*10 Decisions will be entered for respondent as to the deficiencies in tax and for petitioners as to the addition to tax.
Ps were awarded damages of $ 995,000 in a Michigan wrongful death action and D appealed. After exhausting its appeals, D paid Ps $ 2,254,741.70, which was the sum of the damages, $ 6,134.53 in costs, and $ 1,253,607.17 in statutory interest. Held:
*125 OPINION
RUWE, Judge: Respondent determined deficiencies in petitioners' 1987 Federal income taxes and additions to tax as follows:
| Addition to Tax | ||
| Petitioner | Deficiency | Sec. 6661 |
| Rosemary S. Kovacs | $ 220,572 | $ 55,143 |
| Lois E. Kovacs | 34,992 | 8,748 |
| Mary Ann Kovacs | 33,103 | 8,276 |
| Kathleen L. Kovacs | 30,184 | 7,546 |
*11 Respondent has conceded the additions to tax under section 6661. 2
The primary issue remaining for decision is whether "interest", which petitioners received pursuant to Michigan Compiled Laws (M.C.L.)
Petitioners resided in Fowlerville, Michigan, when they filed the petitions in this case.
The parties submitted this case fully stipulated pursuant to Rule 122. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Rosemary S. Kovacs is the widow of Charles L. Kovacs, who was killed in 1976 when the truck that he was driving was*12 struck by a locomotive operated by the Chesapeake & Ohio Railroad Co. (C & O). On September 25, 1978, Mrs. Kovacs, as administratrix of her husband's estate, filed a complaint in the Livingston County Circuit Court against C & O and others in accordance with
On May 28, 1982, a Livingston County Circuit Court jury delivered a verdict in favor of Mrs. Kovacs, awarding damages*126 in the amount of $ 1,500,000, later reduced to $ 995,000. 3 The Michigan Court of Appeals affirmed, as did the Michigan Supreme Court.
On March 17, *13 1987, C & O issued a check in the amount of $ 2,254,741.70, payable to Rosemary Kovacs, administratrix of the estate of Charles L. Kovacs, deceased, and C. Robert Beltz, her attorney. The check for $ 2,254,741.70 was full payment for damages in the amount of $ 995,000, $ 6,134.53 in costs advanced, and $ 1,253,607.17 in interest on the damages, pursuant to
By order of the trial court, Mrs. Kovacs received 66-2/3 percent from the net proceeds and her daughters, Lois, Mary Ann, and Kathleen, each received 11-1/9 percent. The total award of $ 2,254,741.70 was disbursed as follows:
| Attorney's fees | $ 749,535.72 |
| Costs advanced | 6,134.53 |
| Rosemary S. Kovacs | 999,380.96 |
| Mary Ann Kovacs | 166,563.50 |
| Lois Elizabeth Kovacs | 166,563.50 |
| Rosemary S. Kovacs, conservator | |
| of the Estate of Kathleen L. | |
| Kovacs, a minor | 166,563.50 |
Petitioners did not report any part of the amounts received on their 1987 Federal income tax returns, nor did they deduct any part of the attorney's fees. Respondent determined that*14 petitioners should have included the interest portion of the award in gross income. Respondent allocated the interest among the recipients in proportion to the percentages in the trial court's order. Respondent also determined that, under section 212(1), petitioners were entitled to miscellaneous itemized deductions, subject to the 2-percent floor provided by section 67, for attorney's fees attributable to the interest portion of the award. Respondent allocated the*127 amounts of interest income and deductions for attorney's fees, after taking into account the 2-percent floor, as follows:
| Interest | ||
| Income | Attorney's Fees | |
| Rosemary S. Kovacs | $ 835,730 | $ 260,961.16 |
| Mary Ann Kovacs | 139,290 | 43,448.67 |
| Lois E. Kovacs | 139,290 | 43,251.67 |
| Kathleen L. Kovacs | 139,290 | 43,637.67 |
| Totals | $ 1,253,600 | $ 391,299.17 |
Petitioners filed a timely petition with this Court.
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; [Emphasis added.]
*16
For damages to be excludable under
Petitioners take the position that the term "damages" in
There is no more persuasive evidence of the purpose of a statute than the words which the legislature used to give expression to its wishes.
*20 We last analyzed this issue in
This issue first arose in
We have found no cases since Riddle was decided in 1933 which suggest that "interest" paid on an award of "damages" received on account of personal injury is excludable under
The relevant statutory and case law in Michigan is consistent with our holding. The claim underlying petitioners' interest award was brought under
*131 reasonable medical, hospital, funeral, and burial expenses for which the estate is liable; reasonable compensation for the pain and suffering, while conscious, undergone by the deceased person during the period intervening between the time of the injury and death; and damages for the loss of financial support and the loss of the society and companionship of the deceased. * * * [
Petitioners received their interest pursuant to
*27 *132 Finally, petitioners argue that the Periodic Payment Settlement Act of 1982, Pub. L. 97-473, section 101, 96 Stat. 2605, supports their position that interest is excludable under
*28 The legislative history indicates that the limited purpose of the Periodic Payment Settlement Act of 1982 was to "provide statutory certainty" for the exclusion of "damages" that are paid in "periodic payments." S. Rept. 97-646 (1982),
where * * * Congress adopts a new law incorporating sections of a prior law, Congress normally can be presumed to have had knowledge of the interpretation given to the incorporated law, at least insofar as it affects the new statute. [
*30 Deductibility of Attorney's Fees
The parties have agreed that if we hold that petitioners' interest award is includable in income, the attorney's fees attributable to interest are deductible under section 212(1). 15 Because we have held that the interest is includable in income, petitioners will be allowed to deduct the portion of their attorney's fees attributable to interest.
*31 *134 Decisions will be entered for respondent as to the deficiencies in tax and for petitioners as to the addition to tax.
HAMBLEN, PARKER, SHIELDS, COHEN, CLAPP, SWIFT, GERBER, WRIGHT, PARR, WELLS, CHIECHI, AND LARO, JJ., agree with majority opinion.
