USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 95-2066
JOSEPH P. DELANEY and
JANE H. DELANEY,
Petitioners, Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent, Appellee.
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ON APPEAL FROM A DECISION OF THE
UNITED STATES TAX COURT
[Hon. Thomas B. Wells, U.S. Tax Court Judge]
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____________________
Before
Torruella, Chief Judge,
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Cyr and Lynch, Circuit Judges.
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Kimberly L. O'Brien, with whom Justin S. Holden and Justin S.
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Holden & Associates, Inc. were on brief for petitioners, appellants.
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Kevin M. Brown, Attorney, Tax Division, Department of Justice,
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with whom Loretta C. Argrett, Assistant Attorney General, and Gary R.
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Allen and Bruce R. Ellisen, Attorneys, Tax Division, Department of
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Justice, were on brief for respondent, appellee.
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November 1, 1996
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CYR, Circuit Judge. Joseph J. and Jane H. Delaney
CYR, Circuit Judge
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("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
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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
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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).
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II
II
DISCUSSION
DISCUSSION
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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
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It is settled law that taxpayers bear the burden of
proving that a tax deficiency assessment is erroneous. United
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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
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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
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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
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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,
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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
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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.
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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
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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
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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.
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Commissioner, 79 T.C. 680, 694 (1982), aff'd, 749 F.2d 37 (Table)
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(9th Cir. 1984); see also Mitchell v. Commissioner, 60 T.C.M.
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(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.),
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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
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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-
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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
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tort judgment had not become final since it was on appeal at the
time of the settlement; therefore, following McShane, the debt
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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
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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.
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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.
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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
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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
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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
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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
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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
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the first time on appeal, we decline to address it. See, e.g.,
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Villfane-Neriz v. F.D.I.C., 75 F.3d 727, 734 (1st Cir. 1996)
______________ ________
(arguments first raised on appeal not ordinarily addressed).6
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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
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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
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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,
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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).
____ ______
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