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interest income received by a spouse. We noted that section 1041
“does not provide for the exclusion of income; it provides for
the nonrecognition of gain or loss under the circumstances
described therein.” Id. In Gibbs, the taxpayer recognized that
each payment she received under the terms of the divorce decree
consisted partially of principal and partially of interest. The
Court held that the principal portion and interest portion of the
installment payments the petitioner received were “two distinct
items that give rise to separate Federal income tax
consequences.” Id. The principal portion was subject to section
1041, but the interest portion was not. Id.
The Separation Agreement provided that Mr. Shearin would
ultimately determine the division between principal and interest
for both petitioner and Dr. Capps. We conclude that Dr. Capps
agreed to pay petitioner monthly payments which included unstated
interest to compensate petitioner for payments made over time,
and, pursuant to the Separation Agreement, Mr. Shearin was
delegated and performed the task of “stating” such interest for
tax purposes. Petitioner acquiesced in the allocation made by
Mr. Shearin as is evident by the fact that she included the
amount of her proceeds allocated to interest on her respective
Federal income tax returns.
We hold that the portion of petitioner’s monthly payments
which was allocated by Mr. Shearin to principal is not taxable to
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