JACOBS, J., concurs in the result only.
CHABOT, J., dissents.
HALPERN, J., dissenting. I dissent because I believe that the majority has not properly taken account of Congress' 1982 amendment to
The legislative history of the 1982 amendment makes it crystal clear that the exclusion for periodic payments of damages on account of personal injuries is not limited to the present value of such periodic payments. Periodic payments -- in their entirety -- are excludable from gross income under
*33 Interest Portion of Periodic Payments Excluded
The legislative history of the 1982 amendment states that the amendment was intended to codify, rather than change, present law:
The bill specifically provides that the Code
S. Rept. 97-646 (1982),
Lump-Sum Payments
Once it is understood that the 1982 amendment stands for the proposition that, with regard to periodic payments, the time value of money is to be disregarded, then the only remaining question is whether Congress intended any different result with regard to lump-sum payments. I believe that it did not and, consequently, whether payments are made periodically or in a lump sum, time value of money considerations are to be disregarded in determining the taxability of amounts received under
The revenue rulings cited in the legislative*36 history of the 1982 amendment are of little help in resolving the question, their analysis being mostly conclusory and illustrating well only how to avoid receipt (for tax purposes) of the present value of the expected future payments. Certainly, the rule of exclusion for periodic payments is not limited to the three situations cited as illustrative of present law. Indeed, it appears indisputable that those examples are merely illustrative of some broader rationale on the part of Congress. The breadth of that rationale, however, is unclear. I perceive no persuasive evidence to explain Congress' distinguishing between lump-sum and periodic payments, as the majority suggests.
Congress, one might hypothesize, may have been concerned that a taxpayer accepting a periodic payment arrangement had accepted the credit risk that even the present value of the expected periodic payments would not be received.
I have no quarrel with the majority's distinction between a principal sum and interest. Majority op. p. 8. That distinction, however, appears to be irrelevant when dealing with damages received, whether by suit or agreement and whether as a lump-sum or periodic payment, on account of personal injuries. For purposes of
*138 Judge Beghe's Dissent
Judge Beghe also dissents from the opinion of the majority. Of course, I agree with Judge Beghe to the extent that he would exclude the entirety of petitioners' recovery based on the 1982 amendment. Beghe op. p. 45-47. I also agree with his rejection of application of the so called "reenactment doctrine" to this case.
Unlike Judge Beghe, I do not read Burke as standing for the proposition that all amounts received through the prosecution of a claim for a tort (or tortlike) personal injury are excludable under
Notwithstanding*40 a common-law tradition of broad tort damages and the existence of other federal antidiscrimination statutes offering similarly broad remedies, Congress declined to recompense Title VII plaintiffs for anything beyond the wages properly due them -- wages that, if paid in the ordinary course, would have been fully taxable. Thus, we cannot say that a statute such as Title VII, whose sole remedial focus is the award of backwages, redresses a tort-like personal injury within the meaning of
*139 Accordingly, we hold that the backpay awards received by respondents in settlement of their Title VII claims are not excludable from gross income as "damages received . . . on account of personal injuries" under
*41 I therefore would hold that Burke sheds no light on the question of whether the interest at issue constitutes damages received on account of personal injuries within the meaning of
Nevertheless, I am prepared to agree with Judge Beghe that the interest at issue constitutes "damages" within the meaning of
*140 WHALEN, J.,agrees with this dissenting opinion.
BEGHE, J., dissenting: I respectfully dissent. Statutory prejudgment interest on damages received on account of personal injuries is properly excluded from gross income under
I. Exclusion*46 of Prejudgment Interest as Damages
A. Distinction Between Prejudgment and Postjudgment Interest
The way to get into this case is to observe that, on February 3, 1987, the Michigan Supreme Court, the State court of last resort, denied the C & O's motion for a rehearing. Prior thereto, petitioners had no legal right to recover on their claims, but on that date the judgment against the C & O in favor of petitioners became final, and petitioners' entire claim for damages, including statutory interest, was liquidated and became an indebtedness of the C & O to petitioners.
Petitioners argue that the "prejudgment interest" accruing to February 3, 1987, is part of the damages excludable from gross income under
I agree with petitioners that the statutory interest accruing to February 3, 1987, or "prejudgment interest", should be*142 treated as part of the damages received on account of Mr. Kovacs' wrongful death. 12 Although a time value of money element inheres in both prejudgment and postjudgment interest, there is a long history of legal precedent that treats prejudgment interest on an unliquidated claim as part of the damages received on account of the injury that gave rise to the claim and the resulting right to receive such damages, see McCormick, Handbook on the Law of Damages, sec. 50, at 205 (1935), whereas postjudgment interest is considered interest eo nomine ("by that name"), Dobbs, Law of Remedies, sec. 3.5, at 164 (1973), because it accrues on an indebtedness that has been fixed by final court order.
*48 Interest has been generally defined as the compensation allowed by law or fixed by the parties for the use or forbearance of money. See Black's Law Dictionary 812 (6th ed. 1990). While this definition applies to most types of interest, it fails to capture the nature of interest on damages arising from noncontractual claims. As Professor McCormick stated in his often-cited treatise on the law of damages: "This definition * * * is defective in ignoring interest allowed as compensation for delay in satisfying unliquidated claims." McCormick, supra at 205 n.1. 13 The defect is that interest (as compensation for the time value of money) is not simply a creature of contract, but also may be an amount "allowed by*143 law as additional damages for loss of use of the money due as damages, during the lapse of time since the accrual of the claim."
*49 Professor McCormick showed that there is an historical distinction between "'conventional' or promised interest, on the one hand, and interest as damages, on the other."
