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.I

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 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 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.

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 "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 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 § 139813 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 estate16 -- "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 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 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 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 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 (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 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.

2. Transfer in Satisfaction of Inchoate Marital Rights

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.

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

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.

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.

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.

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.

Susan has failed to demonstrate that the payment she received 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.