                        T.C. Memo. 2002-113



                      UNITED STATES TAX COURT



        MARK J. STEEL AND CONNIE J. STEEL, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

         ODD-BJORN HUSE AND LISA L. HUSE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 7338-00, 7453-00.         Filed May 6, 2002.



     Deborah A. R. Jaffe and Robert M. McCallum, for petitioners.

     Randall E. Heath, for respondent.



                        MEMORANDUM OPINION


     RUWE, Judge:   Respondent determined deficiencies of $2,400

and $56,639 in Mark J. and Connie J. Steel’s Federal income taxes

for 1996 and 1997, respectively.     Respondent determined a

deficiency of $7,000 in Odd-Bjorn Huse’s Federal income tax for
                                - 2 -

1996.    Respondent also determined a deficiency of $109,242 in

Odd-Bjorn and Lisa L. Huse’s Federal income tax for 1997.    The

issue for decision is whether petitioners are entitled to long-

term capital gain treatment for certain amounts received in

connection with the settlement of a lawsuit.

                             Background

     The parties submitted this case fully stipulated pursuant to

Rule 122.1   The stipulation of facts and the attached exhibits

are incorporated herein by this reference.    Petitioners Mark J.

and Connie J. Steel resided in Redmond, Washington, when they

filed their petition.    Petitioners Odd-Bjorn and Lisa L. Huse

resided in Las Vegas, Nevada, when they filed their petition.2

     Mr. Huse, Mr. Steel, and Bjorn Nymark were general partners

in Bochica Partners (Bochica), which was formed on October 28,

1994.    Bochica’s partnership agreement states that it was formed

for the purpose of acquiring the stock of Birting Fisheries, Inc.

(BFI).    At some point after its formation, Bochica acquired all

the stock of BFI.    BFI was a Washington corporation engaged in

commercial fishing operations in the Bering Sea near Alaska and


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the tax years in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
     2
      References to petitioners are to Mr. Steel and Mr. Huse.
Mrs. Steel and Mrs. Huse are parties to these cases by virtue of
the fact they filed joint returns with their husbands for the
years in issue.
                                 - 3 -

in the fishing grounds off the western coast of the United

States.

     On December 9, 1991, BFI purchased an insurance policy on a

commercial fishing vessel, the F/T Ocean Rover (Ocean Rover).

The insurer agreed to indemnify BFI for any “loss of hire”

damages, including lost profits from operations that might result

from a mechanical breakdown.     In March and July 1992, the Ocean

Rover experienced several breakdowns, and BFI realized a loss of

profits.   The losses were covered under the insurance policy, and

BFI filed a claim with the insurer.      In May 1993, the insurer

paid $1,024,517 on the claim to BFI, which BFI reported as

ordinary income.3   However, a dispute arose as to the extent of

the damages suffered by BFI, and the insurer refused to pay any

further amounts on the claim.4    In September 1995, BFI filed a

lawsuit against the insurer alleging a breach of contract, bad

faith, and consumer protection violations.

     On January 25, 1996, Bochica entered into an agreement with

a Norwegian corporation, Norway Seafoods A/S (Norway), for the


     3
      Any proceeds received by BFI from the insurance claim would
have represented ordinary income.
     4
      On Dec. 15, 1993, BFI filed a bankruptcy petition pursuant
to 11 U.S.C. sec. 362 (1994). The insurance claim survived the
bankruptcy proceedings and remained an asset of BFI as of the
close of the 1995 tax year. In those proceedings, the insurance
claim was assigned a zero value. However, a disclosure statement
dated Aug. 22, 1994, noted that “debtor believes that perhaps as
much as $1 - 4 million could be recovered on this claim.”
                               - 4 -

sale of 100 percent (1,000 shares) of the common stock of BFI to

Norway.5   According to the agreement, the purchase price was $9

million.   The parties used an internal financial statement of the

assets and liabilities of BFI to arrive at this figure.6    The

financial statement provided information on the financial status

of BFI relevant to December 31, 1995.   As of that date, the value

of the lawsuit was not ascertainable, was not listed in the

financial statement, and did not figure in the $9 million

purchase price.   The agreement states that closing was to occur

at a time convenient to the parties, but “will occur not later

than February 27, 1996”.

     The agreement also addresses the disposition of the lawsuit

filed in September 1995.   Under the paragraph entitled

“Contemplated Transactions Out of the Ordinary Course of

Business”, it states: “Purchaser acknowledges that the following

transactions may occur between the Shareholders and the Company

prior to the Closing Date”.   A subparagraph then authorizes BFI

to assign its rights under the lawsuit to its selling

shareholders.

     5
      The acquisition was structured as a stock sale to preserve
BFI’s fishing rights, to facilitate the transfer of other assets
to Norway, and to provide Norway with the revenues from the “A”
fishing season conducted at the beginning of 1996.
     6
      The agreement required an adjustment to the purchase price
upon the completion of an audited financial statement of the
assets and liabilities of BFI. On June 20, 1996, a final
purchase price of $9,325,000 was agreed upon.
                                 - 5 -

     On February 15, 1996, Messrs. Huse, Nymark, and Steel, the

directors and shareholders of BFI, consented to the assignment of

the lawsuit to Ottar, Inc., a corporation in which Messrs. Huse,

Nymark, and Steel owned all outstanding stock.     On February 16,

1996, BFI executed an assignment agreement which assigned BFI’s

rights in the lawsuit to Ottar for the benefit of the individual

partners of Bochica.7   Neither Bochica nor Ottar reported any tax

effects from this transaction.

