                         T.C. Memo. 1997-196



                       UNITED STATES TAX COURT



                      LINDA GIBBS, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 26551-95.                    Filed April 29, 1997.



       John M. Bjornstad, for petitioner.

       Albert B. Kerkhove and Mark E. O'Leary, for respondent.


                          MEMORANDUM OPINION


       CARLUZZO, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.    Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue.      All

Rule references are to the Tax Court Rules of Practice and

Procedure.    Respondent determined deficiencies in petitioner's
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1991, 1992, and 1993 Federal income taxes in the amounts of

$2,520, $1,699, and $1,232, respectively.

     The issue for decision is whether petitioner must include in

income interest paid to her by her former spouse pursuant to a

decree of divorce.

Background

     This case was submitted fully stipulated.    The stipulated

facts are incorporated into our findings by this reference.     At

the time that the petition was filed in this case, petitioner

resided in Hartley, Iowa.

     On November 20, 1976, petitioner married Bertrum C. Gibbs,

Jr. (Mr. Gibbs).   During their marriage they opened and operated

a convenience store called SuperAmerica.    As best as can be

determined from the record, SuperAmerica was organized as a sole

proprietorship.

     By Judgment and Decree dated February 12, 1990 (the divorce

decree), the Iowa District Court for O'Brien County (the district

court) dissolved the marriage between petitioner and Mr. Gibbs.

In connection with their divorce, petitioner and Mr. Gibbs agreed

upon the division of much of the marital property; however, the

value and division of SuperAmerica was contested in the divorce

proceeding.   After determining the value of SuperAmerica to be

$250,000, the district court concluded that Mr. Gibbs should

retain ownership of it upon the payment of $122,500 to petitioner

for her equitable interest in the property.    Specifically, the
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district court concluded and found, as stated in the divorce

decree:
          Because in this case * * * [petitioner and Mr.
     Gibbs] have worked extremely hard and have contributed
     their joint efforts towards the accumulation of
     property, it is the feeling of the court that an equal
     division of their property is justified. * * * [Mr.
     Gibbs] should certainly retain ownership of the
     SuperAmerica station. He should, however, pay to * * *
     [petitioner] a sum of money sufficient to essentially
     equalize the property division. To equalize the
     division, * * * [Mr. Gibbs] should pay to * * *
     [petitioner] the sum of $122,500. It would be
     extremely difficult for * * * [Mr. Gibbs] to pay said
     money in cash, and, consequently, the decree will
     provide for payment of $22,500 at this time with the
     balance to be paid over a ten-year period, with
     interest at 9 percent. Equal installments of $15,583
     will be required and will be ordered to be paid
     annually. To secure said payments, * * * [Mr. Gibbs]
     shall provide * * * [petitioner] with a mortgage on the
     property. [Emphasis added.]

     Based upon the foregoing conclusions and findings, in the

divorce decree, the district court ordered:

     [Mr. Gibbs] shall pay * * * [petitioner] the sum of
     $122,500. Payment shall be $22,500 on or before March
     15, 1990, with the balance to be paid in ten
     installments of $15,583 each, the first of which will
     be due March 15, 1991, with payments continuing
     annually for nine years, making ten installment
     payments in all. * * * [Petitioner's] attorney shall
     prepare a note evidencing said payments and a mortgage
     covering the SuperAmerica property, which shall be
     executed by * * * [Mr. Gibbs] and delivered to * * *
     [petitioner's] attorney.

     In accordance with the divorce decree, in each of the years

in issue, Mr. Gibbs paid $15,583 to petitioner.   The parties

stipulated that the payments consisted of the following:1


     1
        We note that the sum of the interest and principal for
each year does not equal $15,583. We assume that the $1
discrepancy is the result of rounding.
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            Year         Principal               Interest
            1991          $6,582                  $9,000
            1992           7,174                   8,408
            1993           7,820                   7,762

Petitioner, who computed her Federal income tax liabilities for

the years in issue using the cash receipts and disbursements

method of accounting, did not include any of the above-mentioned

payments, or portions thereof, in the income she reported on her

1991, 1992, or 1993 Federal income tax returns.

     In the notice of deficiency, respondent determined that the

interest portion of each payment petitioner received from Mr.

Gibbs pursuant to the divorce decree must be included in income

in the year received and adjusted her income for each year in

issue accordingly.

Discussion

     Unless specifically excluded, section 61 defines gross

income to mean income from whatever source derived, including

interest.    Sec. 61(a)(4).   Normally, interest is defined to

include a payment made to compensate for the delay in receipt of

an amount otherwise due.      Aames v. Commissioner, 94 T.C. 189, 193

(1990).   In many cases, interest is paid and received pursuant to

a contractual arrangement, but a taxpayer can realize interest

income from nonconsensual withholding of property as well.

