                        T.C. Memo. 1999-10



                     UNITED STATES TAX COURT



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



     Docket No. 13188-96.                    Filed January 22, 1999.


     Bernard A. Barton, Jr., for petitioners.

     Charles Baer, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION


     THORNTON, Judge:   Respondent determined a deficiency in

petitioners' Federal income tax for tax year 1990 in the amount

of $5,582,555.
                               - 2 -

     After stipulations and concessions,1 the remaining issues

for consideration are:   (1) Whether a jury award paid to

petitioner husband pursuant to a judgment against U.S.

Industries, Inc. (USI), on a claim for fraudulent inducement to

enter into a contract is excludable under section 104(a)(2) as

damages received on account of personal injury.    We hold that it

is not.   (2) Whether a jury award paid to petitioner husband

pursuant to a judgment against USI on a claim for interference

with a business relationship is excludable under section

104(a)(2) as damages received on account of personal injury.     We

hold that it is not.   (3) Whether prejudgment interest paid to

petitioner husband pursuant to a judgment against USI is

excludable under section 104(a)(2).    We hold that it is not.

     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.




     1
       The parties stipulate that $2,500,000 in punitive damages
awards received by petitioner husband is properly includable in
petitioners' gross income. The parties further stipulate that
should this Court find that the $8,128,515 in compensatory
damages received by petitioner husband for his fraud claim are
properly includable in petitioners' income, then such damages are
properly characterized as capital gain rather than ordinary
income. On brief, petitioners concede that the $103,341 awarded
for petitioner husband’s breach of contract claims is includable
in gross income.
                                - 3 -

                         FINDINGS OF FACT

     The parties submitted this case fully stipulated in

accordance with Rule 122.   The stipulation of facts, with

attached exhibits, is incorporated herein by this reference.

     For the calendar year 1990, petitioners filed a joint

Federal individual income tax return.   When the petition was

filed in this case, petitioners were husband and wife, and

resided in Leesburg, Florida.   Hereinafter, references to

petitioner are to F. Browne Gregg, Sr., and references to

petitioners are to F. Browne Gregg, Sr., and Juanita O. Gregg.

     In 1969, petitioner owned corporate businesses in Florida

that were engaged in construction, sand mining, and design of

dredging equipment.   The businesses had expanded rapidly and were

hard pressed for working capital.   As a result, on August 27,

1969, petitioner entered into an "Agreement and Plan of

Reorganization" with USI, whereby petitioner transferred to USI

the stock of his companies, $1 million in personal capital, and

petitioners’ $500,000 promissory note in exchange for $3.5

million in common and preferred USI stock.   The agreement

provided that, as further consideration, petitioner could receive

up to an additional $6.5 million in USI stock if the companies

formerly owned by petitioner met specified profitability levels

over the next 5 years.   On the date of closing, October 1, 1969,

a separate "Employment Agreement" was signed under which

petitioner was to remain for 5 years as president and chief

operating officer of his former companies.
                                - 4 -

     During the 5 years after the acquisition, USI put some $12

to $14 million into petitioner's former companies and guaranteed

some $2 million in loans.    Initially, the operations were

successful.   Petitioner received one distribution of USI stock

(called by the parties earn-out stock), valued at $871,484 and

based upon 1969 profits.    Soon, however, relations between

petitioner and USI began to sour.    Petitioner's former businesses

became less and less successful.    USI began limiting petitioner's

authority, and ultimately in May 1971, removed him as president

and chief operating officer, and appointed him to be a salaried

consultant, with little work to perform.

     In December 1971, petitioner pledged his USI stock to the

First National Bank of Leesburg (Leesburg Bank) as security for a

$1.5 million loan.    On April 20, 1972, petitioner failed to make

an installment payment on the note he had transferred to USI and

informed USI he was not going to pay the remaining balance on the

note but instead would offset it against USI’s outstanding

obligations to him.   USI stopped paying his salary and requested

that Chemical Bank in New York, its stock transfer and dividend

disbursing agent, stop payment on petitioner's USI dividends.