     On the same day as the assignment of the lawsuit, Bochica

and Norway closed on the stock sale.     Bochica used its entire

basis to compute its gain from the sale of the BFI stock.

Petitioners recognized gain from the sale as part of their

distributive share from Bochica.    At the close of BFI’s taxable

year on July 31, 1996, BFI’s earnings and profits exceeded the

value of the lawsuit.

     Following the assignment of the lawsuit, the Bochica

partners were substituted as plaintiffs in the suit against the

insurer, and an amended complaint was filed to reflect the

change.   In 1996, the insurer paid $172,175 on the insurance

claim.    This amount was distributed to the general partners

according to their respective interests:


     7
      BFI was an accrual basis taxpayer, and at the time of the
assignment it had not accrued income from the insurance claim
except for the May 1993 payment. No income was accrued since the
value of the claim was disputed and could not be ascertained.
                              - 6 -



                             Amount          Ownership
          Partner           Received         Percentage

         Mr. Huse           $68,870              39.68%
         Mr. Nymark          68,870              39.68
         Mr. Steel           34,435              20.64
           Total            172,175

In July 1997, the Bochica partners and the insurer settled the

lawsuit for $1.5 million, which was also distributed to the

general partners according to their respective interests:

                             Amount          Ownership
          Partner           Received         Percentage

         Mr. Huse           $595,238             39.68%
         Mr. Nymark          595,238             39.68
         Mr. Steel           309,524             20.64
           Total           1,500,000

     After accounting for expenses of the lawsuit, Mr. and Mrs.

Huse and Mr. and Mrs. Steel reported the amounts received in 1996

and 1997 as long-term capital gain on Schedules D, Capital Gains

and Losses, of their Forms 1040, U.S. Individual Income Tax

Return, in the following amounts:

                           1996           1997

     Mr. Huse            $60,342           ---
     Mr. & Mrs. Huse       ---          $557,359
     Mr. & Mrs. Steel     30,001         289,827

On March 30, 2000, respondent issued notices of deficiency to Mr.

and Mrs. Steel for 1996 and 1997, to Mr. Huse for 1996, and to

Mr. and Mrs. Huse for 1997, in which he determined:

     We have reduced the amount of the capital gain that you
     reported by the amounts you received and identified as
     additional stock proceeds. It has been determined that
                                   - 7 -

     these amounts were actually payments received from an
     insurance company in settlement of claims and were not
     proceeds from the sale or disposition of capital
     assets. Since they are not sale proceeds they are
     considered ordinary income.

                 *    *     *      *       *   *     *

     We have increased your ordinary income to include the
     amounts that you reported on Schedule D as capital
     gains and identified as additional stock proceeds. It
     has been determined that these amounts were actually
     payments received from an insurance company in
     settlement of claims and were not proceeds from the
     sale or disposition of capital assets. Since they are
     not sale proceeds they are considered ordinary income.

                                Discussion

     Respondent determined that the source of the proceeds from

the insurance company was the settlement of the lawsuit and that

the proceeds were not received as part of a sale or exchange.

Petitioners contend that the rights under the lawsuit, including

the right to any settlement proceeds, were received as additional

consideration from the sale of their BFI stock.

     “[N]ot every gain growing out of a transaction concerning

capital assets is allowed the benefits of the capital gains tax

provision.    Those are limited by definition to gains from ‘the

sale or exchange’ of capital assets.”          Dobson v. Commissioner,

321 U.S. 231, 231-232 (1944); Pounds v. United States, 372 F.2d

342, 348 (5th Cir. 1967).       A sale or exchange must be shown for a

taxpayer to receive long-term capital gain treatment.          Nahey v.

Commissioner, 111 T.C. 256, 262 (1998), affd. 196 F.3d 866 (7th

Cir. 1999).    This requirement is found in section 1222(3), which
                                 - 8 -

defines long-term capital gain as “gain from the sale or exchange

of a capital asset held for more than 1 year, if and to the

extent such gain is taken into account in computing gross

income.”   Though the statute does not define what is a sale or

exchange, the terms “sale” and “exchange” are given their

ordinary meaning.   Helvering v. William Flaccus Oak Leather Co.,

313 U.S. 247, 249 (1941).

     “It is well established that a compromise or collection of a

debt is not considered a sale or exchange of property because no

property or property rights passes to the debtor other than the

discharge of the obligation.”     Nahey v. Commissioner, supra at

262; see also Pounds v. United States, supra at 349 (“And the

courts have universally recognized that mere collection of an

obligation, purchased or not, does not fit the ordinary meaning

of ‘sale or exchange’.”).    In general, where property or property

rights come to an end and vanish, we have held that a sale or

exchange has not occurred.    Leh v. Commissioner, 27 T.C. 892, 898

(1957), affd. 260 F.2d 489 (9th Cir. 1958).    In this same line of

cases, we recently decided that the settlement of a lawsuit was

not a sale or exchange for purposes of section 1222(3).     Nahey v.

Commissioner, supra.

     In Nahey, two S corporations owned by the taxpayer purchased

the assets of a corporation, including a lawsuit with a value

that could not be ascertained.    The taxpayer settled the lawsuit
                               - 9 -

and reported the proceeds received as capital gains.      We upheld

the Commissioner’s determination that the settlement proceeds

were received as ordinary income.      Id. at 266.   Specifically, we

held where only one party to an income event receives property, a

sale or exchange does not occur.    Id. at 265.