320 East 47th St. Corp. v. Commissioner, 243 F.2d 894, 896 (2d

Cir. 1957), revg. on another issue 26 T.C. 545 (1956).
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     For Federal income tax purposes, interest is generally

treated differently than the underlying obligation to which it

relates.   Wheeler v. Commissioner, 58 T.C. 459, 461-462 (1972).

This is obvious in the typical debtor-creditor relationship in

which principal repayments do not constitute income to the

lender, but interest payments do.    Different treatment, however,

also occurs in other contexts.    For example, in Aames v.

Commissioner, supra, we held that the interest portion of a

payment received by the taxpayer in connection with a malpractice

claim against the taxpayer's attorney must be included in the

taxpayer's income even though the award itself was excluded from

income under section 104(a)(2).    In accord is Kovacs v.

Commissioner, 100 T.C. 124, 129-130 (1993), affd. without

published opinion 25 F.3d 1048 (6th Cir. 1994), which held that

interest statutorily imposed upon a judgment awarded to the

taxpayer for personal injuries was not excluded from the

taxpayer's income under section 104(a)(2) even though the damages

were.   Similarly, in Tiefenbrunn v. Commissioner, 74 T.C. 1566

(1980), we held that interest received by the taxpayer in

connection with a condemnation award must be included in the

taxpayer's income even though the gain that the taxpayer realized

as a result of the condemnation was subject to the nonrecognition

provisions of section 1033.   Generally, any portion of a judgment

that compensates a taxpayer for the delay in receipt, or lost
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use, of the taxpayer's money constitutes interest and is taxable

as such.   Kieselbach v. Commissioner, 317 U.S. 399, 403 (1943).

     The parties stipulated that a portion of each payment

petitioner received from Mr. Gibbs represented interest.    The

stipulation on this point is certainly supported by the

underlying facts.    The portion of each payment characterized by

the parties as interest is not only in accord with the divorce

decree, but is in accord with the traditional purpose for which

interest is paid, or received, as well.    See Kieselbach v.

Commissioner, supra; Aames v. Commissioner, supra.

     Considering the foregoing, it would appear that the issue

here under consideration should be resolved in respondent's favor

based upon section 61(a)(4) and the above-cited authorities.

However, the circumstances under which the interest was paid to

petitioner and the nature of her arguments oblige us to comment

further.

     Petitioner points out that, incident to her divorce from

him, the payments she received from Mr. Gibbs were for her share

of SuperAmerica.    That being the case, she argues that the

payments are excludable from her income under section 1041.

Pursuant to section 1041(a), no gain or loss is recognized on the

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).
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     We begin by noting 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.    As in

the case of other nonrecognition sections, the Federal income tax

consequences of a transaction described in section 1041 are

deferred.   Also similar to other nonrecognition sections, the tax

deferral is effectuated through the treatment of the basis of the

property involved in the underlying transaction.   Sec. 1041(b).

For a discussion of the background, purpose, and scope of section

1041, see Balding v. Commissioner, supra at 370-372.

     Petitioner relies upon Balding in support of her position

regarding the application of section 1041.   In Balding, we held

that payments received over a 3-year period by the taxpayer in

settlement of her claim to her former husband's military

retirement benefits were subject to nonrecognition treatment

under section 1041.   Petitioner argues that because the payments

in Balding were spread out over 3 years, a portion of each

payment must have included unstated interest that the taxpayer

was not required to include in her income.   Because we disagree

with petitioner's presumption that unstated interest was involved

in Balding, we find no support in that case for her section 1041

argument.   There is nothing in Balding that suggests that

interest was involved, or that interest paid to a spouse or

former spouse in connection with the division of marital property

incident to a divorce would be subject to section 1041.
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       In this case, incident to her divorce from Mr. Gibbs,

petitioner transferred her interest in SuperAmerica to him for

$122,500, a transaction that falls squarely within the scope of

section 1041.    Presumably because it is not important here, the

record contains no evidence establishing petitioner's basis, if

any, in SuperAmerica.    See secs. 1011 and 1012.   Consequently, it

is unknown whether petitioner realized a gain as a result of the

transfer.    To the extent that she did, respondent has not

proposed that any such gain be recognized.

       Although petitioner recognizes, as reflected in the

stipulation of facts, that each payment consisted partially of

principal and partially of interest, her section 1041 argument

makes no such distinction, but is directed to the entire amount

of each payment.    To the extent that petitioner did realize a

gain from the transfer of her interest in SuperAmerica to Mr.

Gibbs, presumably some part of that gain is included in the

principal portion of each payment that petitioner received from

him.    However, the issue in this case has nothing to do with any

gain that petitioner might have realized from the transfer.

Petitioner mistakenly equates the interest portion of each

installment payment with any gain presumably included in the

principal portion.    The interest petitioner was paid pursuant to

the divorce decree, and the gain she might have realized upon the

transfer of SuperAmerica to Mr. Gibbs, are two distinct items
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that give rise to separate Federal income tax consequences.   The

latter item might be subject to section 1041; the former is not.

