                        T.C. Memo. 2001-245



                     UNITED STATES TAX COURT



   F. BROWNE GREGG, SR., AND JUANITA O. GREGG, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent*



     Docket No. 13188-96.                 Filed September 19, 2001.


     Bernard A. Barton, Jr. and Harold R. Bucholtz, for

petitioners.

     J. Michael Melvin, for respondent.



                 SUPPLEMENTAL MEMORANDUM OPINION


     THORNTON, Judge:   In this Court’s original opinion, T.C.

Memo. 1999-10, vacated and remanded (11th Cir., Sept. 19, 2000),

we held that jury awards paid to petitioner husband (hereinafter

__________________

     * This opinion supplements our prior opinion in Gregg v.
Commissioner, T.C. Memo. 1999-10, vacated and remanded (11th
Cir., Sept. 19, 2000).
                                 - 2 -

petitioner) pursuant to judgments against U.S. Industries, Inc.

(USI), on claims for both fraudulent inducement to enter into a

contract and tortious interference with a business relationship,

plus prejudgment interest, are not excludable from gross income

as damages received “on account of personal injuries or sickness”

within the meaning of section 104(a)(2).1      In reaching this

conclusion, we cited Fabry v. Commissioner, 111 T.C. 305 (1998),

for the proposition that we must look to all the facts and

circumstances to determine the nature of petitioner’s claims

against USI and whether his recoveries on those claims were on

account of personal injuries or sickness.

         While the instant case was pending on appeal there, the

U.S. Court of Appeals for the Eleventh Circuit reversed this

Court’s decision in Fabry, stating that the “facts and

circumstances approach” used therein was “insufficient.”       Fabry

v. Commissioner, 223 F.3d 1261, 1269 (11th Cir. 2000).

Thereafter, the Court of Appeals vacated our decision in the

instant case and remanded it for further consideration in light

of its decision in Fabry, stating:       “We imply no view as to the

result that should be reached on remand.”




     1
       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.
                               - 3 -

     In Fabry, the question was whether a $500,000 payment the

taxpayers received for damage to their business reputation in

settlement of a tort action was excludable from gross income as

damages received “on account of personal injuries or sickness”

within the meaning of section 104(a)(2).   The Court of Appeals

stated that the IRS had stipulated that the $500,000 payment was

properly allocable as damage to the Fabrys’ business reputation.

Id. at 1268.   The Court of Appeals found on the basis of the

“unique facts” presented that the Fabrys’ business was so much a

part of their persona that “Their business reputation was their

personal reputation.”   Id. at 1270.   The Court of Appeals found

that the Fabrys had suffered “distress, humiliation and mental

anguish * * * through the loss of their good name”.    Id.

Accordingly, the Court of Appeals concluded that the $500,000 the

Fabrys received on account of injuries to their business

reputation was received on account of personal injuries and thus

was excludable from gross income under section 104(a)(2).

     In the instant case, by contrast, the parties have not

stipulated that any part of the jury awards that petitioner

received is properly allocable to damage to his reputation or to

any other particular type of injury, personal or otherwise.

     Petitioners bear the burden of proof.   See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933); Feldman v.

Commissioner, 20 F.3d 1128, 1132 (11th Cir. 1994) (the
                               - 4 -

