                       T.C. Memo. 1999-341



                     UNITED STATES TAX COURT



                 JOHN L. SULLIVAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7933-98.                    Filed October 12, 1999.



     Charles J. Reilly, for petitioner.

     Robert E. Marum, for respondent.



                       MEMORANDUM OPINION


     JACOBS, Judge: Respondent determined a $72,600.30 deficiency,

a $17,565.58 addition to tax under section 6651(a)(1), and a

$4,734.19 addition to tax under section 6654 with respect to

petitioner's 1989 Federal income tax. Respondent now concedes that
                              - 2 -


petitioner is not liable for the addition to tax under either

section 6651(a) or 6654.

     Following other concessions, the issues for decision are: (1)

Whether interest received as part of a personal injury award is

includable in petitioner's gross income for 1989; and if so, (2)

the amount of interest allocable to petitioner; and (3) the amount

of the Schedule A deduction for legal fees incurred in receiving

the interest.

     All section references are to the Internal Revenue Code as in

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

Background

     This case was submitted fully stipulated under Rule 122.   The

stipulations of facts and the exhibits submitted therewith are

incorporated herein by this reference.

     Petitioner resided in Warwick, Rhode Island, at the time he

filed his petition in this case.   Petitioner computed his income

and expenses under the cash receipts and expenditures method of

accounting.

     Petitioner (hereinafter sometimes referred to as Mr. Sullivan)

and Becky Lusignan (Mrs. Sullivan) were married on March 5, 1977;

they had three children.   Mr. and Mrs. Sullivan were divorced on

August 8, 1990.
                                  - 3 -


Personal Injury Judgment

     During 1987, Mr. Sullivan was employed by Counsel Tech, a

heating   and   ventilation    contractor.   On   January   15,   1987,

petitioner was assigned by his employer to repair heating equipment

at a Wendy's restaurant owned by South Isle Food Corp. (South

Isle).    While making repairs on the roof, he fell off a ladder,

sustaining severe neck injuries.

     In October 1987, Mr. and Mrs. Sullivan, both individually and

on behalf of their three children, instituted a suit against South

Isle in the U.S. District Court for the District of Rhode Island.

The complaint contained three counts: One for negligence, a second

for infliction of emotional distress, and a third for loss of

consortium.     The plaintiffs sought $7 million in damages with

interest, court costs, and attorney's fees; none of the counts

stated a specific monetary damage amount.

     On November 10, 1988, the jury awarded damages of $1,256,150.

Mr. Sullivan was determined to be 25 percent at fault because of

his contributory negligence; consequently, the damage award was

reduced to $942,112.50. The jury did not allocate the damage award

among the three counts.       A judgment was entered on November 14,

1988, and an amended judgment was subsequently entered on December

21, 1988. The amended judgment was for "the plaintiff, John L.

Sullivan in the amount of $942,112.50 plus interest computed at 12%

from 1/15/87 to 11/10/88 in the amount of $210,623.20, plus costs
                               - 4 -


in the amount of $2,816.92."   On July 24, 1989, the U.S. Court of

Appeals for the First Circuit affirmed the amended judgment.    On

August 18, 1989, a writ of execution was issued for $1,241,739.29,

plus costs of $2,816.92, plus additional interest of $309.74 for

each day after August 16, 1989, that the judgment award was not

satisfied.

Other Events

     At an unspecified time in early 1989, Mrs. Sullivan filed for

divorce in the family court for Kent County, Rhode Island (family

court).   During the dissolution of his marriage, Mr. Sullivan

attempted suicide.   On May 25, 1989, Mrs. Sullivan, through her

attorney, Robert F. DiPippo (Mr. DiPippo), filed an ex parte motion

for the appointment of a guardian ad litem for Mr. Sullivan.    In

that motion, Mrs. Sullivan stated that Mr. Sullivan had obtained a

judgment of over $1 million in the U.S. District Court for the

District of Rhode Island on November 10, 1988, and that the

judgment was properly part of the marital estate, subject to the

Rhode Island general laws relating to equitable distribution.   The

motion further stated that "this Judgment is presently being

jeopardized by the actions of the Defendant, John L. Sullivan, who

has threatened to settle this Judgment for $75,000.00" and that

"any attempt by the Defendant in the instant Divorce Action, to

diminish the amount of recovery in the Federal Court Case would be

a fraud on the Plaintiff, Becky L. Sullivan, and on the family
                                      - 5 -


