T.C. Memo. 1999-10
UNITED STATES TAX COURT
F. BROWNE GREGG, SR., AND JUANITA O. GREGG, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13188-96. Filed January 22, 1999.
Bernard A. Barton, Jr., for petitioners.
Charles Baer, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
THORNTON, Judge: Respondent determined a deficiency in
petitioners' Federal income tax for tax year 1990 in the amount
of $5,582,555.
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After stipulations and concessions,1 the remaining issues
for consideration are: (1) Whether a jury award paid to
petitioner husband pursuant to a judgment against U.S.
Industries, Inc. (USI), on a claim for fraudulent inducement to
enter into a contract is excludable under section 104(a)(2) as
damages received on account of personal injury. We hold that it
is not. (2) Whether a jury award paid to petitioner husband
pursuant to a judgment against USI on a claim for interference
with a business relationship is excludable under section
104(a)(2) as damages received on account of personal injury. We
hold that it is not. (3) Whether prejudgment interest paid to
petitioner husband pursuant to a judgment against USI is
excludable under section 104(a)(2). We hold that it is not.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
1
The parties stipulate that $2,500,000 in punitive damages
awards received by petitioner husband is properly includable in
petitioners' gross income. The parties further stipulate that
should this Court find that the $8,128,515 in compensatory
damages received by petitioner husband for his fraud claim are
properly includable in petitioners' income, then such damages are
properly characterized as capital gain rather than ordinary
income. On brief, petitioners concede that the $103,341 awarded
for petitioner husband’s breach of contract claims is includable
in gross income.
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FINDINGS OF FACT
The parties submitted this case fully stipulated in
accordance with Rule 122. The stipulation of facts, with
attached exhibits, is incorporated herein by this reference.
For the calendar year 1990, petitioners filed a joint
Federal individual income tax return. When the petition was
filed in this case, petitioners were husband and wife, and
resided in Leesburg, Florida. Hereinafter, references to
petitioner are to F. Browne Gregg, Sr., and references to
petitioners are to F. Browne Gregg, Sr., and Juanita O. Gregg.
In 1969, petitioner owned corporate businesses in Florida
that were engaged in construction, sand mining, and design of
dredging equipment. The businesses had expanded rapidly and were
hard pressed for working capital. As a result, on August 27,
1969, petitioner entered into an "Agreement and Plan of
Reorganization" with USI, whereby petitioner transferred to USI
the stock of his companies, $1 million in personal capital, and
petitioners’ $500,000 promissory note in exchange for $3.5
million in common and preferred USI stock. The agreement
provided that, as further consideration, petitioner could receive
up to an additional $6.5 million in USI stock if the companies
formerly owned by petitioner met specified profitability levels
over the next 5 years. On the date of closing, October 1, 1969,
a separate "Employment Agreement" was signed under which
petitioner was to remain for 5 years as president and chief
operating officer of his former companies.
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During the 5 years after the acquisition, USI put some $12
to $14 million into petitioner's former companies and guaranteed
some $2 million in loans. Initially, the operations were
successful. Petitioner received one distribution of USI stock
(called by the parties earn-out stock), valued at $871,484 and
based upon 1969 profits. Soon, however, relations between
petitioner and USI began to sour. Petitioner's former businesses
became less and less successful. USI began limiting petitioner's
authority, and ultimately in May 1971, removed him as president
and chief operating officer, and appointed him to be a salaried
consultant, with little work to perform.
In December 1971, petitioner pledged his USI stock to the
First National Bank of Leesburg (Leesburg Bank) as security for a
$1.5 million loan. On April 20, 1972, petitioner failed to make
an installment payment on the note he had transferred to USI and
informed USI he was not going to pay the remaining balance on the
note but instead would offset it against USI’s outstanding
obligations to him. USI stopped paying his salary and requested
that Chemical Bank in New York, its stock transfer and dividend
disbursing agent, stop payment on petitioner's USI dividends.
Under instructions from USI, Chemical Bank delivered petitioner's
USI stock dividend checks to USI. On June 15, 1972, petitioner
borrowed an additional $135,000 from the Leesburg Bank, assigning
as security all dividends from his USI stock. Both petitioner
and the Leesburg Bank mailed to USI notice of the assignment.