Commissioner’s determination of a deficiency is ordinarily

presumed correct, and the taxpayer has the burden of proving it

is erroneous or arbitrary), affg. T.C. Memo. 1993-17.    As we

discussed in our original opinion and as further discussed below,

petitioners have failed to show that the subject jury awards were

received on account of personal injuries such as distress,

humiliation, mental anguish, or any other type of personal

injury.   Indeed, the record does not establish that petitioner

suffered personal injuries.   To the contrary, as discussed in our

original opinion and below, the evidence strongly indicates that

the injuries redressed by the jury awards in question were

economic injuries.2

Petitioner’s Compensatory Damages for Fraudulent Inducement

     On supplemental brief, petitioners argue, in conclusory

fashion and without any references to the pages of the

transcript, the exhibits, or other sources relied upon to support



     2
       As we discussed in our original opinion, in construing
sec. 104(a)(2), the Supreme Court and other courts have
distinguished personal injuries and economic injuries. In Fabry
v. Commissioner, 223 F.3d 1261, 1270 (11th Cir. 2000), revg. 111
T.C. 305 (1998), the Court of Appeals appeared to recognize this
distinction, stating that in a nonphysical personal injury case,
the taxpayer must establish a direct causal link between the
damages received and “an intangible element of the injury (i.e.,
emotional distress, pain and suffering, loss of reputation,
etc.).” Similarly, the Court of Appeals distinguished between
compensation paid to replace the lost value of the Fabrys’
business and amounts paid to compensate them for “distress,
humiliation and mental anguish suffered by the Fabrys through the
loss of their good name”. Id.
                                 - 5 -

their statements, that USI’s fraudulent conduct caused petitioner

to suffer damage to his business reputation and credit.

Statements in briefs do not constitute evidence.   Rule 143(b).

We have found no evidence in the record that credibly supports

petitioners’ allegations of personal injury to petitioner.      By

contrast, in Fabry v. Commissioner, 223 F.3d at 1263 n.4, 1270,

the Court of Appeals found evidence in the record that the Fabrys

endured personal embarrassment, lost friends, were forced to

withdraw from trade organizations, and suffered health

consequences.   Unlike the taxpayers in Fabry, petitioner did not

operate the businesses in question as sole proprietorships and

has not established that his personal name was synonymous with

his businesses.

     Moreover, as we discussed in our original opinion, the

record does not show that petitioner presented evidence in the

USI litigation regarding any personal injuries or that petitioner

made any specific request to the jury for an award to compensate

him for any personal injuries.

     Petitioners seem to suggest that we should assign no

significance to the absence of evidence supporting their

contentions that petitioner sustained personal injuries and

received damages on account of those personal injuries.    On

supplemental brief, petitioners argue that “fraud is an

inherently personal dignitary tort, and, as a result, all the
                                - 6 -

damages received on the fraud claim are excludable from income.”

Petitioners suggest that because petitioner successfully

prosecuted claims against USI for fraudulent inducement and

because such claims generally may encompass personal injuries,

any damages petitioner received necessarily must have been on

account of personal injuries.

     In effect, then, petitioners would have us make an a priori

determination, seemingly without reference to empirical evidence,

that all damages awarded on petitioner’s fraudulent inducement

claim necessarily must have been received on account of personal

injuries.   Petitioners suggest that the Court of Appeals’

decision in Fabry mandates this conclusion.   For the reasons

discussed below, we disagree.

     As the Court of Appeals discussed in Fabry, the Supreme

Court in Commissioner v. Schleier, 515 U.S. 323, 336 (1995),

found that before a recovery may be excluded under section

104(a)(2), a taxpayer must meet two “independent requirements”:

(1) The taxpayer must show that the underlying cause of action is

based upon “tort or tort type rights”; and (2) the taxpayer must

show that “the damages were received on account of personal

injuries or sickness.”   If petitioners were correct in their

argument that personal injuries inhere in certain types of torts

(such as fraudulent inducement) so as to satisfy automatically

the conditions of section 104(a)(2), the result would be to
                                - 7 -

render superfluous the second Schleier requirement for such

torts, thereby contradicting the Supreme Court’s characterization

of these two requirements as “independent”.   Id.

     Petitioners’ argument is plainly incorrect, however,

proceeding as it does from a faulty premise that a tort-based

cause of action for fraudulent inducement protects only

inherently personal rights, such as dignitary rights.   It is

hornbook law that torts generally encompass not just invasions of

personal dignitary rights but any “civil wrong, other than breach

of contract, for which the court will provide a remedy in the

form of an action for damages.”   Keeton et al., Prosser & Keeton

on the Law of Torts, sec. 1, at 2 (5th ed. 1984).   More

particularly, although the tort of fraud might involve personal

injury, it generally involves “‘injury to property rather than to

person’”.   Food Fair, Inc. v. Anderson, 382 So. 2d 150, 154 (Fla.

