
USCA1 Opinion

	




                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                                                                      ____________________        No. 95-2066                                JOSEPH P. DELANEY and                                   JANE H. DELANEY,                               Petitioners, Appellants,                                          v.                          COMMISSIONER OF INTERNAL REVENUE,                                Respondent, Appellee.                                                                                      ____________________                           ON APPEAL FROM A DECISION OF THE                               UNITED STATES TAX COURT                     [Hon. Thomas B. Wells, U.S. Tax Court Judge]                                            ____________________                                                                                      ____________________                                        Before                               Torruella, Chief Judge,                                          ___________                            Cyr and Lynch, Circuit Judges.                                           ______________                                                                                      ____________________             Kimberly L. O'Brien,  with whom  Justin S. Holden  and Justin  S.             ___________________              ________________      __________        Holden & Associates, Inc. were on brief for petitioners, appellants.        _________________________             Kevin M.  Brown, Attorney,  Tax Division, Department  of Justice,             _______________        with  whom Loretta C. Argrett, Assistant Attorney General, and Gary R.                   __________________                                  _______        Allen and  Bruce R.  Ellisen, Attorneys,  Tax Division,  Department of        _____      _________________        Justice, were on brief for respondent, appellee.                                                                                      ____________________                                   November 1, 1996                                                                                      ____________________                    CYR, Circuit  Judge.   Joseph  J. and  Jane H.  Delaney                    CYR, Circuit  Judge                         ______________          ("appellants" or  "the Delaneys")  challenge a United  States Tax          Court  ruling upholding  a determination  by the  Commissioner of          Internal  Revenue that  a  portion of  their $250,000  settlement          recovery in a tort-based action for personal  injuries is subject          to federal  income tax  as statutory  prejudgment  interest.   We          affirm the Tax Court ruling, without deciding whether prejudgment          interest  is ever excludable  as "damages received  on account of          personal  injuries"  under  Section  104(a)(2)  of  the  Internal          Revenue Code.                                           I                                          I                                      BACKGROUND                                      BACKGROUND                                      __________                    In 1988, the  Delaneys commenced a tort action in Rhode          Island Superior  Court, demanding  damages for personal  injuries          sustained by Mr. Delaney in a fall from the second-floor porch of          their  Apple  Valley  condominium in  Smithfield,  Rhode  Island.          Apple Valley Associates,  Inc., the condominium developer;  Apple          Valley  Condominium  Association,  Inc., the  condominium  owners          association;   and Condominium Management,  Inc., the  management          firm responsible for maintaining the condominium properties, were          named as defendants.                     On October  12, 1990,  a jury  awarded $150,000 to  Mr.          Delaney  for personal injuries  and $25,000  to Mrs.  Delaney for          loss of consortium, assigning fault among the three defendants as          follows:   Apple Valley Associates 25%;  Apple Valley Condominium          Association and  Apple  Valley Condominium  Management,  jointly,                                          2          75%.   As required  under Rhode Island  law, the  clerk of  court          added  $112,000 in  statutory  prejudgment interest  to the  jury          award,  bringing the total judgment to  $287,000.  The defendants          appealed the judgment to the Rhode Island Supreme Court.                    In 1991,  while their  appeal was still  pending, Apple          Valley Condominium Association,  Inc. and Condominium Management,          Inc.  entered  into a  settlement agreement  to pay  the Delaneys          $250,000 for a release of "any and all past, present, or future .          . .  claims .  . .  arising out of  bodily injuries  sustained by                                Joseph P.  Delaney .  . .  ."1   The  agreement itself  mentioned                                       1          neither  prejudgment nor  postjudgment interest;  furthermore, it          failed  to  indicate what,  if  any,  understanding the  settling          parties had reached regarding any apportionment of the settlement          amount as  between prejudgment interest and compensatory damages.          