     Petitioners attempt to distinguish our holding in Nahey v.

Commissioner, supra, on the following basis:

     Although Nahey involved a sale and a contingent claim,
     in Nahey, the court was faced with a situation in which
     the purchaser obtained the contingent claim in the
     sale, and pursued the claim to settlement, rather than
     the situation which faces this Court, wherein the
     sellers obtained the claim as part of a transaction in
     which they disposed of their entire stock interest.

Under petitioners’ theory of the case--that they received the

lawsuit from Norway in exchange for their stock in BFI--they were

as much “purchasers” of the lawsuit as the taxpayer in Nahey.

The only difference was in the consideration used.      In Nahey, the

purchasers used cash, whereas petitioners contend that they used

stock in this case.   If petitioners are attempting to make a

distinction between what was a “sale” in Nahey and what is,

purportedly, an “exchange” in this case, we do not believe Nahey

is distinguishable on that basis.   Moreover, petitioners emerged

from the transactions as the holders of the insurance claim and

lawsuit.   They then proceeded to collect on that claim through

settlement of the lawsuit.   Those are the facts which this Court

found essential in Nahey, and those are the facts which we find
                              - 10 -

essential in this case.   Whether collectors on claims are

“sellers” or “purchasers” in prior transactions is a matter which

was irrelevant in Nahey and which is irrelevant in this case,

where the taxpayer is entitled to and receives proceeds in

collection of a claim or in the settlement of a lawsuit.     Indeed,

as in Nahey v. Commissioner, supra at 266 n.4, our focus is on

the receipt of settlement proceeds, not on prior or intervening

transactions.   See also Nahey v. Commissioner, 196 F.3d at 868-

869; Pounds v. United States, supra at 349; Fahey v.

Commissioner, 16 T.C. 105, 108 (1951).

     On the basis of the statutory mandate of section 1222(3),

and our recent opinion in Nahey v. Commissioner, 111 T.C. 256

(1998), we conclude that the settlement of the lawsuit in this

case was not a sale or exchange.8   Accordingly, the proceeds

originating from the settlement of the lawsuit were not received

in a sale or exchange.

     Petitioners argue that the holding in Nahey v. Commissioner,

111 T.C. 256 (1998), is not applicable to this case, because they

     8
      In Helvering v. William Flaccus Oak Leather Co., 313 U.S.
247, 251 (1941), the Court stated: “Congress has expressly
specified the ambiguous transactions which are to be regarded as
sales or exchanges for income tax purposes.” Implicit in this
statement is that certain ambiguous transactions are not
considered sales or exchanges unless expressly specified by
Congress. Congress has identified several transactions which are
to be regarded as sales or exchanges. See, e.g., secs. 302,
1234(a)(1) and (2), 1234A, 1241, 1271(a)(1). However, Congress
has not identified the settlement of a lawsuit as a sale or
exchange for capital gain purposes.
                              - 11 -

received the lawsuit in exchange for their BFI stock.

Petitioners contend that the open transaction doctrine applies,

and under that doctrine the sale or exchange requirement was

satisfied when they received the lawsuit for their stock.    They

emphasize that the receipt of proceeds in an open transaction is

relevant only in establishing the amount realized.

     We shall first deal with petitioners’ contention that they

received the lawsuit in exchange for their stock.    As a general

rule, a taxpayer is bound by the form of the transaction that he

has chosen.   Framatome Connectors USA, Inc. v. Commissioner, 118

T.C. 32, 47 (2002); Estate of Durkin v. Commissioner, 99 T.C.

561, 571-572 (1992).9   A taxpayer is ordinarily free to organize

his affairs as he sees fit; however, once having done so, he must

accept the tax consequences of his choice, whether contemplated

or not, and may not enjoy the benefit of some other route he

might have chosen but did not.   Commissioner v. Natl. Alfalfa

Dehydrating & Milling Co., 417 U.S. 134, 149 (1974).    In this

     9
      See also In re Steen, 509 F.2d 1398, 1402 n.4 (9th Cir.
1975):

     As a general rule, the government may indeed bind a
     taxpayer to the form in which he has factually cast a
     transaction. The rule exists because to permit a
     taxpayer at will to challenge his own forms in favor of
     what he subsequently asserts to be true “substance”
     would encourage post-transactional tax-planning and
     unwarranted litigation on the part of many taxpayers
     and raise a monumental administrative burden and
     substantial problems of proof on the part of the
     government. * * * [Citations omitted.]
                               - 12 -

case, the form of the transactions was a distribution of the

lawsuit from BFI to petitioners followed by a sale of stock by

petitioners to Norway.

     The stock sale agreement states that “Purchaser acknowledges

that the following transactions may occur between the

Shareholders and the Company prior to the Closing Date.”    Among

the transactions listed under that provision is the authorized

assignment of the lawsuit to petitioners:    “The Company may

transfer to the Shareholders (or their designee) the rights

arising out of a lawsuit (the “Lawsuit”) commenced by the Company

in September 1995”.    These provisions contemplate a distribution

of the lawsuit from BFI to petitioners before the stock sale

transaction.