Under instructions from USI, Chemical Bank delivered petitioner's

USI stock dividend checks to USI.    On June 15, 1972, petitioner

borrowed an additional $135,000 from the Leesburg Bank, assigning

as security all dividends from his USI stock.    Both petitioner

and the Leesburg Bank mailed to USI notice of the assignment.
                                - 5 -

     Later in 1972, the price of USI's stock fell, and the

Leesburg Bank issued margin calls to petitioner.    When petitioner

did not respond, the bank began selling his stock.    Petitioner

then demanded that USI pay the dividends to the Leesburg Bank,

but USI refused.    Subsequently, the Leesburg Bank liquidated

petitioner’s stock because the loans had become under-

collateralized.

     In 1972, petitioner filed suit in Florida against USI.

Petitioner's lawsuit against USI lasted several years and

included a jury trial that ended in a mistrial, a second jury

trial that was appealed, reversed in part, and remanded (Gregg v.

U.S. Indus., Inc., 715 F.2d 1522 (11th Cir. 1983), modified 721

F.2d 345 (11th Cir. 1983)), and a third jury trial that was

affirmed by the Court of Appeals for the Eleventh Circuit (Gregg

v. U.S. Indus., Inc., 887 F.2d 1462 (11th Cir. 1989)).     USI paid

petitioner on the judgment in 1990.

      The claims on which petitioner prevailed that are relevant

to this case are:    (1) Common-law fraud; and (2) interference

with a business relationship.


The Common-Law Fraud Claim

     The crux of petitioner's common-law fraud claim was

fraudulent inducement.    Petitioner alleged that USI fraudulently

promised to provide petitioner's former businesses with capital

required for their successful operation, when in fact USI's

established financial policies severely limited the cash that it

could make available to them for additional working capital.
                               - 6 -

Petitioner alleged further that USI fraudulently promised to

employ him to operate and manage petitioner's former companies

when it did not intend to continue him in this position.

      The jury returned a verdict awarding petitioner $8,128,515

compensatory damages on his fraud claim.   Petitioners excluded

this damage award from taxable income on their 1990 Federal

income tax return.


The Claim for Interference with a Business Relationship

     In his complaint in the third jury trial, petitioner alleged

that USI maliciously interfered with petitioner’s business and

contractual relationship with Leesburg Bank by withholding

payments of dividends on the USI stock that petitioner had

pledged as security for loans from the bank, that consequently

the bank was required to sell petitioner’s stock at a depressed

price to satisfy his loans, and that petitioner was deprived of

the use and benefit of the dividends and “otherwise damaged”.

     The jury returned a verdict awarding petitioner compensatory

damages in the amount of $43,050 and punitive damages in the

amount of $18,500,000, which the trial judge remitted to $2

million.   On their 1990 joint Federal income tax return,

petitioners included in income $34,748 of the compensatory

damages, but excluded from income the remaining amounts received

with respect to this claim.
                                - 7 -

Prejudgment Interest

      The trial court awarded petitioner prejudgment interest of

$10,823,954 on his fraud claim, and $121,941 on a claim of breach

of employment agreement, of which petitioners excluded

$10,823,954 on their 1990 Federal income tax return.


Notice of Deficiency

      In the notice of deficiency, respondent determined that the

amounts USI paid petitioner on his claims for fraud and

interference with business relationship were not on account of

personal injury or sickness within the meaning of section 104(a),

and consequently were includable in petitioners’ 1990 taxable

income.   Respondent also determined that all amounts of

prejudgment interest received were includable in petitioners’

taxable income.


                               OPINION

 A.   Exclusion of Damages Under Section 104

      1. In General

      Gross income includes income from whatever source derived.

Sec. 61(a).   Statutory exclusions from income are narrowly

construed.    Commissioner v. Schleier, 515 U.S. 323, 327 (1995);

United States v. Burke, 504 U.S. 229, 233 (1992); Commissioner v.

Glenshaw Glass Co., 348 U.S. 426, 431 (1955); Helvering v.

Clifford, 309 U.S. 331, 334 (1940).

      One such statutory exclusion appears in section 104(a)(2),

which excludes from gross income "the amount of any damages
                                 - 8 -

received (whether by suit or agreement and whether as lump sums

or as periodic payments) on account of personal injuries or

sickness".   The applicable regulations define "damages received"

as “an amount received * * * through prosecution of a legal suit

or action based upon tort or tort type rights”.     Sec. 1.104-1(c),

Income Tax Regs.

     In United States v. Burke, supra at 237, the Supreme Court

held that to qualify for the section 104(a)(2) income exclusion,

a taxpayer must show that the legal basis for recovery redresses

a “tort-like personal injury”.

