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position with respect to the punitive damages portion of the
settlement amount.
Because of our finding that there was substantial authority
for petitioners' reporting position, we need not address the
issue of whether they were negligent in not reporting the
punitive damages as income.
Accordingly, we find that petitioners are not liable for the
section 6662(a) penalty for the portion of the underpayment of
tax attributable to the punitive damages portion of the
settlement amount.
Interest
Petitioners did not report any of the amount of the
settlement proceeds that they received in 1991 as interest
income. Respondent determined that a portion of the settlement
amount is attributable to interest. Petitioners have presented
no argument to support their reporting position on this issue,
other than their assertion that section 104(a)(2) excludes the
entire settlement amount.
In Kovacs v. Commissioner, 100 T.C. 124 (1993), affd. per
curiam without published opinion 25 F.3d 1048 (6th Cir. 1994), we
stated that we had last analyzed this issue in Aames v.
Commissioner, 94 T.C. 189 (1990), in which we held that interest
was not excludable under section 104(a)(2). In Aames, we drew a
distinction between the damages and the interest on the damages,
noting that the nature of interest is that it is paid because of
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