Opinion ID: 758821
Heading Depth: 3
Heading Rank: 2

Heading: Transfer in Satisfaction of Inchoate Marital Rights

Text: 19 In the district court, Susan also argued that the $5.75 million was exempt from tax under IRC § 1041. Section 1041 provides that property received from a former spouse incident to divorce is excluded from the recipient's gross income. The 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. 20 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 presumably is determined by common law doctrines--e.g., the Davis rule and, potentially, the assignment of income doctrine. 25 21 Specifically, Susan asserts that Ken's filing of a bankruptcy petition converted her undivided one-half ownership 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 her 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. 22 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 were exchanged. 26 As such, the market value of the property transferred by the husband was taken by the wife as her tax basis for the property received. 27 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. 23 The district court rejected this argument, and so do we. Unlike the husband in Davis, Ken never transferred anything to Susan in discharge 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 nontaxable 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. 24 The government takes the position that Tenneco purchased 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, contends 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 Estate, have everything to do with the taxability of her payment. The government aptly notes that there is no evidence that Tenneco's payment was made at Ken's behest or that of his bankruptcy trustee, in exchange for a release of the claims under the gas purchase contract. Neither did Tenneco contract to buy Susan's claims against the Estate out of any concern for Ken or his marital property obligations. Susan's reliance on the Davis rule is wholly misplaced. III