     As noted above, although under certain circumstances

specific statutes control the Federal income tax consequences of

certain awards, judgments, or payments, the statutes do not

necessarily control the Federal income tax consequences of

interest paid to the taxpayer in connection with such awards,

judgments, or payments.   See Kovacs v. Commissioner, 100 T.C. 124

(1993); Aames v. Commissioner, 94 T.C. 189 (1990); and

Tiefenbrunn v. Commissioner, 74 T.C. 1566 (1980).    With respect

to interest, we see no reason why transactions subject to section

1041 should be treated any differently than transactions subject

to sections 104(a)(2) and 1033.   Consequently, we conclude that

section 1041 has no application to the interest petitioner

received from Mr. Gibbs during the years in issue, and hold that

such interest must be included in her income in the year

received.

     Petitioner suggests that if she is required to include the

interest in her income, taxpayers receiving "unstated" interest

under similar circumstances will receive an unfair tax advantage.

We view the hypothetical problem presented in her argument to be

one of proof rather than principle.    We can envision a case where

the distinction between the payment of interest and the payment

of the underlying obligation is not clearly drawn.   In such a

case the facts and circumstances might have to be examined to
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determine whether, although unstated, an interest factor was

involved in a payment, or a series of installment payments, in

connection with a transaction otherwise subject to section 1041.

This is not such a case.   Here the parties have stipulated that a

portion of each payment constituted interest.

     We have considered petitioner's other arguments and find

them unpersuasive.   Although we agree with petitioner's argument

that the interest payments do not constitute alimony under

section 71, and therefore, are not includable in income as such,

we disagree with her contention that unless the payments

constitute alimony they need not be included in her income.

Nothing in section 71 suggests that a payment from one spouse to

another constitutes income only if the payment satisfies the

definition of alimony contained in that section.   In support of

her argument on this point petitioner relies upon Fox v.

Commissioner, 510 F.2d 1330 (3d Cir. 1975); Gammill v.

Commissioner, 73 T.C. 921 (1980), affd. 710 F.2d 607 (10th Cir.

1982); and McCormick v. Commissioner, T.C. Memo. 1987-418.     Each

of those cases involves attempts by the taxpayer to deduct, as

imputed interest under section 483, portions of installment

payments to a former spouse that were made pursuant to a divorce

settlement that did not call for interest payments.   In those

cases, it was determined that section 483 did not apply to

property settlements made incident to divorce, and the taxpayers

were not entitled to deductions for interest.
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     Petitioner seems to suggest that these cases stand for the

proposition that section 215, which allows a deduction for

alimony or separate maintenance payments, provides the exclusive

means for deducting a payment from one spouse to another, if the

payment is made pursuant to a divorce.    From this petitioner

concludes that section 71 must be the exclusive means by which

one spouse can receive income from the other.    Neither the

premise nor the conclusion is correct.    As previously indicated,

gross income is broadly defined to include income from any source

derived.   Sec. 61(a); Commissioner v. Glenshaw Glass Co., 348

U.S. 426 (1955).    Deductions, on the other hand, are a matter of

legislative grace.    A taxpayer claiming a deduction must

establish the statutory basis for the deduction and demonstrate

that all of the requirements of the relevant statute have been

satisfied.    New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).    The cases relied upon by petitioner focus upon the

allowance of deductions claimed by the payor/taxpayers rather

than the characterization of the payments to the recipients.

     Lastly, petitioner argues that it would be unfair to require

her to include the interest payments in her income.    She

maintains that she will have received less than she was entitled

to receive under the divorce decree if the interest payments must

be included in her income.    Separate and apart from our inability

to grant relief to a taxpayer because the imposition of a Federal

income tax law results in some harshness or unfairness, Estate of
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Cowser v. Commissioner, 736 F.2d 1168, 1171-1174 (7th Cir. 1984),

affg. 80 T.C. 783, 787-788 (1983), we fail to appreciate the

unfairness about which petitioner complains.   Pursuant to the

divorce decree, $100,000 of the amount awarded to her was to be

paid in installments.   Had petitioner received the entire

$100,000 at the time of the divorce and invested the fund in an

interest-bearing account at 9 percent (there is nothing in the

record that suggests that 9 percent was not an appropriate or

fair rate of interest at the time), most likely she would be in

exactly the same posture that she is in as a result of our

holding.   Although the question is not before us, we think it

highly unlikely that had petitioner received and deposited the

entire $100,000 in an interest-bearing account, or made some

other type of income-producing investment, the income earned from

the account or investment should be excluded from income merely

because the source of the deposit or investment was a transaction

subject to section 1041.

     To reflect the foregoing,

                                            Decision will be

                                         entered for respondent.