court which has jurisdiction over the marital assets." On the same

day (May 25, 1989), the family court entered a Consent Order,

appointing     Richard   MacAdams     (Mr.    MacAdams)      as   Mr.   Sullivan's

guardian ad litem and restraining Mr. Sullivan from negotiating or

attempting to negotiate with South Isle or its insurance company.

Issuance of Judgment Proceeds

      On November 1, 1989, Messrs. MacAdams, Thomas Tarro III (Mr.

Tarro), and Leo Dailey (Mr. Dailey)1 held a conference call to

discuss steps to be taken following receipt of the judgment award.

They agreed that the settlement proceeds would be deposited in a

daily interest-bearing account in the names of Messrs. Tarro and

MacAdams at the Rhode Island Central Credit Union (Credit Union).

The settlement proceeds would be available at the offices of

Richard Van Tienhoven (Mr. Van Tienhoven), the attorney for South

Isle, on November 6, 1989, and would include interest through that

date.

      On November 2, 1989, Continental Insurance Co. (Continental),

the     insurance   carrier     for   South    Isle,    issued     a     check   for

$1,248,778.12, in satisfaction of the judgment. The check was made

payable to "John L. Sullivan, Richard MacAdams, Guardian-ad-Litem,

and   Thomas    Tarro    III,   His   Attorney."       The   check      represented



      1
          Mr. Tarro was one of Mr. Sullivan's attorneys in the
personal injury action filed in U.S. District Court. Mr. Dailey
represented Mr. Sullivan in his divorce action.
                                  - 6 -


$942,112.50 in principal, $2,816.92 in costs, and $303,848.70 in

interest.   (It is the $303,848.70 in interest that is the subject

matter of this proceeding.)

     On November 6, 1989, Messrs. Sullivan, MacAdams, and Tarro

went to Mr. Van Tienhoven's office to receive the check and sign

documents to be filed with the U.S. District Court indicating that

the judgment had been satisfied in full.       Mr. Sullivan refused to

endorse the check unless his name was on the Credit Union account.

Mr. MacAdams told Mr. Sullivan that because he was Mr. Sullivan's

guardian, it was inappropriate and unnecessary for Mr. Sullivan's

name to be on the account.    Mr. MacAdams informed Mr. Sullivan that

the latter's refusal to sign the check would prevent the check from

being deposited.

     On   November   8,   1989,   Mr.   MacAdams   filed   a       motion   for

instructions with the family court.        Thereafter, and before any

action by the family court, Mr. Sullivan endorsed the check.

Following Mr. Sullivan's endorsement of the check, a meeting was

held at the Credit Union.     The proceeds of the Continental check

were later disbursed as follows:

     American Universal                                        $41,958.53
       (Worker's compensation)

     Attorney Valletta (fees)                                  214,108.94

     Attorney Tarro (fees)                                     214,113.94
                                                               1
     Attorneys Tarro, Valletta, DiPippo                         84,399.37
       and Dailey (disputed fees)
                              - 7 -

                                                       2
     Dailey/DiPippo                                     347,091.18

     DiPippo/Dailey                                    $347,091.18

     DiPippo/Dailey                                           5.00

     Valletta                                                 5.00

     Dailey/DiPippo                                         5.00
                                                   3
       Total                                        1,248,778.14
     1
        A dispute arose between Mr. Sullivan and Messrs. Tarro and
Valletta (the attorneys involved in the personal injury suit) as to
whether the attorney's fees should be 33-1/3 percent or 40 percent
of the judgment award.
     2
         Mr. DiPippo represented Mrs. Sullivan, and Mr. Dailey
represented Mr. Sullivan in their divorce proceeding.
     3
         Continental's check was in the amount of $1,248,778.12.
The record does not explain the discrepancy.

