Court Opinion

ID: 2964349
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:24:26.501568+00
Date Added: 2024-06-11T11:37:24.118156
License: Public Domain

USCA1 Opinion

	

                            UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT

                                                     
                                 ____________________

        No. 95-2066

                                JOSEPH P. DELANEY and
                                   JANE H. DELANEY,

                               Petitioners, Appellants,

                                          v.

                          COMMISSIONER OF INTERNAL REVENUE,

                                Respondent, Appellee.

                                                     
                                 ____________________

                           ON APPEAL FROM A DECISION OF THE

                               UNITED STATES TAX COURT

                     [Hon. Thomas B. Wells, U.S. Tax Court Judge]
                                            ____________________

                                                     
                                 ____________________

                                        Before

                               Torruella, Chief Judge,
                                          ___________

                            Cyr and Lynch, Circuit Judges.
                                           ______________

                                                     
                                 ____________________

             Kimberly L. O'Brien,  with whom  Justin S. Holden  and Justin  S.
             ___________________              ________________      __________
        Holden & Associates, Inc. were on brief for petitioners, appellants.
        _________________________
             Kevin M.  Brown, Attorney,  Tax Division, Department  of Justice,
             _______________
        with  whom Loretta C. Argrett, Assistant Attorney General, and Gary R.
                   __________________                                  _______
        Allen and  Bruce R.  Ellisen, Attorneys,  Tax Division,  Department of
        _____      _________________
        Justice, were on brief for respondent, appellee.

                                                     
                                 ____________________

                                   November 1, 1996
                                                     
                                 ____________________

                    CYR, Circuit  Judge.   Joseph  J. and  Jane H.  Delaney
                    CYR, Circuit  Judge
                         ______________

          ("appellants" or  "the Delaneys")  challenge a United  States Tax

          Court  ruling upholding  a determination  by the  Commissioner of

          Internal  Revenue that  a  portion of  their $250,000  settlement

          recovery in a tort-based action for personal  injuries is subject

          to federal  income tax  as statutory  prejudgment  interest.   We

          affirm the Tax Court ruling, without deciding whether prejudgment

          interest  is ever excludable  as "damages received  on account of

          personal  injuries"  under  Section  104(a)(2)  of  the  Internal

          Revenue Code. 

                                          I
                                          I

                                      BACKGROUND
                                      BACKGROUND
                                      __________

                    In 1988, the  Delaneys commenced a tort action in Rhode

          Island Superior  Court, demanding  damages for personal  injuries

          sustained by Mr. Delaney in a fall from the second-floor porch of

          their  Apple  Valley  condominium in  Smithfield,  Rhode  Island.

          Apple Valley Associates,  Inc., the condominium developer;  Apple

          Valley  Condominium  Association,  Inc., the  condominium  owners

          association;   and Condominium Management,  Inc., the  management

          firm responsible for maintaining the condominium properties, were

          named as defendants. 

                    On October  12, 1990,  a jury  awarded $150,000 to  Mr.

          Delaney  for personal injuries  and $25,000  to Mrs.  Delaney for

          loss of consortium, assigning fault among the three defendants as

          follows:   Apple Valley Associates 25%;  Apple Valley Condominium

          Association and  Apple  Valley Condominium  Management,  jointly,

                                          2

          75%.   As required  under Rhode Island  law, the  clerk of  court

          added  $112,000 in  statutory  prejudgment interest  to the  jury

          award,  bringing the total judgment to  $287,000.  The defendants

          appealed the judgment to the Rhode Island Supreme Court.

                    In 1991,  while their  appeal was still  pending, Apple

          Valley Condominium Association,  Inc. and Condominium Management,

          Inc.  entered  into a  settlement agreement  to pay  the Delaneys

          $250,000 for a release of "any and all past, present, or future .

          . .  claims .  . .  arising out of  bodily injuries  sustained by
                      

          Joseph P.  Delaney .  . .  ."1   The  agreement itself  mentioned
                                       1

          neither  prejudgment nor  postjudgment interest;  furthermore, it

          failed  to  indicate what,  if  any,  understanding the  settling

          parties had reached regarding any apportionment of the settlement

          amount as  between prejudgment interest and compensatory damages.

