Court Opinion

ID: 2964475
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:26:14.396859+00
Date Added: 2024-06-11T09:32:57.096555
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USCA1 Opinion

	

                                [NOT FOR PUBLICATION]
                                [NOT FOR PUBLICATION]

                            United States Court of Appeals
                            United States Court of Appeals
                                For the First Circuit
                                For the First Circuit
                                 ____________________

          No. 95-2180

                                  LAUREL A. FOREST,

                                     Petitioner,

                                          v.

                          COMMISSIONER OF INTERNAL REVENUE,

                                     Respondent.

                                 ____________________

                            ON APPEAL FROM THE DECISION OF

                             THE UNITED STATES TAX COURT

                                 ____________________

                                        Before

                               Torruella, Chief Judge,
                                          ___________

                           Campbell, Senior Circuit Judge,
                                     ____________________

                              and Lynch, Circuit Judge.
                                         _____________

                                _____________________

               Joseph A. Kelly, with whom Carroll, Kelly & Murphy,  Charles
               _______________            _______________________   _______
          J. Reilly, Reilly Law Associates, Inc. and Robert E. Hardman were
          _________  ___________________________     _________________
          on brief for petitioner.
               Kenneth  W.  Rosenberg,   with  whom  Loretta  C.   Argrett,
               ______________________                _____________________
          Assistant  Attorney General, Gary R. Allen,  Bruce R. Ellisen and
                                       _____________   ________________
          Kevin M.  Brown, Attorneys, Tax Division,  Department of Justice,
          _______________
          were on brief for respondent.

                                 ____________________

                                  December 18, 1996
                                 ____________________

                    TORRUELLA, Chief Judge.  Petitioner-Appellant Laurel A.
                    TORRUELLA, Chief Judge.
                               ___________

          Forest ("Taxpayer")  appeals the  income tax deficiency  found by

          the Commissioner of the Internal Revenue Service ("Commissioner")

          and  affirmed by the Tax Court.  See Forest v. Commissioner, T.C.
                                           ___ ______    ____________

          Memo. 1995-377.   In the  spotlight is Section  104(a)(2) of  the

          Internal Revenue Code ("Code"),  which provides that "any damages

          received . . . on  account of personal  injuries or sickness"  be

          excluded  from  gross   income.1    The  Tax  Court   upheld  the

          Commissioner's  determination that  a portion  of the  $2,000,000

          Taxpayer  received in  settlement  of her  personal injury  claim

          should be  characterized as prejudgment interest  and included in

          gross income.   Taxpayer now seeks review of  that decision.  For

          the reasons stated below,  we affirm.  We  do not reach,  because

          they  have  been  waived, issues  concerning  whether prejudgment

          interest  in a  settlement of  a tort action  is excludable  as a

          matter of federal law.

                                      BACKGROUND
                                      BACKGROUND

                    The pertinent facts, some of which have been stipulated

          and incorporated  in the Tax Court's findings,  and others, which

          we draw from the record, are not in dispute.

                    On March 9, 1982, Taxpayer fractured her back  when she

          slipped  and fell  inside  her  employer's walk-in  refrigerator.

          During 1985, she brought a products liability  action against the

          manufacturer  of the  refrigerator,  Bohn Refrigeration  Products
                              
          ____________________

          1   Unless otherwise indicated, all section references are to the
          Internal Revenue Code in effect for 1992.  Internal Revenue Code,
          26 U.S.C.   1 et seq. (1988 & Supp. 1991).
                        _______

                                         -2-

          ("Bohn"), in the  Superior Court of Rhode Island.   See Forest v.
                                                              ___ ______

          Bohn  Refrigeration  Prods.,  Civil   Action  No.  85-0666  (R.I.
          ___________________________

          Superior Court,  Providence, Sc.).   Following a trial,  the jury

          returned  a verdict on September  18, 1991, in  favor of Taxpayer

          for $2,600,000, less ten percent for contributory negligence, for

          a  total award  of $2,340,000.   In  addition, pursuant  to Rhode

          Island General Laws section 9-21-10 (1985), statutory prejudgment

          interest of  twelve percent  was added  to the  jury award.   The

          total judgment, including interest, was $5,007,600.  The interest

          constituted 53% of the total judgment.