Subsequently, however,  the settling parties filed  a stipulation          of dismissal with the Rhode Island  Superior Court, which stated:          "No interest.   No costs."2   The  stipulation was  silent as  to          whether   the  term   "interest"   meant  prejudgment   interest,          postjudgment interest, or both.                    The Delaneys did not declare the $250,000 on their 1991          federal income tax return.  Ultimately, the Commissioner assessed                                        ____________________               1Under the  settlement agreement, both Mr.  and Mrs. Delaney          released their claims  against Apple Valley  Condominium Associa-          tion,  Inc. and  Condominium Management,  Inc.  The  Delaneys re-          served their  right to  proceed against Apple  Valley Associates,          which was not a party to the settlement agreement.                2After deducting $85,866 in legal fees and expenses, counsel          to the Delaneys issued them a check for $164,134.                                          3          a $20,580 deficiency for  tax year 1991, which was  calculated by          allocating 39 percent    or $97,561    of the settlement proceeds          to prejudgment interest.  The IRS based its 39 percent allocation          on the fact that 39 percent (or $112,000) of the $287,000 superi-          or court judgment constituted prejudgment interest.                     The  Delaneys initiated  proceedings in the  Tax Court,          alleging that  the entire  $250,000 settlement had  been properly          excluded from gross income as "damages  received . . . on account          of personal  injuries or sickness" pursuant  to Section 104(a)(2)          of the Internal Revenue Code.  The Commissioner has conceded that          the  settlement amount attributable  to compensatory  damages for          personal injuries  is excludable, but not  the statutory prejudg-          ment interest.   Through the  testimony of their  counsel in  the          underlying tort action, their  letter proposing settlement to the          defendants, the settlement agreement  itself, and the stipulation          of dismissal, the  Delaneys attempted  to show the  Tax Court  at          trial that none  of the  settlement amount had  been intended  as          prejudgment interest.   After  determining that the  Delaneys had          not  met their  burden of  proving the  Commissioner's assessment          incorrect, the  Tax Court  ruled that  the settlement  included a          prejudgment interest  component amounting  to $97,561, or  39% of          the  $250,000 settlement.   Delaney  v. Commissioner  of Internal                                      _______     _________________________          Revenue, 70 T.C.M. (CCH) 353 (1995).           _______                                          II                                          II                                      DISCUSSION                                      DISCUSSION                                      __________                    This  case concerns  the  inherent tension  between two                                          4          sections of  the Internal Revenue Code  governing exclusions from          gross income.  Section 61(a) of the Internal Revenue Code states:          "[e]xcept as  otherwise provided  in this subtitle,  gross income            _______ __  _________ ________  __ ____ ________          means  all income  from whatever  source derived."   26  U.S.C.            61(a)  (emphasis added).  On the other hand, section 104(a)(2) of          the Internal Revenue Code  provides that "damages received .  . .          on account of personal injuries or  sickness" are excludable from          gross income.   26 U.S.C.   104(a)(2).  The  courts have accorded          section 61(a) wide sweep.   Commissioner v. Schleier,      U.S.                                        ____________    ________  ____      _          ,    , 115 S. Ct. 2159, 2167 (1995); Brabson v. United States, 73            ___                                _______    _____________          F.3d 1040, 1042 (10th  Cir. 1996); O'Gilvie v. United  States, 66                                             ________    ______________          F.3d 1550, 1555 (10th Cir. 1995), cert. granted, 116 S. Ct.  1316                                            _____ _______          (1996);  see  also 26  U.S.C.     61(a)(4) (including  "interest"                   ___  ____          within definition of "gross income").                      Thus, gain constitutes gross income under section 61(a)          unless  the  taxpayer  can   demonstrate  a  specific  exclusion.          Brabson, 73 F.3d at 1042 (citing Schleier,       U.S.  at       ,          _______                          ________   ____          ______          115 S.  Ct. at 2163 (1995); Commissioner v. Glenshaw Gas Co., 348                                      ____________    ________________          U.S. 426, 430  (1955); Wesson v. United States, 48  F.3d 894, 898                                 ______    _____________          (5th  Cir. 1995)).   In  determining exclusions  under 104(a)(2),          courts  are "guided by the corollary to   61(a)'s broad construc-          tion, the  `default rule of statutory  interpretation that exclu-          sions  from income must  be narrowly  construed.'"   