*50 B. Nondeductibility of Prejudgment Interest on Unliquidated Claims
To determine properly the income tax character of the amount awarded under
C. Recent Developments
In
*53 Unlike conventional interest on indebtedness, prejudgment interest as damages takes its character from the originating claim; in this case a claim for physical personal injuries. In*145
In
In
The majority conclude, majority op. p. 8, that none of the interest portion of the award can be treated as damages because it serves a purpose fundamentally different from the underlying damages -- compensating petitioners for the C & O's delay in payment. However, this overemphasizes the time value of money aspect of the recovery. The regulation under
The term "damages received (whether by suit or agreement)" means an amount received (other than workmen's compensation) through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution. [Emphasis added.]
This regulation covers all amounts received and does*57 not distinguish among the component parts of an award received by a plaintiff in a tort action, such as lost future earnings, medical and funeral expenses, pain and suffering, loss of companionship, etc., or interest. Instead, the regulation focuses on the nature of the underlying claim. Once it is found that the personal injury claim is tort or tortlike, all amounts received from the defendant and its insurer through the prosecution of the claim are excluded from gross income. See
As the majority recognize, majority op. p. 6, petitioners' wrongful death claim against the C & O was for personal injuries and sounded in tort. Consequently, under the Code and regulations, any amount petitioners received on account of that claim was "damages" for such personal injuries within the meaning of
D. Michigan Law
The majority state, majority op. pp. 11-12, that, under Michigan law, statutory interest is not an element of damages and therefore must be treated differently*59 from interest awarded as an element of damages. As support for this argument, the majority cite
The majority's reliance on
Although the Michigan Court of Appeals, in
According to the majority, "petitioners' right to 'damages' for wrongful *61 death stems solely from, and is limited to, what is provided by
reasonable medical, hospital, funeral, and burial expenses for which the estate is liable; reasonable compensation for the pain and suffering, while conscious, undergone by the deceased person during the period intervening between the time of the injury and death; and damages for the loss of financial support and the loss of the society and companionship of the deceased. * * * [
The statute also provides that "the court or jury may award damages as the court or jury shall consider fair and equitable".
There is nothing in subsection 6 of the Michigan Wrongful Death Act that prohibits a Michigan court or jury from including an interest (time value of money) element in its*149 verdict, so long as it's "fair and equitable". *62 The indented language quoted above simply provides what must be included in the damages for wrongful death; it does not limit the damage award to those amounts or prohibit what may be included in addition to them. Moreover, the Michigan Supreme Court did not say anything in
*63 In
The majority correctly observe that statutory interest is awarded under a separate statute from the basic wrongful death damages. Majority op. pp. 11-12. However, that does not dispose of the question before us. The statute providing for interest on damages,
The majority point out that statutory interest is calculated on and added to the judgment. Majority op. pp. 11-12. In Michigan, when a plaintiff obtains a money judgment in any civil action, the plaintiff is automatically entitled to receive interest on the judgment under
E. Congressional Intent
The approach the Court should take in the case is consistent with the legislative purposes of
*67 Another view is that the exclusion of personal damages is grounded in compassion for the victim. That is, "taxation of recoveries carved from pain and suffering is offensive, and the victim is more to be pitied rather than taxed." Harnett, "Torts and Taxes",
*68 1. Lump sum and periodic payment settlements. To exclude the interest portion of the award from gross income would be consistent with Congress' 1982 amendment to
*69 In addition, victims of personal injury who settle their claims may exclude from gross income amounts that the parties take account of as interest yet characterize as damages in their settlement agreement. See
*71 *153 Just as there is no reason to distinguish between damages and interest received by settlement and damages and prejudgment interest received by verdict, there is no reason to distinguish between interest when it is received in a lump sum or in periodic payments. The jurisprudence of this Court and Congress' 1982 amendment to
2. Insurance proceeds analogy. The notions that underlie the statutory exclusion of personal injury damages,
*73 3. Canons of construction. The majority argue that reading
*75 Nor should the doctrine of "reenactment" referred to by the majority, majority op. p. 10, impede us from properly deciding this case. There is no valid reason to believe that Congress reenacted the Board of Tax Appeals' decision in
Riddle concerned the taxability of postjudgment interest on a $ 15,000 award by the Mixed Claims Commission for personal injuries suffered by the taxpayer in the sinking of the Lusitania in 1915. The interest had accrued from November 1, 1923, the date of the award. The award was not paid until 1928, the taxable year before the Board. Under the rules of the Mixed Claims Commission, interest was not allowable from the time of loss, but only from the time the loss was fixed by the Commission. In these circumstances, the Board held that *76 the interest was not excludable as part of the personal injury damages awarded by the Board, but was rather separately stated postjudgment interest and taxable as such.
Even if the majority properly read Riddle as supporting the proposition that all interest on damages for personal injuries, whether accruing before or after final judgment, is not excludable from gross income as damages, there is no reason to believe that Congress has ever reenacted the result*155 or reasoning of Riddle. As the Supreme Court said in
It is urged that re-enactment of
*77 The long-standing judicial view of this subject is, if anything, contrary to the majority's reading of
the "interest" was included in the judgment as part of just compensation for damages sustained. * * * Here, the stipulation denominated the sum of $ 84,531.73 as the "amount received for damages measured by interest" and in its opinion the Court of Claims stated: "The plaintiff is entitled to interest, as has been said, because such allowance is 'rightful' and is necessary adequately to compensate it for the damage." * * * Here the obligation of the United States is to make just compensation for the unlawful detention of the vessel. Just compensation for the damage so suffered requires that the party damaged be made whole. An integral part of a payment for such purpose is interest covering the period of detention. In such a case it is merely a convenient method of measuring the amount of one of the factors of damage. It is not a separable item of interest on an obligation. [
F. Authorities Arguably in Point
In reaching our conclusion in
Absent
G. Stare Decisis
*82 Insofar as
II. *85 Deductibility of Attorney's Fees
As the majority point out, the parties have agreed that if the interest portion of the award is includable in gross income, the attorney's fees allocable to the taxable interest are deductible under section 212(1). As a result, the deductible portion of the attorney's fees is not deductible "above the line" in arriving at adjusted gross income, and is subject to the 2-percent floor of section 67 because section 212(1) deductions are not among the "above the line" deductions enumerated in section 62.