Dist. Ct. App. 1980) (quoting 37 Am. Jur. 2d, Fraud and Deceit,

sec. 292 (1968)).   In a fraudulent inducement claim, “‘Generally,

the plaintiff’s loss is a purely economic loss’”.   HTP, Ltd. v.

Lineas Aereas Costarricenses, S.A., 685 So. 2d 1238, 1240 (Fla.

1996) (quoting with approval from the dissent in Woodson v.

Martin, 663 So. 2d 1327, 1330 (Fla. Dist. Ct. App. 1995), revd.

685 So. 2d 1240 (Fla. 1996)).

     Consequently, contrary to petitioners’ argument and

consistent with the two-prong test enunciated in Schleier, the
                                  - 8 -

mere fact that petitioner’s underlying cause of action against

USI was based on the tort of fraudulent inducement does not in

and of itself satisfy the independent requirement that

petitioners must show that the damages received were on account

of personal injuries or sickness.

     The Court of Appeals in Fabry v. Commissioner, 223 F.3d at

1270, concluded, on the basis of its review of relevant Supreme

Court and other judicial precedents, that to qualify for the

exclusion under section 104(a)(2), “a cause and effect

relationship must be established between the tort, the personal

injury resulting, and the amount received in settlement.”    Thus,

in a nonphysical personal injury case:

     each element of the tort settlement must be examined to
     determine whether there is a direct causal link between
     such element and an intangible element of the injury
     (i.e., emotional distress, pain and suffering, loss of
     reputation, etc.). If such a link is found, it would
     seem to satisfy Schleier and payments received for such
     damage, including losses of earning capacity and the
     like, would be excludable. [Id.; emphasis added.]

     In a footnote, the Court of Appeals observed that the

Supreme Court in Schleier, in requiring such a causal analysis,

“did not explain exactly what the link was nor how close the link

must be for a recovery to qualify for a IRC sec. 104(a)(2)

exclusion.”   Id. at 1266 n.16.     The Court of Appeals noted,

however, that in holding that damages received in settlement of

an age discrimination claim under the Age Discrimination in

Employment Act of 1967 were not excludable under section
                               - 9 -

104(a)(2), the Supreme Court in Schleier had concluded that

although the taxpayer’s “unlawful termination may have caused him

some pain, suffering and emotional distress such as that suffered

by an automobile accident victim, no personal injury had been

suffered affecting the amount of back wages recovered.”      Id. at

1267 (emphasis added).   The Court of Appeals further noted that

in O’Gilvie v. United States, 519 U.S. 79 (1996), the Supreme

Court had revisited, in the context of an award of punitive

damages, the causal analysis mandated by Schleier and had

rejected a “but-for” causal analysis in favor of an

“interpretation under which only those damages were excludable

that were awarded ‘by reason of’ or ‘because of’ the personal

injuries.”   Fabry v. Commissioner, 223 F.3d at 1269 n.25.    The

Court of Appeals stated:

     O’Gilvie is consistent with Schleier because punitive
     damages do not bear the direct causal link with the
     victim’s personal injury since the amount of punitive
     damages awarded generally varies positively with the
     degree of the tortfeasor’s conduct, not with the extent
     of the injury sustained. * * * [Id. at 1270 n.25;
     emphasis added.]

     On the basis of the Court of Appeals’ analysis in Fabry of

these Supreme Court precedents, then, it would appear that the

“direct causal link” between damages awarded and personal

injuries sustained depends, at least in part, on whether personal

injuries sustained affected the amount of damages received.     As

previously discussed, petitioners have failed to show that the
                              - 10 -

amount of damages petitioner received on his fraudulent

inducement claim was affected by any personal injuries that he

might have suffered.