     Further, the actual assignment of the lawsuit to petitioners

took the form of a distribution from BFI that did not involve

Norway.    In a document entitled “Written Consent in Lieu of

Meeting of Shareholders and Directors”, Messrs. Huse, Nymark, and

Steel, as directors of BFI, consented to the assignment of the

lawsuit.    A document entitled “Assignment Agreement”, signed by

Mr. Nymark, as president of BFI, and Mr. Huse, as president of

Ottar, assigned the lawsuit to Ottar for the benefit of

petitioners.    The form of the assignment was a distribution from

BFI to petitioners, not a transfer of the lawsuit by Norway to

petitioners for their stock.
                               - 13 -

     Petitioners contend that the distribution of the lawsuit was

“integrally related” to the stock sale, and the lawsuit should be

treated as received by petitioners as part of the sale of their

BFI stock.    Respondent, on the other hand, argues that the

distribution of the lawsuit and the sale of the stock were

separate transactions.

     Assuming arguendo that petitioners are not bound to the form

of the transactions chosen, petitioners cannot ignore the

unambiguous terms of a binding agreement unless they present

“strong proof”, which is more than a preponderance of the

evidence, that the terms of the written instrument do not reflect

the actual intentions of the contracting parties.    Ullman v.

Commissioner, 264 F.2d 305, 308-309 (2d Cir. 1959), affg. 29 T.C.

129 (1957); Norwest Corp. & Subs. v. Commissioner, 111 T.C. 105,

142 (1998).    And, generally, where a taxpayer asserts that an

allocation of consideration is other than that specified in a

contract, we have held that the taxpayer must present “strong

proof” that the asserted allocation “is correct based on the

intent of the parties and the economic realities.”    Meredith

Corp. & Subs. v. Commissioner, 102 T.C. 406, 438 (1994).10     The

     10
      Several Courts of Appeals have applied the more stringent
standard enunciated in Commissioner v. Danielson, 378 F.2d 771,
777 (3d Cir. 1967), vacating and remanding 44 T.C. 549 (1965):
where a specific allocation of consideration is contained in a
written agreement, the taxpayer “may not, absent a showing of
fraud, undue influence and the like on the part of the other
                                                   (continued...)
                               - 14 -

strong proof rule applies only in the case of an unambiguous

agreement.    Gerlach v. Commissioner, 55 T.C. 156, 169 (1970);

Estate of Hoffman v. Commissioner, T.C. Memo. 2001-109.

     In the stock sale agreement, Norway and petitioners agreed

to a $9 million purchase price for the stock.    The agreement

states:   “The Purchase Price for the Shares shall be Nine Million

Dollars”.    The agreement does not disclose any additional

consideration owing from Norway to petitioners, except for

certain adjustments to be made to the purchase price following

the completion of an audited financial statement.     Further, the

payment terms are very explicit and do not mention the lawsuit or

any settlement proceeds.    See appendix A.   We find that the stock

sale agreement was unambiguous regarding the allocation of

consideration.    The provision of the agreement which authorized

the assignment of the lawsuit to petitioners does not treat the

lawsuit, or any proceeds therefrom, as additional consideration

from Norway.    Indeed, that provision and the assignment agreement

effectively sever BFI’s and Norway’s relationship to the lawsuit.

     Other documents in the record indicate that the parties did

not contemplate that the settlement proceeds be viewed as


     10
      (...continued)
party, challenge the allocation for tax purposes.” However, the
Court of Appeals for the Ninth Circuit, to which this case is
appealable, has yet to adopt this standard. We shall, therefore,
apply the strong proof rule. Elrod v. Commissioner, 87 T.C.
1046, 1065-1066 (1986).
                              - 15 -

additional consideration.   On February 1, 1996, Bochica filed an

affidavit with the State of Washington which was signed by Mr.

Steel as a general partner of Bochica.   That document describes

the acquisition of the BFI stock as follows:

          The purchase price of the shares will be Nine
     Million Dollars ($9,000,000), subject to adjustment to
     reflect the amount of the Company’s Net Liability and
     the Company’s Net Deferred Taxes, as those terms are
     defined in the Stock Purchase Agreement, as shown by
     post-closing audited financial statements. In
     addition, Norway Seafoods AS will enter into
     noncompetition agreements with two of the partners of
     BOCHICA Partners. The consideration for the
     noncompetition agreements will be Three Million Dollars
     ($3,000,000).

No other consideration is cited in that document.   In an

agreement dated June 20, 1996, a final purchase price was

established after adjustments were made under paragraph 2.3 of

the stock sale agreement.   That document states:

          2.1 Adjustment to Purchase Price. The parties
     agree that in lieu of any purchase price adjustments
     pursuant to Section 2.3 of the Stock Purchase Agreement
     the purchase price of Nine Million Dollars
     ($9,000,000.00) will be increased to $9,325,000.00, and
     will not be further adjusted.

          2.2 Payment of Escrow Funds. Within 24 hours of
     the execution of this Agreement by the Parties,
     Purchaser will sign escrow instructions directing the
     Escrow Agent to disburse to BOCHICA Partners the funds
     in the Escrow Account established pursuant to
     subsection 2.2.2 of the Stock Purchase Agreement.

          2.3 Payment of Purchase Price Adjustment. Within
     five business days of the execution of this Agreement
     by the Parties, Purchaser will pay BOCHICA Partners
     $325,000.00.

The record in this case shows that the only consideration coming
                               - 16 -

from Norway was the $9 million in cash and the subsequent

$325,000 adjustment amount.

     Petitioners argue that the distribution of the lawsuit and

the stock sale to Norway should be integrated as a single

transaction and that the lawsuit should be treated as additional

consideration from Norway for their stock.    In support of this

argument, petitioners state:

     the parties’ agreement relative to the distribution of
     the claim to the selling shareholders was set forth in
     the Stock Purchase Agreement itself, so there could be
     no closer relationship between the sale of the stock
     and the distribution of the rights under the insurance
     lawsuit.

