1 Tenneco Gas Louisiana, Inc. is a subsidiary of Tenneco, Inc. Revised December 1, 1998

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

______________________________________

No. 97-31277

(Summary Calendar)

______________________________________

SUSAN TAYLOR MARTIN,

Plaintiff-Appellant,

versus

UNITED STATES OF AMERICA,

Defendant-Appellee.

______________________________________________________________

Appeal from the United States District Court

for the Eastern District of Louisiana

______________________________________________________________ November 12, 1998

Before WIENER, BARKSDALE and EMILIO M. GARZA, Circuit Judges.

WIENER, Circuit Judge:

In this tax refund suit, Plaintiff-Appellant Susan Taylor

Mar tin (“Susan”) appeals the district court’s order denying her

motion for summary judgment and granting the cross-motion for

summary judgment of Defend ant-Appellee United States of America

(the “government”). Concluding that the district court did not err

in holding that Susan must recognize gain on the $5.75 million

payment she received from Tenneco Gas Louisiana, Inc. (“Tenneco”) 1

for the sale of her claims against her former husband’s bankruptcy2 Susan filed a petition for legal separation in August, 1990.

Separation from bed and board was abolished by 1990 La. Acts, No. 1009, §

1 (eff. Jan. 1, 1991). S ee comment (c) to La. Civ. Code art. 101; La. R.S.

9:381-84. For cases arising prior to January, 1991, however, a judgment

of separation terminat e s the community of acquets and gains existing

bet w een spouses under the community property regime. Termination is

retroactive to the date of filing of the petition for separation. La. Civ.

Code art. 2356 (amended 1990).

3 Originally, Susan indicated that the premise of her claim was an

“undivided 1⁄2 interest in debtor’s community.” On her amended proof,

however, she also asserted “claims for fraud, bad faith management of the

community, breach of debtor’s fiduciary duty, and any and all other

delictual, contractual and quasi-contractual claims.”

2 estate (the “Estate”), we affirm.

I

FACTS AND PROCEEDINGS

Ken Martin (“Ken”) and Susan were married in 1958. At all

relevant times they lived in Louisiana, and all property that they

acquired while married was community property. In July, 1990,

Susan and Ken separated; they obtained a legal separation in March,

1991, 2 and a divorce in September of that year.

In February, 1991, before Susan and Ken were legally separated

and before they partitioned their community property, Ken filed for

protection under Chapter 7 of the United States Bankruptcy Code.

As a result, all community property became part of the Estate.

Susan did not join in the bankruptcy petition, but filed two proofs

of claim to p rotect her interests in the Estate. 3 Although Ken

listed no assets in his bankruptcy petition, Susan asserted that4 This contract existed between Martin Intrastate Gas Co. (MIG)

—— a

corporation formed by Ken —— and Louisiana Intrastate Gas Co. (LIG)

——

another subsidi ary of Tenneco, Inc. Tenneco entered into all of the

agreements relevant to this matter. According to Plaintiff’s Statement of

Unconte sted Material Facts, the contract required LIG to purchase from MIG

large quantities of gas at a fixed price, which was (at all times pertinent

to this case) quadruple the market price. Although Tenneco, Inc. later

sold all of its interest in LIG, it became the indemnitor to and for LIG

for all liability and performance under the contract.

5 On July 9, 1993, the bankruptcy trustee filed a complaint asserting

that the $5.75 million received by Susan from Tenneco was the property of

the Estate. The bankruptcy court ruled against the Trustee, finding that

Susan had sold only her interests as a claimant and not the actual “assets”

of the Estate.

6 The Estate thereby became solvent. On March 3, 1994, Tenneco and

the bankruptcy trustee executed an amendment to the 1993 settlement

agreement. This amendment —— approved by the bankruptcy court —— and the

v arious releases executed pursuant to it (a) settled all outstanding claims

each party had against all other parties in the various law suits over the

gas purchase contract, and (b) effected a distribution of all the assets

in the Estate. Pursuant to the amendment, Tenneco agreed to distributions

by the trus tee of all the property in the Estate —— including distributions

to Ken

—— without any distribution to itself in satisfaction of the claims

it had acquired from Susan.

