Michael J. & Carrie L. Woods, Petitioner

SER E CAL. STAT.

S. T.

JUDG FILES T.C. Memo. 1998-435 UNITED STATES TAX COURT MICHAEL J. AND CARRIE' L. WOODS, Petitioners y. COMMISSIONER OF INTERNAL REVENUE, Respondent JACQUELYN WOODS, Petitioner y. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 12783-94, 12784-94.

Filed December 10, 1998.

Arthur I. .Fixler, for petitioners.

Carmino J. Santaniello, for respondent.

MEMORANDUM OPINION

COLVIN, Judge: Respondent determined that petitioners Michael J. and Carrie L. Woods had a $13,454 deficiency in income tax for 1992, and that petitioner Jacquelyn Woods had a $190,777 deficiency in income tax for 1992.

The sole issue for decision is whether part of the proceeds petitioners received in settlement of a tort action is

SERVED

.0EC 1 0 1998 (McCarten). Dr. Erinakes' medical malpractice insurer was Joint Underwriting Association (JUA).

.

.In December 1991, the Woodses and Jacquelyn settled their claim against the hospital.for an unspecified amount of damages.

The settlement proceeds from the hospital are fully excludable from gross income under section 104(a)(2).

On December 11, 1991, a jury awarded damages against Dr.

Erinakes of $1.2 million to Jacquelyn and $120,000 to the Woodses.

The clerk of the court added statutory prejudgdent interest of $888,000 as required by R.I. Gen. Laws section 9-21- 10 (1997) to Jacquelyn's award, totaling $2,088,000.

The jury award for Jacquelyn of $1.2 million is 57.47 percent of $2,088,000.

The statutory prejudgment interest of $888,000 is 42.53 percent of $2,088,000.

The clerk of the court added statutory prejudgment. interest of $88,800 as required by R.I.

Gen. Laws section 9-21-10 to the Woodses' award, totaling $208,800.

The jury award for the Woodses of :$120,000 is 57.47 percent of $208,800.

The statutory.prejudgment interest of $88,800 is 42.53 percent of $208,800.

On December 20, 1991, Dr. Erinakes moved for a new trial on all issues, or, alternatively, on the issue of damages.

The trial court denied the motion on February 28, 1992. Dr. Erinakes appealed the judgments and the trial court's denial of his motion for a new trial to the Rhode Island Supreme Court.

Decof paid himself $63,379.81 for legal fees and costs and paid the Woodses $120,472.19. Decof paid himself $640,840.39 for legal fees and costs and paid Jacquelyn $1,218,107.61.

D.

Petitioners' 1992 Tax Returns and Respondent's Determination The Woodses and Jacquelyn timely filed their 1992 Federal income tax returns.

They did not report any of their settlement próceeds on their returns or deduct any legal fees or costs from the lawsuit.

Respondent issued a notice of deficiency in which respondent determined that Jacquelyn's deficiency in income tax was attributed to unreported interest income of $790,587, computed as follows:

Original award Percentage¹ Settlement Damages Interest Total $1,200,000 888,000 '$2,088,000 57.4712643 42.5287356 .

100.0000000 $1,068,361 790,587 $1,858,948 ¹ Rounded.

Respondent allowed Jacquelyn to deduct legal fees of $256,729. under section 212(1).

The parties do not dispute this amount.

Respondent determined the Woödses' income tax deficiency was attributable to unreported interest income of $78,190, computed as follows:

Damages Interest Total ¹ Rounded.

Original award Percentage¹ Settlement $120,000 88,800 $208,800 57.4712643 42.5287356 100.0000000 $105,662 78,190 $183,852 appealable, approved the Tax Court's allocation of the prejudgment interest component of a settlement. under Rhode Island law where the parties did not allocate any .amount to prejudgment interest.

The allocation of prejudgment interest in Rozpad was calculated by applying a ratio based on the judgment of the State court, to apportion the total settlement between prejudgment interest (added to the State court's tort damage award under R.I.

Gen. Laws section 9-21-10) and compensatory damages. Rozpad is indistinguishable from this case.

The clerk of the Rhode Island court calculated a prejudgment interest component of $88,800 to the Woodses' award and $888,000 to Jacquelyn's award under R.I. Gen. Laws section 9-21-10, which was.42.53 percent of each total award. Respondent determined that $78,190 of the $183,852 settlement with the. Woodses and $790,587 of the $1,858,948 settlement with Jacquelyn was prejudgment interest by using as the ratio of prejudgment interest to total settlement the same ratio that the clerk of the State court had used to calculate the prejudgment interest portion of the total judgment (that is, damages plus prejudgment interest).. Respondent correctly applied the Rozpad allocation formula.

B.

Petitioners' Other Contentions Petitioners contend that prejudgment interest is part of damages under Rhode Island law and is therefore excludable under section 104(a)(2).

We disagree.

The Court of Appeals for the First Circuit concluded that prejudgment interest is separate and _ 9 _ merely requests for the court to dismiss the * * * [action] without imposing interest or costs."

C.

Conclusion Applying the allocation formula in Rozpad, we conclude that $78,19.0 (i.e., 42.53 percent of $183,852) of the settlement paid for the Woodses and $790,587 (i.e., 42.53 percent of $1,858,948) of the settlement paid for Jacquelyn was prejudgment interest and is not excludable from income under section 104.

To reflect the foregoing, Decisions will be entered for respondent.