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Later in 1972, the price of USI's stock fell, and the
Leesburg Bank issued margin calls to petitioner. When petitioner
did not respond, the bank began selling his stock. Petitioner
then demanded that USI pay the dividends to the Leesburg Bank,
but USI refused. Subsequently, the Leesburg Bank liquidated
petitioner’s stock because the loans had become under-
collateralized.
In 1972, petitioner filed suit in Florida against USI.
Petitioner's lawsuit against USI lasted several years and
included a jury trial that ended in a mistrial, a second jury
trial that was appealed, reversed in part, and remanded (Gregg v.
U.S. Indus., Inc., 715 F.2d 1522 (11th Cir. 1983), modified 721
F.2d 345 (11th Cir. 1983)), and a third jury trial that was
affirmed by the Court of Appeals for the Eleventh Circuit (Gregg
v. U.S. Indus., Inc., 887 F.2d 1462 (11th Cir. 1989)). USI paid
petitioner on the judgment in 1990.
The claims on which petitioner prevailed that are relevant
to this case are: (1) Common-law fraud; and (2) interference
with a business relationship.
The Common-Law Fraud Claim
The crux of petitioner's common-law fraud claim was
fraudulent inducement. Petitioner alleged that USI fraudulently
promised to provide petitioner's former businesses with capital
required for their successful operation, when in fact USI's
established financial policies severely limited the cash that it
could make available to them for additional working capital.
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Petitioner alleged further that USI fraudulently promised to
employ him to operate and manage petitioner's former companies
when it did not intend to continue him in this position.
The jury returned a verdict awarding petitioner $8,128,515
compensatory damages on his fraud claim. Petitioners excluded
this damage award from taxable income on their 1990 Federal
income tax return.
The Claim for Interference with a Business Relationship
In his complaint in the third jury trial, petitioner alleged
that USI maliciously interfered with petitioner’s business and
contractual relationship with Leesburg Bank by withholding
payments of dividends on the USI stock that petitioner had
pledged as security for loans from the bank, that consequently
the bank was required to sell petitioner’s stock at a depressed
price to satisfy his loans, and that petitioner was deprived of
the use and benefit of the dividends and “otherwise damaged”.
The jury returned a verdict awarding petitioner compensatory
damages in the amount of $43,050 and punitive damages in the
amount of $18,500,000, which the trial judge remitted to $2
million. On their 1990 joint Federal income tax return,
petitioners included in income $34,748 of the compensatory
damages, but excluded from income the remaining amounts received
with respect to this claim.
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Prejudgment Interest
The trial court awarded petitioner prejudgment interest of
$10,823,954 on his fraud claim, and $121,941 on a claim of breach
of employment agreement, of which petitioners excluded
$10,823,954 on their 1990 Federal income tax return.
Notice of Deficiency
In the notice of deficiency, respondent determined that the
amounts USI paid petitioner on his claims for fraud and
interference with business relationship were not on account of
personal injury or sickness within the meaning of section 104(a),
and consequently were includable in petitioners’ 1990 taxable
income. Respondent also determined that all amounts of
prejudgment interest received were includable in petitioners’
taxable income.
OPINION
A. Exclusion of Damages Under Section 104
1. In General
Gross income includes income from whatever source derived.
Sec. 61(a). Statutory exclusions from income are narrowly
construed. Commissioner v. Schleier, 515 U.S. 323, 327 (1995);
United States v. Burke, 504 U.S. 229, 233 (1992); Commissioner v.
Glenshaw Glass Co., 348 U.S. 426, 431 (1955); Helvering v.
Clifford, 309 U.S. 331, 334 (1940).
One such statutory exclusion appears in section 104(a)(2),
which excludes from gross income "the amount of any damages
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received (whether by suit or agreement and whether as lump sums
or as periodic payments) on account of personal injuries or
sickness". The applicable regulations define "damages received"
as “an amount received * * * through prosecution of a legal suit
or action based upon tort or tort type rights”. Sec. 1.104-1(c),
Income Tax Regs.
In United States v. Burke, supra at 237, the Supreme Court
held that to qualify for the section 104(a)(2) income exclusion,
a taxpayer must show that the legal basis for recovery redresses
a “tort-like personal injury”.
In Commissioner v. Schleier, supra at 336, the Supreme Court
concluded that a tort or tort-like claim is a necessary but
insufficient condition for excludability under section 104(a)(2).
