                          T.C. Memo. 2000-25



                      UNITED STATES TAX COURT



        YANCY D. GREER AND RITA K. GREER, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 191-98.                        Filed January 19, 2000.



     Richard L. Weil, for petitioners.

     Mary Beth Calkins, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   For 1993, respondent determined a deficiency

of $29,025 in petitioners' Federal income tax.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.
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     The issue for decision is whether certain funds received in

connection with a medical malpractice lawsuit should be treated

as taxable interest income or as excludable income from personal

injuries.   All references to petitioner in the singular are to

Rita Greer.


                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     At the time the petition was filed, petitioners resided in

Hammond, Louisiana.

     Some time prior to 1985, petitioner was diagnosed with a

medical disease known as bacterial endocarditis.   As a result of

the disease, petitioner sustained devastating injuries to her

heart and unfortunately will be subject to a lifetime of

associated medical and physical complications.   In 1985,

petitioner filed a medical malpractice claim and a lawsuit

against the doctor who, she alleged, failed properly to diagnose

and treat her disease.

     On December 3, 1992, petitioner won a jury verdict against

her doctor in the amount of $100,000 for pain and suffering,

disfigurement, and disability and in the amount of $70,000 for

medical expenses that had been incurred relating to her

endocarditis.   On January 19, 1993, a court judgment was entered

in favor of petitioner reflecting the total jury award of
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$170,000, plus interest from the date petitioner filed the

malpractice claim in 1985.

     Under Louisiana law, a qualified doctor's maximum personal

liability with respect to a medical malpractice award is

$100,000, plus interest.   See La. Rev. Stat. Ann. sec.

40:1299.42B(2) (West 1999).   Petitioner's doctor carried a

private medical insurance policy (the Doctor's Insurance) to

cover his personal liability under the above law.   Medical

malpractice awards in excess of $100,000 up to a ceiling of

$500,000, plus interest and additional amounts for continuing

health care costs, are paid by a State-sponsored patient’s

compensation fund (the State's Insurance).   See La. Rev. Stat.

Ann. sec. 40:1299.42B(1) (West 1999); La. Rev. Stat. Ann. sec.

40:1299.44A(1) (West 1999); La. Rev. Stat. Ann. sec. 40:1299.44C

(West 1999).

     On February 5, 1993, in partial payment of the above-

$170,000 court judgment, petitioner received from the Doctor's

Insurance three checks (totaling $125,403) in the separate

amounts of $100,000, $7,473, and $17,930.    These checks were not

labeled or identified in any way as to whether they represented

payments for petitioner's personal injuries, interest, court

costs, or otherwise.

     On February 8, 1993, petitioner received from the State's

Insurance a check in the amount of $195,477.   This check was
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labeled “Payment for:   Satisfaction of Judgment” and, by

numerical coding reflected on the check, the $195,477 was

allocated by the State's Insurance $70,000 to medical expenses

and $125,477 to interest.

     The total amount petitioner received from both the Doctor's

Insurance and the State's Insurance was $320,880 ($125,403 plus

$195,477 equals $320,880).

     On February 21, 1993, petitioner signed an agreement (the

Agreement) which, in exchange for payment of the $125,403 from

the Doctor's Insurance, released petitioner's doctor and the

Doctor's Insurance from any further liability with respect to the

medical treatment petitioner received relating to bacterial

endocarditis.

     In approximately February of 1993, a document entitled

“Satisfaction of Judgment” (the Satisfaction of Judgment

document) was signed by petitioner's lawyers in which it was

represented that by payment of the $125,403 petitioner's doctor

and the Doctor's Insurance satisfied their portion of the above

court judgment and that by payment of the $195,477 the State's

Insurance satisfied its portion of the court judgment, except for

petitioner's future medical costs.

     For 1993, petitioners timely filed a joint Federal income

tax return on which petitioners excluded from reported gross
                               - 5 -

income the total $320,880 received from the Doctor's Insurance

and from the State's Insurance.

     On audit, respondent determined that $143,407 of the total

$320,880 petitioner received constituted interest income and

should be included in petitioners' gross income.


                              OPINION

     Under section 61(a), gross income includes all income from

whatever source derived unless otherwise excluded by the Internal

Revenue Code.   Under section 61(a)(4), interest income is

specifically included in the computation of gross income.

     Under section 104(a)(2), however, “damages” received

relating to personal injuries are excluded from gross income.

