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any debt incurred with respect to such transfers cannot be
allocated to the property acquired. We do not agree.
In Gibbs v. Commissioner, supra, the taxpayer failed to
include as income the amount of interest she received from her
former spouse pursuant to a decree of divorce. Although the
taxpayer conceded that a portion of each payment she received
represented interest, she argued that the payments received from
her former spouse were in exchange for her interest in certain
property transferred incident to divorce and, thus, excludable
from her income under section 1041. In Gibbs v. Commissioner,
supra, we stated that the interest portion of the payments the
taxpayer received pursuant to the divorce decree, and any gain
she might have realized upon the transfer of the property to her
former spouse, "are two distinct items that give rise to separate
Federal income tax consequences." Consequently, we held that
section 1041 has no application to the interest portion of the
payments received by the taxpayer and that such interest must be
included in the taxpayer's income in the year received. Id.
In Notice 88-74, 1988-2 C.B. 385, the Internal Revenue
Service (IRS) announced that for debt incurred to acquire an
interest in a residence incident to divorce or legal separation,
regulations will provide that, in general, such debt will be
eligible to be treated as debt incurred in acquiring a residence
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