                    On  September 27, 1991, Bohn  filed a motion  for a new

          trial.   On October  15, following a  hearing on the  motion, the

          Superior  Court   found  that  the  jury's   award  "shocked  the

          conscience"  and  ordered a  new trial  on  the issue  of damages

          unless Taxpayer agreed to a remittitur of $1,000,000 on or before

          November 15, 1991.   Two  days later, Taxpayer  consented to  and

          filed  the $1,000,000 remittitur and the Superior Court entered a

          judgment for  Taxpayer against Bohn  in the amount  of $1,440,000

          (i.e., $1,600,000 less ten percent contributory negligence), plus

          interest  and costs.   Statutory  prejudgment interest  of twelve

          percent was  added to  the judgment, this  time in the  amount of

          $1,641,600, resulting in  a total judgment of $3,081,600.  Again,

          the interest constituted  53% of  the total judgment.   Then,  on

          October  30,  1991,  Bohn, not  satisfied  with  the  new result,

          appealed the judgment to the Rhode Island Supreme Court.

                                         -3-

                    During  the pendency  of the  appeal, Bohn  settled the

          case with Taxpayer on December 19, 1991.  In return for a General

          Release  ("Release")  by  Taxpayer  of all  claims  for  personal

          injuries, Bohn agreed  to pay Taxpayer  $2,000,000.  The  Release

          did  not provide for  any allocation  of the  settlement proceeds

          between  damages and interest (or costs for that matter).  During

          the   settlement  negotiations,  the  parties  neither  discussed

          whether  any  portion  of   the  settlement  proceeds  should  be

          allocated  to interest  nor stated  that none  of the  settlement

          proceeds  represented  interest   --  interest  was  simply   not

          discussed, neither during the negotiations nor in the Release.

                    On December 19, 1991, and in accordance with  the terms

          of  the General  Release, Aetna  Casualty issued  a check  in the

          amount  of $2,000,000 to Taxpayer and her attorneys.  On December

          23, 1991, Bohn withdrew its appeal and the parties entered into a

          Satisfaction  Stipulation ("Stipulation")  in the  Superior Court

          for  the purpose of removing  the case from  the Superior Court's

          docket.  The Stipulation stated:

                      The  judgment  entered by  this  Court on
                      October  17,  1991[,]  in the  amount  of
                      $1,440,000, plus interest and  costs, has
                      been fully satisfied.

          The  parties  did  not  consider  the  tax  consequences  of  the

          Stipulation.    The  Clerk of  the  Superior  Court  did not  add

          interest to the settlement of $2,000,000.

                    During  1992, Taxpayer's  attorneys issued  a  check to

          Taxpayer in  the amount of $1,256,511.36,  representing her share

          of the settlement proceeds after deducting $668,489 in legal fees

                                         -4-

          and  costs.    Taxpayer  neither  reported  any  portion  of  the

          $2,000,000 settlement on  her 1992 federal income  tax return nor

          claimed any deductions for legal fees and costs stemming from the

          lawsuit.  There was  uncontroverted testimony that Taxpayer never

          received  a  Form 1099  documenting  interest  income from  Aetna

          Casualty.