          Subsequently, however,  the settling parties filed  a stipulation

          of dismissal with the Rhode Island  Superior Court, which stated:

          "No interest.   No costs."2   The  stipulation was  silent as  to

          whether   the  term   "interest"   meant  prejudgment   interest,

          postjudgment interest, or both.

                    The Delaneys did not declare the $250,000 on their 1991

          federal income tax return.  Ultimately, the Commissioner assessed

                              
          ____________________

               1Under the  settlement agreement, both Mr.  and Mrs. Delaney
          released their claims  against Apple Valley  Condominium Associa-
          tion,  Inc. and  Condominium Management,  Inc.  The  Delaneys re-
          served their  right to  proceed against Apple  Valley Associates,
          which was not a party to the settlement agreement. 

               2After deducting $85,866 in legal fees and expenses, counsel
          to the Delaneys issued them a check for $164,134.

                                          3

          a $20,580 deficiency for  tax year 1991, which was  calculated by

          allocating 39 percent    or $97,561    of the settlement proceeds

          to prejudgment interest.  The IRS based its 39 percent allocation

          on the fact that 39 percent (or $112,000) of the $287,000 superi-

          or court judgment constituted prejudgment interest. 

                    The  Delaneys initiated  proceedings in the  Tax Court,

          alleging that  the entire  $250,000 settlement had  been properly

          excluded from gross income as "damages  received . . . on account

          of personal  injuries or sickness" pursuant  to Section 104(a)(2)

          of the Internal Revenue Code.  The Commissioner has conceded that

          the  settlement amount attributable  to compensatory  damages for

          personal injuries  is excludable, but not  the statutory prejudg-

          ment interest.   Through the  testimony of their  counsel in  the

          underlying tort action, their  letter proposing settlement to the

          defendants, the settlement agreement  itself, and the stipulation

          of dismissal, the  Delaneys attempted  to show the  Tax Court  at

          trial that none  of the  settlement amount had  been intended  as

          prejudgment interest.   After  determining that the  Delaneys had

          not  met their  burden of  proving the  Commissioner's assessment

          incorrect, the  Tax Court  ruled that  the settlement  included a

          prejudgment interest  component amounting  to $97,561, or  39% of

          the  $250,000 settlement.   Delaney  v. Commissioner  of Internal
                                      _______     _________________________

          Revenue, 70 T.C.M. 353 (1995). 
          _______

                                          II
                                          II

                                      DISCUSSION
                                      DISCUSSION
                                      __________

                    This  case concerns  the  inherent tension  between two

                                          4

          sections of  the Internal Revenue Code  governing exclusions from

          gross income.  Section 61(a) of the Internal Revenue Code states:

          "[e]xcept as  otherwise provided  in this subtitle,  gross income
            _______ __  _________ ________  __ ____ ________

          means  all income  from whatever  source derived."   26  U.S.C.  

          61(a)  (emphasis added).  On the other hand, section 104(a)(2) of

          the Internal Revenue Code  provides that "damages received .  . .

          on account of personal injuries or  sickness" are excludable from

          gross income.   26 U.S.C.   104(a)(2).  The  courts have accorded

          section 61(a) wide sweep.   Commissioner v. Schleier,      U.S.  
                                      ____________    ________  ____      _

          ,    , 115 S. Ct. 2159, 2167 (1995); Brabson v. United States, 73
            ___                                _______    _____________

          F.3d 1040, 1042 (10th  Cir. 1996); O'Gilvie v. United  States, 66
                                             ________    ______________

          F.3d 1550, 1555 (10th Cir. 1995), cert. granted, 116 S. Ct.  1316
                                            _____ _______

          (1996);  see  also 26  U.S.C.     61(a)(4) (including  "interest"
                   ___  ____

          within definition of "gross income").  

                    Thus, gain constitutes gross income under section 61(a)

          unless  the  taxpayer  can   demonstrate  a  specific  exclusion.