The Supreme Court held that excludability under section 104(a)(2)
also requires that the amounts received be “on account of
personal injuries or sickness”, focusing on whether there is
proximate cause between any personal injury and the damages
recovered. Commissioner v. Schleier, supra at 336.
In O’Gilvie v. United States, 519 U.S. 79 (1996), the
Supreme Court revisited this issue. Acknowledging that “the
phrase ‘on account of’ does not unambiguously define itself”, the
Court rejected an interpretation of section 104(a)(2) that would
require no more than a “but-for” connection between personal
injuries and damages received, and instead required a “stronger
causal connection, making the provision applicable only to those
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personal injury lawsuit damages that were awarded by reason of,
or because of, the personal injuries”. Id. at 83.
Respondent concedes that petitioner’s causes of action for
fraud and interference with a business relationship sounded in
tort. The question for our consideration, then, is whether
petitioner’s recoveries on these claims were “on account of
personal injuries or sickness”. This determination is based on
all the facts and circumstances, Fabry v. Commissioner, 111 T.C.
__, __ (1998) (slip op. at 10), which in the context of litigated
claims include the allegations in petitioner’s complaints, the
evidence presented, and the arguments made in the underlying
litigation, Metzger v. Commissioner, 88 T.C. 834, 848 (1987),
affd. without published opinion 845 F.2d 1013 (3d Cir. 1988);
Bent v. Commissioner, 87 T.C. 236, 245 (1986), affd. 835 F.2d 67
(3d Cir. 1987); Seay v. Commissioner, 58 T.C. 32, 37 (1972). The
taxpayer bears the burden of proof. Rule 142(a).2
It is well settled that "personal injuries" include
intangible as well as tangible harms, and nonphysical as well as
2
Respondent argues that petitioner is collaterally estopped
from claiming the damages he received were on account of personal
injuries, because the jury instructions and appellate decisions
in the underlying litigation make it clear, in respondent’s view,
that petitioner’s injuries were not personal. We reject
respondent’s strained and peculiar theory of collateral estoppel
if for no other reason than because the characterization of
petitioner’s damages for Federal income tax purposes was not
essential to and was not litigated in petitioner’s prior
litigation. See Kightlinger v. Commissioner, T.C. Memo. 1998-
357. We have, however, considered the contents of the jury
instructions and the appellate decisions as part of our factual
inquiry in determining the basis upon which petitioner’s damage
awards were made.
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physical injuries. Commissioner v. Schleier, supra at 329 n.4;
United States v. Burke, supra at 234 n.6; Threlkeld v.
Commissioner, 87 T.C. 1294, 1305 (1986), affd. 848 F.2d 81 (6th
Cir. 1988).3 In United States v. Burke, supra at 239, the
Supreme Court distinguished personal tort-like injuries from
“legal injuries of an economic character”. Similarly, in
Commissioner v. Schleier, supra at 331, the Supreme Court
distinguished “injuries that were personal rather than economic”.
See also Robinson v. Commissioner, 102 T.C. 116, 126 (1994),
affd. in part, revd. in part on another issue 70 F.3d 34 (5th
Cir. 1995) and cases cited therein (damages are not excludable
under section 104(a)(2) if they are “received pursuant to the
settlement of economic rights arising out of a contract (e.g.,
lost profits))”; Kightlinger v. Commissioner, T.C. Memo. 1998-
357, and cases cited therein (recovery for injuries to “business
or property” is separate and distinct from recovery for personal
injuries).
To determine whether damages are received on account of
personal injuries under section 104(a)(2), we look to the nature
of the claim underlying the damages award. United States v.
3
In 1996, Congress limited sec. 104(a)(2) to damages
received on account of a personal “physical” injury or “physical”
sickness, effective generally with respect to amounts received
after June 30, 1996. Small Business Job Protection Act of 1996,
Pub. L. 104-188, sec. 1605, 110 Stat. 1838. Because of the
prospective effective date, this amendment does not apply to the
case at hand. The conference report indicates that no inference
was intended as to the application of sec. 104(a)(2) prior to
June 30, 1996, in connection with a case not involving a physical
injury or physical sickness. H. Conf. Rept. 104-737, at 300
(1996).
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Burke, supra at 237; Threlkeld v. Commissioner, supra at 1305.
Our focus is on the nature of the taxpayer’s injury and whether
the award was received on account of personal or nonpersonal
injuries. Threlkeld v. Commissioner, supra at 1308; Bennett v.