Id. (quoting                                                               __          Schleier,       U.S. at      , 115 S. Ct. at 2163).          ________  _____         _____                    The   present  appeal  revolves  around  two  principal          claims.   First, the Delaneys claim that the Tax Court improperly                                          5          second-guessed their settlement agreement  with the defendants in          the  tort action by treating a portion of the $250,000 settlement          as statutory prejudgment  interest despite the explicit  language          in  their subsequent stipulation of dismissal:  "No interest.  No          costs."  The Delaneys insist that the  stipulated settlement term          "no interest" unambiguously  provides that the  settlement amount          included no interest component  of any type.   Second, appellants          maintain that  any prejudgment interest in  a settlement recovery          for personal  injuries comes within the  section 104(a)(2) exclu-          sion  for "damages"  resulting from personal  injuries.   We find          neither claim availing.          A.   Settlement Agreement          A.   Settlement Agreement               ____________________                    It is  settled law  that taxpayers  bear the burden  of          proving  that a  tax deficiency  assessment is  erroneous. United                                                                     ______          States v. Rexach, 482  F.2d 10, 16 (1st Cir.),  cert. denied, 414          ______    ______                                _____ ______          U.S. 1039 (1973);   Tax Court Rule 142(a). The  Supreme Court has          held  that the Commissioner's "ruling  has the support  of a pre-          sumption of  correctness, and  the petitioner  has the  burden of          proving  it to be wrong."  Welch  v. Helvering, 290 U.S. 111, 115                                     _____     _________          (1933);  see also  United  States v.  Janis,  428 U.S.  433,  439                   ___ ____  ______________     _____          (1976); Estate of  Todisco v.  Commissioner, 757 F.2d  1, 6  (1st                  __________________     ____________          Cir. 1985) (the basic rule in all tax cases places  the burden of          proof with the taxpayer).   The rationale  for this rule is  more          deeply  rooted  than the  conventional  regimen  that places  the          burden of proof on the moving party.  See Rexach, 482 F.2d at 16.                                                ___ ______          Thus,  in a tax deficiency suit "the burdens of going forward and                                          6          of ultimate persuasion are always on the taxpayer and never shift          to the Commissioner."   Id. at 16-17.   Ultimately, of course,  a                                  __          tax deficiency assessment is subject to reversal if  the taxpayer          establishes by  a  preponderance  of the  evidence  that  it  was          erroneous.  Estate of  Whit v. Commissioner, 751 F.2d  1548, 1556                      _______________    ____________          (11th Cir.), cert. denied, 474 U.S. 1005 (1985).                        ____  ______                    Viewed  simply  as a  linguistic  exercise, appellants'          interpretation  has  a  certain  appeal.   Since  the  settlement          agreement  language itself  suggests  no differentiation  between          damages and prejudgment interest, its silence plainly permits the          interpretation  that the  entire $250,000  constituted recompense          for  personal injury.   Moreover,  the subsequent  stipulation of          dismissal  executed by the parties to the tort action purports to          fill  the void by precluding     with the  language "No interest.          No costs."    the interpretation urged by the Commissioner.                      The difficulty  with appellants'  approach lies  in the          fact that  the required  inquiry encompasses much  more than  the                         ________          mere  language  subscribed to  by  the  parties, whether  in  the          settlement  agreement proper,  the  stipulation of  dismissal, or          both,  because under  established  precedent the  Tax Court  must          determine "in  lieu  of  what  were damages  awarded"  or  paid.3                                   ____                                        ____________________               3Of course, it  is the  nature of the  settled claim  itself                                       ______                 _____          which controls whether any  of the settlement constituted compen-          sation for a tort-type personal injury.  Metzger v. Commissioner,                       _________                   _______    ____________          88 T.C. 834, 847  (1987), aff'd, 845 F.2d  1013 (Table) (3d  Cir.                                    _____          1988); Glynn v. Commissioner, 76 T.C. 116, 119 (1981), aff'd, 676                 _____________________                           _____          F.2d 682 (Table) (1st Cir. 1982).  Furthermore, "amounts received          in compromise of  a claim must  be considered as having  the same          nature as the right  compromised."  