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paid and also argues that she is entitled to one-half of the
income tax credit attributable to that income.
Respondent has determined a deficiency in petitioner's
income tax for 1991 on the ground that the military retirement
payment of $10,107 received by petitioner in 1991 and omitted
from her return is gross income under section 61 and should have
been reported as income on such return. Respondent's
determinations are presumed correct, and petitioner has the
burden of proving otherwise. Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933).
In general, State law governs the creation of legal
interests and rights in property and Federal law determines the
Federal tax consequences of transactions affecting such rights.
United States v. Mitchell, 403 U.S. 190 (1971); Estate of Gamble
v. Commissioner, 69 T.C. 942, 948 (1978).
As a preliminary matter, we conclude that the payment at
issue in this case represents petitioner's community property
interest in Kenneth's disposable retired pay. New Mexico is a
community property State. N.M. Stat. Ann. sec. 40-3-6 to 40-3-17
(Michie 1994); Ruggles v. Ruggles, 116 N.M. 52, 62, 860 P.2d 182,
192 (1993). Community property is "property acquired by either
or both spouses during marriage which is not separate property."
N.M. Stat. Ann. sec. 40-3-8B. Separate property includes
"property designated as separate property by a judgment or decree
of any court having jurisdiction" and "property designated as
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