                    In  its February  3,  1994, notice  of deficiency,  the

          Commissioner determined  a deficiency in Taxpayer's  gross income

          for  the  taxable year  1992  in the  amount  of  $137,459.   The

          Commissioner  determined  that  the  deficiency  was  based  upon

          Taxpayer's  failure to  included  in her  1992  gross income  the

          additional  interest income from the settlement  in the amount of

          $560,000.   This  figure represented  the difference  between the

          settlement   proceeds   ($2,000,000)   and   the   damage   award

          ($1,440,000).  The Commissioner also determined that, pursuant to

          Section  212(1) and subject to  the 2% floor  provided by Section

          67, Taxpayer was entitled to miscellaneous itemized deductions in

          the amount  of $175,513 for  attorneys' fees attributable  to the

          interest portion of the settlement proceeds.

                    Taxpayer petitioned the Tax Court for a redetermination

          of the deficiency, arguing that an amount received  in settlement

          of a personal injury claim represented damages under Rhode Island

          law  and  that  the  entire  lump  sum   received  was  therefore

          excludable from  income under Section  104(a)(2).  The  Tax Court

          sustained   the  Commissioner's  determination,  holding  that  a

                                         -5-

          portion   of  the  settlement  proceeds  represented  prejudgment

          interest and was not excludable from income:

                      [I]n   the   instant  case,   no  express
                      allocations  were  made in  the [G]eneral
                      [R]elease  as to  interest.   Indeed, the
                      [G]eneral [R]elease does not even mention
                      interest.  Because there were  no express
                      allocations,  we  must   look  to   other
                      evidence in the  record to decide whether
                      any of the settlement proceeds  are to be
                      allocated to interest.

          After setting forth the chronology of events culminating with the

          Stipulation, the Tax  Court concluded that "[b]ased  on the facts

          and circumstances of  the instant case,  we hold that  [Taxpayer]

          has failed to establish that none of the settlement proceeds were

          paid on account of prejudgment statutory interest."

                    The Tax Court  then proceeded to decide what portion of

          the $2,000,000 constitutes interest.   The court determined that,

          "[b]ased on our calculations,  we find that the interest  portion

          of a $2,000,000  judgment accruing interest at a rate  of 12% per

          annum  over  9.5  years  is  $1,065,420.56"  (footnote  omitted).

          Nevertheless, in  light  of the  Commissioner's  concession  that

          Taxpayer is  not liable for  a deficiency  in excess of  that set

          forth  in the notice of  deficiency, the Tax  Court sustained the

          Commissioner's  determination in  the notice  of  deficiency that

          $560,000 of the settlement represents interest.

                    This appeal  ensued.  We have  jurisdiction pursuant to

          26 U.S.C.   7482(a)(1).

                                  STANDARD OF REVIEW
                                  STANDARD OF REVIEW

                                         -6-

                    We review the Tax Court's decision "in the same  manner

          and to the  same extent  as decisions of  the district courts  in

          civil  actions tried  without  a jury."    26 U.S.C.     7482(a).

          Whether  prejudgment interest is taxable  is purely a question of

          law and,  therefore, subject to de  novo review.  See  Brabson v.
                                          ________          ___  _______

          United States, 73 F.3d  1040, 1042 (10th Cir. 1996)  (Coffin, J.,
          _____________

          sitting by  designation), petition  for cert. filed,  64 U.S.L.W.
                                    _________________________

          3709 (Apr. 10, 1996);  Alexander v.  IRS, 72 F.3d  938, 941  (1st
                                 _________     ___

          Cir.  1995) (collecting  cases);  see also  First  Nat'l Bank  in
                                            ________  _____________________

          Albuquerque v. Commissioner, 921 F.2d 1081, 1086 (10th Cir. 1990)
          ___________    ____________

          (stating that de novo  review is applied to tax  court's findings
                        _______

          of  law  and  of  ultimate  fact  derived  from   applying  legal

          principles to  subsidiary facts).   The  Tax Court's findings  of

          fact  -- including its  allocation of the  settlement proceeds to

          various elements  of recovery  -- is  reviewable  only for  clear

          error.  Alexander, 72 F.3d at 941.
                  _________

                                      DISCUSSION
                                      DISCUSSION

                    Neither  party  disputes   that  the  claim  underlying

          Taxpayer's recovery was in the nature of a tort, or that Taxpayer

          suffered injuries.  What the parties vigorously dispute, and what

          we must determine,  is whether a portion of the lump sum received

          in  settlement of  Taxpayer's personal  injury claim  constitutes

          prejudgment interest  and,  if so,  whether it  is excludable  as

          "damages received . .  . on account of personal  injuries" within

          the meaning of Section 104(a)(2).