Following respondent's lead, the majority cite
Total Attorney's Fees x Nonexempt Income / Total Award = Deductible Fees
Petitioners did not argue this issue other than to preserve the point that, *86 if any part of the interest should be held taxable, the attorney's fees allocable thereto would be deductible.
Although it might initially appear that the proper allocation of the attorney's fees is a cut-and-dried proposition, some aspects of the question do deserve further attention. It is not self-evident that a pro rata apportionment should be used to compute the deductible interest.
Petitioners' contingent fee agreement with the attorneys who represented them in the wrongful death action is not part of the stipulated record in this case. We do know that the total award of $ 2,254,741.70 was disbursed as follows:
| Attorney's Fees | $ 749,535.72 |
| Costs | 6,134.53 |
| Petitioners' Receipts (Gross) | 1,499,071.45 |
| Total | $2,254,741.70 |
It is clear that the agreed attorney's fees were one-third (33-1/3 percent) of the gross award, as it had been reduced by costs:
| Gross Award | $ 2,254,741.70 |
| Less: Costs | 6,134.53 |
| Net Award before Fees | 3)2,248,607.17 |
| Attorney's Fees | $ 749,535.72 |
At first blush, this computation would seem to confirm that a pro rata Church apportionment would be appropriate. The 33-1/3 percent attorney's contingent fee was calculated on the entire*87 amount of the award, without any differentiation between the basic damages and the statutory interest. See sec. 265(a)(1). However, some additional observations are in order:
First, the fact that the attorney's contingent fee agreement did not differentiate between basic damages and statutory*160 interest in computing the fee reinforces my view (expressed in Part I) that statutory interest on the basic damages is part of the damages for the purposes of the
Second, the pro rata Church apportionment is not the only way to go. Two other possibilities deserve consideration: One would disallow any deduction for attorney's fees; the other would allow them as a deduction by applying them, dollar for dollar, up to (but not in excess of) the taxable interest portion of the award. There are authorities that could support either of these approaches.
Authority for total disallowance of the deduction is found in the treatment of attorney's fees paid to obtain condemnation awards. Inasmuch as the majority rely on
Petitioners' attorney's fees were for services in*89 connection with obtaining the jury award. Interest on the jury award accrued as a matter of right so that it cannot be said that the attorney's services made any direct contribution to the interest element. Thus there is no basis for allocating any part of the fee to the collection of interest.
*161 Our views on the treatment of attorney's fees in condemnation awards are at variance with our views on their treatment in personal injury actions. The views expressed in Fulks also do not apply to the facts of this case (even though interest accrues as a matter of right under the Michigan statute) because the fees obviously increased by 33-1/3 cents for each dollar of interest, a fact that supports a pro rata apportionment of the fees. But this variance also casts doubt on the correctness of the majority's decision on the main issue in this case. The Court's lack of consistency in deciding the deductibility of attorney's fees in personal injury and condemnation cases reinforces*90 my view that the condemnation cases do not prevent prejudgment interest in personal injury cases from being excluded from gross income as part of the damages.
Irrespective of whether the amount taxable is the postjudgment interest (approximately $ 30,000, see supra note 11), the amount by which the entire interest portion of the award exceeded the interest that accrued from the date of the original judgment ($ 1,253,607.17 - $ 360,777.41 = $ 892,829.76), or the entire interest portion of the award ($ 1,253,607.17), I think there is a proper basis for allowing the attorney's fees to be deducted, dollar for dollar, from the taxable interest. There is support for this approach under Michigan law, in that one of the rationales for statutory interest advanced by the Michigan Courts is that it helps to defray costs and attorney's fees incurred in order to obtain the award.
*92 In conclusion, I would hold: (I) That the prejudgment interest portion of the award is excluded from gross income under
COLVIN, J., agrees with this dissenting opinion.
Footnotes
1. Cases of the following petitioners are consolidated herewith: Lois E. Kovacs, docket No. 5618-90; Mary Ann Kovacs, docket No. 5619-90; and Kathleen L. Kovacs, docket No. 5620-90.↩
2. 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. ↩
3. The original verdict of $ 1,500,000 was reduced one-third due to Charles L. Kovacs' contributory negligence and further reduced by $ 5,000 for an amount previously paid by the Board of Road Commissioners for the County of Livingston to settle claims against the board.↩
4. Michigan Compiled Laws (M.C.L.)
sec. 600.6013 (1987), provides:(1) Interest shall be allowed on a money judgment recovered in a civil action, as provided in this section * * *
(2) For complaints filed before June 1, 1980, in an action involving other than a written instrument having a rate of interest exceeding 6% per year, the interest on the judgment shall be calculated from the date of filing the complaint to June 1, 1980, at the rate of 6% per year and on and after June 1, 1980, to the date of satisfaction of the judgment at the rate of 12% per year compounded annually.↩
5. See also
Kieselbach v. Commissioner, 317 U.S. 399">317 U.S. 399 , 403-404 (1943) (interest constitutes "compensation for the delay in payment ");Tiefenbrunn v. Commissioner, 74 T.C. 1566">74 T.C. 1566 , 1572 (1980) (interest component of a condemnation award constitutes amount separate from price of condemned property);Smith v. Commissioner, 59 T.C. 107">59 T.C. 107 , 111-113↩ (1972) (interest as compensation for delay in payment).6. Cf.
