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If the taxpayer incurs a debt in consideration for the sale
or use of property, or takes property subject to a debt, and no
debt proceeds are disbursed to the taxpayer, the debt is treated
as if the taxpayer used an amount of the debt proceeds equal to
the balance of the outstanding debt to make an expenditure for
such property. Sec. 1.163-8T(c)(3)(ii), Temporary Income Tax
Regs., 52 Fed. Reg. 25001 (July 2, 1987).
Petitioner contends that the interest he paid to Mrs.
Seymour is properly allocable to the assets he received from her
incident to their divorce. Respondent contends that because the
assets were transferred incident to a divorce, the treatment of
the transaction under section 1041 prevents the allocation of
petitioner's indebtedness to such assets, and the interest should
be allocated to his personal obligation and, thus, characterized
as nondeductible personal interest under section 163(h)(1).
Section 1041(a) provides that no gain or loss shall be
recognized on a transfer of property from an individual to a
spouse, or former spouse, if the transfer is incident to divorce.
See Balding v. Commissioner, 98 T.C. 368, 370 (1992); Gibbs v.
Commissioner, T.C. Memo. 1997-196. In the case of such a
transfer, section 1041(b) provides that the property shall be
treated as acquired by the transferee by gift and the basis of
the property shall be the adjusted basis of the transferor.
Respondent appears to argue that, since section 1041(b) provides
that transfers incident to a divorce are to be treated as gifts,
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