     In the USI litigation, the jury awarded petitioner $8.1

million in compensatory fraud damages but only $1 on his breach

of contract claim.   From this circumstance, petitioners would

have us deduce that the entire $8.1 million fraud damages award

was for noneconomic, personal injuries.   Their argument on

supplemental brief is as follows:

     Clearly, the jury understood Mr. Gregg’s contract
     claim, but elected to award damages to Mr. Gregg for
     his personal injury, not any injury to an economic,
     contract, or property right he possessed. The fact
     that Mr. Gregg was awarded nominal damages on his
     contract claim indicates that the jury intended the
     fraud damages to compensate some other injury.

     Petitioners’ argument is a non sequitur.   Implicit in their

argument is an assumption that damages awarded on a fraudulent

inducement claim cannot compensate for economic losses--a

proposition for which petitioners cite no authority and which, as

previously discussed, is contrary to Florida jurisprudence.    See

HTP, Ltd. v. Lineas Aereas Costarricenses, S.A., supra at 1238;

Woodson v. Martin, 685 So. 2d 1240 (Fla. 1996).   The fact that

the same measure of damages might have been employed under the

breach of contract claim does not preclude the tort remedy to

recover economic losses.   See La Pesca Grande Charters, Inc. v.

Moran, 704 So. 2d 710, 712 (Fla. Dist. Ct. App. 1998).    It seems
                               - 11 -

most likely that in awarding only $1 on the breach of contract

claim, the jury was simply following the trial judge’s

instructions to avoid awarding duplicate damages.3

     As an alternative to their principal argument that the

entire $8.1 million of compensatory fraud damages was on account

of personal injuries, petitioners argue on supplemental brief

that these damages should be allocated between damages for

personal and nonpersonal injuries.      In an attempt to align

themselves with the “unique facts” of Fabry,4 petitioners argue

that the Court of Appeals’ decision in Gregg v. U.S. Indus.,

Inc., 887 F.2d 1462 (11th Cir. 1989), must be read as limiting

petitioner’s economic damages on the fraudulent inducement claim

to no more than $5.6 million, thereby relegating $2.5 million of

the total $8.1 million fraud damages to noneconomic losses.




     3
         The jury instructions in the second jury trial stated:

          You should consider the fraud claim and the breach
     of contract claim as separate and distinct claims;
     however, any damages you may award on one of these
     claims may not be included in the damages on the other
     claim.
     4
       In Fabry v. Commissioner, 223 F.3d at 1270, the Court of
Appeals noted that after the tortfeasor had paid the taxpayers
$3.3 million to restore the lost value of their “business qua
business * * * something intangible remained.” The Court of
Appeals concluded that under the “unique facts” of Fabry, the
additional $500,000 that was allocated to business reputation
represented compensation for this “something intangible”, which
the Court of Appeals concluded was for personal injuries. Id.
                              - 12 -

     Petitioners’ alternative argument is without merit.    Their

characterization of the Court of Appeals’ opinion in Gregg v.

U.S. Indus., Inc., supra, is (viewed charitably) inaccurate.

After the jury awarded petitioner $8.1 million on his fraudulent

inducement cause of action, USI appealed the verdict to the Court

of Appeals for the Eleventh Circuit, arguing that the trial court

had erred in instructing the jury to measure damages on an “out-

of-pocket” rather than a “benefit of the bargain” basis.      Id. at

1465.   USI argued that, under a “benefit of the bargain”

approach, the maximum amount that petitioner could have recovered

for the fraud was $5.6 million--or $2.5 million less than the

$8.1 million that the jury actually awarded him.   The Court of

Appeals rejected USI’s argument, however, and held that there was

no error in the jury’s use of the out-of-pocket measure of

damages.   See id. at 1467.