On November 14, 1989, the family court issued an order which, in

relevant part, provided:

     2.   The Guardian-ad-Litem is authorized to endorse the
     Check and to permit the following disbursements
     therefrom:

          a.   A one-third contingent fee of the gross
          amount of the Check to Attorneys Thomas Tarro,
          III, and David Valletta;

          b.   Payment of the expenses incurred in
          prosecution of the matter involving South Isle
          Food Corp., copies of which are attached to
          the Motion as Exhibits E and F with the
          exception of $1,147.50 payable to Vincent
          Ragosta, Esq. and, in addition thereto,
          payment of expenses in the amount of $80.10
          incurred in the appeal of the matter of South
          Isle Food Corp.;

          c.   Payment of a Worker's Compensation lien
          of American Universal in accordance with the
          agreement heretofore reached by Attorney Tarro
          with American Universal concerning said lien;
                                   - 8 -


      3.   There being a dispute as to whether Attorneys Tarro
      and Valletta are entitled to a forty (40) percent
      contingent fee of the gross amount of the Check, the
      difference between the one-third fee authorized herein
      and the 40 percent fee shall be placed in an interest
      bearing account, along with an additional $1,147.50
      representing the disputed fee of Vincent Ragosta, Esq.
      The account shall be in the joint names of Attorneys
      Tarro, Valletta, Robert DiPippo and Leo Dailey with
      payments to be made as appropriate following the final
      resolution of those matters;

      4.   The balance of the proceeds after the deduction of
      the aforesaid amounts shall be paid to Robert DiPippo,
      Esq. and Leo Dailey, Esq. jointly to be held by them in
      an interest bearing clients' account or accounts as they
      shall deem proper for the benefit of the parties herein;

      5.   The motion of the Guardian-ad-Litem for termination
      of his guardianship of John L. Sullivan and for his
      discharge as Guardian-ad-Litem is granted;

      6.   The Guardian-ad-Litem is authorized to file a
      request for payment for service rendered and expenses
      incurred in the discharge of the performance of his
      duties as Guardian-ad-Litem.

      On March 19, 1990, Mr. Sullivan received a $7,500 payment; on

August 10, 1990, he received a $366,156 payment.          Mrs. Sullivan was

paid $200,000 according to the terms of a property settlement

agreement dated August 1, 1990, which was incorporated into the

terms of a divorce decree dated August 8, 1990.

      Neither Mr. nor Mrs. Sullivan filed a tax return for 1989.

Mr. Sullivan     filed   a   delinquent    income   tax   return   for   1990,

reporting interest income from Wendy's/Commercial (sic) Insurance

of   $151,925   and   deducting   $50,638    in   legal   fees   incurred   in

receiving this income.
                               - 9 -


     On March 16, 1995, respondent issued a notice of deficiency to

Mr. Sullivan, determining that he had additional interest income in

1990 of $151,844 from the personal injury settlement. Mr. Sullivan

filed a petition with this Court contesting that determination.

That case was resolved following a concession by respondent that

the interest was not includable in the gross income of Mr. Sullivan

for 1990.

     In the notice of deficiency giving rise to this case, dated

February 20, 1998, respondent determined that Mr. Sullivan had

$303,848.70 in unreported interest income from the satisfaction of

the personal injury judgment, and $21,853 in salary income and $12

in dividend income from McDonald's Corp. (Respondent now concedes

that Mr. Sullivan did not have salary or dividend income from

McDonald's Corp. for 1989.) Respondent further determined that Mr.

Sullivan was entitled to a Schedule A miscellaneous itemized

deduction in the amount of $101,276 for attorney's fees incurred in

connection with earning the interest income.

Discussion

     The dispute in this case involves the year in which petitioner

must report as income interest received on a judgment award and the

amount thereof.   Petitioner argues that:   (1) Because his receipt

of the judgment award was subject to substantial restrictions, he

did not have actual or constructive receipt of the interest in

1989, as respondent claims; and (2) the amount of interest he
                                     - 10 -


received was substantially less than that determined by respondent.