          Brabson, 73 F.3d at 1042 (citing Schleier,       U.S.  at       ,
          _______                          ________   ____          ______

          115 S.  Ct. at 2163 (1995); Commissioner v. Glenshaw Gas Co., 348
                                      ____________    ________________

          U.S. 426, 430  (1955); Wesson v. United States, 48  F.3d 894, 898
                                 ______    _____________

          (5th  Cir. 1995)).   In  determining exclusions  under 104(a)(2),

          courts  are "guided by the corollary to   61(a)'s broad construc-

          tion, the  `default rule of statutory  interpretation that exclu-

          sions  from income must  be narrowly  construed.'"   Id. (quoting
                                                               __

          Schleier,       U.S. at      , 115 S. Ct. at 2163).
          ________  _____         _____

                    The   present  appeal  revolves  around  two  principal

          claims.   First, the Delaneys claim that the Tax Court improperly

                                          5

          second-guessed their settlement agreement  with the defendants in

          the  tort action by treating a portion of the $250,000 settlement

          as statutory prejudgment  interest despite the explicit  language

          in  their subsequent stipulation of dismissal:  "No interest.  No

          costs."  The Delaneys insist that the  stipulated settlement term

          "no interest" unambiguously  provides that the  settlement amount

          included no interest component  of any type.   Second, appellants

          maintain that  any prejudgment interest in  a settlement recovery

          for personal  injuries comes within the  section 104(a)(2) exclu-

          sion  for "damages"  resulting from personal  injuries.   We find

          neither claim availing.

          A.   Settlement Agreement
          A.   Settlement Agreement
               ____________________

                    It is  settled law  that taxpayers  bear the burden  of

          proving  that a  tax deficiency  assessment is  erroneous. United
                                                                     ______

          States v. Rexach, 482  F.2d 10, 16 (1st Cir.),  cert. denied, 414
          ______    ______                                _____ ______

          U.S. 1039 (1973);   Tax Court Rule 142(a). The  Supreme Court has

          held  that the Commissioner's "ruling  has the support  of a pre-

          sumption of  correctness, and  the petitioner  has the  burden of

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

          (1933);  see also  United  States v.  Janis,  428 U.S.  433,  439
                   ___ ____  ______________     _____

          (1976); Estate of  Todisco v.  Commissioner, 757 F.2d  1, 6  (1st
                  __________________     ____________

          Cir. 1985) (the basic rule in all tax cases places  the burden of

          proof with the taxpayer).   The rationale  for this rule is  more

          deeply  rooted  than the  conventional  regimen  that places  the

          burden of proof on the moving party.  See Rexach, 482 F.2d at 16.
                                                ___ ______

          Thus,  in a tax deficiency suit "the burdens of going forward and

                                          6

          of ultimate persuasion are always on the taxpayer and never shift

          to the Commissioner."   Id. at 16-17.   Ultimately, of course,  a
                                  __

          tax deficiency assessment is subject to reversal if  the taxpayer

          establishes by  a  preponderance  of the  evidence  that  it  was

          erroneous.  Estate of  Whit v. Commissioner, 751 F.2d  1548, 1556
                      _______________    ____________

          (11th Cir.), cert. denied, 474 U.S. 1005 (1985). 
                       ____  ______

                    Viewed  simply  as a  linguistic  exercise, appellants'

          interpretation  has  a  certain  appeal.   Since  the  settlement

          agreement  language itself  suggests  no differentiation  between

          damages and prejudgment interest, its silence plainly permits the

          interpretation  that the  entire $250,000  constituted recompense

          for  personal injury.   Moreover,  the subsequent  stipulation of

          dismissal  executed by the parties to the tort action purports to

          fill  the void by precluding     with the  language "No interest.

          No costs."    the interpretation urged by the Commissioner.  

                    The difficulty  with appellants'  approach lies  in the

          fact that  the required  inquiry encompasses much  more than  the
                         ________

          mere  language  subscribed to  by  the  parties, whether  in  the

          settlement  agreement proper,  the  stipulation of  dismissal, or

          both,  because under  established  precedent the  Tax Court  must

          determine "in  lieu  of  what  were damages  awarded"  or  paid.3
                                   ____
                              
          ____________________

               3Of course, it  is the  nature of the  settled claim  itself
                                       ______                 _____
          which controls whether any  of the settlement constituted compen-
          sation for a tort-type personal injury.  Metzger v. Commissioner,
                       _________                   _______    ____________
          88 T.C. 834, 847  (1987), aff'd, 845 F.2d  1013 (Table) (3d  Cir.
                                    _____
          1988); Glynn v. Commissioner, 76 T.C. 116, 119 (1981), aff'd, 676
                 _____________________                           _____
          F.2d 682 (Table) (1st Cir. 1982).  Furthermore, "amounts received
          in compromise of  a claim must  be considered as having  the same
          nature as the right  compromised."  Alexander v. I.R.S.,  72 F.3d
                                              _________    ______
          938, 942 (1st Cir. 1995). 