     In Commissioner v. Schleier, supra at 336, the Supreme Court

concluded that a tort or tort-like claim is a necessary but

insufficient condition for excludability under section 104(a)(2).

The Supreme Court held that excludability under section 104(a)(2)

also requires that the amounts received be “on account of

personal injuries or sickness”, focusing on whether there is

proximate cause between any personal injury and the damages

recovered.   Commissioner v. Schleier, supra at 336.

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

Supreme Court revisited this issue.      Acknowledging that “the

phrase ‘on account of’ does not unambiguously define itself”, the

Court rejected an interpretation of section 104(a)(2) that would

require no more than a “but-for” connection between personal

injuries and damages received, and instead required a “stronger

causal connection, making the provision applicable only to those
                                - 9 -

personal injury lawsuit damages that were awarded by reason of,

or because of, the personal injuries”.     Id. at 83.

     Respondent concedes that petitioner’s causes of action for

fraud and interference with a business relationship sounded in

tort.    The question for our consideration, then, is whether

petitioner’s recoveries on these claims were “on account of

personal injuries or sickness”.    This determination is based on

all the facts and circumstances, Fabry v. Commissioner, 111 T.C.

__, __ (1998) (slip op. at 10), which in the context of litigated

claims include the allegations in petitioner’s complaints, the

evidence presented, and the arguments made in the underlying

litigation, Metzger v. Commissioner, 88 T.C. 834, 848 (1987),

affd. without published opinion 845 F.2d 1013 (3d Cir. 1988);

Bent v. Commissioner, 87 T.C. 236, 245 (1986), affd. 835 F.2d 67

(3d Cir. 1987); Seay v. Commissioner, 58 T.C. 32, 37 (1972).     The

taxpayer bears the burden of proof.     Rule 142(a).2

     It is well settled that "personal injuries" include

intangible as well as tangible harms, and nonphysical as well as

     2
       Respondent argues that petitioner is collaterally estopped
from claiming the damages he received were on account of personal
injuries, because the jury instructions and appellate decisions
in the underlying litigation make it clear, in respondent’s view,
that petitioner’s injuries were not personal. We reject
respondent’s strained and peculiar theory of collateral estoppel
if for no other reason than because the characterization of
petitioner’s damages for Federal income tax purposes was not
essential to and was not litigated in petitioner’s prior
litigation. See Kightlinger v. Commissioner, T.C. Memo. 1998-
357. We have, however, considered the contents of the jury
instructions and the appellate decisions as part of our factual
inquiry in determining the basis upon which petitioner’s damage
awards were made.
                              - 10 -

physical injuries.   Commissioner v. Schleier, supra at 329 n.4;

United States v. Burke, supra at 234 n.6; Threlkeld v.

Commissioner, 87 T.C. 1294, 1305 (1986), affd. 848 F.2d 81 (6th

Cir. 1988).3   In United States v. Burke, supra at 239, the

Supreme Court distinguished personal tort-like injuries from

“legal injuries of an economic character”.   Similarly, in

Commissioner v. Schleier, supra at 331, the Supreme Court

distinguished “injuries that were personal rather than economic”.

See also Robinson v. Commissioner, 102 T.C. 116, 126 (1994),

affd. in part, revd. in part on another issue 70 F.3d 34 (5th

Cir. 1995) and cases cited therein (damages are not excludable

under section 104(a)(2) if they are “received pursuant to the

settlement of economic rights arising out of a contract (e.g.,

lost profits))”; Kightlinger v. Commissioner, T.C. Memo. 1998-

357, and cases cited therein (recovery for injuries to “business

or property” is separate and distinct from recovery for personal

injuries).

     To determine whether damages are received on account of

personal injuries under section 104(a)(2), we look to the nature

of the claim underlying the damages award.   United States v.

     3
       In 1996, Congress limited sec. 104(a)(2) to damages
received on account of a personal “physical” injury or “physical”
sickness, effective generally with respect to amounts received
after June 30, 1996. Small Business Job Protection Act of 1996,
Pub. L. 104-188, sec. 1605, 110 Stat. 1838. Because of the
prospective effective date, this amendment does not apply to the
case at hand. The conference report indicates that no inference
was intended as to the application of sec. 104(a)(2) prior to
June 30, 1996, in connection with a case not involving a physical
injury or physical sickness. H. Conf. Rept. 104-737, at 300
(1996).
                                 - 11 -

Burke, supra at 237; Threlkeld v. Commissioner, supra at 1305.