3 the community owned valuable rights under a gas purchase contract. 4

On July 1, 1993, Tenneco paid Susan $5.75 million for her

claims again st the Estate. 5 The following day, Tenneco and the

bankruptc y trustee executed a settlement agreement pursuant to

which Tenneco paid $7 million for a n option to buy the Estate’s

rights and interests in the gas purchase contract. 6 The trustee

reported this $7 million payment on the Estate’s 1992 federal

income tax return.

Susan timely filed her federal income tax return for calendar

year 1993, and attached a Form 8275 in which she set forth her

reasons why the $5.75 million she had received from Tenneco was not4

taxable. The government disagreed with Susan’s analysis, and

assessed a deficiency calculated by treating the entire payment as

taxable income. In February, 1996, Susan paid the assessed taxes

and interest, then filed an administrative claim for a refund. The

following month, the government disallowed her refund claim.

Immediately following this disallowance, Susan filed suit in

federal district court to recover the claimed refund. She then

filed a Motion for Partial Summary Judgment on the issue of “what”

she had sold to Tenneco in 1993. Susan asserted that she had sold

only her claims against the Estate, not any assets of the Estate

itself. The court agreed and granted her motion, and the

government did not appeal.

Susan subsequently filed another motion for summary judgment

in which she asserted that the payment from Tenneco should not be

treated as taxable income. The government opposed Susan’s motion,

and filed a cross-motion for summary judgment which t he district

court granted. The court found that she had no basis in her claims

against the Estate that she had sold to Tenneco and held that the

entire $5.75 million she received as proceeds of that sale was

taxable. Susan timely filed a notice of appeal.

II

ANALYSIS

A. Standard of Review

We review a grant of summary judgment de novo

, applying the7 Firesheets v. A.G. Bldg. Specialists, Inc.

, 134 F.3d 729, 730 (5th

Cir. 1998).

8 26 U.S.C. § 61(a).

9 Wesson v. United States

, 48 F.3d 8 94, 898 (5th Cir. 1995). For

federal income tax purposes, the amount of gain from a sale or other

di sposition of property is determined by subtracting the basis of the

property (generally its cost, see 26 U.S.C. § 1012) from the amount

realized on the sale (generally the selling price, see 26 U.S.C. § 1001(a)

and (b)). S ee Byram v. Commissioner

, 555 F.2d 1234, 1236 (5th Cir. 1977).

The entire amount of gain from the sale of property must be recognized by

the taxpayer, unless the gain falls within a specific exclusion under the

Internal Revenue Code. S ee Wesson

, 48 F.3d at 898. Susan does not dispute

the amount of gain on which she owes taxes, but rather whether she must

recognize any gain at all.

10 370 U.S. 65 (1962).

5 same standard as the District Court. 7

B. Applicable Law

Section 61(a) of the Inte rnal Revenue Code (“IRC”) provides

that individuals shall be taxed on “all income from whatever source

derived.” 8 “Accessions to wealth are generally presumed to be

gross income unless the taxpayer can show that the accession falls

within a specific exclusion. Exclusions from income are to be

construed narrowly.” 9

Susan contends that the payment fromTenneco should not be

included in her gross income because it is either (1) an excludable

distribution from the Estate pursuant to IRC § 1398(f)(2); or (2)

an excludable payment in satisfaction of her inchoate marital

rights pursuant to the rule of United States v. Davis

. 10

1. IRC § 1398

Under the Bankruptcy Code, the co mmencement of either a11 11 U.S.C. § 541(a)(1). It is pursuant to this provision that title

to the Martin’s unpartitioned community property vested in the bankruptcy

trustee.

12 11 U.S.C. § 541 (a)(6).

13 26 U.S.C. § 1398.

14 In re Kochell , 804 F.2d 84, 87 (7th Cir. 1986).

15 26 U.S.C. § 1398(f)(1)(emphasis added).

16 26 U.S.C. § 1398(f)(2)(emphasis added).

17 26 U.S.C. § 1398(f).