Albertson's, Inc. v. Commissioner, 95 T.C. 415">95 T.C. 415 (1990), where we held that amounts which were deducted as accrued interest in a transaction that did not involve borrowing, withholding of amounts due, or forbearance from demanding payment were not properly characterized as "interest" because there was not, and never had been, a present right to claim the so-called principal amount. Albertson's↩ involved employment contracts, wherein the employer and employees agreed, in advance of the performance of any services, that part of the employees' compensation would be deferred until retirement or termination of employment. The amounts which were ultimately to be paid were characterized by the employer as deferred compensation plus interest. A deduction for interest on the amount designated as deferred compensation was taken by the employer prior to retirement or termination of the employees, even though the employees had never had a basis upon which they could have filed a claim demanding payment. Under those circumstances, we held that no part of the agreed-upon deferred compensation arrangement constituted interest.7. The Revenue Act of 1928, ch. 852,
sec. 22(b)(5) , 45 Stat. 791, 798, excluded from gross income the following:Amounts received, through accident or health insurance or under workmen's compensation acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness;↩
8. Cf.
McShane v. Commissioner, T.C. Memo 1987-151">T.C. Memo. 1987-151 , which involved a one-time settlement payment for a personal injury. In excluding the full amount of that payment, we relied primarily on the taxpayers' testimony, which indicated that no interest or costs were included in the settlement payment. In addition, we reasoned that no unconditional obligation upon which to compute interest existed until the settlement agreement was reached. We noted, however, that "any statutory interest on the final judgment would have been taxable income undersection 61↩ ."9. See Periodic Payment Settlement Act of 1982, Pub. L. 97-473, sec. 101(a), 96 Stat. 2605;
sec. 104(a)(2), I.R.C. 1954 ,68A Stat. 30;sec. 22(b)(5), I.R.C. 1939 ,53 Stat. (Part 1) 10. The most recent amendment tosec. 104(a)(2)↩ was enacted by the Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7641(a), 103 Stat. 2106, 2379.10. See also
Cannon v. Univ. of Chicago, 441 U.S. 677">441 U.S. 677 , 696-697↩ (1979) ("It is always appropriate to assume that our elected representatives, like other citizens, know the law;").11. Under the Michigan statute, interest is awarded as a matter of right upon entry of the judgment at a specified rate regardless of the type of claim or the importance of any element thereof. See
M.C.L. sec. 600.6013 (1987) ("Interest shall↩ be allowed on a money judgment recovered in a civil action, as provided in this section") (emphasis added).12. Historically, judges and commentators have debated over whether interest constitutes an award "in the nature of damages". See 25 C.J.S., Damages, sec. 51 (1966), and cases cited therein. The historically debated status of interest shows, at a minimum, that it has always been recognized as a concept with its own identity distinct from "damages".
To permit an award of interest it is necessary that the claim for damages shall represent a pecuniary loss which is susceptible of computation with reasonable certainty, or by means of established market values or other generally recognized standards. [25 C.J.S., Damages, sec. 51, at 790 (1966)].
The cases in Michigan make clear that statutory interest computed from the date of filing a claim until payment pursuant to
M.C.L. sec. 600.6013 is not a part of damages. SeeVannoy v. City of Warren, 182 N.W.2d 65">182 N.W.2d 65 , 68 (Mich. Ct. App. 1970), affd.194 N.W.2d 304">194 N.W.2d 304 (Mich. 1972);Swift v. Dodson, 149 N.W.2d 476">149 N.W.2d 476 , 478↩ (Mich. Ct. App. 1967).13. The Periodic Payment Settlement Act of 1982, Pub. L. 97-473, sec. 101, 96 Stat. 2605, amended
sec. 104(a)(2)↩ by striking out "whether by suit or agreement" and inserting in lieu thereof "whether by suit or agreement and whether as lump sums or as periodic payments."14. The legislative history cites four prior revenue rulings dealing with settlements of personal injury claims. See S. Rept. 97-646 (1982),
1 C.B. 514">1983-1 C.B. 514 , 515. InRev. Rul. 77-230, 2 C.B. 214">1977-2 C.B. 214 , periodic payments from a Federal Government trust for a taxpayer's future medical expenses were ruled fully excludable. InRev. Rul. 79-220, 2 C.B. 74">1979-2 C.B. 74 , all periodic payments from an annuity contract purchased by a tortfeasor's insurer were ruled fully excludable. InRev. Rul. 79-313, 2 C.B. 75">1979-2 C.B. 75 , 50 consecutive annual payments, to be increased by 5 percent each year, were ruled fully excludable. Finally, inRev. Rul. 76-133, 1 C.B. 34">1976-1 C.B. 34 , involving a lump sum awarded in a personal injury suit, part of which was then ordered by the court to be invested on behalf of a minor until he reached majority, the interest earned on the investment was ruled includable in the minor taxpayer's gross income. What distinguishedRev. Rul. 76-133 , supra, from the other three rulings was that the taxpayer inRev. Rul. 76-133 was found to have had constructive receipt or the economic benefit of the damages at the time they were invested on his behalf. See S. Rept. 97-646 (1982),1 C.B. 515">1983-1 C.B. 515 nn. 2 and 3;Rev. Rul. 76-133 , supra↩. It is clear from the legislative history that it was Congress' intent to provide "statutory certainty" that the type of "periodic payments" described in the first three rulings would continue to be excluded from gross income.15. Attorney's fees attributable to the damages excludable from income are not deductible. Sec. 265(a);
Metzger v. Commissioner, 88 T.C. 834">88 T.C. 834 , 860 (1987), affd. without published opinion845 F.2d 1013">845 F.2d 1013↩ (3d Cir. 1988).16. In
Church v. Commissioner, 80 T.C. 1104 (1983) , we used the following formula to determine the correct deduction:Total Attorney's Fees X Nonexempt Income / Total Award = Deductible Fees ↩
1. Judge Beghe↩, in his dissent,informs us that petitioners have conceded the taxability of certain "postjudgment" interest. I would limit my holding for petitioners to "prejudgement" interest, saving the question of "postjudgment" interest for another day.
2. The Court relied in part on
sec. 1.104-1(c), Income Tax Regs. , which defines "damages received". Justice Scalia, questioning the relevance of that regulation, noted: "this regulation purports expressly to define only the term 'damages received,' and not the * * * term we are called upon to interpret today ('personal injuries')".United States v. Burke, 504 U.S. ,112 S. Ct. 1867">112 S. Ct. 1867 , 1875↩ (1992) (Scalia, J., concurring) (citations omitted).1.