Our focus is on the nature of the taxpayer’s injury and whether

the award was received on account of personal or nonpersonal

injuries.      Threlkeld v. Commissioner, supra at 1308; Bennett v.

Commissioner, T.C. Memo. 1994-190.

     If damages have been clearly allocated to an identifiable

claim in a court judgment, we are guided by the nature of the

claim as defined under State law personal injury concepts.

Roemer v. Commissioner, 716 F.2d 693, 697 (9th Cir. 1983), revg.

79 T.C. 398 (1982); Threlkeld v. Commissioner, supra at 1305-

1306.    Although Federal law rather than State law governs the

characterization of payments for Federal income tax purposes, a

State’s characterization of a payment can inform the Federal

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

affg. T.C. Memo. 1997-528.


        2.   Petitioner’s Compensatory Damages for Common-Law Fraud

     Petitioners argue that the compensatory damages petitioner

received on his claim for fraud were on account of personal

injury because “the fraud perpetrated on Mr. Gregg violated his

person and his rights and is a personal injury under applicable

State law”.      Respondent contends that the damages were awarded

for fraud in regard to a sales contract, not for injury to a

person.      For the reasons described below, we agree with

respondent that petitioner’s damages award on his claim for

common-law fraud was not received on account of a personal injury

within the meaning of section 104(a)(2).
                              - 12 -

     Pursuant to Florida jurisprudence, a claim for common-law

fraud requires the following elements:   (1) A false statement

concerning a material fact; (2) the representor's knowledge that

the representation is false; (3) an intention that the

representation induce another to act on it; and (4) consequent

injury to the party acting in reliance on the representation.

Azalea Meats, Inc. v. Muscat, 246 F.Supp. 780 (S.D. Fla. 1965),

revd. on other grounds 386 F.2d 5 (5th Cir. 1967); Food Fair,

Inc. v. Anderson, 382 So. 2d 150 (Fla. Dist. Ct. App. 1980).

     Petitioners suggest that the nature of the injury necessary

to sustain a claim for fraud under Florida law is inherently

personal, noting the availability of remedies for emotional

distress and similar personal injuries resulting from the fraud

perpetrated.   Petitioners concede on brief, however, that there

is nothing in the record to demonstrate that compensatory damages

were paid to petitioner on account of emotional stress or “other

damages that are classic personal injury damages”.   Because our

focus is on the injuries that actually affected petitioner’s

receipt of compensatory damages rather than on other possible

injuries, see Commissioner v. Schleier, 515 U.S. 323 (1995),

petitioners’ argument is unavailing.

     Florida law does not appear to rigidly categorize the nature

of the injury necessary to sustain a claim for fraud.4   We note,

     4
       As stated in Food Fair, Inc. v. Anderson, 382 So. 2d 150,
154 (Fla. Dist. Ct. App. 1980):

     Florida decisions defining injury go in both directions
                                                   (continued...)
                              - 13 -

however, that under Florida law the award of prejudgment interest

on petitioner’s fraud claim supports the conclusion that

petitioner did not receive the compensatory damages on account of

personal injuries.   Under Florida law, prejudgment interest is

ordinarily not recoverable for personal injury actions, because

“the amount and the measure of damages is largely discretionary

with the jury and is in consequence unliquidated until the

trial”.   Farrelly v. Heuacker, 159 So. 24, 25 (Fla. 1935); see

also Argonaut Ins. Co. v. May Plumbing Co., 474 So. 2d 212, 214

n.1 (Fla. 1985); Zorn v. Britton, 162 So. 879 (Fla. 1935).5   For

similar reasons, prejudgment interest is ordinarily not available

as a remedy for an action in tort under Florida law, although

prejudgment interest may be awarded where there is an

ascertainable out-of-pocket loss as the result of the loss of

     4
      (...continued)
     in explaining what constitutes damage sufficient to
     warrant actionable fraud * * *. Early cases reflect a
     requirement that the injury sustained must ordinarily
     be pecuniary in nature. Other Florida decisions seem
     to align themselves with the general rule * * * [that]
     Damage need not be subject to accurate measurement in
     money, but may result from the fact that the defrauded
     party has been induced to incur legal liabilities or
     obligations different from those represented or
     contracted for. * * * [Citations omitted.]

