                        T.C. Memo. 1997-528



                      UNITED STATES TAX COURT



     JOSEPH S. ROZPAD and KATHLEEN M. ROZPAD, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

      FLORIANO DIBIASIO and ANGELA DIBIASIO, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent


     Docket Nos. 6351-94, 6719-94.      Filed November 24, 1997.


     Justin S. Holden and Kimberly L. O'Brien, for petitioners.

     Carmino J. Santaniello, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     FOLEY, Judge:   Respondent issued notices of deficiency to

Joseph and Kathleen Rozpad for their 1992 tax year and to

Floriano and Angela DiBiasio for their 1989 tax year.   The

Rozpads and the DiBiasios each petitioned this Court in April of
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1994.     On April 1, 1997, we granted respondent's motion to

consolidate the Rozpads' and the DiBiasios' cases.

     Unless otherwise indicated, all section references are to

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

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

Procedure.     The issues for decision are:

     1.    Whether portions of the proceeds received by petitioners

in their respective settlements of tort actions are excludable

from gross income under section 104(a)(2).      We hold that they are

not excludable.

     2.    Whether petitioners may, pursuant to section 212, deduct

attorney's fees and costs relating to their respective

settlements.     We hold that they are entitled to deduct such fees

and costs.

     3.    Whether the 3-year statute of limitation bars respondent

from assessing and collecting the deficiency relating to the

DiBiasios' 1989 tax year.     We hold that it does not.

                           FINDINGS OF FACT

     The parties submitted these cases fully stipulated pursuant

to Rule 122.     At the time the Rozpads filed their petition, they

resided in Riverside, Rhode Island.      At the time the DiBiasios

filed their petition, they resided in Cranston, Rhode Island.

The Rozpads
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     On June 21, 1989, at the Memorial Hospital in Providence,

Rhode Island, Dr. Douglas J. Glod operated on Mrs. Rozpad's right

foot.   Mrs. Rozpad was scheduled, however, to have an operation

on her left foot.   The Rozpads filed a medical malpractice claim

in the Superior Court of Rhode Island against the Memorial

Hospital and Dr. Glod.    The Rozpads settled their dispute with

the Memorial Hospital, but did not settle with Dr. Glod.

     On May 8, 1992, a jury rendered a verdict against Dr. Glod

and awarded $2 million to Mrs. Rozpad and $65,000 to Mr. Rozpad.

As required by R.I. Gen. Laws sec. 9-21-10 (1985), the court

added statutory prejudgment interest to the awards.    On May 18,

1992, Dr. Glod filed a motion for a new trial or, in the

alternative, a remittitur of the judgment.    On August 19, 1992,

the trial court ordered a new trial, solely on the issue of

damages, unless Mrs. Rozpad agreed to remit all of the jury's

verdict in excess of $650,000.    On August 27, 1992, Mrs. Rozpad

consented to the remittitur.    On September 14, 1992, the trial

court entered judgments for Mrs. Rozpad and Mr. Rozpad of

$650,000 and $65,000, respectively, plus statutory prejudgment

interest totaling $250,250.

     Following the judgment, the Rozpads and Dr. Glod settled

their dispute.   The settlement agreement required Dr. Glod to pay

the Rozpads $800,000 for a release and discharge of any and all

past and future claims.    During the settlement negotiations, the
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parties did not discuss the tax consequences of the settlement.

In addition, the agreement did not contain any reference to

prejudgment or postjudgment interest.     On September 18, 1992, the

parties filed a stipulation of dismissal with the trial court.

The stipulation states:   "The above-entitled action is hereby

dismissed, no interest, no costs."     The settlement and

stipulation of dismissal voided any judgment previously entered

in the case.    Dr. Glod's medical malpractice insurer issued an

$800,000 check to the Rozpads and their attorney.     Their attorney

cashed the check; retained $361,112.87 for attorney's fees and

costs; and issued a $438,887.13 check to the Rozpads.       Dr. Glod's

medical malpractice insurer did not issue a Form 1099, regarding

the $800,000 settlement, to either the Rozpads or the Internal

Revenue Service.

     The Rozpads, on their 1992 Federal income tax return,

neither reported any portion of the $800,000 settlement nor

claimed any deductions relating to the medical malpractice

dispute.