                                          7

          Alexander v. I.R.S., 72  F.3d 938, 942 (1st Cir.  1995) (emphasis
          _________    ______

          added) (quoting  Raytheon Production  Corp. v.  Commissioner, 144
                           __________________________     ____________

          F.2d 110, 113  (1st Cir.),  cert. denied, 323  U.S. 779  (1944)).
                                      ____  ______

          See  Getty v. Commissioner, 913  F.2d 1486, 1490  (9th Cir. 1990)
          ___  _____    ____________

          (utilizing Raytheon's  "in  lieu of"  test to  classify, for  tax
                     ________

          purposes,  components comprising  settlement amount)).   See also
                                                                   ___ ____

          Bent v.  Commissioner, 87 T.C. 236 (1986), aff'd, 835 F.2d 67 (3d
          ____     ____________                      _____

          Cir. 1987).  Moreover,  the courts repeatedly have held  that the

          intent of the  payor is  a key determinant  whether a  settlement

          recovery  is excludable  from  gross  income.   See  Knuckles  v.
                                                          ___  ________

          Commissioner, 349 F.2d 610,  613 (10th Cir. 1965); Ray  v. United
          ____________                                       ___     ______

          States, 25 Cl. Cr. 535, 540 (1992), aff'd, 989 F.2d 1204  (Table)
          ______                              _____

          (Fed. Cir. 1993); Stocks  v. Commissioner, 98 T.C. 1,  10 (1992);
                            ______     ____________

          Agar v. Commissioner, 290 F.2d 283, 284 (2d Cir. 1961), aff'g per
          ____    ____________                                    _____ ___

          curiam 19 T.C.M. 116 (1960).  Thus, while acknowledging the
                                              
          ______

          importance of the terms employed in the stipulation of dismissal,

          the  Tax  court appropriately  inquired,  inter  alia, whether  a
                                                    _____  ____

          portion  of the settlement  amount represented prejudgment inter-

          est, by looking beyond the language utilized by the parties.

                    Accordingly,  confronted  with a  $250,000 postjudgment

          settlement literally allocating  nothing to statutory prejudgment

          interest  notwithstanding  the   $112,000  prejudgment   interest

          component  concededly included  in  the  $287,000 superior  court

          judgment, the  Tax Court  reasonably considered, inter  alia, the
                                                           _____  ____

          intent of the parties in context.  The Tax Court's approach seems

          especially apt in these circumstances, where a relevant indicator

                                          8

          extrinsic to  the settlement  documentation suggested  that their

          choice of settlement language may have been driven by tax consid-

          erations.   See Taggi v. United  States, 35 F.3d 93,  96 (2d Cir.
                      ___ _____    ______________

          1994); Glynn v. Commissioner, 76 T.C. 116, 121 (1981), aff'd, 676
                 _____    ____________                           _____

          F.2d 682 (Table) (1st Cir.  1982); Robinson v. Commissioner,  102
                                             ________    ____________

          T.C. 116, 126 (1994), aff'd. in  part, rev'd. in part, 70 F.3d 34
                                ______ __  ____  ______ __ ____

          (5th  Cir. 1995), cert. denied,  65 U.S.L.W. 3252  (U.S. Oct. 07,
                            _____ ______

          1996)  (No. 95-2067);   Threlkeld v. Commissioner,  87 T.C. 1294,
                                  _________    ____________

          1306-1307 (1986), aff'd,  848 F.2d  81 (6th Cir.  1988); Fono  v.
                            _____                                  ____

          Commissioner, 79 T.C. 680, 694 (1982), aff'd, 749 F.2d 37 (Table)
          ____________                           _____

          (9th Cir.  1984); see  also Mitchell  v. Commissioner,  60 T.C.M.
                            ___  ____ ________     ____________

          (CCH)  1368 (1990)  (allocation  in settlement  documentation not

          binding  where taxpayer drafted document without participation or

          approval of adversary), aff'd, 992 F.2d 1219  (Table) (9th Cir.),
                                  _____

          cert. denied, 510 U.S. 861 (1993).  
          _____ ______

                    Moreover,  viewed in  context the  settlement term  "no

          interest" is not without ambiguity as the Delaneys would have it.