     5
       Under Florida law, a personal injury plaintiff may be
entitled to prejudgment interest on medical expenses, but only
when the plaintiff shows that he has made actual out-of-pocket
payments for those expenses prior to judgment. Alvarado v. Rice,
614 So. 2d 498, 500 (Fla. 1993). However, this exception to the
general rule applies because such a plaintiff suffers the loss of
a vested property right; namely the loss of use of his money.
Id. In any event, petitioner has not alleged physical harm, and
the record is devoid of any evidence of any medical expenses that
he incurred.
                               - 14 -

vested property rights.    Underhill Fancy Veal, Inc. v. Padot, 677

So. 2d 1378, 1380 (Fla. Dist. Ct. App. 1996).

     Petitioners further assert that petitioner's dignitary, or

personal, right to be free from fraud and lies is the injury at

issue, likening the damages award to an award for libel or

slander, in ostensible reliance on Threlkeld v. Commissioner, 87

T.C. at 1308.   In that case, this Court held that compensatory

damages received in settlement of the taxpayer’s claim for

injuries to his professional reputation arising out of a claim

for malicious prosecution were excludable from income under

section 104(a)(2).   This Court determined that an action for

malicious prosecution was similar to an action for defamation and

under Tennessee law would be classified as an action for personal

injuries.   Adopting a definition of personal injury from the

Tennessee Supreme Court, this Court stated:   “Exclusion under

section 104 will be appropriate if compensatory damages are

received on account of any invasion of the rights that an

individual is granted by virtue of being a person in the sight of

the law.”   Id. at 1308 (paraphrasing Brown v. Dunstan, 409 S.W.2d

365, 367 (Tenn. 1966)).6


     6
       That this definition differentiates between a personal
injury and an economic injury is made plain by the more complete
discussion in the paraphrased source, which defines personal
injuries as “injuries resulting from invasions of rights that
inhere in man as a rational being, that is, rights to which one
is entitled by reason of being a person in the eyes of the law.
Such rights, of course, are to be distinguished from those which
accrue to an individual by reason of some peculiar status or by
virtue of an interest created by contract or property.” Brown v.
Dunstad, 409 S.W.2d 365, 367 (Tenn. 1966). (Emphasis added.)
                              - 15 -

      As this Court recently noted in Fabry v. Commissioner, 111

T.C. __, __ (1998) (slip op. at 8), Threlkeld v. Commissioner,

supra, did not adopt a per se rule that damages received on

account of injury to an individual’s business reputation are

excludable under section 104(a)(2).     Rather, we must look to all

the facts and circumstances to determine the nature of the claim.

Id.   Whether or not the fraud perpetrated upon petitioner may

have resulted in some dignitary injury is not controlling.

Rather, petitioners must show that the damages received were on

account of personal injury and that the personal injury affected

the amount of recovery.   See Commissioner v. Schleier, supra at

336-337 (settlement amounts received by the taxpayer in

settlement of his claim under the Age Discrimination in

Employment Act (ADEA) were not on account of personal injuries,

notwithstanding that the taxpayer may have suffered some personal

injury comparable to pain and suffering).

      We look to petitioner’s complaints in the USI litigation to

determine the nature of his claim.     The overwhelming thrust of

petitioner’s complaints is the adverse effects USI’s actions had

on his businesses and on his “earn-out” rights that arose out of

and were dependent on petitioner's contract with USI.     In his

restated complaint in the second jury trial, petitioner asked for

$15 million in compensatory damages.     The complaint

particularized these damages to a degree, alleging that

petitioner had been deprived of the value of his companies and

their businesses “which had a value of at least $10 million”, and
                              - 16 -

that he had been deprived of additional capital contributions

that he had made to USI in the amount of $2,671,000.    These

injuries clearly constitute economic injuries.

     Petitioner’s restated complaint also alleged that USI caused

him to lose the fair value of his earning capacity.    This

allegation parallels a portion of petitioner's complaint alleging

breach of contract.   It appears that any such injury was to

petitioner's lost ability to take advantage of the contractual

"earn-out" provisions, rights that arose out of and were

dependent on petitioner's contract with USI.   Even if the jury

award compensated petitioner for this alleged harm, it would not

constitute a personal injury within the ambit of section

104(a)(2).   See Robinson v. Commissioner, 102 T.C. 116, 126

(1994) (compensatory damages for compromised economic rights that

arise from a contract are not excludable under section

104(a)(2)), affd. in part, revd. in part on another issue 70 F.3d

34 (5th Cir. 1995); Baca v. Commissioner, T.C. Memo. 1990-632.