6 liquidation (Chapter 7) or a reorganization (Chapter 11) proceeding

creates a bankruptcy esta te comprising all property formerly

belonging to the debtor. Property of the estate includes “all

legal or equitable interests of the debtor in property as of the

commencement of the case,” 11 as well as “[p]roceeds

. . . or profits

of or from property of the estate

. . . .” 12 IRC § 1398 1 3 treats the

bankruptcy estate as a separate entity for tax purposes; the estate

is taxed as if it were the debtor with respect to items of income

to which the estate is entitled. 14 Section 1398(f) provides that

a “transfer (other than by sale or exchange) of an asset from the

debtor to the [bankruptcy] estate” 15

—— or “ from the estate to the

debtor” on termination of the estate 16

—— “shall not be treated as

a disposition for purposes of any provision of this title assigning

tax consequences to a disposition . . . .” 17

The district court held that § 1398(f)(2) was inapplicable to

the facts of this case b ecause (1) Susan was a nonfiling spouse18 The Bankruptcy Code defi nes the term “debtor” as a “person or

mu nicipality concerning which a case under this title has been commenced.”

11 U.S.C. § 101(13)

19 11 U.S.C. § 726.

7 rather than a “debtor” 18 ; (2) there was no “transfer from the

estate”; and (3) Susan did not receive any “asset” of the estate.

We agree.

Susan contends, however, that, when all of her and Ken’s

unpartitioned community property was transferred to the bankruptcy

estate, her ownership interest in that property was replaced

—— by

operation of law

—— with a “claim,” specifically, the right to

receive a distribution from the sale of the Estate’s assets. 19 As

she was not required to recognize any gain on this initial

transfer, Susan reasons, the government must have been treating her

as a debtor for purposes of § 1398(f)(1). Consequently, Susan

concludes, she should also be treated as a debtor for purposes of

§ 1398(f)(2), pertaining to transfers to a debtor from the

bankruptcy estate. As a classic flawed syllogism, this argument

fails.

Susan’s assumption that § 1398(f)(1) applied to the transfer

of her interest in the community property to the Estate is simply

wrong. As the government correctly points out, § 1398(f)(1) merely

states the general rule tha t a transfer that would otherwise

constitute a taxable disposition is nontaxable when the transferor

is the debtor and the transferee is the estate. Here, in exchange20 If she is not considered a debtor for purposes of § 1398(f)(2),

contends Susan, then this section denies her the equal protection of the

laws by treating filing and nonfiling spouses differently. Susan argues

that she and Ken are similarly situated with respect to their community

prop erty interests, and that to make a distribution to one of them a

nontaxable event while imposing tax on the other would be unconstitutional.

This argument is without merit. First, unlike Ken, Susan did not

receive a “transfer” of “assets” fr om the bankruptcy estate on its

“termination.” In addition, unlike Ken, Susan retained a property interest

in the community property even after it was transferred to the bankruptcy

estate. She was, therefore, entitled to protect this interest by filing

a claim against the estate. Consequently, the two are not similarly

situated, and they need not be treated “equally” under the law.

8 for her transfer to the Estate, Susan received only the right to a

future distribution; she did not have an “accession to wealth” at

that time. The transfer was not, therefore, a taxable disposition,

even absent the application of § 1398(f)(1). Hence, the corollary

proposition urged by Susan

—— that she must be treated as a debtor

for purposes § 1398(f)(2) —— is baseless. 20

We also conclude that § 1398(f)(2) is inapplicable to the

facts of this case, principally because Susan never received a

transfer of an asset from the Estate on termination of the Estate.

Susan argues that, even though the distribution came from Tenneco

rather than from the bankruptcy trustee, the $5.75 million should

be deemed to have been transferred from the Estate pursuant to the

“origin of the claim” doctrine. Under this doctrine, Susan

advances, the taxability of income de pends on the nature and

character of the claimfrom which the money is derived. She

contends that, in this particular instance, she was entitled to a

tax-free distribution from the Estate, and that the payment from

Tenneco was, in fact, a substitute for this distribution.21 See generally Lyeth v. Hoey