This alone does not convince us that the distribution should be

integrated with the stock transaction.    Indeed, petitioners have

overemphasized the role that the stock sale agreement played in

the rights and obligations “relative” to the lawsuit.

     The stock sale agreement merely acknowledged that the

assignment of the lawsuit could be made without affecting the

overall sales transaction.    In fact, the stock sale agreement

discusses the assignment of the lawsuit in a paragraph entitled

“Contemplated Transactions Out of the Ordinary Course of

Business” and provides in a subparagraph thereunder:

          The Company may transfer to the Shareholders (or
     their designee) the rights arising out of a lawsuit
     (the “Lawsuit”) commenced by the Company in September
     1995, * * *; provided that, (i) such rights are
     assignable; (ii) all steps are taken, including without
     limitation amending the complaint, so that the Company
     is no longer a party to the Lawsuit; (iii) the Company
                                - 17 -

     is not obligated in any manner to pursue the Lawsuit;
     and (iv) the Company is not obligated to execute or
     file motions, pleadings, affidavits or any other
     documents in connection with the Lawsuit. If the
     rights under the Lawsuit are assigned, then the
     Shareholders agree to indemnify, defend and hold the
     Company and Purchaser harmless from any and all costs,
     expenses (including without limitation reasonable
     attorneys fees), claims, counterclaims, and crossclaims
     which may arise in connection with, or as a result of,
     the Lawsuit. Purchaser agrees that it will make
     reasonable efforts as requested by Shareholders to
     assist in the Lawsuit; provided that, such assistance
     does not require Purchaser to incur expense or
     interrupt the Company’s operations. It is expected
     that the nature of the assistance requested by
     Shareholders will be to facilitate communication
     between the Shareholders and persons who were employed
     by the Company during the times relevant to the lawsuit
     and to provide reasonable access to and copies of
     relevant documents.

Similarly, the assignment agreement states that BFI “is

contemplating a sale of all of its issued and outstanding stock

to Norway”.   See appendix B.   The agreement does not restrict or

otherwise condition the assignment of the lawsuit on the sale of

the stock to Norway.   Conceivably, the assignment or the stock

sale might have occurred without the occurrence of the other

event.   The distribution of the lawsuit and the stock sale may

have been interrelated; however, the “closer relationship” that

petitioners allude to simply does not exist.

     In their petitions to this Court, petitioners allege:

          n. Identifying a specific value for the claim at
     the time Norway Seafoods and BOCHICA Partners were
     negotiating a price for the sale of the stock, which
     both sides felt was fair, was difficult, and proved to
     be a stumbling block to arriving at an agreement for
                             - 18 -

     the sale of the stock in Birting Fisheries, Inc. to
     Norway Seafoods.

          o. Rather than derailing the entire sale of the
     stock in Birting Fisheries, Inc., due to their
     inability to arrive at a value for the claim which
     would be reflected in the purchase price stated in the
     Stock Purchase Agreement, Norway Seafoods and BOCHICA
     Partners agreed that the claim itself would be
     transferred to the owners of the stock in Birting
     Fisheries, Inc. who were selling their stock to Norway
     Seafoods, or to the designee of those shareholders.

          p. The transfer of the claim to or for the
     benefit of the shareholders of Birting Fisheries, Inc.
     was intended by the parties to the Stock Purchase
     Agreement as a solution to the problem of their
     inability to agree upon the value of the claim for
     inclusion in the financial statements of Birting
     Fisheries, Inc. upon which the purchase price was to be
     based.

Assuming we accept petitioners’ statements of fact as true, and

that the sale of stock to Norway precipitated the distribution of

the lawsuit by BFI, we cannot conclude that these factors require

the characterization petitioners suggest.   See Nahey v.

Commissioner, 196 F.3d at 869.   If anything, those factors group

this case with cases dealing with the distribution of unwanted

assets before a stock transaction.    See, e.g., West v.

Commissioner, 37 T.C. 684 (1962); Coffey v. Commissioner, 14 T.C.

1410 (1950) (wherein we declined to treat corporate distributions

to the taxpayers as part of the purchase price for their stock).

     If petitioners are correct that the substance of the

transactions herein is the receipt of the lawsuit as part of the

BFI stock sale, we must recognize that BFI first distributed the
                              - 19 -

lawsuit to Norway, and then Norway transferred the lawsuit to

petitioners for their BFI stock.   This might result in tax

consequences to both BFI, see sec. 311(b), and Norway either at

the time of the distribution or at the time of the settlement.

     In Henry Schwartz Corp. v. Commissioner, 60 T.C. 728, 738-

739 (1973), we recognized the interplay of the tax effects of

particular transactions and their intended structure, stating:

          In this regard it is important to note that the
     parties to the agreement, Henry and Sydell and Suval,
     were dealing at arm’s length and indeed had conflicting
     interests with respect to the treatment of the policy.
     Thus, if the distribution of the policy was considered
     as part of the overall price for the stock, and the
     distribution was from Plastic Calendering to Suval and
     then to Henry, then Suval might be charged with a
     dividend on the initial distribution of the policy to
     it. See Frithiof T. Christensen, 33 T.C. 500, 504-505.
     On the other hand, if the policy were distributed to
     Henry by Plastic Calendering, not as part of the
     purchase price for the stock but simply because the
     purchaser did not want this asset and the sellers had
     agreed that it would not be part of the sale, then
     Henry might be charged with receipt of a dividend. See
     John R. West, 37 T.C. 684, 687. Thus, the agreement
     between the parties represents an accurate reflection
     of an arm’s-length transaction, and this agreement
     makes it clear that the policy was distributed from
     Plastic Calendering to Suval and then to Henry.

