                        T.C. Memo. 1998-433



                      UNITED STATES TAX COURT



         JOSEPH M. PERRY, Petitioner v. COMMISSIONER OF
                  INTERNAL REVENUE, Respondent



     Docket No. 24068-95.                Filed December 10, 1998.



     Joseph M. Perry, pro se.

     Carmino J. Santaniello, for respondent.



                        MEMORANDUM OPINION


     COLVIN, Judge:   Respondent determined that petitioner had a

$12,024 deficiency in income tax for 1990.    The sole issue for

decision is whether part of the $137,437.50 petitioner received

in settlement of a tort action is prejudgment interest, and, if

so, whether it is excludable from gross income as damages for a
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personal injury under section 104(a)(2).    We hold that $64,510.60

(45.43 percent of the $137,437.50 payment) was prejudgment

interest, and is not excludable under section 104.

       Unless otherwise specified, section references are to the

Internal Revenue Code in effect for the year in issue.    Rule

references are to the Tax Court Rules of Practice and Procedure.

                              Background

       The parties submitted this case fully stipulated under Rule

122.

A.     Petitioner

       Petitioner resided in North Scituate, Rhode Island, when he

filed his petition.

       On October 12, 1982, while petitioner was driving his

motorcycle, he was struck by a truck attempting to make an

illegal U-turn.     The truck was owned by Allied Fence & Guardrail,

Inc. (Allied Fence), and driven by an Allied Fence employee.

Petitioner suffered serious back injuries, requiring more than 3

years of physical therapy.

B.     The Tort Action, Judgment, and Interest

       Petitioner was represented by John Coughlin (Coughlin) who

filed a personal injury lawsuit on petitioner's behalf in the

Superior Court of Rhode Island on November 13, 1984, against

Allied Fence and the employee driving the truck.    Allied Fence

was represented by Peter J. Comerford (Comerford) and was insured

by Aetna Life and Casualty (Aetna).
                                 - 3 -

     On September 20, 1989, a jury awarded petitioner $75,000 in

damages.   The clerk of the court added statutory prejudgment

interest of $62,437.50 as required by R.I. Gen. Laws section 9-

21-10 (1997).    This totals $137,437.50.   The jury award of

$75,000 is 54.57 percent of $137,437.50.     The statutory

prejudgment interest of $62,437.50 is 45.43 percent of

$137,437.50.

C.   The Settlement

     Following the judgment, Allied Fence moved for a remittitur

or amendment of the verdict on comparative negligence or, in the

alternative, for a new trial.    Petitioner also filed a posttrial

motion for an additur.    The trial court denied these motions and

ordered that the verdict in the full amount be "entered

forthwith."    The judgment, entered on December 5, 1989, for

petitioner and against Allied Fence and its employee was for

$75,000 "with interest as provided by law."

     On December 12, 1989, Allied Fence and its employee filed a

notice of appeal with the Rhode Island Supreme Court.

     Following the judgment, Aetna agreed to pay petitioner

$142,000 (rounded) in exchange for a release and discharge of any

and all past or future claims.    Petitioner and Coughlin signed

the release on November 1, 1990.    The parties did not discuss tax

consequences during the negotiation of the settlement.       The

release did not state whether any of the $142,000 was interest,

and the parties did not otherwise allocate any of the amount to
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interest.    On October 31, 1990, the parties had filed a

stipulation of dismissal with the trial court.    The judgment

entered on December 5, 1989, was not an enforceable final

judgment under Rhode Island law because it was voided by the

parties' settlement and the stipulation of dismissal.

     Aetna paid $142,000 to petitioner and Coughlin on November

2, 1990.    Aetna did not issue a Form 1099 to petitioner or

respondent regarding the payment.

     Coughlin paid himself $55,389 for legal fees and costs and

paid petitioner $86,610.41.

D.   Petitioner's 1990 Tax Return and Respondent's Determination

     Petitioner timely filed his 1990 Federal income tax return.

He did not report any of the $142,000 and did not deduct any

legal fees or costs related to the lawsuit.

     Respondent issued a notice of deficiency in which respondent

determined that petitioner had failed to report interest income

of $67,0001 and had an income tax deficiency of $12,024.

Respondent allowed petitioner to deduct legal fees and costs of




     1
       Respondent concedes that prejudgment interest was only
$64,510.60.
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$18,984 under section 212(1).   The parties do not dispute this

amount.

                            Discussion

     Petitioner contends that his entire settlement is excludable

under section 104(a), and that he did not receive prejudgment

interest because the parties did not allocate any amount to it

and because the money he received was paid pursuant to an out-of-

court settlement.   We disagree.

     A taxpayer may exclude from income "damages received

(whether by suit or agreement * * *) on account of personal

injuries or sickness".   Sec. 104(a)(2).   However, prejudgment

interest is not excludable from income under section 104(a)(2).

Rozpad v. Commissioner, 154 F.3d 1, 6-7 (1st Cir. 1998), affg.

T.C. Memo. 1997-528; Kovacs v. Commissioner, 100 T.C. 124 (1993),

affd. without published opinion 25 F.3d 1048 (6th Cir. 1994);

Delaney v. Commissioner, T.C. Memo. 1995-378, affd. 99 F.3d 20

(1st Cir. 1996); Forest v. Commissioner, T.C. Memo. 1995-377,

affd. without published opinion 104 F.3d 348 (1st Cir. 1996).

     Respondent's determination is presumed to be correct, and

petitioner bears the burden of proving otherwise.    Rule 142(a).

     We must decide whether, and, if so, to what extent the

$142,000 settlement petitioner received was prejudgment interest,

and whether it is excludable from income under section 104(a)(2).

     In Rozpad v. Commissioner, supra, the U.S. Court of Appeals

for the First Circuit, the circuit in which this case is
                                 - 6 -

appealable, approved the Tax Court's allocation of part of a

settlement under Rhode Island law to prejudgment interest where

the parties had not allocated 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 that the

prejudgment interest component of the jury award was $62,437.50

under R.I. Gen. Laws section 9-21-10, which was 45.43 percent of

the total award.   Applying the allocation formula in Rozpad, we

conclude that $64,510.60 (i.e., 45.43 percent of $142,000) of the

$142,000 settlement was prejudgment interest and is not

excludable from income under section 104.

     To reflect the foregoing,


                                              Decision will be entered

                                         under Rule 155.