Alexander v. I.R.S.,  72 F.3d                                              _________    ______          938, 942 (1st Cir. 1995).                                           7          Alexander v. I.R.S., 72  F.3d 938, 942 (1st Cir.  1995) (emphasis          _________    ______          added) (quoting  Raytheon Production  Corp. v.  Commissioner, 144                           __________________________     ____________          F.2d 110, 113  (1st Cir.),  cert. denied, 323  U.S. 779  (1944)).                                      ____  ______          See  Getty v. Commissioner, 913  F.2d 1486, 1490  (9th Cir. 1990)          ___  _____    ____________          (utilizing Raytheon's  "in  lieu of"  test to  classify, for  tax                     ________          purposes,  components comprising  settlement amount)).   See also                                                                   ___ ____          Bent v.  Commissioner, 87 T.C. 236 (1986), aff'd, 835 F.2d 67 (3d          ____     ____________                      _____          Cir. 1987).  Moreover,  the courts repeatedly have held  that the          intent of the  payor is  a key determinant  whether a  settlement          recovery  is excludable  from  gross  income.   See  Knuckles  v.                                                          ___  ________          Commissioner, 349 F.2d 610,  613 (10th Cir. 1965); Ray  v. United          ____________                                       ___     ______          States, 25 Cl. Cr. 535, 540 (1992), aff'd, 989 F.2d 1204  (Table)          ______                              _____          (Fed. Cir. 1993); Stocks  v. Commissioner, 98 T.C. 1,  10 (1992);                            ______     ____________          Agar v. Commissioner, 290 F.2d 283, 284 (2d Cir. 1961), aff'g per          ____    ____________                                    _____ ___          curiam 19 T.C.M. (CCH) 116 (1960).  Thus, while acknowledging the                                                        ______          importance of the terms employed in the stipulation of dismissal,          the  Tax  court appropriately  inquired,  inter  alia, whether  a                                                    _____  ____          portion  of the settlement  amount represented prejudgment inter-          est, by looking beyond the language utilized by the parties.                    Accordingly,  confronted  with a  $250,000 postjudgment          settlement literally allocating  nothing to statutory prejudgment          interest  notwithstanding  the   $112,000  prejudgment   interest          component  concededly included  in  the  $287,000 superior  court          judgment, the  Tax Court  reasonably considered, inter  alia, the                                                           _____  ____          intent of the parties in context.  The Tax Court's approach seems          especially apt in these circumstances, where a relevant indicator                                          8          extrinsic to  the settlement  documentation suggested  that their          choice of settlement language may have been driven by tax consid-          erations.   See Taggi v. United  States, 35 F.3d 93,  96 (2d Cir.                      ___ _____    ______________          1994); Glynn v. Commissioner, 76 T.C. 116, 121 (1981), aff'd, 676                 _____    ____________                           _____          F.2d 682 (Table) (1st Cir.  1982); Robinson v. Commissioner,  102                                             ________    ____________          T.C. 116, 126 (1994), aff'd. in  part, rev'd. in part, 70 F.3d 34                                ______ __  ____  ______ __ ____          (5th  Cir. 1995), cert. denied,  65 U.S.L.W. 3252  (U.S. Oct. 07,                            _____ ______          1996)  (No. 95-2067);   Threlkeld v. Commissioner,  87 T.C. 1294,                                  _________    ____________          1306-1307 (1986), aff'd,  848 F.2d  81 (6th Cir.  1988); Fono  v.                            _____                                  ____          Commissioner, 79 T.C. 680, 694 (1982), aff'd, 749 F.2d 37 (Table)          ____________                           _____          (9th Cir.  1984); see  also Mitchell  v. Commissioner,  60 T.C.M.                            ___  ____ ________     ____________          (CCH)  1368 (1990)  (allocation  in settlement  documentation not          binding  where taxpayer drafted document without participation or          approval of adversary), aff'd, 992 F.2d 1219  (Table) (9th Cir.),                                  _____          cert. denied, 510 U.S. 861 (1993).            _____ ______                    Moreover,  viewed in  context the  settlement term  "no          interest" is not without ambiguity as the Delaneys would have it.          Rather, it  may fairly be read either to provide for no interest,          as  the Delaneys  suggest,  or no  interest  in addition  to  the                                                       __ ________          $250,000 settlement amount.  Under the latter interpretation, the          stipulation of  dismissal left open whether  the $250,000 settle-          ment   amount  included  statutory  prejudgment  or  postjudgment          interest.   