Horton v. Commissioner, 100 T.C. (1993) ;Miller v. Commissioner, 93 T.C. 330">93 T.C. 330 (1989), revd. and remanded914 F.2d 586">914 F.2d 586↩ (4th Cir. 1990).2.
Downey v. Commissioner, 97 T.C. 150 (1991) ;Keller v. Commissioner, T.C. Memo. 1991-373↩ .3.
Albertson's, Inc. v. Commissioner, 95 T.C. 415">95 T.C. 415↩ (1990), on appeal (9th Cir., June 6, 1991).4.
McShane v. Commissioner, T.C. Memo. 1987-151↩ .5. Of
Aames v. Commissioner, 94 T.C. 189 (1990) ; see alsoRiddle v. Commissioner, 27 B.T.A. 1339">27 B.T.A. 1339↩ (1933).6.
Planned Parenthood v. Casey, 504 U.S. , ,112 S. Ct. 2791">112 S. Ct. 2791 , 2808-2809↩ (1992).7. Opposed to the thrust of each such maxim or canon of construction is a parry or counterthrust. See Llewellyn, The Common Law Tradition: Deciding Appeals, 521-535 (1960); infra↩ pp. 48-52.
8.
Kieselbach v. Commissioner, 399">317 U.S. 399 (1943);Tiefenbrunn v. Commissioner, 74 T.C. 1566">74 T.C. 1566 (1980);Smith v. Commissioner, 59 T.C. 107">59 T.C. 107 (1972);Wheeler v. Commissioner, 58 T.C. 459">58 T.C. 459 (1972); see alsoFerreira v. Commissioner, 57 T.C. 866">57 T.C. 866 , 872↩ n.7 (1972).9. See, e.g.,
Church v. Commissioner, 80 T.C. 1104">80 T.C. 1104 , 1110-1111↩ (1983).10. The thrust of Judge Halpern's dissent is that petitioners' concession should be disregarded and that, for cash basis taxpayers such as petitioners, the entire award received by them is entitled to exclusion under
sec. 104(a)(2) , and only the subsequent earnings on the amounts received and invested by them are properly taxable. Inasmuch as it was the income from investment of the proceeds of a personal injury or malpractice award that was at issue inTrez v. Commissioner, T.C. Memo. 1976-141↩ , the citation of that case by the majority is inapposite (majority op. p. 5).11. Petitioners have not provided a computation of the taxable amount, but, at the 12-percent compounded rate under Mich. Comp. Laws (M.C.L.)
sec. 600.6013↩ (1987), it would appear to be approximately $ 30,000. This amount could be fixed on a Rule 155 computation.12. The trial court had awarded statutory interest under
M.C.L. sec. 600.6013 , calculated from the commencement of the suit, Sept. 25, 1978, through the date of its original judgment, June 18, 1982, in the amount of $ 360,777.41. The swelling of the interest amount included in the award finally paid on March 17, 1987, $ 1,253,607.17, is attributable not only to the passage of time, but also to the increase in the statutory rate underM.C.L. sec. 600.6013 . Effective as of June 1, 1980, the statutory rate was increased from 6 percent per year to 12 per cent per year compounded annually. This raises the question whether the division date between prejudgment and postjudgment should be the date of the original judgment of the trial court or the later date on which the decision of the court of last resort became final. The question can have substantive law significance, e.g., for insurance law purposes. CompareMatich v. Modern Research Corp., 420 N.W.2d 67">420 N.W.2d 67 , 75 n.15 (Mich. 1988) withIncollingo v. Ewing, 379 A.2d 79">379 A.2d 79 (Pa. 1977). In any event, I think this question should be decided by reference to a Federal standard, see the discussion inFisher v. Commissioner, T.C. Memo. 1992-740 , and that the date the judgment becomes final should be the choice for Federal income tax purposes. I would choose the later date, when the judgment becomes final, as the division date, by analogy to the rule that an accrual basis taxpayer is not entitled to accrue a deductible claim until he ceases to contest it or the judgment becomes final. CompareUnited States v. Consolidated Edison Co., 380">366 U.S. 380↩ (1961) with sec. 461(f).13. Although Professor McCormick's treatise on the law of damages has remained unchanged since its publication in 1935, it continues to be cited as one of the leading authorities on the subject, particularly with reference to its exposition of the history of interest as an element of damages. See, e.g.,
Monessen Southwestern Ry. v. Morgan, 486 U.S. 330">486 U.S. 330 , 337 (1988);Library of Congress v. Shaw, 478 U.S. 310">478 U.S. 310 , 314 (1986); see also Williams, "Prejudgment Interest: An Element of Damages Not To Be Overlooked",8 Cumb. L. Rev. 521">8 Cumb. L. Rev. 521↩ (1977).14. See
sec. 1.61-7(a), Income Tax Regs. , for examples of conventional interest on various types of contractual and liquidated claims. The list also includes one type of interest on what might be considered unliquidated claims, "the interest portion of a condemnation award".Sec. 1.61-7(a), Income Tax Regs. ; see alsoKieselbach v. Commissioner, 317 U.S. 399">317 U.S. 399 (1943) (interest on condemnation awards), discussed infra pp. 52-54 and58-59 ↩.15. The majority rule at common law was that prejudgment interest was not allowed on personal injury claims, at least with respect to pain and suffering and other nonfinancial harms. 4
Restatement, Torts 2d, sec. 913(2) (1979); McCormick, Handbook on the Law of Damages, sec. 50, at 205 (1935). Some jurisdictions allowed interest on lost wages between the time of the injury and the time of the verdict, just as they required lost future wages to be discounted to present value as of the time of the verdict. 4Restatement, supra secs. 913(2) comment, 913A; McCormick, supra sec. 56.Be that as it may, the Michigan statutory system for interest now applies to all types of claims without any distinction between contractual and noncontractual claims, and between pecuniary harms and other types of injury.