     Petitioner’s restated complaint also alleged, without

elaboration, damage to his reputation and credit rating.      The

record, however, does not show that evidence was presented in the

USI litigation regarding such injuries or that the damages were

awarded by reason of such harms.   The mere mention of a

particular personal injury in a complaint, without more, does not

serve to bring a recovery for damages within the ambit of section

104(a)(2).   See Kightlinger v. Commissioner, T.C. Memo. 1998-357

(a contrary rule “would improperly expand the scope of section
                              - 17 -

104(a)(2) because the * * * [personal injury] language could

easily be included in every complaint, even if such a claim were

only a ‘throwaway’ claim”).

     In closing arguments at the third jury trial, petitioner’s

counsel characterized petitioner’s injuries as damages suffered

“by reason of giving up his businesses”; petitioner’s counsel

made no argument for compensatory damages for any other type of

injury.   The jury instructions contain no reference to any

injuries other than economic harms.    The trial court instructed

the jury in relevant part as follows:

     Therefore, if you find that * * * [petitioner] has been
     damaged, you should award * * * [petitioner] an amount
     of damages equal to the difference in value between
     what * * * [petitioner] gave USI and the value of what
     he received from USI in return.

     Standing alone, the fact that damages are measured in

economic terms does not compel the conclusion that the injury

redressed is economic rather than personal, for economic loss may

be the best available measure of a personal injury.    Bent v.

Commissioner, 835 F.2d 67, 70 (3d Cir. 1987), affg. 87 T.C. 236

(1986).   In the case at hand, however, we believe that the harm

which was measured by economic factors was in fact an economic

injury.   See Kightlinger v. Commissioner, supra (concluding that

“economic factors were not merely used as a yardstick to measure

the extent of the injury; rather, they were the harm for which

petitioner received his compensation”).

     In sum, petitioners have failed to prove that the

compensatory damages awarded on petitioner’s common-law fraud
                                - 18 -

claim were received on account of personal injuries within the

meaning of section 104(a)(2).    Accordingly, we sustain

respondent’s determination on this issue.


     3.   Petitioner’s Compensatory Damages for Interference With
          a Business Relationship

     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 Torts, sec. 129, at 978 and nn.5 and 6 (5th

ed. 1984).    Under Florida law, tortious interference with a

business relationship is “basically the same cause of action” as

interference with a contract.    Smith v. Ocean State Bank, 335

So. 2d 641, 642 (Fla. Dist. Ct. App. 1976).

      Petitioner’s claim of tortious interference with a business

relationship required proof of each of the following three

elements:    (1) The existence of a business relationship under

which the plaintiff has legal rights; (2) an intentional and

unjustified interference with the relationship by the defendant;

and (3) damage to the plaintiff as a result of the tortious

interference with the relationship.      Gregg v. U.S. Indus., Inc.,

887 F.2d 1462, 1473 (11th Cir. 1989).

     Petitioner’s complaint in the third jury trial focused

almost entirely on the economic injury petitioner suffered as a

consequence of USI’s interference with his business relationship
                              - 19 -

with the Leesburg Bank.   Although petitioners suggest that

petitioner’s tortious interference claim might have supported

recovery for mental suffering, damage to reputation, or violation

of dignitary rights, there is no evidence in the record that

petitioner sought or received compensatory damages for any such

injuries.7

     The jury returned a verdict awarding petitioner $43,050

compensatory damages and punitive damages in the amount of

$18,500,000, which the trial judge remitted to $2 million.

Although the record does not expressly indicate the basis on

which the jury determined compensatory damages, it seems most

likely that the award was based on the theory outlined in

petitioner’s trial brief, which explicitly equated his claim to

one for “wrongful detention or attachment of property” and which

advocated computing his loss by reference to the decrease from

$65,125.45 in the value of his USI stock when the Leesburg Bank

sold it to satisfy petitioner’s loans.

     Based on all the evidence, then, we conclude that

petitioners have failed to prove that the compensatory damages on

the tortious interference claim were received on account of

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


     7
       In fact, the record shows that petitioner sought
compensatory damages on his tortious interference claim
principally as a foothold for a much larger amount of punitive
damages. In his closing arguments in the third jury trial,
petitioner’s counsel requested only one dollar compensatory
damages, stating, “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”.
                               - 20 -

     This Court reached a similar conclusion with respect to an

analogous claim for tortious interference in Kightlinger v.