Thus,  in ascertaining  the tax  consequences of  the          final  settlement, the  Tax Court  appropriately went  beyond the          explicit "no interest" allocation memorialized in the stipulation          of dismissal, see Bent, 87 T.C. at 244, to consider any extrinsic                        ___ ____                                          9          evidence probative of the true nature of the settlement.                      The  Tax Court  was presented  with a  markedly similar          situation on a prior occasion, where the taxpayers had obtained a          $1,275,000  jury award in a personal injury action under a state-          law regime that entitled  them to statutory prejudgment interest.          McShane  v. Commissioner, 53 T.C.M. (CCH)  409 (1987).  As in our          _______     ____________          own case, the  taxpayers in McShane  eventually settled with  the                                      _______          tort-action defendants  while their  case was on  appeal, for  an          amount greater than the jury award.  Id.4  In the deficiency suit                                               __          subsequently brought by the taxpayers, the Tax Court decided that          it "must carefully review the settlement agreements and all other          evidence in the record in order to determine whether the payments          ultimately received included interest."  Id.  Its approach simply                                                   __          mirrors other Tax Court rulings requiring that all relevant facts          and circumstances receive careful consideration in resolving such          disputes.5  See Byrne v. Commissioner, 90 T.C. 1000, 1007 (1988),                      ___ _____    ____________                                        ____________________               4In  McShane, the  settlement agreement  itself,  as distin-                    _______          guished from a separate stipulation, explicitly stated:  "without          costs  and interest."  Id.  The  Delaney Tax Court apparently did                                 __        _______          not  consider  this  distinction  of  significance,  although the          Commissioner had  emphasized it  in his  argument.   Delaney,  70                                                               _______          T.C.M.  353.   Moreover,  though the  taxpayers  in McShane  were                                                              _______          entitled to statutory prejudgment interest, it is unclear whether          their  judgment included  it.   On the  other hand,  the superior          court  judgment appealed  from in  Delaney did  include statutory                                             _______          prejudgment interest.                5Appellants cite McShane for their claim that the underlying                                _______          tort judgment had not become final since it was on  appeal at the          time of  the settlement;  therefore, following McShane,  the debt                                                         _______          had  not been liquidated and  there was no  fixed or determinable          amount excludable under    104(a)(2).  Appellants miss  the point          of McShane,  however, wherein  such indeterminacy  merely allowed             _______                                                _______          the  Tax Court to go beyond the language of the settlement agree-          ment. McShane, 53 T.C.M. (CCH) 409 (1987).                 _______                                          10          rev'd. on other  grounds, 883 F.2d 211 (3d  Cir. 1988); Glynn, 76          ______ __ _____  _______                                _____          T.C. at 120; Robinson, 102 T.C. at 126; cf. Miller v. Commission-                       ________                   __  ______    ___________          er,  65 T.C.M. (CCH) 1884 (1993), supplemented by 66 T.C.M. (CCH)          __          1568 (1993) (absent explicit allocations in  settlement agreement          itself,  Tax Court may  consider pleadings,  jury award,  and any          court  order or  judgment in  determining settlement  payor's in-                                              tent),  aff'd,  60 F.3d  823 (Table)  (4th  Cir. 1995);  Fitts v.                  _____                                            _____          Commissioner, 67 T.C.M. (CCH) 2136 (1994) (if no lawsuit has been          ____________          filed,  court  considers  all  relevant  documents,  letters  and          testimony), aff'd, 53 F.3d 335 (Table) (8th Cir. 1995).                       _____                    The McShane court considered a combination  of factors.                        _______          First, the term "without costs and interest" had been included in          the settlement  agreement at  the insistence  of counsel for  the          principal defendant in the tort  action.  Second, the  intentions                    _________          of  all parties to the underlying tort action, as stated by their          attorneys,  were  most consistent  with  an intention  to  pay no          interest.  Third,  the Tax  Court credited the  testimony of  all          counsel in the tort  action that the settlement amounts  for each          plaintiff  had been arrived at  by assessing the  risks on appeal          and that the tax consequences had never been discussed.  Id.                                                                    __                    The  Tax Court in the present  case pursued a similarly          inclusive  approach by  probing beyond  the settlement  agreement          terms, examining all relevant evidence including the testimony of          the Delaneys' counsel in  the underlying tort action, who  stated          that  the excludability  of the  $250,000 settlement  amount from          gross income  was  never taken  into  account in  the  settlement                                          11          agreement, only the risks  on appeal.  In addition,  however, the          Tax Court considered a letter  from the Delaneys' counsel propos-          ing  settlement to  the  tort-action defendants  and noting  that          interest was continuing to accumulate on the superior court judg-          ment.  There was no  testimonial evidence regarding the  relevant          intentions of any tort-action defendant.                      Finally, the Tax  Court considered the  appropriateness          of  the parallel utilized by the Commissioner in apportioning the          undifferentiated settlement amount  as between prejudgment inter-          est and compensatory damages.  The Commissioner had allocated 39%          of the  $250,000  settlement to  statutory prejudgment  interest,          representing  the  identical proportion  by  which  the clerk  of          court, pursuant  to Rhode  Island law,  had increased the  jury's          personal  injury award.  The  Fifth Circuit has  noted in similar          circumstances that  a jury verdict provides  "the best indication          of the worth" of  the taxpayers' original tort claims.   Robinson                                                                   ________          v.  Commissioner, 70 F.3d 34,  38 (5th Cir.  1995) (approving Tax              ____________          Court's allocation of settlement  proceeds based on percentage of          damages represented  by each  element  in jury  award, where  Tax          Court went beyond terms of agreement settling action against bank          for wrongful failure to release lien).                      As the  Tax Court  supportably ruled that  the Delaneys          had not  overcome  the presumption  of correctness  to which  the          Commissioner's allocation  is entitled, the allocation  of 39% of          the settlement amount to statutory prejudgment interest, substan-          tially based upon the aforementioned parallelism, did not consti-                                          12          tute error.  See Robinson, 70 F.3d at 38; Estate  of Todisco, 757                       ___ ________                 __________________          F.2d at 5.                                           13          B.   Excludability of Prejudgment Interest          B.   Excludability of Prejudgment Interest               _____________________________________                    The  Delaneys next  contend that  statutory prejudgment          interest  itself  is excludable  as "damages  received  . .  . on                                               _______          account  of  personal  injury  or  sickness,"  see  26  U.S.C.                                                            ___          104(a)(2)  (1986) (emphasis  added),  because the  "gross income"          exclusion under section 104(a)(2) embraces all amounts recovered,          by settlement  or otherwise,  as compensation for  personal inju-          ries,  without regard to the  stage in the  litigation process at          which settlement occurs.  We address their predicate arguments in          turn.                1.   Tax Court Authorities                1.   Tax Court Authorities                     _____________________                    The Delaneys challenge the leading precedent upon which          the  Tax Court relied, see  Kovacs v. Commissioner,  100 T.C. 124                                 ___  ______    ____________          (1993),  aff'd, 25 F.3d  1048 (Table)  (6th Cir.),  cert. denied,                   _____                                      ____  ______          ____U.S.____, 115 S.  Ct. 424  (1994), for its  holding that  the          prejudgment interest component in a compensatory damages recovery          for personal  injuries is  taxable.  The  Delaneys maintain  that                                            .            Kovacs is unsound because it  relied upon judicial precedents for          ______          taxing postjudgment interest as authority for taxing  prejudgment                 ____________                                   ___________          interest.   Consequently,  they contend,  Kovacs progeny  such as                                                    ______          Delaney  are similarly flawed.   As their argument  is raised for          _______          the  first time on appeal, we decline  to address it.  See, e.g.,                                                                 ___  ____          Villfane-Neriz v.  F.D.I.C.,  75 F.3d  727, 734  (1st Cir.  1996)          ______________     ________          (arguments first raised on appeal not ordinarily addressed).6                                          ____________________               6Not  only did the Delaneys themselves  rely on Kovacs below                                                               ______          as  support for their contention that prejudgment interest is not          taxable, at no time  did they broach their present  argument that                                          14               2.   