- 9 -
Petitioners contend that respondent's allocation is
inconsistent with section 104(a)(2). We reject this argument, as
did the Court of Appeals in Rozpad v. Commissioner, supra at 3-6.
Petitioners contend that prejudgment interest should not be
more than $35,000 because any more than that amount would cause
the tax-free amount of their settlement to be worse than the tax-
free amount of their default judgment award. We disagree. Like
the taxpayers in Rozpad and Delaney, petitioners agreed to settle
their case for less than the total of the judgment and
prejudgment interest they would have received if they prevailed
on appeal. The Court of Appeals for the First Circuit affirmed
our decisions approving the Commissioner's method of allocating
prejudgment interest in Delaney and in Rozpad.
C. Conclusion
Applying the allocation formula in Rozpad, we conclude that
$42,910 (i.e., 28.61 percent of $150,000) of the settlement was
prejudgment interest and is not excludable under section 104.
To reflect the foregoing,
Decision will be entered
under Rule 155.
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Last modified: May 25, 2011