Michael J. and Carrie L. Woods - Page 2

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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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