                                          I
                                          I

                                         -7-

                    As always, we begin  with the relevant Code provisions,

          of which there are  two.  Section 61(a) provides  that, "[e]xcept

          as otherwise  provided in this  subtitle, gross income  means all

          income  from whatever source derived."  26 U.S.C.   61(a); see 26
                                                                     ___

          C.F.R.    1.104-1(c).  As  the "'sweeping scope'  of this section

          and  its  predecessors  has  been repeatedly  emphasized  by  the

          Supreme Court[,]" Brabson, 73  F.3d at 1042 (quoting Commissioner
                            _______                            ____________

          v. Schleier,  ___ U.S. ___, 115  S. Ct. 2159, 2163  (1995)), "any
             ________

          gain constitutes  gross income  unless the  taxpayer demonstrates

          that  it falls  within a  specific  exemption."   Id.   In  turn,
                                                            ___

          Section  104(a)(2) -- the exclusion at issue here -- provides, in

          relevant  part, that gross income does not include "the amount of

          any damages received (whether by suit or agreement and whether as

          lump  sums  or  as  periodic  payments)  on account  of  personal

          injuries  or sickness."   26  U.S.C.   104(a)(2).   As  the Tenth

          Circuit recently noted in Brabson, "[i]n interpreting the breadth
                                    _______

          of   104(a)(2), we are guided by the corollary to   61(a)'s broad

          construction, the 'default rule of statutory  interpretation that

          exclusions  from  income  must  be  narrowly  construed.'"    Id.
                                                                        ___

          (quoting Schleier, ___ U.S. at ___, 115 S. Ct. at 2163); see also
                   ________                                        ________

          Delaney v. Commissioner, 99 F.3d 20 (1st Cir. 1996).
          _______    ____________

                                          II
                                          II

                    Taxpayer makes two main  contentions on appeal.  First,

          she claims that the settlement amount did not contain prejudgment

          interest,  but  consisted  solely  of  damages, excludable  under

          Section 104(a)(2).  Second,  she argues that prejudgment interest

                                         -8-

          is considered  "damages" and, therefore, any  amount attributable

          to prejudgment  interest is  excludable under  Section 104(a)(2).

          We address Taxpayer's arguments in turn.

                                         -9-

                    A.   Allocation of Settlement Amount
                    A.   Allocation of Settlement Amount

                    "It is  settled law that  taxpayers bear the  burden of

          proving that a tax deficiency assessment is erroneous."  Delaney,
                                                                   _______

          99  F.3d at 23.  The Commissioner's  "ruling has the support of a

          presumption of correctness, and the [Taxpayer] has  the burden of

          proving it to  be wrong."  Welch v. Helvering,  290 U.S. 111, 115
                                     _____    _________

          (1933).  "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."  Delaney,
                                                                   _______

          99 F.3d at 23.

                    Taxpayer  argues that the  General Release's silence as

          to  interest is key to the proper determination of the allocation

          of  the settlement.    While this  argument  may have  a  certain

          appeal, see id. ("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."), it

          ignores   the  guiding  principle   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."   Id.  at 23-24.    In  making this
                                          ___

          determination, "the  intent of  the payor  is  a key  determinant

          whether a  settlement recovery is excludable  from gross income."