Surely, if petitioners’ characterization of the transactions in

this case were correct, a reduced purchase price would have been

negotiated reflecting BFI’s or Norway’s tax liability for those

amounts.   Instead, the purchase price continued to reflect the

book value of the assets and liabilities of BFI.   It appears from

the record that the parties to the stock sale were relatively
                               - 20 -

sophisticated and would have understood that the tax benefit to

one party might result in an adverse tax effect to the other

party.11   We cannot conclude that the parties contemplated or

intended the lawsuit be received by petitioners from Norway as

part of the purchase price for their stock.

     Petitioners argue that where “simultaneous mutually binding

interdependent transactions result in the termination of a

shareholder’s stock interest in a corporation”, the transactions

should be integrated, citing In re Steen, 509 F.2d 1398 (9th Cir.

1975); Casner v. Commissioner, 450 F.2d 379 (5th Cir. 1971),

affg. in part, revg. in part and remanding T.C. Memo. 1969-98;

Smith v. Commissioner, 82 T.C. 705 (1984); and Roth v.

Commissioner, T.C. Memo. 1983-651.      On the basis of those cases,

petitioners argue that the lawsuit was received in substance as

part of the sale of the BFI stock to Norway.     The import of the

cases petitioners cite is that on the specific facts presented it


     11
      In Casner v. Commissioner, 450 F.2d 379, 398 (5th Cir.
1971), affg. in part, revg. in part and remanding T.C. Memo.
1969-98, the Court of Appeals for the Fifth Circuit observed:

          In the instant case, both the selling stockholders
     and the buying stockholders have denied tax liability
     for the cash distributions * * * made to the selling
     stockholders. However, this Court recognizes that the
     selling stockholders and the buying stockholders cannot
     so manipulate their transactions or so frame their
     transactions as to result in the dividend disappearing
     with no one taxable for the receipt of the cash
     dividends or cash distributions. Under the statute,
     the cash dividends or cash distributions are inexorably
     someone’s income.
                               - 21 -

was more appropriate to view the “distribution” as a part of the

related stock transaction.    However, the facts of those cases are

distinguishable from the facts of this case.

     In In re Steen, supra at 1403, the Court of Appeals for the

Ninth Circuit relied upon a finding that the stock sale agreement

stated a reduced purchase price and that this reduction was

attributable to a tax contingency provision contained in a

related agreement with the purchaser:    “Further, the conclusion

may be fairly drawn that the tax contingency provision reflects

part of the purchase price for assets.    Depending upon the taxes

paid, the value of those assets and the amount to be paid to the

vendors was correspondingly increased or diminished.”    In the

instant case, the purchase price did not correlate to the amounts

actually recovered under the lawsuit.    Under the stock sale

agreement, Norway agreed to pay $9 million to Bochica for the

stock.    No matter the amount petitioners actually collected on

the insurance claim, the purchase price would not be adjusted.

Thus, if they collected zero on the lawsuit, Norway’s obligation

was to remain $9 million.    Further, the parties did not agree to

any independent means of adjusting the purchase price if the

lawsuit was not distributed by BFI.12



     12
      In In re Steen, 509 F.2d 1398 (9th Cir. 1975), the tax
contingency payments were paid by the purchaser of the stock. In
this case, neither the underlying lawsuit nor any proceeds
therefrom originated with Norway, either directly or indirectly.
                                - 22 -

     In Roth v. Commissioner, supra, we applied the step

transaction doctrine to integrate a redemption of stock with a

sale of stock.     An important factor in our decision was that the

taxpayer’s interest in the corporation was completely terminated

simultaneously with the cash distribution.    In this case, the

assignment of the lawsuit and the stock sale did not occur

simultaneously.    Bochica and Norway agreed that the contemplated

transactions in the stock sale agreement were to occur at

different times.    The distribution of the lawsuit was to occur at

some point before the transfer of the stock to Norway.    Further,

the transactions were to occur between different parties.    The

lawsuit was to be transferred in the form of a distribution from

BFI to Bochica, and the stock transfer was to be in the form of a

sale of the stock by Bochica to Norway.    The transactions may

have occurred on the same day; however, they were not

simultaneous.    Indeed, petitioners stipulated that the assignment

of the lawsuit occurred “prior to the transfer of stock”.    In

Smith v. Commissioner, supra at 717, we held that certain

“commissions” paid to the taxpayer in conjunction with a sale of

his stock were received as consideration for that stock.13    We


     13
      In Smith v. Commissioner, 82 T.C. 705 (1984), the stock
purchase agreement allocated amounts to be paid to the taxpayer
between the purchase price for the stock and “commissions due”.
However, we concluded that the stock sale agreement when
construed with a subsequent addendum was ambiguous, and we
declined to apply either the standard enunciated in Commissioner
                                                   (continued...)
                                - 23 -

found that the purchasers intended to use the corporation’s

income as a “financing tool” for a portion of the purchase price

of the selling shareholders stock.       Id. at 717-718.   In this

case, there is no evidence to suggest that Norway required the

assignment of the lawsuit in order to finance the acquisition of

the BFI stock, and the purchase price of the stock was not

reduced to reflect the lawsuit’s assignment.      The transactions in

this case were not designed as a “financing tool”.