For    the   reasons    hereinafter    stated,     we    sustain    respondent's

determinations.

       We    first   decide   the   amount    of   the   judgment    award,   and

accompanying interest, allocable to petitioner.              In this respect,

the record is devoid of any indication as to how the judgment award

is to be allocated among the various plaintiffs in the suit against

South Isle.      Respondent determined that the judgment was awarded

solely to Mr. Sullivan, and consequently, the interest accompanying

that award is taxable solely to him.                Because of petitioner's

failure to satisfy his burden of proving otherwise, we accept

respondent's determination in this regard. See Rule 142(a); Sodoma

v. Commissioner, T.C. Memo. 1996-275, affd. 139 F.3d 899 (5th Cir.

1998).

       Petitioner maintains that because Mrs. Sullivan ultimately

received approximately one-third of the net amount of the personal

injury award, one-third of the interest should not be taxable to

him.     We disagree.    Mrs. Sullivan received a payment of $200,000

not as a party to the suit against South Isle but as her share of

the marital estate.       Accordingly, her entitlement to the $200,000

arises from an event separate from the satisfaction of the judgment

against South Isle.      Now we turn our attention to deciding the year

in which the interest is includable in petitioner's gross income.
                                          - 11 -


      A taxpayer reporting income on the cash method of accounting,

such as petitioner, must include all income items in gross income

for     the    taxable     year     in    which    the   item       is   actually    or

constructively received.            See    sec. 451(a); Ames v. Commissioner,

112 T.C. 304 (1999); sec. 1.451-1(a), Income Tax Regs. Income is

considered to be constructively received in the taxable year during

which it is credited to the taxpayer's account, set apart for him,

or otherwise made available so that he may draw upon it at any

time. See sec. 1.451-2(a), Income Tax Regs. However, income is not

constructively received if the taxpayer's control of its receipt is

subject to substantial limitations or restrictions.                      See id.

      In the instant case, the check for the award and interest was

received on November 6, 1989, by petitioner, his guardian ad litem,

and his attorney. At that time, petitioner was legally entitled to

both the judgment award and interest. Shortly thereafter petitioner

endorsed the check.         The placing of the proceeds of Continental's

check into escrow accounts does not alter petitioner's entitlement

to the check for the proceeds, which he received and endorsed in

1989.    Rather, the placing of the proceeds in escrow was to secure

payment of petitioner's obligations.

      The     constructive      receipt     doctrine     is   concerned     with    the

receipt       of   the   proceeds    from    the   payor,     not    the   subsequent

disposition of the proceeds by the payee.                In the instant case, the

escrow    accounts       only   limited     petitioner's      disposition     of    the
                                 - 12 -


proceeds.   Therefore, although the placing of the check proceeds

into escrow accounts pending resolution of disputes over the amount

of attorney's fees and the amount of Mrs. Sullivan's share of the

marital estate was a substantial restriction over petitioner's

ultimate disposition of the judgment proceeds, these restrictions

did not limit petitioner's legal entitlement to the judgment award

and interest in 1989.    Because he received and endorsed the check

for the judgment with interest in 1989, that is the year in which

petitioner must report the entire amount of interest.

     Respondent    determined   that   petitioner   was   entitled   to   a

Schedule A deduction in the amount of $101,276 for attorney's fees

incurred in connection with earning the interest.         The $101,276 is

approximately one-third of the amount of the interest.        Petitioner

maintains that he should have received a deduction for attorney's

fees of 40 percent rather than 33-1/3 percent.       Again, we disagree

with petitioner.    During 1989, petitioner disputed the amount of

legal fees to be paid to Messrs. Valletta and Tarro.         There is no

evidence in the record establishing that the legal fees were ever

more than 33-1/3 percent. Consequently, petitioner is not entitled

to a Schedule A deduction for attorney's fees in an amount greater

than that allowed by respondent.

     In reaching our conclusions herein, we have considered all

other arguments presented by petitioner and, to the extent not

discussed above, find them to be irrelevant or without merit.
                        - 13 -


To reflect the foregoing and respondent's concessions,



                                           Decision will be

                                     entered under Rule 155.
