Martin v. U.S., 97-31277
| Decision Date | 12 November 1998 |
| Docket Number | No. 97-31277,97-31277 |
| Citation | 159 F.3d 932 |
| Parties | -7038 Susan Taylor MARTIN, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. Summary Calendar. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Michael E. Guarisco, Jean N. Knouse, Guarisco, Weiler & Cordes, New Orleans, LA, Frank J. Romaguera, IV, R. Lee Eddy, III, Metairie, LA, for Plaintiff-Appellant.
Michelle B. O'Connor, Jonathan S. Cohen, U.S. Dept. of Justice, Tax Div., App. Section, Washington, DC, for Defendant-Appellee.
Appeal from the United States District Court for the Eastern District of Louisiana.
Before WIENER, BARKSDALE and EMILIO M. GARZA, Circuit Judges.
In this tax refund suit, Plaintiff-Appellant Susan Taylor Martin ("Susan") appeals the district court's order denying her motion for summary judgment and granting the cross-motion for summary judgment of Defendant-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 bankruptcy estate (the "Estate"), we affirm.
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 protect her interests in the Estate. 3 Although Ken listed no assets in his bankruptcy petition, Susan asserted that the community owned valuable rights under a gas purchase contract. 4
On July 1, 1993, Tenneco paid Susan $5.75 million for her claims against the Estate. 5 The following day, Tenneco and the bankruptcy trustee executed a settlement agreement pursuant to which Tenneco paid $7 million for an 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 not 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 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 the 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.
and granted her motion, and the government did not appeal.
We review a grant of summary judgment de novo, applying the same standard as the District Court. 7
Section 61(a) of the Internal Revenue Code ("IRC") provides that individuals shall be taxed on "all income from whatever source derived." 8 9
Susan contends that the payment from Tenneco 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
Under the Bankruptcy Code, the commencement of either a liquidation (Chapter 7) or a reorganization (Chapter 11) proceeding creates a bankruptcy estate 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 13 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 because (1) Susan was a nonfiling 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.
spouse 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'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 that 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 exchange 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 depends on the nature and character of the claim from 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. Regardless of its immediate 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 tax-exempt funds were themselves nontaxable. 21 In each of the 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 before 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.
cases cited, however, the taxpayer received proceeds from an adverse party in settlement of an underlying, disputed claim. 22 In the instant case, Susan's claims were not settled; she sold her claims 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. Consequently, regardless of whether Susan might have thought 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 them at the risk of recovering less...To continue reading
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