          Rather, it  may fairly be read either to provide for no interest,

          as  the Delaneys  suggest,  or no  interest  in addition  to  the
                                                       __ ________

          $250,000 settlement amount.  Under the latter interpretation, the

          stipulation of  dismissal left open whether  the $250,000 settle-

          ment   amount  included  statutory  prejudgment  or  postjudgment

          interest.   Thus,  in ascertaining  the tax  consequences of  the

          final  settlement, the  Tax Court  appropriately went  beyond the

          explicit "no interest" allocation memorialized in the stipulation

          of dismissal, see Bent, 87 T.C. 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.  409 (1987).  As in our
          _______     ____________

          own case, the  taxpayers in McShane  eventually settled with  the
                                      _______

          tort-action defendants  while their  case was on  appeal, for  an

          amount greater than the jury award.  Id.4  In the deficiency suit
                                               __

          subsequently brought by the taxpayers, the Tax Court decided that

          it "must carefully review the settlement agreements and all other

          evidence in the record in order to determine whether the payments

          ultimately received included interest."  Id.  Its approach simply
                                                   __

          mirrors other Tax Court rulings requiring that all relevant facts

          and circumstances receive careful consideration in resolving such

          disputes.5  See Byrne v. Commissioner, 90 T.C. 1000, 1007 (1988),
                      ___ _____    ____________
                              
          ____________________

               4In  McShane, the  settlement agreement  itself,  as distin-
                    _______
          guished from a separate stipulation, explicitly stated:  "without
          costs  and interest."  Id.  The  Delaney Tax Court apparently did
                                 __        _______
          not  consider  this  distinction  of  significance,  although the
          Commissioner had  emphasized it  in his  argument.   Delaney,  70
                                                               _______
          T.C.M.  353.   Moreover,  though the  taxpayers  in McShane  were
                                                              _______
          entitled to statutory prejudgment interest, it is unclear whether
          their  judgment included  it.   On the  other hand,  the superior
          court  judgment appealed  from in  Delaney did  include statutory
                                             _______
          prejudgment interest. 

               5Appellants cite McShane for their claim that the underlying
                                _______
          tort judgment had not become final since it was on  appeal at the
          time of  the settlement;  therefore, following McShane,  the debt
                                                         _______
          had  not been liquidated and  there was no  fixed or determinable
          amount excludable under    104(a)(2).  Appellants miss  the point
          of McShane,  however, wherein  such indeterminacy  merely allowed
             _______                                                _______
          the  Tax Court to go beyond the language of the settlement agree-
          ment. McShane, 53 T.C.M. 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. 126; cf. Miller v. Commission-
                       ________                   __  ______    ___________

          er,  65 T.C.M. 1884 (1993), supplemented by 66 T.C.M. (CCH)
          __

          1568 (1993) (absent explicit allocations in  settlement agreement

          itself,  Tax Court may  consider pleadings,  jury award,  and any

          court  order or  judgment in  determining settlement  payor's in-
                                    

          tent),  aff'd,  60 F.3d  823 (Table)  (4th  Cir. 1995);  Fitts v.
                  _____                                            _____

          Commissioner, 67 T.C.M. 2136 (1994) (if no lawsuit has been
          ____________

          filed,  court  considers  all  relevant  documents,  letters  and

          testimony), aff'd, 53 F.3d 335 (Table) (8th Cir. 1995). 
                      _____

                    The McShane court considered a combination  of factors.
                        _______

          First, the term "without costs and interest" had been included in

          the settlement  agreement at  the insistence  of counsel for  the

          principal defendant in the tort  action.  Second, the  intentions
                    _________

          of  all parties to the underlying tort action, as stated by their

          attorneys,  were  most consistent  with  an intention  to  pay no

          interest.  Third,  the Tax  Court credited the  testimony of  all

          counsel in the tort  action that the settlement amounts  for each

          plaintiff  had been arrived at  by assessing the  risks on appeal

          and that the tax consequences had never been discussed.  Id. 
                                                                   __