M.C.L. sec. 600.6013 provides a legislative exception to the common law prohibition against interest as an element of damages and codifies the American trend favoring the award of prejudgment interest.Ramada Development Co. v. U.S. Fidelity & Guaranty Co., 626 F.2d 517">626 F.2d 517 , 525 (6th Cir. 1980). However the jury is still instructed that it can include in the damages interest on financial claims accruing during the time from the date of the injury to the initiation of the lawsuit.Ryan v. Ford Motor Co., 334 F. Supp. 674">334 F. Supp. 674 , 675-676 (E.D. Mich. 1971);Vannoy v. City of Warren, 182 N.W.2d 65">182 N.W.2d 65 (Mich. Ct. App. 1970), affd.194 N.W.2d 304">194 N.W.2d 304↩ (Mich. 1972).16. Subject, of course, to the current restrictions on the deductibility of personal interest under sec. 163(h) and the economic performance requirements under sec. 461(h).↩
17. This is consistent with respondent's view that dividends on restricted stock that is not substantially vested under sec. 83, as to which the employee-stockholder has not made a sec. 83(b) election, are treated as compensation and not as dividend income. See
Rev. Proc. 80-11, 1 C.B. 616">1980-1 C.B. 616 ; cf.Rev. Proc. 83-22, 1 C.B. 680">1983-1 C.B. 680 ;Rev. Proc. 83-38, 1 C.B. 773">1983-1 C.B. 773↩ .18.
Snyder v. Massachusetts, 291 U.S. 97">291 U.S. 97 , 114 (1934) (Opinion of Cardozo↩, J.).19.
Endykiewicz v. State Highway Commission, 324 N.W.2d 755↩ (Mich. 1982) , holds that the administratrix of a decedent's estate could sue under the Wrongful Death Act for damages for loss of companionship and society in an action that alleged that the State of Michigan breached its duty to maintain a highway in a reasonably safe condition even though the State had, in another statute, limited its liability for highway defects to bodily injury and property damage.20. As the majority observe, wrongful death is a purely statutory tort unknown at common law, majority op. p. 11. Prosser & Keeton, Law of Torts, sec. 127, at 945-947 (5th ed. 1984).↩
21. The exclusion for damages received on account of personal injuries or sickness first appeared in the Revenue Act of 1918, ch. 18, sec. 213(b)(6), 40 Stat. 1057, 1066.↩
22. The human capital justification for
sec. 104(a)(2) has been criticized as being inconsistent with other principles of taxation. Blackburn, "Taxation of Personal Injury Damages: Recommendations for Reform",56 Tenn. L. Rev. 661">56 Tenn. L. Rev. 661 (1989); Dodge, "Taxes and Torts",77 Cornell L. Rev. 143">77 Cornell L. Rev. 143 , 152-153 (1992). For example, if a person receives no damage award after being injured by another, that person is not entitled to a casualty loss deduction under sec. 165(c)(3). See Bittker & Lokken, Federal Taxation of Income, Estates and Gifts, par. 34 (1990). InDowney v. Commissioner, 97 T.C. 150">97 T.C. 150 , 159 (1991), we stated that it is doubtful "whether the return of capital theory justifies the exclusion from income of the full range of damages found to be excludable undersection 104(a)(2)↩ , particularly damages received in lieu of lost income."23. The compassion justification has also been criticized on the ground that there is nothing in the legislative history of
sec. 104(a)(2) that indicates that Congress intended to bestow a humanitarian benefit on taxpayers who received damages for personal injuries or sickness. See Dodge, supra at 148-149. However, inDowney v. Commissioner, supra↩ at 158-159 , we observed that the emotional justification for the exclusion was more satisfactory than the human capital approach.24.
Rev. Rul. 79-313, 2 C.B. 75">1979-2 C.B. 75 ;Rev. Rul. 79-220, 2 C.B. 74">1979-2 C.B. 74 ;Rev. Rul. 77-230, 2 C.B. 214">1977-2 C.B. 214↩ .25. In
McShane v. Commissioner, T.C. Memo. 1987-151 , the taxpayers settled their personal injury case while it was on appeal from a jury verdict in their favor, for an amount in excess of the basic damages awarded by the jury that obviously included prejudgment interest. We noted that the interest portion of the settlement would have been awarded as statutory interest under the applicable Massachusetts law had the case not been settled and the verdicts rendered in their favor proceeded to final judgment. We stated that it was "undisputed that if that had been the case, any statutory interest on the final judgment would have been taxable undersection 61 ." However, this statement in McShane↩ is dictum, because the issue of the taxability of interest on a judgment was not before us, and inapplicable here, because it appears to have been merely a statement of what the parties in that case did not dispute rather than a description of the applicable law.26. It might be argued that there is a public policy reason for favoring settlements by providing personal injury plaintiffs who settle with more favorable tax consequences than if they pursue their claims to final judgment. Insofar as this tax case is concerned, however, it could be improper for us to be distracted by what is essentially a local law consideration that already appears to have been adequately taken care of by the Michigan statute. The Michigan statute providing for judgment interest already has built-in provisions that are designed in a more discriminating way to favor settlement and to discourage parties who reject reasonable settlements and hold out for final judgment on the merits.
M.C.L. sec. 600.6013(5)↩ , provides that if the plaintiff should reject a bona fide reasonable offer of settlement made by defendant, which is substantially identical to or substantially more favorable to the prevailing party than the ultimate judgment, then the court is not to allow interest beyond the time the written offer of settlement was made and rejected by the plaintiff, and filed with the Court. Similarly, if such an offer is made by the plaintiff and rejected by the defendant, the court shall order that interest be calculated from the date of the rejection of the offer to the date of satisfaction of the judgment at a rate of interest 2 percentage points higher than what the rate would have otherwise been.27. For a similar analysis that arrives at a contrary conclusion, see Abreu, "Distinguishing Interest from Damages: A Proposal For a New Perspective",
40 Buff. L. Rev. 373">40 Buff. L. Rev. 373 , 390↩ n.72 (1992).28. A current example of the administrative application and extension of the compassion approach is the pending proposal to allow terminally ill beneficiaries (such as AIDS victims) of life insurance policies to draw down the proceeds free of income tax.