, 305 U.S. 188 (1938)(holding that an

he ir who contested his grandmother’s will and who, as a result of a

compromise of that contest, received property from the grandmother’s estate

which he would not have received had the will gone uncontested, acquired

that property “by bequest, devise, or inheritance,” and was therefore not

liable for federal income taxes); Early v. Commissioner

, 445 F.2d 166 (5th

Cir. 1971)(holding that an agreement between t axpayers and heirs of

decedent

—— pursuant to which taxpayers received a joint life interest in

income from the trust estate in return for the surrend er of stock allegedly

gifted to them by the dec edent —— was actually a compromise of the

taxpayers’ disputed right to the stock, and since they claimed the stock

as donees, they were to be treated as having acquired their life estate in

that capacity for federal income tax purposes).

22 Susan relies on Estate of Longino v. Commissioner , 32 T.C. 904

(1959) for the proposition that the origin of the claim doctrine can also

b e used to determine the taxability of proceeds received from third

parties. In L ongino

, the taxpayers’ cotton crop was destroyed through

their use of a pesticide distributed by Unite d Cooperatives, Inc.

Taxpayers filed suit for damages against United and others who had had

anything to do with the product. Taxpayers settled their claim with United

for a payment of $21,087.60 from United’s insurer. Because the insurer

desired to preserve United’s rights against the manufacturer and others,

the settlement was handled by an assignm ent of taxpayers’ claim in exchange

for the settlement sum. The court held that, because the payment clearly

represented damages for loss of profits

—— and not proceeds from a sale

——

the amount was taxable as ordinary income. I d. at 905-06. The holding in

Longino is clearly inapposite to the instant case, in which Tenneco paid

Susan $5.75 million for her claims against Ken’s Esta te, and not in

settlement of those claims.

9 Regardless of its i mmediate source, insists Susan, the payment

should be treated no differently for tax purposes than one made

directly from the Estate.

We are singularly unpersuaded by this argument. In support of

her “origin of the claim” theory, Susan relies on cases in which

courts have held that proceeds received “in lieu of” otherwise taxexempt funds were themselves nontaxable. 21 In each of the cases

cited, however, t he taxpayer received proceeds from an adverse

party in settlement of an underlying, disputed claim. 2 2 In the

instant case, Susan’s claims were not settled; she sold her claims10

against Ken’s estate to Tenneco for a $5.75 million payment. This

payment did not operate to extinguish her underlying claims against

the Estate; rather, it expressly transferred her claims to Tenneco.

C onsequently, regardless of whether Susan might have thou ght

subjectively that this payment was in settlement of her claims ——

in lieu of a tax-free Estate distribution

—— the fact is

inescapable that the $5.75 million payment is the proceeds of the

sale of her unextinguished claims. Tenneco merely stepped into her

shoes as claimant. In essence, Susan consciously chose to

liquidate an asset —— her claims against the Estate —— by selling

them for cash to a third party rather than retaining her claims and

pursuing themat the risk of recovering less (or nothing) and at

the expense of the time value of the money.

In addition, because the payment came from Tenneco rather than

from the Estate, Susan obviously did not receive an “asset from the

estate” as required under § 1398(f)(2). And, finally, there is the

element of timing: Susan received the payment from Tenneco almost

a year b efore distributions of the Estate’s assets were made.

Receipt of the payment prior to termination of the Estate is

another reason why § 1398(f)(2) is not applicable.

2. Transfer in Satisfaction of Inchoate Marital Rights

In th e district court, Susan also argued that the $5.75

million was exempt fr om tax under IRC § 1041. Section 1041

provi des that property received from a former spouse incident to

divorce is excluded from the recipient’s gross income. The23 Arnes v. United States , 981 F.2d 456, 458 (9th Cir. 1992).

24 Davis involved the transfer of appreciated stock by a husband to his

former wife pursuant to a divorce decree in satisfaction of the wife’s

inchoate marital rights. The Supreme Court held that this transfer was a

taxable event, that the value of the property received by the husband (the

release of the wife’s inchoate marital rights) was equal to the fair market

value of the stock, and that the husband must recognize g ain on the

transfer. The Court further held that the market value of the stock should

be taken by the wife as her tax basis. 370 U.S. at 72-3.