                    The  Tax Court in the present  case pursued a similarly

          inclusive  approach by  probing beyond  the settlement  agreement

          terms, examining all relevant evidence including the testimony of

          the Delaneys' counsel in  the underlying tort action, who  stated

          that  the excludability  of the  $250,000 settlement  amount from

          gross income  was  never taken  into  account in  the  settlement

                                          11

          agreement, only the risks  on appeal.  In addition,  however, the

          Tax Court considered a letter  from the Delaneys' counsel propos-

          ing  settlement to  the  tort-action defendants  and noting  that

          interest was continuing to accumulate on the superior court judg-

          ment.  There was no  testimonial evidence regarding the  relevant

          intentions of any tort-action defendant.  

                    Finally, the Tax  Court considered the  appropriateness

          of  the parallel utilized by the Commissioner in apportioning the

          undifferentiated settlement amount  as between prejudgment inter-

          est and compensatory damages.  The Commissioner had allocated 39%

          of the  $250,000  settlement to  statutory prejudgment  interest,

          representing  the  identical proportion  by  which  the clerk  of

          court, pursuant  to Rhode  Island law,  had increased the  jury's

          personal  injury award.  The  Fifth Circuit has  noted in similar

          circumstances that  a jury verdict provides  "the best indication

          of the worth" of  the taxpayers' original tort claims.   Robinson
                                                                   ________

          v.  Commissioner, 70 F.3d 34,  38 (5th Cir.  1995) (approving Tax
              ____________

          Court's allocation of settlement  proceeds based on percentage of

          damages represented  by each  element  in jury  award, where  Tax

          Court went beyond terms of agreement settling action against bank

          for wrongful failure to release lien).  

                    As the  Tax Court  supportably ruled that  the Delaneys

          had not  overcome  the presumption  of correctness  to which  the

          Commissioner's allocation  is entitled, the allocation  of 39% of

          the settlement amount to statutory prejudgment interest, substan-

          tially based upon the aforementioned parallelism, did not consti-

                                          12

          tute error.  See Robinson, 70 F.3d at 38; Estate  of Todisco, 757
                       ___ ________                 __________________

          F.2d at 5. 

                                          13

          B.   Excludability of Prejudgment Interest
          B.   Excludability of Prejudgment Interest
               _____________________________________

                    The  Delaneys next  contend that  statutory prejudgment

          interest  itself  is excludable  as "damages  received  . .  . on
                                               _______

          account  of  personal  injury  or  sickness,"  see  26  U.S.C.   
                                                         ___

          104(a)(2)  (1986) (emphasis  added),  because the  "gross income"

          exclusion under section 104(a)(2) embraces all amounts recovered,

          by settlement  or otherwise,  as compensation for  personal inju-

          ries,  without regard to the  stage in the  litigation process at

          which settlement occurs.  We address their predicate arguments in

          turn. 

               1.   Tax Court Authorities 
               1.   Tax Court Authorities 
                    _____________________

                    The Delaneys challenge the leading precedent upon which

          the  Tax Court relied, see  Kovacs v. Commissioner,  100 T.C. 124
                                 ___  ______    ____________

          (1993),  aff'd, 25 F.3d  1048 (Table)  (6th Cir.),  cert. denied,
                   _____                                      ____  ______

          ____U.S.____, 115 S.  Ct. 424  (1994), for its  holding that  the

          prejudgment interest component in a compensatory damages recovery

          for personal  injuries is  taxable.  The  Delaneys maintain  that
                                            .  