Commissioner, T.C. Memo. 1994-190.
If damages have been clearly allocated to an identifiable
claim in a court judgment, we are guided by the nature of the
claim as defined under State law personal injury concepts.
Roemer v. Commissioner, 716 F.2d 693, 697 (9th Cir. 1983), revg.
79 T.C. 398 (1982); Threlkeld v. Commissioner, supra at 1305-
1306. Although Federal law rather than State law governs the
characterization of payments for Federal income tax purposes, a
State’s characterization of a payment can inform the Federal
decision. Rozpad v. Commissioner, 154 F.3d 1, 6 (1st Cir. 1998),
affg. T.C. Memo. 1997-528.
2. Petitioner’s Compensatory Damages for Common-Law Fraud
Petitioners argue that the compensatory damages petitioner
received on his claim for fraud were on account of personal
injury because “the fraud perpetrated on Mr. Gregg violated his
person and his rights and is a personal injury under applicable
State law”. Respondent contends that the damages were awarded
for fraud in regard to a sales contract, not for injury to a
person. For the reasons described below, we agree with
respondent that petitioner’s damages award on his claim for
common-law fraud was not received on account of a personal injury
within the meaning of section 104(a)(2).
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Pursuant to Florida jurisprudence, a claim for common-law
fraud requires the following elements: (1) A false statement
concerning a material fact; (2) the representor's knowledge that
the representation is false; (3) an intention that the
representation induce another to act on it; and (4) consequent
injury to the party acting in reliance on the representation.
Azalea Meats, Inc. v. Muscat, 246 F.Supp. 780 (S.D. Fla. 1965),
revd. on other grounds 386 F.2d 5 (5th Cir. 1967); Food Fair,
Inc. v. Anderson, 382 So. 2d 150 (Fla. Dist. Ct. App. 1980).
Petitioners suggest that the nature of the injury necessary
to sustain a claim for fraud under Florida law is inherently
personal, noting the availability of remedies for emotional
distress and similar personal injuries resulting from the fraud
perpetrated. Petitioners concede on brief, however, that there
is nothing in the record to demonstrate that compensatory damages
were paid to petitioner on account of emotional stress or “other
damages that are classic personal injury damages”. Because our
focus is on the injuries that actually affected petitioner’s
receipt of compensatory damages rather than on other possible
injuries, see Commissioner v. Schleier, 515 U.S. 323 (1995),
petitioners’ argument is unavailing.
Florida law does not appear to rigidly categorize the nature
of the injury necessary to sustain a claim for fraud.4 We note,
4
As stated in Food Fair, Inc. v. Anderson, 382 So. 2d 150,
154 (Fla. Dist. Ct. App. 1980):
Florida decisions defining injury go in both directions
(continued...)
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however, that under Florida law the award of prejudgment interest
on petitioner’s fraud claim supports the conclusion that
petitioner did not receive the compensatory damages on account of
personal injuries. Under Florida law, prejudgment interest is
ordinarily not recoverable for personal injury actions, because
“the amount and the measure of damages is largely discretionary
with the jury and is in consequence unliquidated until the
trial”. Farrelly v. Heuacker, 159 So. 24, 25 (Fla. 1935); see
also Argonaut Ins. Co. v. May Plumbing Co., 474 So. 2d 212, 214
n.1 (Fla. 1985); Zorn v. Britton, 162 So. 879 (Fla. 1935).5 For
similar reasons, prejudgment interest is ordinarily not available
as a remedy for an action in tort under Florida law, although
prejudgment interest may be awarded where there is an
ascertainable out-of-pocket loss as the result of the loss of
4
(...continued)
in explaining what constitutes damage sufficient to
warrant actionable fraud * * *. Early cases reflect a
requirement that the injury sustained must ordinarily
be pecuniary in nature. Other Florida decisions seem
to align themselves with the general rule * * * [that]
Damage need not be subject to accurate measurement in
money, but may result from the fact that the defrauded
party has been induced to incur legal liabilities or
obligations different from those represented or
contracted for. * * * [Citations omitted.]
5
Under Florida law, a personal injury plaintiff may be
entitled to prejudgment interest on medical expenses, but only
when the plaintiff shows that he has made actual out-of-pocket
payments for those expenses prior to judgment. Alvarado v. Rice,
614 So. 2d 498, 500 (Fla. 1993). However, this exception to the
general rule applies because such a plaintiff suffers the loss of
a vested property right; namely the loss of use of his money.