25 Quoting Cindy L. Wofford, “Divorc e and Separation,” 515 T.M.

P ORTFOLIOS , p. A-21 (BNA 1995).

11 recipient’s basis is equal to the transferor’s basis, and the

recognition of any gain or loss is deferred until the recipient

transfers the property to a third party. 23 The district court

rejected the applicability of § 1041 to the facts of this case, and

Susan does not raise this argument again on appeal, thereby waiving

it. On appeal, she relies instead on United States v. Davis

, 24

which governed the transfer of property in satisfaction of marital

rights prior to the 1984 enactment of § 1041.

The Martins were divorced in 1991. Nevertheless, Susan argues

that “[w]here § 1041 fails to apply and the Code does not provide

substitute tax treatment, the tax treatment pr esumably is

determined by common law doctrines

—— e.g., the Davis rule and,

potentially, the assignment of income doctrine.” 25

Specifically, Susan asserts that Ken’s filing of a bankruptcy

petition converted her undivided one-half ow nership interest in

their community property into an inchoate interest in the Estate.

Susan maintains that Ken had a legal obligation to reimburse her

for her share of the marital assets. Had the payment come from her26 370 U.S. at 72.

27 Id. at 73.

12 former husband in exchange for the release of this obligation,

contends Susan, then, under Davis , he would be taxed on the gain,

and she would take a basis equal to the face value of the cash

distribution —— $5.75 million.

In Davis

, the Supreme Court assumed “that the parties acted at

arm’s length and that they judged the marital rights to be equal in

value to the property for which they wer e exchanged.” 2 6 As such,

“the market value of the property transferred by the husband” was

taken by the wife “as her tax basis for the property rece ived.” 2 7

Under the facts of this case, argues Susan, because the only asset

available for distribution was cash, her tax basis is the face

value of the payment she received. The fact that the payment came

from Tenneco rather than from Ken, insists Susan, should not alter

the tax consequences.

The district court rejected this argument, and so d o we.

Unlike the husband in Davis

, Ken never transferred anything to

Susan in discharg e of his marital obligation. Instead, Susan

accepted a cash payment from Tenneco in exchange for her claims

against the Estate, almost a year before any distributions were

made from the trustee and almost two years after her divorce. Had

she waited for and received a distribution from the Estate, she

might have been entitled to treat such distribution as a nontaxable13

payment incident to divorce, pursuant to IRC § 1041. As it stands,

however, the transaction between Susan and Tenneco can be

characterized as nothing other than a garden variety sale on which

Susan recognized substantial and immediate gain.

The government takes the position that Tenneco purchase d

Susan’s claims to limit its liability to her under the gas purchase

contract. The fact that Ken or the Estate ultimately might have

benefitted from this transaction, conte n ds the government, is

irrelevant. We agree. Despite Susan’s attempt to convince us

otherwise, the facts that the payment came to her from Tenneco and

not Ken, that her claims were not satisfied or extinguished but

continued to exist in the hands of the purchaser, and that she was

paid long before distributions were made by the Est ate, have

everything to do with the taxability of her payment. The

government aptly notes that there is no evid ence that Tenneco’s

payment was made at Ken’s behest or that of his bankruptcy trustee,

in exchange for a release of the claims u nder the gas purchase

c ontract. Neither did Tenneco contract to buy Susan’s claims

against the Estate out of a ny concern for Ken or his marital

property obligations. Susan’s reliance on the D avis rule is wholly

misplaced.

III

CONCLUSION

Susan has failed to demonstrate that the payment she received14

from Tenneco was excludable from her gross income either as a

distribution from the Estate under § 1398(f)(2), or in satisfaction

of her inchoate marital rights under Davis

. Consequently, she must

recognize gain on that transaction. And, as Susan has failed to

establish any tax basis in her claims against the Estate, the gain

that she must recognize is on the entire amount of the payment she

received from the sale of these claims to Tenneco. The district

court did not err in holding the entire $5.75 million taxable and

denying Susan’s claim for a refund of the taxes she paid on the

transaction. For the foregoing reasons, the judgment of the

district court is, in all respects,

AFFIRMED.