          Id. at 24.
          ___

                                         -10-

                    Where, as here, that intent is not readily discernable,

          the Tax  Court looks to  all facts and  circumstances surrounding

          the settlement, including "the details surrounding the litigation

          in the  underlying proceeding,  the allegations contained  in the

          payee's  complaint  and  amended  complaint  in  the   underlying

          proceeding, and  the arguments made in  the underlying proceeding

          by each party  there."   Robinson v. Commissioner,  102 T.C.  116
                                   ________    ____________

          (1994), rev'd  in part  on other  grounds, 70  F.3d 34  (5th Cir.
                  _________________________________

          1995), cert.  denied, 117 S. Ct. 83  (1996).  Furthermore,  as we
                 _____________

          recently pointed out, and as Taxpayer recognizes, "a jury verdict

          provides 'the  best indication  of the  worth' of  the taxpayers'

          original tort claims."  Delaney, 99 F.3d at 25 (quoting Robinson,
                                  _______                         ________

          70 F.3d at 38).

                    Here, the  Tax Court, recognizing the General Release's

          silence  as to allocation of the settlement and having little, if

          any,  evidence before  it indicating  the payor's  intent, looked

          beyond  the  language of  the General  Release  to the  facts and

          circumstances  surrounding  that  settlement.    The   Tax  Court

          considered  evidence  from  Taxpayer's  attorneys  that  the  tax

          consequences of  the settlement were not  contemplated during the

          settlement negotiations.  The Tax Court also recognized, however,

          that  the  settlement  was  negotiated  under  the  shadow  of  a

          judgment2  that  provided  prejudgment   interest,  in  the  same
                              
          ____________________

          2  Taxpayer argues that the jury award was not a final verdict or
          decision  of the court under Rhode Island law.  Taxpayer contends
          that  any debt was rendered unenforceable  during the pendency of
          the appeal and therefore  there can be no finding  of an interest
          component  based on the jury  award.  Even  if Taxpayer correctly

                                         -11-

          percentage  of  the  total  award  both  before  and  after   the

          remittitur.3  Regardless of which judgment is considered, the Tax

          Court was not clearly  erroneous in considering this circumstance

          as part of the context in which the settlement was reached.

                    Additionally, the Stipulation, which stated that "[t]he

          judgment .  . . in  the amount of  $1,440,000, plus  interest and

          costs, has  been fully satisfied," indicates  that the settlement

          reached reflected satisfaction  of the jury award, as  that award

          had been apportioned by the Superior Court.

                    Moreover, while the  available facts and  circumstances

          support  the  Tax  Court's  finding that  the  settlement  amount

          included  prejudgment  interest,  nothing  in  those  facts   and

          circumstances  supports the  opposite conclusion.   At  best, the

                              
          ____________________

          recites the law of Rhode Island, which we need not decide, we are
          not  looking  to  the judgment  as  the  sole  indication of  the
          existence of an interest component in  this settlement.  Instead,
          we regard the Superior Court's judgment as part of the context in
          which the parties negotiated the settlement.

          3  Taxpayer  contends that Bohn's appeal  reinstated the original
          jury  award.  In support of this contention, Taxpayer cites Dawes
                                                                      _____
          v. McKenna, 215  A.2d 235 (R.I. 1965).  Dawes,  however, does not
             _______                              _____
          hold that the original award is automatically reinstated; rather,
          it  allows only  that the original  award is  open for  review on
          appeal.   Id. at 325-26.  Thus,  it was not clearly erroneous for
                    ___
          the  Tax  Court  to  look  to the  award  after  remittitur  as a
          circumstance for consideration.

             Furthermore, as  the Tax Court  appropriately recognized, even
          if  the original award were considered, there is no precedent for
          the  argument that a jury award larger than the settlement amount
          necessitates a finding that the entire settlement is attributable
          to compensation  for personal  injuries.   In Robinson,  102 T.C.
                                                        ________
          116,  the  Tax  Court found  that  a  portion  of the  settlement
          proceeds  was  attributable to  interest  even  though the  total
          proceeds  represented less  than twenty  percent of  the original
          damage award.

