't pay state taxes, but deduct 'em anyway.
And sure, after reading this opinion, you might be inclined to say: But he lost his federal tax refund lawsuit. The Ninth Circuit affirms. So all's right in the world. Justice was served.
Which is partially correct. But don't forget what happens below. Naify thought he'd owe California $62 million, but the FTB only went after $58 million. And Naify settles that dispute on very favorable terms: he ends up only having to pay $19 million of the $62 million he purportedly owes, plus $7 million in interest (as he's had the time value of money for that $19 million, which has since gotten a lot bigger). So his scheme largely works.
And it works on the federal side as well, at least in part. The IRS then allows Naify to deduct the entire $26 million it paid. But Naify continues to say that he should be allowed to deduct even more than this amount -- on the grounds that his scheme had at least a two-thirds chance of failing, so even if he shouldn't be allowed to deduct the entire $62 million, he should still be allowed to deduct $47 million: the "chance" that his plans would fail and he'd have to pay. (Parenthetically, notice -- as the Ninth Circuit does, that two-thirds of $62 million is actually $41 million, not the $47 million deduction that Naify seeks. "Oops," Naify's lawyers say. "We must have done the math wrong." Yeah. Or simply asked for -- yet again -- a higher deduction than Naify could conceivably have been entitled to, hoping that the FTB wouldn't audit them.)
So, sure, the Ninth Circuit doesn't allow Naify to deduct more than he's actually paid. And it only took years and years of litigation in the district court and Ninth Circuit to make that happen. After the guy avoids paying tens of millions of dollars that he probably owes to California to begin with.
Yeah. That's justice. What a huge win.