     In seeking to rely upon Gregg v. U.S. Indus., Inc., supra,

petitioners seem to have confused the rejected argument advanced

by USI with the holding of the Court of Appeals.   In fact, the

Court of Appeals’ holding bolsters the view that the fraud

damages represented compensation for petitioner’s economic losses

rather than for any personal injury.   The Court of Appeals

stated:

     The jury assessed the evidence presented regarding the
     value of Gregg’s companies prior to the closing with
     USI and awarded Gregg an out-of-pocket amount of
     damages representing that value less the value of the
                               - 13 -

       stock he received from USI. This approach restored
       Gregg to the position he was in prior to his dealings
       with USI; a measure wholly consistent with the dictates
       of Florida law. * * * [Id. at 1467.]

       In sum, petitioners have failed to carry their burden to

“show that the damages were received ‘on account of personal

injuries or sickness.’”    Commissioner v. Schleier, 515 U.S. at

337.    Accordingly, we adhere to our original conclusion that

petitioners have failed to prove that the compensatory damages

awarded on the fraudulent inducement cause of action were

received on account of personal injuries within the meaning of

section 104(a)(2).

Petitioner’s Compensatory Damages for Tortious Interference With
a Business Relationship

       Petitioners present similar conclusory arguments to support

their contention that the $43,050 jury award for tortious

interference with a business relationship was received on account

of personal injury.    Their primary argument parallels an argument

that we have previously considered and rejected in the context of

petitioner’s damages award for fraudulent inducement:

petitioners argue that injuries suffered as a result of tortious

interference with business relationships are “inherently

personal, dignitary injuries.”    Thus, petitioners contend that

the entire jury award on this cause of action is excludable under

section 104(a)(2).
                              - 14 -

     As previously discussed, damages received in a tort action

may be excluded from income only when received on account of

personal injuries or sickness.   As noted in our original opinion,

tortious interference with a business relationship is part of a

larger body of tort law aimed at protecting relationships, some

economic (for example, interference with prospective economic

advantage) and some personal (for example, interference with

family relations, or libel and slander).   Keeton et al., Prosser

& Keeton on the Law of Torts, sec. 129, at 978 and nn.5 and 6

(5th ed. 1984).   Petitioners have failed to demonstrate that the

jury award for tortious interference with a business relationship

was on account of anything other than injury to petitioner’s

economic relationship with his bank.

     Petitioners’ reliance on Noel v. Commissioner, T.C. Memo.

1997-113 (holding that part of a settlement payment attributable

to a tortious interference claim was on account of personal

injuries), is misplaced.   In Noel, the evidence before the Court

indicated that the tortfeasor’s actions caused the taxpayer to

suffer emotional distress and damage to his business reputation,

that the taxpayer discussed these damages with the tortfeasor

during the settlement negotiations, and that the payment by the

tortfeasor was intended partly to cover this tort claim.

     The only evidence petitioners cite to support their argument

that the tortious interference award was on account of personal
                              - 15 -

injuries consists of certain remarks that petitioner’s counsel

made in closing arguments in the third jury trial.   Although

petitioners have neglected to favor us with citations to the

record source of these remarks (which petitioners have

paraphrased on brief), our independent perusals of the lengthy

record have brought to light the following remarks in closing

arguments in the USI litigation, which we infer are the remarks

upon which petitioners seek to rely:

          USI interfered * * * with * * * [petitioner’s]
     relationship [with the Leesburg Bank], because after it
     learned that the dividends had been assigned to the
     bank, it wouldn’t let the dividends go to the bank.
     They just hid them, sat on them like a dog in a manger.
     They couldn’t cash them, they just held them. Well, we
     know that that caused problems with Gregg’s
     relationship with the bank. Thereafter, when he tried
     to make loans, he was turned down by the bank. We
     can’t tell you what the damage amount is, but they
     damaged him, they wronged him and the damages should be
     one dollar nominal damages.

               *    *    *    *    *    *    *

     The one dollar on the interference claim will justify
     your going into the punishment aspect of it and then
     you can allow punitive damages that will get their
     attention.

     From these remarks, it seems clear that the injury

complained of was to petitioner’s business relationship with the

Leesburg Bank and to his prospective economic advantage in being

able to borrow money there.