Id. In any event, petitioner has not alleged physical harm, and
the record is devoid of any evidence of any medical expenses that
he incurred.
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vested property rights. Underhill Fancy Veal, Inc. v. Padot, 677
So. 2d 1378, 1380 (Fla. Dist. Ct. App. 1996).
Petitioners further assert that petitioner's dignitary, or
personal, right to be free from fraud and lies is the injury at
issue, likening the damages award to an award for libel or
slander, in ostensible reliance on Threlkeld v. Commissioner, 87
T.C. at 1308. In that case, this Court held that compensatory
damages received in settlement of the taxpayer’s claim for
injuries to his professional reputation arising out of a claim
for malicious prosecution were excludable from income under
section 104(a)(2). This Court determined that an action for
malicious prosecution was similar to an action for defamation and
under Tennessee law would be classified as an action for personal
injuries. Adopting a definition of personal injury from the
Tennessee Supreme Court, this Court stated: “Exclusion under
section 104 will be appropriate if compensatory damages are
received on account of any invasion of the rights that an
individual is granted by virtue of being a person in the sight of
the law.” Id. at 1308 (paraphrasing Brown v. Dunstan, 409 S.W.2d
365, 367 (Tenn. 1966)).6
6
That this definition differentiates between a personal
injury and an economic injury is made plain by the more complete
discussion in the paraphrased source, which defines personal
injuries as “injuries resulting from invasions of rights that
inhere in man as a rational being, that is, rights to which one
is entitled by reason of being a person in the eyes of the law.
Such rights, of course, are to be distinguished from those which
accrue to an individual by reason of some peculiar status or by
virtue of an interest created by contract or property.” Brown v.
Dunstad, 409 S.W.2d 365, 367 (Tenn. 1966). (Emphasis added.)
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As this Court recently noted in Fabry v. Commissioner, 111
T.C. __, __ (1998) (slip op. at 8), Threlkeld v. Commissioner,
supra, did not adopt a per se rule that damages received on
account of injury to an individual’s business reputation are
excludable under section 104(a)(2). Rather, we must look to all
the facts and circumstances to determine the nature of the claim.
Id. Whether or not the fraud perpetrated upon petitioner may
have resulted in some dignitary injury is not controlling.
Rather, petitioners must show that the damages received were on
account of personal injury and that the personal injury affected
the amount of recovery. See Commissioner v. Schleier, supra at
336-337 (settlement amounts received by the taxpayer in
settlement of his claim under the Age Discrimination in
Employment Act (ADEA) were not on account of personal injuries,
notwithstanding that the taxpayer may have suffered some personal
injury comparable to pain and suffering).
We look to petitioner’s complaints in the USI litigation to
determine the nature of his claim. The overwhelming thrust of
petitioner’s complaints is the adverse effects USI’s actions had
on his businesses and on his “earn-out” rights that arose out of
and were dependent on petitioner's contract with USI. In his
restated complaint in the second jury trial, petitioner asked for
$15 million in compensatory damages. The complaint
particularized these damages to a degree, alleging that
petitioner had been deprived of the value of his companies and
their businesses “which had a value of at least $10 million”, and
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that he had been deprived of additional capital contributions
that he had made to USI in the amount of $2,671,000. These
injuries clearly constitute economic injuries.
Petitioner’s restated complaint also alleged that USI caused
him to lose the fair value of his earning capacity. This
allegation parallels a portion of petitioner's complaint alleging
breach of contract. It appears that any such injury was to
petitioner's lost ability to take advantage of the contractual
"earn-out" provisions, rights that arose out of and were
dependent on petitioner's contract with USI. Even if the jury
award compensated petitioner for this alleged harm, it would not
constitute a personal injury within the ambit of section
104(a)(2). See Robinson v. Commissioner, 102 T.C. 116, 126
(1994) (compensatory damages for compromised economic rights that
arise from a contract are not excludable under section
104(a)(2)), affd. in part, revd. in part on another issue 70 F.3d
34 (5th Cir. 1995); Baca v. Commissioner, T.C. Memo. 1990-632.
