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The sole issue for decision is whether part of the proceeds
petitioners received in settlement of a tort action is
prejudgment interest, and, if so, whether it is excludable from
gross income as damages for a personal injury under section
104(a)(2). We hold that $78,190 (42.53 percent of the $183,852
payment to Michael and Carrie Woods) and $790,587 (42.53 percent
of the $1,858,948 payment to Jacquelyn Woods) was prejudgment
interest and is not excludable from income under section 104.
Unless otherwise specified, section references are to the
Internal Revenue Code in effect for the year in issue. Rule
references are to the Tax Court Rules of Practice and Procedure.
Background
The parties submitted these cases fully stipulated under
Rule 122.
A. Petitioners
Petitioners Michael and Carrie Woods (the Woodses) lived in
Warwick, Rhode Island, when they filed their petition. Jacquelyn
Woods (Jacquelyn) is the minor child of the Woodses.
Jacquelyn was born on September 25, 1985. Jacquelyn's
shoulder was injured during birth. This injury resulted in
stunted growth of her arm and permanent weakness and restricted
motion of her arm and shoulder.
B. The Tort Action, Judgment, and Interest
The Woodses were represented by Mark Decof (Decof), who
filed a medical malpractice suit in the Superior Court of Rhode
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