                                         -12-

          General  Release's  silence  regarding   the  allocation  of  the

          settlement  proceeds is ambiguous.   In light of  the other facts

          and  circumstances   weighing  in   favor  of  the   Tax  Court's

          conclusion,  that ambiguity is certainly  not enough to warrant a

          finding that the Tax Court's findings are clearly erroneous.

                    Taxpayer contends that this  case is similar to McShane
                                                                    _______

          v.  Commissioner, T.C. Memo 1987-151.  Although the facts in both
              ____________

          cases  involve  a  jury  award,  an  appeal,  and  a  settlement,

          thereafter the  two cases  diverge.   In McShane,  the settlement
                                                   _______

          agreement provided for  lump sum payments to the taxpayers.  In a

          recent case similar  to the one at  bar, this court reviewed  the

          McShane  decision and  found that  the Tax  Court's determination
          _______

          that  the  settlement did  not include  interest  was based  on a

          unique set of facts:

                      "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."

          Delaney, 99 F.3d at 25.
          _______

                    The Tax  Court in  the instant  case  made a  similarly

          thorough inquiry into the  relevant facts and circumstances.   It

          found that the settlement agreement was negotiated in the context

                                         -13-

          of the jury award in the underlying case.  It also heard evidence

          from the  Taxpayer's attorneys that neither  tax consequences nor

          interest  were considered in reaching the  settlement amount.  It

          heard no evidence as to the intent of the payor, Bohn.  The court

          found that, unlike the agreement in McShane, there was no express
                                              _______

          statement in the Release  indicating that the payment was  not to

          include prejudgment interest.  Finally, the Stipulation contained

          language indicating  that the  settlement satisfied  the judgment

          after remittitur,  including interest  and costs.   We  find that

          these facts are sufficient to distinguish this case from McShane.
                                                                   _______

                    Thus, the Tax Court's  conclusion is amply supported by

          the  facts  and  circumstances  surrounding  the  settlement  and

          Taxpayer's arguments  are insufficient to overcome  her burden of

          showing error in the  Commissioner's determination or clear error

          in the Tax Court's findings.

                    B.   Whether  prejudgment  interest  is  excludable  as
                    B.   Whether  prejudgment  interest  is  excludable  as
                         "damages" under Rhode Island law.
                         "damages" under Rhode Island law.

                      1.  Kovacs v. Commissioner
                      1.  Kovacs v. Commissioner
                          ______    ____________

                    Taxpayer argues that the  Code, legislative history and

          prior case law do not  support the Tax Court's holding in  Kovacs
                                                                     ______

          v.  Commissioner,  100  T.C.  124   (1993),  aff'd,  25 F.3d 1048
              ____________                             _____

          (6th Cir.), cert. denied, 115 S. Ct. 424 (1994), that prejudgment
                      ____________

          interest on a personal injury claim is not excludable from income

          under Section 104(a)(2).  Her contention is that the Tax Court in

          Kovacs improperly  relied on precedent holding that post-judgment
          ______                                              ____

          interest is  not excludable from  interest income.   She  further

          maintains  that nothing  in  the legislative  history of  Section

                                         -14-

          104(a)(2) supports a distinction between compensatory damages and

          interest awarded on a claim of physical injury.  Finally, relying

          on the Periodic Payment Settlement Act of 1982,4  Taxpayer argues

          that Congress, in amending the Code to allow for the exclusion of

          period  settlement payments   -- which would  include a component

          representing the  time value of money, or interest -- disregarded

          any difference between lump  sum and periodic payments  and meant

          for any interest income upon settlement  to be excludable.  As we

          find  nothing  in  the  record  below,  including  the  testimony

          presented and the  initial and  reply briefs of  the parties,  to

          indicate that these  arguments were raised before  the Tax Court,

          we  decline Taxpayer's invitation to consider  them for the first

          time on appeal.   See  Delaney, 99 F.3d  at 26 (determining  that
                            ___  _______

          taxpayer's  failure to raise  a similar  argument before  the Tax

          Court amounted to waiver of that argument).