The DiBiasios

     On July 9, 1982, at St. Joseph Hospital in Providence, Rhode

Island, Dr. A. Louis Mariorenzi operated on Mr. DiBiasio's left

knee.   During the operation, Dr. Mariorenzi punctured an artery

in Mr. DiBiasio's knee.   As a result of complications relating to

the punctured artery, Mr. DiBiasio required extensive vascular
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surgery over the next 5 years, lost significant use of his leg,

received a blood transfusion, and contracted a chronic blood

disease for which he continues to receive treatment.

     On February 8, 1984, Mr. DiBiasio commenced a medical

malpractice action in the Superior Court of Rhode Island against

Dr. Mariorenzi and St. Joseph Hospital.   Mr. DiBiasio settled his

dispute with the hospital, but did not settle with Dr.

Mariorenzi.

     On May 8, 1989, following a 10-day trial, a jury rendered a

verdict against Dr. Mariorenzi and awarded damages of $700,000 to

Mr. DiBiasio.   As required by R.I. Gen. Laws sec. 9-21-10 (1985),

the court added $572,810 in statutory prejudgment interest to the

award, bringing the total judgment to $1,272,810.   Following the

judgment, Mr. DiBiasio and Dr. Mariorenzi settled their dispute.

The settlement agreement required Dr. Mariorenzi to pay Mr.

DiBiasio $1 million for a release and discharge of any and all

past and future claims.   During the settlement negotiations, the

parties did not discuss the tax consequences of the settlement.

In addition, the agreement did not contain any reference to

prejudgment or postjudgment interest.

     On May 15, 1989, Mr. DiBiasio and Dr. Mariorenzi filed a

stipulation of dismissal with the trial court.   The stipulation

states that the case is "Dismissed with prejudice, no interest,

no costs."    Dr. Mariorenzi's medical malpractice insurer issued a
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$1 million check to Mr. DiBiasio and his attorney.   Mr.

DiBiasio's attorney cashed the check; retained $447,460.21 for

attorney's fees and costs; and issued a $552,539.79 check to Mr.

DiBiasio.   Dr. Mariorenzi's medical malpractice insurer did not

issue a Form 1099, regarding the $1 million settlement, to either

Mr. DiBiasio or the Internal Revenue Service.

     The DiBiasios, on their Federal income tax return for the

taxable year 1989, neither reported any portion of the $1 million

settlement on their return nor claimed any deductions relating to

Mr. DiBiasio's medical malpractice dispute.

                              OPINION

1. Allocation of Settlement Proceeds

     Respondent determined that in each case petitioners' gross

income includes the portion of their respective settlement that

is attributable to prejudgment interest.   Petitioners contend

that no part of their respective settlement is attributable to

prejudgment interest.   To support their contention, petitioners

rely on the stipulations of dismissal.   The stipulations state

"no interest."   Petitioners contend that the phrase "no interest"

means no portion of the settlement is allocable to prejudgment

interest.   For the following reasons, we reject petitioners'

contention.

     First, in Delaney v. Commissioner, 99 F.3d 20 (1st Cir.

1996), affg. T.C. Memo. 1995-378, the U.S. Court of Appeals for
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the First Circuit found, on similar facts, that the phrase "no

interest" is ambiguous and could mean that there is no interest

in addition to the interest implicit in the settlement amount.

See also Delaney v. Commissioner, T.C. Memo. 1995-378; Forest v.

Commissioner, T.C. Memo. 1995-377, affd. without published

opinion 104 F.3d 348 (1st Cir. 1996).    Second, the stipulations

are not part of the settlement and do not relate to the

allocation of settlement proceeds.     They are merely requests for

the court to dismiss the respective actions without imposing

interest or costs.   Accordingly, a portion of both the Rozpads'

and the DiBiasios' settlement is allocable to prejudgment

interest.

     Respondent determined that a portion of each settlement must

be allocated to statutory interest in the same ratio that

statutory interest bore to the total judgment.    The facts and

case law support respondent's determination.    Each settlement

occurred after petitioners received awards of damages and

prejudgment interest.   In Delaney, 99 F.3d at 25-26, the Court of

Appeals affirmed this Court's finding that the prejudgment

interest component of a settlement was in the same proportion as

the prejudgment interest that was added to the court's damage

award.   See Robinson v. Commissioner, 70 F.3d 34, 38 (5th Cir.