          Kovacs is unsound because it  relied upon judicial precedents for
          ______

          taxing postjudgment interest as authority for taxing  prejudgment
                 ____________                                   ___________

          interest.   Consequently,  they contend,  Kovacs progeny  such as
                                                    ______

          Delaney  are similarly flawed.   As their argument  is raised for
          _______

          the  first time on appeal, we decline  to address it.  See, e.g.,
                                                                 ___  ____

          Villfane-Neriz v.  F.D.I.C.,  75 F.3d  727, 734  (1st Cir.  1996)
          ______________     ________

          (arguments first raised on appeal not ordinarily addressed).6  
                              
          ____________________

               6Not  only did the Delaneys themselves  rely on Kovacs below
                                                               ______
          as  support for their contention that prejudgment interest is not
          taxable, at no time  did they broach their present  argument that

                                          14

               2.   Choice of Governing Law
               2.   Choice of Governing Law
                    _______________________

                    The Delaneys  next contend  that Rhode Island  law con-

          trols whether  any statutory  prejudgment interest included  in a

          personal  injury settlement  constitutes  "damages"  for  federal

          income tax purposes.  Since prejudgment interest is an element of

          damages  under Rhode  Island  law, appellants  argue, the  entire

          $250,000  settlement must  be  excluded from  gross income  under

          section 104(a)(2) as damages for personal injury.  

                    The Tenth Circuit, recently  confronted with a  similar

          problem,  noted that though state law governs the nature of legal

          interests and  rights created under  state law, the  "federal tax

          consequences pertaining to such interests and rights are solely a

          matter of federal  law."   Brabson, 73 F.3d  1040, 1044  (Coffin,
                                     _______

          J.).    Accordingly,  the  Brabson panel  first  ascertained  the
                                     _______

          pertinent characteristics of statutory prejudgment interest under

          Colorado law, but  then looked  to federal law  to determine  its

          excludability.   Id. at 1044.   As we  agree with  the thoughtful
                           __

          approach in  Brabson, we turn first to Rhode Island law to deter-
                       _______

          mine the nature of  the statutory prejudgment interest ministeri-

          ally added by  the superior  court clerk to  the personal  injury

          damages award returned by the jury in this case.  

                    Unlike  the  Colorado  statute  at  issue  in  Brabson,
                                                                   _______

          statutory  prejudgment interest is not an element of damages in a

          personal injury action under Rhode Island law.  DiMeo v. Philbin,
                                                          _____    _______

          502 A.2d 825, 826  (R.I. 1986) (prejudgment interest  in personal
                              
          ____________________

          Kovacs and its progeny are not good law.  
          ______

                                          15

          injury action purely  statutory and therefore  not an element  of

          damages);  Castrignano v. E.R. Squibb & Sons, Inc., 900 F.2d 455,
                     ___________    ________________________

          463 (1st Cir. 1990) (prejudgment interest under Rhode  Island law

          "is not an element of damages" in personal injury action) (citing

          Andrade  v. State, 448 A.2d 1293, 1295 (R.I. 1982)).7  According-
          _______     _____

          ly,  in order to prevail,  the Delaneys must  establish that pre-

          judgment interest  is excludable under section 104(a)(2) notwith-

          standing its state-law characterization.8  

               3.  Interest as "Damages On Account of Personal Injuries"
               3.  Interest as "Damages On Account of Personal Injuries"
                   ____________________________________________________

                    The two requirements  for determining exclusions  under

          section 104(a)(2) were recently explained in Schleier:
                                                       ________

                    First, the taxpayer must demonstrate that the
                    underlying cause of action giving rise to the
                    recovery is  "based upon  tort  or tort  type
                    rights"; and  second, the taxpayer  must show
                             ___
                    that the damages were received "on account of
                    personal injuries or sickness."

          Schleier,  115 S. Ct. at  2167 (emphasis added).   Although their
          ________

          underlying  causes of  action  clearly satisfy  the first  prong,

          unless the Delaneys are  able to make the second  crucial showing
                              
          ____________________

               7Even though statutory prejudgment interest is an element of
          compensatory damages under Colorado law, the Brabson panel deter-
                                                       _______
          mined, for  purposes of 26  U.S.C.   104(a)(2),  that prejudgment
          interest  under  Colorado  law is  not  "received  on account  of
          personal injury."  73 F.3d at 1044-47.  