                      2.  Treatment of Interest Under Rhode Island Law
                      2.  Treatment of Interest Under Rhode Island Law

                    Taxpayer contends  that whether an award  is taxable is

          determined by  reference to the  nature of the  underlying claim.

          She points out  that the underlying claim here is  one to redress

          personal injury  and, as such,  the damages received  thereon are
                              
          ____________________

          4  We note, in passing,  that, to the extent Taxpayer's arguments
          rely on this  amendment, such  reliance is misplaced.   That  Act
          allows  the  excludability  of  the  entire  amount  of  periodic
          payments in settlement of a claim.  In so doing, the Act allows a
          portion of "interest"  to be  excluded from gross  income.   This
          Act, however,  does not assist  Taxpayer, as her  settlement does
          not  fall within  the  provisions  of that  Act.    We apply  the
          statutory language  relevant to Taxpayer's particular  claim.  As
          the Tax  Court did in Kovacs v.  Commissioner, 100 T.C. 124, 132-
                                ______     ____________
          33,  any inconsistency between  the two methods  of settlement we
          leave to Congress to remedy.

                                         -15-

          excludable.   Noting that the  nature of the  underlying claim is

          determined under  the relevant  state law, Taxpayer  argues that,

          under  Rhode  Island   law,  statutorily   imposed  interest   is

          considered part of  damages meant to compensate the injured party

          and thus is excludable.

                    We   recently  visited   the  question  of   state  law

          characterization  of  interest.   In  Delaney, we  looked  to the
                                                _______

          "thoughtful"  approach utilized  in Brabson,  73 F.3d  1040 (10th
                                              _______

          Cir. 1996) (Coffin, J., sitting by designation):

                      "The  Tenth  Circuit  .  . .  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.' . .
                      .  Accordingly,  the Brabson  panel first
                                           _______
                      ascertained the pertinent characteristics
                      of  statutory prejudgment  interest under
                      [the relevant state] law, but then looked
                      to   federal   law   to   determine   its
                      excludability."

          Delaney, 99 F.3d at 26.
          _______

                    Accordingly,  we  look first  to  Rhode  Island law  to

          determine  the legal  nature of  prejudgment interest.   Taxpayer

          relies on  Factory Mutual Insurance Company of America v. Cooper,
                     ___________________________________________    ______

          262  A.2d 370 (R.I. 1970),  for the proposition  that interest is

          part  of damages.  Taxpayer's reliance is misplaced.  The Factory
                                                                    _______

          Mutual  court  did  not  hold  that  prejudgment  interest  is  a
          ______

          component  of damages under Rhode Island law.  Instead, the court

          there was determining the meaning of the word "damages" as it was

          used in an insurance policy.  See id. at 373. 
                                        ___ ___

                                         -16-

                    "[S]tatutory prejudgment interest is  not an element of

          damages  in a  personal injury  action under  Rhode Island  law."

          Delaney,  99 F.3d at  26 (citing DiMeo v.  Philbin, 502 A.2d 825,
          _______                          _____     _______

          826  (R.I.  1986)  (determining  that  prejudgment   interest  in

          personal injury action is purely  statutory and therefore not  an

          element of damages)).

                    Having found  that, under Rhode Island law, prejudgment

          interest is not considered  damages, we next look to  federal law

          to determine the  nature of prejudgment interest  for federal tax

          purposes.  See id.
                     ___ ___

                      3.  Prejudgment Interest Under Federal Law.
                      3.  Prejudgment Interest Under Federal Law.

                    The   Supreme   Court   recently  explained   the   two

          requirements for exclusion under Section 104(a)(2):

                      "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.'"