Petitioner’s restated complaint also alleged, without
elaboration, damage to his reputation and credit rating. The
record, however, does not show that evidence was presented in the
USI litigation regarding such injuries or that the damages were
awarded by reason of such harms. The mere mention of a
particular personal injury in a complaint, without more, does not
serve to bring a recovery for damages within the ambit of section
104(a)(2). See Kightlinger v. Commissioner, T.C. Memo. 1998-357
(a contrary rule “would improperly expand the scope of section
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104(a)(2) because the * * * [personal injury] language could
easily be included in every complaint, even if such a claim were
only a ‘throwaway’ claim”).
In closing arguments at the third jury trial, petitioner’s
counsel characterized petitioner’s injuries as damages suffered
“by reason of giving up his businesses”; petitioner’s counsel
made no argument for compensatory damages for any other type of
injury. The jury instructions contain no reference to any
injuries other than economic harms. The trial court instructed
the jury in relevant part as follows:
Therefore, if you find that * * * [petitioner] has been
damaged, you should award * * * [petitioner] an amount
of damages equal to the difference in value between
what * * * [petitioner] gave USI and the value of what
he received from USI in return.
Standing alone, the fact that damages are measured in
economic terms does not compel the conclusion that the injury
redressed is economic rather than personal, for economic loss may
be the best available measure of a personal injury. Bent v.
Commissioner, 835 F.2d 67, 70 (3d Cir. 1987), affg. 87 T.C. 236
(1986). In the case at hand, however, we believe that the harm
which was measured by economic factors was in fact an economic
injury. See Kightlinger v. Commissioner, supra (concluding that
“economic factors were not merely used as a yardstick to measure
the extent of the injury; rather, they were the harm for which
petitioner received his compensation”).
In sum, petitioners have failed to prove that the
compensatory damages awarded on petitioner’s common-law fraud
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claim were received on account of personal injuries within the
meaning of section 104(a)(2). Accordingly, we sustain
respondent’s determination on this issue.
3. Petitioner’s Compensatory Damages for Interference With
a Business Relationship
Tortious interference with a business relationship is part
of a larger body of tort law aimed at protecting relationships,
some economic (for example, interference with prospective
economic advantage) and some personal (for example, interference
with family relations, or libel and slander). Keeton et al.,
Prosser & Keeton on Torts, sec. 129, at 978 and nn.5 and 6 (5th
ed. 1984). Under Florida law, tortious interference with a
business relationship is “basically the same cause of action” as
interference with a contract. Smith v. Ocean State Bank, 335
So. 2d 641, 642 (Fla. Dist. Ct. App. 1976).
Petitioner’s claim of tortious interference with a business
relationship required proof of each of the following three
elements: (1) The existence of a business relationship under
which the plaintiff has legal rights; (2) an intentional and
unjustified interference with the relationship by the defendant;
and (3) damage to the plaintiff as a result of the tortious
interference with the relationship. Gregg v. U.S. Indus., Inc.,
887 F.2d 1462, 1473 (11th Cir. 1989).
Petitioner’s complaint in the third jury trial focused
almost entirely on the economic injury petitioner suffered as a
consequence of USI’s interference with his business relationship
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with the Leesburg Bank. Although petitioners suggest that
petitioner’s tortious interference claim might have supported
recovery for mental suffering, damage to reputation, or violation
of dignitary rights, there is no evidence in the record that
petitioner sought or received compensatory damages for any such
injuries.7
The jury returned a verdict awarding petitioner $43,050
compensatory damages and punitive damages in the amount of
$18,500,000, which the trial judge remitted to $2 million.
Although the record does not expressly indicate the basis on
which the jury determined compensatory damages, it seems most
likely that the award was based on the theory outlined in
petitioner’s trial brief, which explicitly equated his claim to
one for “wrongful detention or attachment of property” and which
advocated computing his loss by reference to the decrease from
$65,125.45 in the value of his USI stock when the Leesburg Bank
sold it to satisfy petitioner’s loans.
Based on all the evidence, then, we conclude that
petitioners have failed to prove that the compensatory damages on
the tortious interference claim were received on account of
personal injuries within the meaning of section 104(a)(2).
7
In fact, the record shows that petitioner sought
compensatory damages on his tortious interference claim
principally as a foothold for a much larger amount of punitive
damages. In his closing arguments in the third jury trial,
petitioner’s counsel requested only one dollar compensatory
damages, stating, “The one dollar on the interference claim will
justify your going into the punishment aspect of it and then you
can allow punitive damages that will get their attention”.