               8The Delaneys  cite, inappositely, to Factory  Mut. Ins. Co.
                                                     ______________________
          v. Cooper, 262  A.2d 370  (R.I. 1970), for  the proposition  that
             ______
          prejudgment interest  constitutes  "damages" under  Rhode  Island
          law.   In Factory Mutual,  the Rhode Island  Supreme Court stated
                    ______________
          that the term "damages" included  statutory prejudgment interest,
          id. at 373,  while interpreting the term "damages" as  used in an
          __                                                 __  ____ __ __
          insurance policy.    Id. at  371.   See also,  e.g., Lombardi  v.
          _________ ______     __             ___ ____   ____  ________
          Merchants Mut. Ins. Co., 429 A.2d 1290, 1293 (R.I. 1981) (relying
          _______________________
          on  Factory  Mutual  for  proposition  that  prejudgment interest
              _______________
          constitutes damages in context of insurance subrogation action).

                                          16

             that the portion of their settlement recovery attributable  to

          statutory  prejudgment  interest  was  "received  on  account  of

          personal injuries or sickness"    their claim fails.  Id.
                                                                ___

                    The  second predicate  showing  necessitates  what  the

          Brabson court  termed  proof that  "each element  of damages  was
          _______

          linked to  the injury itself."   Brabson, 73 F.3d at  1043.9  The
                                           _______

          Delaneys utterly failed to  preserve any claim that  the prejudg-

          ment interest  component in their settlement  recovery was linked

          to their  personal injuries.10  Id.   See also Manzoli v. Commis-
                                          __    ___ ____ _______    _______
                              
          ____________________

               9At  this point  in its  analysis, the Brabson  court, after
                                                      _______
          consulting established canons of interpretation,  determined that
          prejudgment interest  under Colorado law simply  is not "received
          `on account  of personal injuries  or sickness'"  notwithstanding
          the   more  hospitable   state-law  environment   there  involved
          (Schleier,  115 S. Ct. at 2167) and  is therefore taxable under  
           ________
          104(a)(2).  In reaching its decision, the Brabson court looked to
                                                    _______
          congressional intent  and, most  importantly, the "default  rule"
          requirement  that courts narrowly  construe exclusions from gross
          income.  Brabson, 73 F.3d at 1045-1046.
                   _______

               10The Delaneys do advert on appeal  to a "time loss value of
          money" element in statutory prejudgment interest, and assert that
          it  constitutes compensatory  damages because  it is  designed to
          make  the personal injury victim whole.  Their "make whole" claim
          was not preserved in the Tax Court, however.  See Villfane-Neriz,
                                                        ___ ______________
          75  F.3d at 734 (arguments first raised on appeal, not ordinarily
          addressed).  No argument  was made below that the  statutory pre-
          judgment interest  ministerially assessed  by the clerk  of court
          pursuant  to  Rhode Island  law comprised  both  a taxable  and a
          nontaxable component, nor did a "make  whole" argument surface in
          any other developed manner before the  Tax Court.  The sum  total
          of their efforts to surface such a claim consisted of a quotation
          from the district court opinion subsequently reversed in Brabson,
                                                                   _______
          cited  in service of the argument that prejudgment interest is an
                                                                      __ __
          element  of damages under Rhode Island law.  Even more important-
          _______  __ _______ _____ _____ ______ ___   ____ ____ __________
          ly, appellants established  no evidentiary predicate  which would
          __
          have  enabled  the Tax  Court to  determine  what portion  of the
          statutory prejudgment interest ministerially  added by the  clerk
          of  court constituted "make whole damages."  See United States v.
                                                       ___ _____________
          Alzanki, 54  F.3d 994, 1009  (1st Cir. 1995)  ("Appellant's utter
          _______
          failure to [raise argument below] disabled the [court below] from
          making a  reasoned assessment  . . .  in the first  instance, and

                                          17

          sioner,  904 F.2d  101, 105 (1st  Cir. 1990).   As  it is neither
          ______

          necessary nor  practicable to  do so  in this  case, see note  10
                                                               ___

          supra, we do not  consider whether statutory prejudgment interest
          _____

          may  ever be excludable from  gross income under    104(a)(2), an

          important question left for another day.  

                                         III
                                         III

                                      CONCLUSION
                                      CONCLUSION
                                      __________

                    For the  foregoing reasons,  the Tax Court  judgment is

          affirmed and costs are awarded to appellee.

                    So ordered.
                    So ordered.
                    __ _______

                              
          ____________________

          from  making the predicate factual findings upon which the claims
          depend."), cert. denied, 116 S. Ct. 909 (1996).  
                     ____  ______

                                          18