      Ultimately, the jury returned a verdict awarding petitioner

$43,050 compensatory damages and $18.5 million punitive damages,
                              - 16 -

which the trial judge remitted to $2 million.   On supplemental

brief, petitioners argue:   “The lack of any direct correlation

between the amount of damages and any identifiable economic

injury confirms that the jury intended to compensate Mr. Gregg

for his intangible personal injury.”   As we discussed in our

original opinion, however, petitioner’s trial brief in the USI

litigation equated petitioner’s tortious interference claim to

one for “wrongful detention or attachment of property” and

advocated computing damages by reference to petitioner’s economic

loss occasioned when the Leesburg Bank sold the USI stock at a

depressed value to satisfy petitioner’s outstanding loans.    The

opinion of the Court of Appeals in the USI litigation, in

affirming the $43,050 jury award for tortious interference,

confirms this direct correlation between the amount of damages

awarded by the jury and petitioner’s economic injury:

          Gregg also presented evidence “that reasonable and
     fair-minded men in the exercise of impartial judgment
     might reach different conclusions” concerning the
     damages he suffered as a result of USI’s interference
     with his business relationship with the Leesburg bank.
     Gregg introduced evidence that because USI refused to
     pay his dividends to the Leesburg Bank, the bank was
     required to sell Gregg’s stock, which was declining in
     value, to satisfy his loans. Gregg also testified at
     trial that he was unable to obtain loans from the
     Leesburg Bank following USI’s actions in refusing to
     disburse the declared dividends. This testimony was
     not objected to nor contradicted by USI.

          The jury, in considering all the evidence
     presented over several days of trial and all the
     reasonable inferences to be drawn from that evidence,
     including Gregg’s uncontroverted testimony, could find
                              - 17 -

     that USI’s actions regarding the dividends and the
     Leesburg Bank caused Gregg damage. In addition, the
     jury could have determined that had USI released the
     dividends, the Leesburg Bank would not have liquidated
     Gregg’s stock, a drastic measure taken by banks when
     loans become undercollateralized or no longer secured
     to the bank’s satisfaction, prevention or delay of
     which would have been a benefit to Gregg; a benefit
     which he was denied, thus causing him damage.

          We hold that the evidence in the record supports
     the jury’s determination that Gregg established his
     claim for tortious interference with his business
     relationship. The jury’s award of $43,050 in
     compensatory damages was also supported by the range of
     the evidence. * * * [Gregg v. U.S. Indus., Inc., 887
     F.2d at 1475; citations omitted.]

     In sum, the evidence clearly indicates a direct correlation

between petitioner’s damages award for tortious interference and

his economic injuries.   Petitioners have failed to show that the

amount of damages was affected by any personal injuries--indeed,

the Court of Appeals’ discussion supra strongly suggests that it

was not.   Accordingly, we adhere to our original conclusion that

petitioners have failed to show that the damages awarded for

tortious interference were received on account of personal

injuries or sickness within the meaning of section 104(a)(2).

Prejudgment Interest

     In our original opinion, we followed well-established

precedents in holding that petitioner’s award of prejudgment

interest was not excludable from gross income under section

104(a)(2).   See Bagley v. Commissioner, 105 T.C. 396, 419 (1995),

affd. 121 F.3d 393 (8th Cir. 1997); Kovacs v. Commissioner, 100
                             - 18 -

T.C. 124, 129-130 (1993), affd. per curiam without published

opinion 25 F.3d 1048 (6th Cir. 1994); Rozpad v. Commissioner,

T.C. Memo. 1997-528, affd. 154 F.3d 1 (1st Cir. 1998); see also

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

Fabry, neither the Tax Court nor the Court of Appeals addressed

the taxation of prejudgment interest.   We conclude that nothing

in the Court of Appeals’ remand requires us to reconsider our

findings in this regard.

                                         Decision will be entered

                                   for the same year in the same

                                   amounts as previously entered

                                   in this case.
