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$1 million check to Mr. DiBiasio and his attorney. Mr.
DiBiasio's attorney cashed the check; retained $447,460.21 for
attorney's fees and costs; and issued a $552,539.79 check to Mr.
DiBiasio. Dr. Mariorenzi's medical malpractice insurer did not
issue a Form 1099, regarding the $1 million settlement, to either
Mr. DiBiasio or the Internal Revenue Service.
The DiBiasios, on their Federal income tax return for the
taxable year 1989, neither reported any portion of the $1 million
settlement on their return nor claimed any deductions relating to
Mr. DiBiasio's medical malpractice dispute.
OPINION
1. Allocation of Settlement Proceeds
Respondent determined that in each case petitioners' gross
income includes the portion of their respective settlement that
is attributable to prejudgment interest. Petitioners contend
that no part of their respective settlement is attributable to
prejudgment interest. To support their contention, petitioners
rely on the stipulations of dismissal. The stipulations state
"no interest." Petitioners contend that the phrase "no interest"
means no portion of the settlement is allocable to prejudgment
interest. For the following reasons, we reject petitioners'
contention.
First, in Delaney v. Commissioner, 99 F.3d 20 (1st Cir.
1996), affg. T.C. Memo. 1995-378, the U.S. Court of Appeals for
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