Section 104(a) states in relevant part as follows:


         (a) In general.–- Except in the case of amounts
    attributable to (and not in excess of) deductions allowed
    under section 213 (relating to medical, etc., expenses) for
    any prior taxable year, gross income does not include–-

    *           *        *         *         *         *          *

              (2) the amount of any damages received (whether by
         suit or agreement and whether as lump sums or as
         periodic payments) on account of personal injuries or
         sickness;


As is noted, “interest” on funds relating to personal injuries is

not mentioned in the exclusionary language of section 104(a)(2).

     Generally, exclusions from gross income are to be narrowly

construed.   See Commissioner v. Jacobson, 336 U.S. 28, 49 (1949);
                              - 6 -

Wesson v. United States, 48 F.3d 894, 898 (5th Cir. 1995); Kovacs

v. Commissioner, 100 T.C. 124, 128 (1993), affd. without

published opinion 25 F.3d 1048 (6th Cir. 1994).

     Courts have consistently held that prejudgment interest

received on funds awarded for personal injuries does not qualify

for the exclusion from income under section 104(a)(2).   See,

e.g., Rozpad v. Commissioner, 154 F.3d 1, 5 (1st Cir. 1998),

affg. T.C. Memo. 1997-528; Aames v. Commissioner, 94 T.C. 189,

192-193 (1990).

     Under Louisiana law, in order that a plaintiff might be made

whole after an injury, courts are required to award prejudgment

interest on personal injury damages.   See La. Rev. Stat. Ann.

sec. 13:4203 (West 1999); Lewis v. Macke Bldg. Serv., Inc., 524

So.2d 16 (La. Ct. App. 1988); Davis v. Le Blanc, 149 So.2d 252

(La. Ct. App. 1963).

     Respondent asserts that $143,407 of the total $320,880

petitioner received in connection with her personal injuries

($17,930 from the Doctor's Insurance and $125,477 from the

State's Insurance) constitutes interest income under section

61(a)(4) and is not excludable from income under section

104(a)(2).

     Petitioners assert that the Agreement and the Satisfaction

of Judgment documents are evidence of a separate settlement under

which the entire $320,880 petitioner received should be treated
                                - 7 -

as compensation for her personal injuries and should be excluded

from gross income under section 104(a)(2).   Petitioners contend

that any intimation of interest from the checks or otherwise

reflects only internal bookkeeping utilized by the Doctor's

Insurance and the State's Insurance.

     On February 5, and 8, 1993, approximately 2 weeks after the

January 19, 1993, court judgment was entered, the Doctor's

Insurance and the State's Insurance issued to petitioner the four

checks.    With regard to the three checks issued to petitioner by

the Doctor's Insurance, according to testimony at trial and

correspondence in evidence, the $100,000 check constitutes the

$100,000 limit of liability on damages under Louisiana law, the

$7,473 check constitutes court costs, and the $17,930 check

constitutes interest.   We conclude that the check for $17,930

constitutes interest.

     With regard to the $195,477 check issued to petitioner by

the State's Insurance, the numerical code and other evidence at

trial establish that $125,477 thereof constitutes interest.    We

so hold.

     Petitioners' argument that a separate settlement existed

between petitioner, the Doctor's Insurance, and the State's

Insurance disparate from the court judgment entered in

petitioner's favor is not supported by the evidence.   The three

checks received from the Doctor's Insurance total $125,403, the
                               - 8 -

exact total amount reflected in the Agreement.    Both the

Satisfaction of Judgment document and the $195,477 check issued

by the State's Insurance specifically reflect that payment was in

satisfaction of the court judgment.    The Agreement and the

Satisfaction of Judgment documents simply acknowledge that the

doctor, the Doctor's Insurance, and the State's Insurance

satisfied their respective financial liabilities under the

$170,000 court judgment.

     Because Louisiana courts are required to award prejudgment

interest on damages awarded relating to personal injuries,

petitioners argue that, for income tax purposes, compulsory

prejudgment interest should be eligible for exclusion under

section 104(a)(2).   Interest, however, is separate and distinct

from damages and generally is awarded to compensate for delay in

payment.   See Rozpad v. Commissioner, 154 F.3d at 6.   Although

petitioner, under Louisiana law, may have received prejudgment

interest automatically as a result of her medical malpractice

claim, under the Internal Revenue Code that income is

nevertheless taxable as interest income.

     Although the court judgment amount of $170,000 clearly

reflects income from personal injuries within the scope of
                                 - 9 -

section 104(a)(2), the additional $143,407 petitioner received

constitutes interest income and must be included in petitioners'

gross income under section 61(a)(4).

     To reflect the foregoing,

                                              Decision will be entered

                                         under Rule 155.