Choice of Governing Law               2.   Choice of Governing Law                    _______________________                    The Delaneys  next contend  that Rhode Island  law con-          trols whether  any statutory  prejudgment interest included  in a          personal  injury settlement  constitutes  "damages"  for  federal          income tax purposes.  Since prejudgment interest is an element of          damages  under Rhode  Island  law, appellants  argue, the  entire          $250,000  settlement must  be  excluded from  gross income  under          section 104(a)(2) as damages for personal injury.                      The Tenth Circuit, recently  confronted with a  similar          problem,  noted that though state law governs the nature of legal          interests and  rights created under  state law, the  "federal tax          consequences pertaining to such interests and rights are solely a          matter of federal  law."   Brabson, 73 F.3d  1040, 1044  (Coffin,                                     _______          J.).    Accordingly,  the  Brabson panel  first  ascertained  the                                     _______          pertinent characteristics of statutory prejudgment interest under          Colorado law, but  then looked  to federal law  to determine  its          excludability.   Id. at 1044.   As we  agree with  the thoughtful                           __          approach in  Brabson, we turn first to Rhode Island law to deter-                       _______          mine the nature of  the statutory prejudgment interest ministeri-          ally added by  the superior  court clerk to  the personal  injury          damages award returned by the jury in this case.                      Unlike  the  Colorado  statute  at  issue  in  Brabson,                                                                   _______          statutory  prejudgment interest is not an element of damages in a          personal injury action under Rhode Island law.  DiMeo v. Philbin,                                                          _____    _______          502 A.2d 825, 826  (R.I. 1986) (prejudgment interest  in personal                                        ____________________          Kovacs and its progeny are not good law.            ______                                          15          injury action purely  statutory and therefore  not an element  of          damages);  Castrignano v. E.R. Squibb & Sons, Inc., 900 F.2d 455,                     ___________    ________________________          463 (1st Cir. 1990) (prejudgment interest under Rhode  Island law          "is not an element of damages" in personal injury action) (citing          Andrade  v. State, 448 A.2d 1293, 1295 (R.I. 1982)).7  According-          _______     _____          ly,  in order to prevail,  the Delaneys must  establish that pre-          judgment interest  is excludable under section 104(a)(2) notwith-          standing its state-law characterization.8                 3.  Interest as "Damages On Account of Personal Injuries"               3.  Interest as "Damages On Account of Personal Injuries"                   ____________________________________________________                    The two requirements  for determining exclusions  under          section 104(a)(2) were recently explained in Schleier:                                                       ________                    First, the taxpayer must demonstrate that the                    underlying cause of action giving rise to the                    recovery is  "based upon  tort  or tort  type                    rights"; and  second, the taxpayer  must show                             ___                    that the damages were received "on account of                    personal injuries or sickness."          Schleier,  115 S. Ct. at  2167 (emphasis added).   Although their          ________          underlying  causes of  action  clearly satisfy  the first  prong,          unless the Delaneys are  able to make the second  crucial showing                                        ____________________               7Even though statutory prejudgment interest is an element of          compensatory damages under Colorado law, the Brabson panel deter-                                                       _______          mined, for  purposes of 26  U.S.C.   104(a)(2),  that prejudgment          interest  under  Colorado  law is  not  "received  on account  of          personal injury."  73 F.3d at 1044-47.                 8The Delaneys  cite, inappositely, to Factory  Mut. Ins. Co.                                                     ______________________          v. Cooper, 262  A.2d 370  (R.I. 1970), for  the proposition  that             ______          prejudgment interest  constitutes  "damages" under  Rhode  Island          law.   In Factory Mutual,  the Rhode Island  Supreme Court stated                    ______________          that the term "damages" included  statutory prejudgment interest,          id. at 373,  while interpreting the term "damages" as  used in an          __                                                 __  ____ __ __          insurance policy.    Id. at  371.   See also,  e.g., Lombardi  v.          _________ ______     __             ___ ____   ____  ________          Merchants Mut. Ins. Co., 429 A.2d 1290, 1293 (R.I. 1981) (relying          _______________________          on  Factory  Mutual  for  proposition  that  prejudgment interest              _______________          constitutes damages in context of insurance subrogation action).                                          16             that the portion of their settlement recovery attributable  to          statutory  prejudgment  interest  was  "received  on  account  of          personal injuries or sickness"    their claim fails.  Id.                                                                ___                    The  second predicate  showing  necessitates  what  the          Brabson court  termed  proof that  "each element  of damages  was          _______          linked to  the injury itself."   Brabson, 73 F.3d at  1043.9  The                                           _______          Delaneys utterly failed to  preserve any claim that  the prejudg-          ment interest  component in their settlement  recovery was linked          to their  personal injuries.10  Id.   See also Manzoli v. Commis-                                          __    ___ ____ _______    _______                                        ____________________               9At  this point  in its  analysis, the Brabson  court, after                                                      _______          consulting established canons of interpretation,  determined that          prejudgment interest  under Colorado law simply  is not "received          `on account  of personal injuries  or sickness'"  notwithstanding          the   more  hospitable   state-law  environment   there  involved          (Schleier,  115 S. Ct. at 2167) and  is therefore taxable under             ________          104(a)(2).  In reaching its decision, the Brabson court looked to                                                    _______          congressional intent  and, most  importantly, the "default  rule"          requirement  that courts narrowly  construe exclusions from gross          income.  Brabson, 73 F.3d at 1045-1046.                   _______               10The Delaneys do advert on appeal  to a "time loss value of          money" element in statutory prejudgment interest, and assert that          it  constitutes compensatory  damages because  it is  designed to          make  the personal injury victim whole.  Their "make whole" claim          was not preserved in the Tax Court, however.  See Villfane-Neriz,                                                        ___ ______________          75  F.3d at 734 (arguments first raised on appeal, not ordinarily          addressed).  No argument  was made below that the  statutory pre-          judgment interest  ministerially assessed  by the clerk  of court          pursuant  to  Rhode Island  law comprised  both  a taxable  and a          nontaxable component, nor did a "make  whole" argument surface in          any other developed manner before the  Tax Court.  The sum  total          of their efforts to surface such a claim consisted of a quotation          from the district court opinion subsequently reversed in Brabson,                                                                   _______          cited  in service of the argument that prejudgment interest is an                                                                      __ __          element  of damages under Rhode Island law.  Even more important-          _______  __ _______ _____ _____ ______ ___   ____ ____ __________          ly, appellants established  no evidentiary predicate  which would          __          have  enabled  the Tax  Court to  determine  what portion  of the          statutory prejudgment interest ministerially  added by the  clerk          of  court constituted "make whole damages."  See United States v.                                                       ___ _____________          Alzanki, 54  F.3d 994, 1009  (1st Cir. 1995)  ("Appellant's utter          _______          failure to [raise argument below] disabled the [court below] from          making a  reasoned assessment  . . .  in the first  instance, and                                          17          sioner,  904 F.2d  101, 105 (1st  Cir. 1990).   As  it is neither          ______          necessary nor  practicable to  do so  in this  case, see note  10                                                               ___          supra, we do not  consider whether statutory prejudgment interest          _____          may  ever be excludable from  gross income under    104(a)(2), an          important question left for another day.                                           III                                         III                                      CONCLUSION                                      CONCLUSION                                      __________                    For the  foregoing reasons,  the Tax Court  judgment is          affirmed and costs are awarded to appellee.                    So ordered.                    So ordered.                    __ _______                                        ____________________          from  making the predicate factual findings upon which the claims          depend."), cert. denied, 116 S. Ct. 909 (1996).                       ____  ______                                          18