1995), affg. in part, revg. in part and remanding in part 102

T.C. 116 (1994); see also United States v. Burke, 504 U.S. 229,
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237 (1992); Alexander v. Commissioner, 72 F.3d 938, 942 (1st Cir.

1995), affg. T.C. Memo. 1995-51.    Accordingly, we sustain

respondent's determination.

2.   Prejudgment Interest

      Petitioners contend that prejudgment interest is excludable

from gross income.   They rely on section 104(a), which permits

taxpayers to exclude "damages received (whether by suit or

agreement * * *) on account of personal injuries or sickness".

Contrary to well-established precedent, petitioners contend that

the receipt of prejudgment interest is tantamount to the receipt

of "damages" within the meaning of section 104(a)(2).    In the

seminal case Kovacs v. Commissioner, 100 T.C. 124 (1993), affd.

without published opinion 25 F.3d 1048 (6th Cir. 1994), and in

every case this Court has decided since, we have consistently

held that statutorily mandated prejudgment interest does not

constitute "damages" within the meaning of section 104(a)(2).

See, e.g., Robinson v. Commissioner, 102 T.C. 116 (1994); Delaney

v. Commissioner, T.C. Memo. 1995-378; Forest v. Commissioner,

supra; Burns v. Commissioner, T.C. Memo. 1994-284; see also

Brabson v. United States, 73 F.3d 1040 (10th Cir. 1996).

Prejudgment interest imposed by R.I. Gen. Laws sec. 9-21-10 is

indistinguishable from the prejudgment interest at issue in

Kovacs and its progeny.     Delaney v. Commissioner, T.C. Memo.

1995-378; Forest v. Commissioner, supra; see Delaney v.
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Commissioner, 99 F.3d at 26.    Therefore, the Kovacs line of

authority controls.

      Petitioners contend that the holdings of Kovacs and its

progeny are flawed and should not be followed.   We are, however,

bound by this Court's prior decisions, unless subsequent events

warrant a change in position.   See Vasquez v. Hillery, 474 U.S.

254, 266 (1986); Hesselink v. Commissioner, 97 T.C. 94, 99

(1991).   After considering the relevant post-Kovacs authorities

including Commissioner v. Schleier, 515 U.S. 323 (1995) (holding

that damages received under the Age Discrimination in Employment

Act of 1967, Pub. L. 90-202, 81 Stat. 602, are not excludable

pursuant to section 104(a)(2)) and O'Gilvie v. United States, 519

U.S. __, 117 S. Ct. 452 (1996) (holding that punitive damages are

not excludable pursuant to section 104(a)(2)), we reject

petitioners' contention that departure from Kovacs and its

progeny is warranted.   Accordingly, petitioners must include in

income the prejudgment interest portion of their respective

settlements.

3.   Section 212 Deduction

      Respondent determined that petitioners were entitled to an

itemized deduction for attorney's fees and costs relating to the

taxable portion (i.e., the portion relating to prejudgment

interest) of their respective settlements.   Respondent's

determination is presumed correct, and petitioners have the
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burden of proving it erroneous.   Rule 142(a).   Petitioners have

offered neither arguments nor evidence to contradict respondent's

determination.   Accordingly, we affirm respondent's

determination.   See Church v. Commissioner, 80 T.C. 1104 (1983);

Forest v. Commissioner, supra.

4.   Statute of Limitations

      The DiBiasios contend that respondent cannot assess or

collect any tax deficiency for their 1989 tax year because the

notice of deficiency was issued after the expiration of the 3-

year period of limitation on assessment and collection.   Sec.

6501(a).   Respondent, however, contends that the 6-year period of

limitation, which has not yet expired, is applicable because the

DiBiasios omitted from gross income "an amount properly

includible therein which is in excess of 25 percent of the amount

of gross income stated in the return".   Sec. 6501(e)(1)(A).

Respondent has the burden of proving that the exception applies.

Burbage v. Commissioner, 82 T.C. 546, 553 (1984), affd. 774 F.2d

644 (4th Cir. 1985).

      On their 1989 Federal income tax return, the DiBiasios

reported gross income totaling $123,382.52 and omitted

approximately $450,000 (i.e., more than 25 percent of the gross

income reported).   Accordingly, the 6-year statute of limitation

is applicable.
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     All other arguments raised by the parties are either

irrelevant or without merit.

     To reflect the foregoing,


                                        Decisions will be entered

                                    under Rule 155.