Commissioner, supra.    In that case, the taxpayer received payment

in settlement of a claim of tortious interference with

prospective economic advantage as an employee.     The complaint in

the underlying litigation sought a remedy for wrongful

interference with economic advantages, and the taxpayer had not

sought or obtained redress for any of the traditional harms

associated with personal injury such as pain and suffering or

emotional distress.    This Court concluded:   “Clearly, recovery

for economic injury based on such a contractual type claim is

excluded from the scope of section 104(a)(2).”

     Petitioners’ reliance on this Court’s decision in Noel v.

Commissioner, T.C. Memo. 1997-113, is misplaced.     In Noel, this

Court held that the taxpayer was entitled to exclude under

section 104(a)(2) an allocable amount received by the taxpayer in

settlement of claims, including a claim for tortious interference

with contractual rights and prospective business advantages.     In

Noel, the record supported a finding of fact that the taxpayer

had suffered both personal emotional distress and damage to his

business reputation, and that these damages had been discussed

during the negotiations that resulted in a settlement.

     By contrast, in the case at hand, petitioners have failed to

prove that the damages award on petitioner’s claim for

interference with a business relationship was received on account
                              - 21 -

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

Accordingly, we sustain respondent’s determination on this issue.


B.   Prejudgment Interest

      Petitioners contend that the prejudgment interest they

received is excludable under section 104(a)(2) as damages

received on account of personal injuries.   As petitioners

acknowledge, however, the well-established precedents in this

Court hold that prejudgment interest is taxable even when

attributable to damages excludable under section 104(a)(2).    See,

e.g., Bagley v. Commissioner, 105 T.C. 396, 419-420 (1995);

Kovacs v. Commissioner, 100 T.C. 124, 129-139 (1993), affd.

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).

      Having concluded that petitioner’s damages were not received

on account of personal injuries within the meaning of section

104(a)(2), a fortiori we conclude that petitioner’s prejudgment

interest was not attributable to personal injuries, and we

decline petitioners’ invitation to disturb the well-established

precedents of this Court.

C.   Evidentiary Issues

      In the parties’ stipulation of facts, respondent reserved

certain evidentiary objections that we now address.

      Paragraph Nos. 25 and 26 of the stipulation of facts relate

to the nature of petitioner's business acumen and personal
                                - 22 -

traits.8   Respondent objects to these stipulations on the grounds

that they are hearsay and lack relevance.      We sustain

respondent's objections on the grounds that petitioner's personal

characteristics as described in these stipulations have no

bearing on whether the damages he received were on account of

personal injuries.

     Respondent further objects to Joint Exhibits 3-C, 10-J, 12-L

and stipulation of facts paragraph No. 31 on the basis that each

merely contains excerpts from other more complete exhibits, and

thus is neither independently relevant or complete.      We sustain

respondent's objections and note that the evidence remains

available elsewhere in the record.       See Fed. R. Evid. 106, 401.

     Finally, on the grounds of relevancy and hearsay, respondent

objects to joint exhibits 5-E and 11-K, which contain transcripts

of the closing arguments made by petitioner's attorney during the

second and third jury trial, respectively.      We overrule

respondent's objections on this issue, for this Court considers

all the facts and circumstances, including arguments made at

trial, in determining whether a taxpayer received damages on

account of a personal injury under section 104(a)(2).         Bent v.

Commissioner, 87 T.C. at 245.    Furthermore, the closing arguments

are not hearsay because, as the stipulation of facts introducing


     8
       Stipulation of Facts, par. 25 states: “Mr. Gregg has been
described as an entrepreneur, a man who has imagination, and a
man with innovative ideas”.

     Stipulation of Facts, par. 26 states:      “Mr. Gregg is a
unique and creative business person”.
                              - 23 -

the exhibit states, the exhibit is not offered to prove the truth

of the matters asserted.   See Knevelbaard v. Commissioner, T.C.

Memo. 1997-330.

     We have considered all other arguments advanced by the

parties, and to the extent we have not addressed these arguments,

consider them irrelevant, moot, or without merit.

     To reflect the foregoing and concessions by the parties,


                                         Decision will be entered

                                    under Rule 155.