     Petitioners also suggest that where the corporation would

not have made the distribution but for the stock sale, the

transactions should be integrated.       Petitioners cite Casner v.

Commissioner, supra at 397; however, even Casner requires a

closer link to the purchase of stock than petitioners’ “but for”

test.     Indeed, the Court of Appeals for the Fifth Circuit cited a

variety of factors to support its view that the distribution and

the stock sale transaction should be integrated:      (1) The

“dividend” distribution and the stock sale depended on one

another; (2) the purpose of the distribution was to permit the

taxpayers to sell all their stock and for the buying shareholders

to finance their purchase of that stock; (3) the parties intended

that the distributions be treated as part of the purchase price



     13
      (...continued)
v. Danielson, 378 F.2d 771 (3d Cir. 1967), or the strong proof
rule. Id. at 714-715. In the instant case, we conclude that the
strong proof rule applies.
                                - 24 -

for the stock.    Id. at 397-399.   Those factors are not found on

the record in this case.   Although the distribution of the

lawsuit and the stock sale were related, they were not

interdependent.   The purpose of the distribution in this case was

perhaps to accommodate the sale of the stock to Norway; however,

the distribution was not a “financing tool” as discussed above.

Finally, the record does not show that the parties intended the

lawsuit to be received from Norway by petitioners as part of the

purchase price for the stock.    Indeed, the various agreements

involving petitioners, Norway, and BFI suggest the exact

opposite.

     To hold that petitioners received the settlement proceeds as

additional consideration for their BFI stock would require us to

engage in some fictional construct that defies the realities and

expectations of the parties to the stock sale transaction.    We

shall not engage in such a construct, and we hold that

petitioners did not receive the settlement proceeds as additional

consideration for their stock, but rather as ordinary income.14


                                           Decisions will be entered

                                      for respondent.



     14
      Because we decide that petitioners did not receive the
settlement proceeds as part of a sale or exchange, we shall not
discuss respondent’s alternative arguments that the lawsuit was
not a capital asset and that the settlement proceeds were
received as part of a dividend distribution from BFI.
                              - 25 -

                            APPENDIX A
                       STOCK SALE AGREEMENT

     2.   Purchase and Sale of Shares

         2.1   Sale of Shares. Subject to the terms and
conditions set forth in this Agreement, and in consideration for
the Purchase Price set forth in Section 2.2 below, Shareholders
will sell and deliver to Purchaser at the time of Closing a total
of One Thousand (1,000) shares of the Company’s Common Stock (the
“Shares”). Each Shareholder will sell and deliver to Purchaser
the number of Shares set forth opposite such Shareholder’s name
on Exhibit A hereto and deliver duly endorsed stock certificates
or certificates accompanied by executed assignments separate from
the certificates.

         2.2 Purchase Price. The Purchase Price for the Shares
shall be Nine Million Dollars ($9,000,000.00), subject to the
adjustment procedure described in Subsection 2.3 below. The
Purchase Price shall be payable as follows:

          2.2.1 One Million Five Hundred Thousand Dollars
     ($1,500,000.00) in cash, which shall be paid to the
     Shareholders at Closing;

          2.2.2 Two Million Three Hundred Thousand Dollars
     ($2,300,000.00) in cash, which shall be paid into an
     escrow account * * * with First Interstate Bank of
     Washington, N.A. * * * at Closing and be used to pay
     the balance of the Purchase Price pursuant to
     Subsection 2.3 below; and

          2.2.3 The balance of Five Million Two Hundred
     Thousand Dollars ($5,200,000.00) shall be paid in
     accordance with the terms of four (4) promissory notes,
     each in the form of Exhibit B, made payable to BOCHICA
     Partners in the following amounts: $2,063,492.00;
     $1,031,746.00; $1,031,746.00; and $1,073,016.00,
     respectively. The obligations under the Promissory
     Notes shall be secured by an irrevocable letter of
     credit in the amount of $5,239,000.00 to be issued by
     any one of Den norske Bank, Industri & Skipsbanken,
     Union Bank of Norway, or Christiania Bank og
     Kreditkasse in a form acceptable to Shareholders, which
     acceptance shall not be unreasonably withheld.

          2.3 Adjustment to Purchase Price. Upon execution of
this Agreement, Shareholders shall instruct the accounting firm
                             - 26 -

of Stetson Guske & Koenes, P.L.L.C. (“SG&K”) to conduct an audit
of the Company’s financial statements, which audit shall be
completed on or before April 30, 1996. The results of the audit
* * * shall be reviewed by KPMG Peat Marwick L.L.P. (“KPMG”) and,
provided that KPMG provides to Purchaser a written report
addressed to the Company stating that KPMG has no material
disagreement with the balance sheet and income statement portions
of the Audited Financial Statements, the Purchase Price shall be
adjusted as set forth in Subsections 2.3.1, 2.3.2 or 2.3.3 below
(as applicable). In connection with KPMG’s review of the Audited
Financial Statements, KPMG shall be provided full access to: (i)
all of SG&K’s working papers relating to the Audited Financial
Statements; and (ii) all of the Company’s books and records. If
KPMG disagrees with the Audited Financial Statements, then the
firm of Price Waterhouse shall be retained to conduct an
independent audit, and the results of that audit shall be the
governing Audited Financial Statements and shall be binding upon
the parties. All of KPMG’s fees and expenses shall be borne by
Purchaser, and all of Price Waterhouse’s fees and expenses shall
be borne 50% by Shareholders and 50% by Purchaser. Based on the
results of the audit, the Purchase Price shall be adjusted as
follows:

          2.3.1 If the amount of the Company’s Net
     Liability, as reflected in the Audited Financial
     Statements, is $17,074,829 (i.e., $50,000 more than the
     Net Liability as reflected in the Balance Sheet) or
     more, then the Purchase Price shall be reduced by the
     amount by which the Net Liability, as reflected in the
     Audited Financial Statements, exceeds $17,024,829. As
     used in this Section 2.3, “Net Liability” means the
     amount equal to Total Long Term Debt (excluding
     Deferred Income Taxes) plus Total Current Liabilities
     minus Total Current Assets; provided, however, that if
     the Audited Financial Statements reflect any reserve
     for the class action litigation, Lane et al v. Birting
     Fisheries, Inc., which is presently being maintained
     against the Company in United States District Court
     under Cause No. C93-827D, then the amount of such
     reserve shall not be included in Total Current
     Liabilities in determining Net Liability. “Total Long
     Term Debt”, “Deferred Income Taxes”, “Total Current
     Liabilities”, and “Total Current Assets” shall be
     determined by reference to the balance sheet contained
     in the Audited Financial Statements.

          2.3.2 If the amount of the Company’s Net
     Liability, as reflected in the Audited Financial
                        - 27 -

Statements, is reflected in the Balance Sheet) or less,
then the Purchase Price shall be increased by the
amount by which the Net Liability, as reflected in the
Audited Financial Statements is less than $17,024,829.

     2.3.3 If the amount of the Company’s Net Deferred
Taxes, as reflected in the Audited Financial
Statements, is greater than $4,100,000, then the
Purchase Price shall be reduced by the amount by which
Net Deferred Taxes exceeds $4,100,000. As used in this
Section 2.3.3, “Net Deferred Taxes” means the amount
equal to Deferred Income Taxes less Long Term Deferred
Income Tax Assets. “Deferred Income Taxes” and “Long
Term Deferred Income Tax Assets” shall be determined by
reference to the balance sheet contained in the Audited
Financial Statements.

     If the Purchase Price is reduced pursuant to
Subsection 2.3.1 above, then, immediately following the
receipt of the written approval from KPMG (or the
receipt of the audit by Price Waterhouse, as the case
may be), the funds in the Escrow Account, less any
amounts required by the adjustment required by
Subsection 2.3.1 above, shall be disbursed to
Shareholders, and the remaining balance in the escrow
account shall be disbursed to Purchaser. If the
Purchase Price has been increased pursuant to
Subsection 2.3.2 above, then all funds in the Escrow
Account shall be disbursed to Shareholders and
Purchaser shall, within five (5) business days, pay any
remaining portion of the Purchase Price (excluding the
portion evidenced by the Promissory Notes) to
Shareholders in cash.
                             - 28 -

                           APPENDIX B
                      ASSIGNMENT AGREEMENT

   BIRTING FISHERIES, INC., a Washington corporation (“BFI”) and
OTTAR INC., formerly known as BIRTING, INC., a Washington
corporation (“BI”) enter into this Assignment Agreement this 16
day of February, 1996.

     WHEREAS, BFI has commenced a lawsuit against Richard Chown,
an underwriter at Lloyd’s London, et al., in United States
District Court, Western District of Washington, under Cause No.
C95-1350D (“Claim”); and

     WHEREAS, BFI is contemplating a sale of all of its issued
and outstanding stock to Norway Seafoods A/S, a Norwegian
corporation pursuant to the terms and conditions set forth in
that certain Stock Purchase Agreement dated January 25, 1996
(“Purchase Agreement”).

     NOW, THEREFORE, for and in consideration for assignee’s
assumption of liabilities and future expenses set forth below and
other good and valuable consideration, the parties agree as
follows:

1.   ASSIGNMENT. BFI hereby assigns to BI all of BFI’s right,
     title and interest in this Claim however awarded, whether in
     settlement, trial or appeal.

2.   BI OBLIGATIONS. BI shall take such steps as may be
     necessary to remove BFI as a party to the Claim, including,
     without limitation, amending the complaint. After the
     closing date, as that term is defined in the Purchase
     Agreement, BI agrees that BFI shall have no obligation to
     pursue the Claim or to execute or file any motions,
     pleadings, affidavits or any other documents in connection
     with the Claim. In the event BI elects to pursue the Claim,
     BI shall be responsible for the payment of all fees, costs,
     and expenses (collectively “Expenses”) incurred by BI in
     connection with pursuit of the Claim from and after the
     closing of the sale of Birting Fisheries, Inc.’s stock by
     BOCHICA Partners, which Expenses would otherwise be payable
     by BFI.

3.   DISCRETION OF BI. BI shall be entitled to pursue the Claim
     as it sees fit, as determined in its sole discretion,
     including dropping the Claim. BFI forever waives any right
     to participate or be involved in any fashion in the pursuit
                             - 29 -

     of the Claim other than BFI’s obligations in Paragraph 4
     below.

4.   COOPERATION OF BFI. BFI agrees to assist BI in pursuing the
     Claim as set forth in Section 6.4.8 of the Purchase
     Agreement.

5.   INDEMNIFICATION AND HOLD HARMLESS. BI shall indemnify,
     defend and hold BFI harmless from any costs, expenses
     (including without limitation reasonable attorney fees),
     claims counterclaims, and crossclaims which may arise in
     connection with, or as a result of, the Claim.