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This Court reached a similar conclusion with respect to an
analogous claim for tortious interference in Kightlinger v.
Commissioner, supra. In that case, the taxpayer received payment
in settlement of a claim of tortious interference with
prospective economic advantage as an employee. The complaint in
the underlying litigation sought a remedy for wrongful
interference with economic advantages, and the taxpayer had not
sought or obtained redress for any of the traditional harms
associated with personal injury such as pain and suffering or
emotional distress. This Court concluded: “Clearly, recovery
for economic injury based on such a contractual type claim is
excluded from the scope of section 104(a)(2).”
Petitioners’ reliance on this Court’s decision in Noel v.
Commissioner, T.C. Memo. 1997-113, is misplaced. In Noel, this
Court held that the taxpayer was entitled to exclude under
section 104(a)(2) an allocable amount received by the taxpayer in
settlement of claims, including a claim for tortious interference
with contractual rights and prospective business advantages. In
Noel, the record supported a finding of fact that the taxpayer
had suffered both personal emotional distress and damage to his
business reputation, and that these damages had been discussed
during the negotiations that resulted in a settlement.
By contrast, in the case at hand, petitioners have failed to
prove that the damages award on petitioner’s claim for
interference with a business relationship was received on account
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of personal injuries within the meaning of section 104(a)(2).
Accordingly, we sustain respondent’s determination on this issue.
B. Prejudgment Interest
Petitioners contend that the prejudgment interest they
received is excludable under section 104(a)(2) as damages
received on account of personal injuries. As petitioners
acknowledge, however, the well-established precedents in this
Court hold that prejudgment interest is taxable even when
attributable to damages excludable under section 104(a)(2). See,
e.g., Bagley v. Commissioner, 105 T.C. 396, 419-420 (1995);
Kovacs v. Commissioner, 100 T.C. 124, 129-139 (1993), affd.
without published opinion 25 F.3d. 1048 (6th Cir. 1994); Rozpad
v. Commissioner, T.C. Memo. 1997-528, affd. 154 F.3d 1 (1st Cir.
1998).
Having concluded that petitioner’s damages were not received
on account of personal injuries within the meaning of section
104(a)(2), a fortiori we conclude that petitioner’s prejudgment
interest was not attributable to personal injuries, and we
decline petitioners’ invitation to disturb the well-established
precedents of this Court.
C. Evidentiary Issues
In the parties’ stipulation of facts, respondent reserved
certain evidentiary objections that we now address.
Paragraph Nos. 25 and 26 of the stipulation of facts relate
to the nature of petitioner's business acumen and personal
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traits.8 Respondent objects to these stipulations on the grounds
that they are hearsay and lack relevance. We sustain
respondent's objections on the grounds that petitioner's personal
characteristics as described in these stipulations have no
bearing on whether the damages he received were on account of
personal injuries.
Respondent further objects to Joint Exhibits 3-C, 10-J, 12-L
and stipulation of facts paragraph No. 31 on the basis that each
merely contains excerpts from other more complete exhibits, and
thus is neither independently relevant or complete. We sustain
respondent's objections and note that the evidence remains
available elsewhere in the record. See Fed. R. Evid. 106, 401.
Finally, on the grounds of relevancy and hearsay, respondent
objects to joint exhibits 5-E and 11-K, which contain transcripts
of the closing arguments made by petitioner's attorney during the
second and third jury trial, respectively. We overrule
respondent's objections on this issue, for this Court considers
all the facts and circumstances, including arguments made at
trial, in determining whether a taxpayer received damages on
account of a personal injury under section 104(a)(2). Bent v.
Commissioner, 87 T.C. at 245. Furthermore, the closing arguments
are not hearsay because, as the stipulation of facts introducing
8
Stipulation of Facts, par. 25 states: “Mr. Gregg has been
described as an entrepreneur, a man who has imagination, and a
man with innovative ideas”.
Stipulation of Facts, par. 26 states: “Mr. Gregg is a
unique and creative business person”.
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the exhibit states, the exhibit is not offered to prove the truth
of the matters asserted. See Knevelbaard v. Commissioner, T.C.
Memo. 1997-330.
We have considered all other arguments advanced by the
parties, and to the extent we have not addressed these arguments,
consider them irrelevant, moot, or without merit.
To reflect the foregoing and concessions by the parties,
Decision will be entered
under Rule 155.