Secs. 1.101-8 ,1.7702-2, Proposed Income Tax Regs. , concerning qualified accelerated death benefits,57 Fed. Reg. 59319 (Dec. 15, 1992); see Pear, "Benefit Proposed for Terminally Ill-IRS would Allow Tax-Free Payment of Life Insurance While Person Is Alive", N.Y. Times, Dec. 16, 1992, at A-29. What this proposal appears to do is turn the interest earnings on the policy (the "inside build-up") into compensation for terminal illness undersec. 104(a)(2)↩ .29. Although our decision in
Miller v. Commissioner, 93 T.C. 330">93 T.C. 330 (1989), was reversed and remanded,914 F.2d 586">914 F.2d 586 (4th Cir. 1990), the fact thatsec. 104(a)(2) is broadly worded has not changed, even since the statute's 1989 amendment after our decision in Miller. Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7641, 103 Stat. 2106, 2379 (amendingsec. 104 to remove punitive damages for cases involving nonphysical injuries or sickness from thesec. 104(a)(2) exclusion). Moreover, our decision in Miller that the phrase "any damages" included punitive as well as compensatory damages was reversed on the ground that punitive damages were not received on account of personal injuries because they required an additional showing of egregious conduct by the defendant. Commissioner v. Miller↩, 914 F.2d at 589-592.30. In
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353">456 U.S. 353 , 381-382 (1982), cited in the majority op. p.10, the Supreme Court stated that:the fact that a comprehensive reexamination and significant amendment of the CEA left intact the statutory provisions under which the federal courts had implied a cause of action is itself evidence that Congress affirmatively intended to preserve that remedy. A review of the legislative history of the statute persuasively indicates that preservation of the remedy was indeed what Congress actually intended. [Fn. ref. omitted.]
Although Congress is presumed to be aware of judicial interpretations of a statute and to adopt them when it reenacts a statute without change, see
Albemarle Paper Co. v. Moody, 422 U.S. 405">422 U.S. 405 , 414 n.8 (1975), it is highly unlikely that Congress had before it the issue inRiddle v. Commissioner, 27 B.T.A. 1339">27 B.T.A. 1339 (1933), when it reenactedsec. 104(a)(2) as it did when it reenacted the statute at issue in Merrill Lynch. Similarly,Society of Plastics Indus. Inc. v. ICC, 955 F.2d 722">955 F.2d 722 , 728-729 (D.C. Cir. 1992), andCannon v. Univ. of Chicago, 441 U.S. 677">441 U.S. 677 , 696-697↩ (1979) (both also cited in the majority op. p. 10), concerned situations in which there was clear evidence or other indications that Congress was actually aware of the prior statutory interpretation that was in issue.31. See also
Ferreira v. Commissioner, 57 T.C. 866">57 T.C. 866 , 872 n.7 (1972), where, in holding "blight damages" under a condemnation award to be taxable ordinary income, we said: "Under Kieselbach we need not conclude that the payment is 'interest' as such. If the $ 26,000 award was made because of the delay in compensating the petitioners for the taking of their property, it constitutes taxable income." Cf.Midkiff v. Commissioner, 96 T.C. 724">96 T.C. 724↩ (1991).32. But see Abreu, supra↩ at 388-389 (recognizing that prejudgment interest is damages but that it should be includable in gross income as compensation for delay in payment).
33. Petitioners ask us to distinguish
Aames v. Commissioner, 94 T.C. 189">94 T.C. 189 (1990), on the ground that it involved not a suit for damages for personal injuries, but the taxpayer's malpractice claim against the attorney who negligently failed to obtain a proper settlement of the taxpayer's personal injury claim. It may also be noteworthy that the interest at issue in Aames did not begin to accrue until 8 years after the accident. I would not distinguish Aames on these grounds. The taxpayer's malpractice suit clearly had its origin in his claim for damages on account of personal injury, and there was some element of prejudgment interest in the award that he finally obtained. We should meet the issue head on and overrule Aames↩ by announcing that we will no longer follow it with respect to prejudgment interest.34. In
Planned Parenthood v. Casey, 504 U.S , ,112 S. Ct. 2791">112 S. Ct. 2791 , 2808-2809↩ (1992), the Supreme Court stated that when it "reexamines a prior holding, its judgment is customarily informed by a series of prudential and pragmatic considerations designed to test the consistency of overruling a prior decision with the ideal of the rule of law, and to gauge the respective costs of reaffirming and overruling a prior case." The considerations are (1) "whether the rule has proved to be intolerable simply in defying practical workability"; (2) "whether the rule is subject to a kind of reliance that would lend a special hardship to the consequences of overruling and add inequity to the cost of repudiation"; (3) "whether related principles of law have so far developed as to have left the old rule no more than a remnant of abandoned doctrine"; and (4) "whether facts have so changed or come to be seen so differently, as to have robbed the old rule of significant application or justification". This case is governed by the third consideration set forth above.35. Inasmuch as punitive damages are much more speculative, and subject to attack on appeal, it might be reasonable to expect that it was the punitive damages that were reduced by agreement of the parties in a post-trial pre-appeal settlement. But see
Miller v. Commissioner, T.C. Memo. 1993-49↩ (on remand).36.
Fincke v. Commissioner, 39 B.T.A. 510">39 B.T.A. 510 (1939), applied basis in full to the sale portion of a part gift-part sale, a result that was made inapplicable to part charitable contributions-part sales of appreciated property by sec. 1011(b), enacted by the Tax Reform Act of 1969, Pub. L. 91-172, sec. 201(f), 83 Stat. 564. Comparesec. 1.1011-2, Income Tax Regs. withsec. 1.1015-4(a), Income Tax Regs.↩