          Commissioner v. Schleier,  ___ U.S.  ___, 115 S.  Ct. 2159,  2167
          ____________    ________

          (1995).  The cause of action underlying Taxpayer's settlement was

          assuredly  one based  upon tort or  tort type  rights.   We look,

          then, to determine whether  Taxpayer has met the second  prong of

          excludability.

                    Taxpayer  appears  to argue  that  the  purpose of  the

          statutorily-imposed prejudgment interest is to make her whole, as

          though the injury had never occurred.  This argument rests on two

          statements  we  glean  from her  brief  to  the  effect that  the

                                         -17-

          interest imposed is meant  to compensate the injured party  for a

          delay in the payment.   Though this argument may have some merit,

          we reserve the question for another day.  Because Taxpayer failed

          to raise the contention that the  statutorily-imposed prejudgment

          interest is somehow related to her personal injury before the Tax

          Court, she  has not preserved  the argument for appeal.   We find

          that argument waived.   See Mulero-Rodr guez  v. Ponte, Inc.,  98
                                  ___ ________________     ___________

          F.3d 670, 679 (1st Cir. 1996) (noting that appellants' silence as

          to a particular legal argument before the trial court amounted to

          waiver  of  that issue  on appeal);  see  also National  Ass'n of
                                               _________ __________________

          Social  Workers v. Harwood, 69  F.3d 622, 627-28  (1st Cir. 1995)
          _______________    _______

          (setting forth the strenuous  guidelines for finding an exception

          to this waiver rule).

                    In  addition,   we  note  that  Taxpayer's  failure  to

          adequately present  any "make  whole" argument  in  her brief  on

          appeal also supports a  finding that this issue has  been waived.

          We  have previously recognized that "a litigant has an obligation

          'to  spell out  its arguments squarely  and distinctly' .  . . or

          else  forever hold its peace."   See Rivera-G mez  v. Castro, 843
                                           ___ ____________     ______

          F.2d  631, 634-35  (quoting Paterson-Leitch Co.  v. Massachusetts
                                      ___________________     _____________

          Municipal Wholesale  Elec.  Co.,  840  F.2d 985,  990  (1st  Cir.
          _______________________________

          1988)).   Here,  Taxpayer  has failed  to  put forth  a  coherent

          argument, beyond  vague reference, regarding any  relationship an

          award of statutorily-imposed interest  might have to her personal

          injuries.    "It  is not  enough  merely  to  mention a  possible

          argument  in the  most  skeletal way,  leaving  the court  to  do

                                         -18-

          counsel's  work, create  the ossature for  the argument,  and put

          flesh on  its bones."  United  States v. Zannino, 895  F.2d 1, 17
                                 ______________    _______

          (1st Cir.),  cert. denied, 494 U.S. 1082  (1990); see also  In re
                       ____________                         ________  _____

          Three Additional Appeals Arising Out of the San Juan Dupont Plaza
          _________________________________________________________________

          Hotel Fire Litigation,  93 F.3d 1, 2 n.2 (1st  Cir. 1996) (noting
          _____________________

          that "it is beyond peradventure that we will not address an issue

          when the party raising it fails to treat it seriously").  We will

          not "abandon the  settled appellate rule that issues  adverted to

          in  a  perfunctory  manner,   unaccompanied  by  some  effort  at

          developed argumentation,  are deemed waived."   Zannino, 895 F.2d
                                                          _______

          at 17.   Because we refuse to  guess at Taxpayer's argument,  any

          "make-whole" argument she might have made is waived.

                    We decline  to pass  on this  question where the  court

          below was not presented with either a legal argument or a factual

          predicate  on   which  to  make   a  reasoned  analysis   of  any

          compensatory component  of prejudgment  interest and where  we do

          not have the benefit of a properly briefed argument.

                                      CONCLUSION
                                      CONCLUSION

                    For  the  foregoing  reasons,  the  decision  below  is

          affirmed.
          affirmed
          ________

                                         -19-