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State court had used to calculate the prejudgment interest
portion of the total judgment (that is, damages plus prejudgment
interest). Respondent correctly applied the Rozpad allocation
formula.
B. Petitioners' Other Contentions
Petitioners contend that prejudgment interest is part of
damages under Rhode Island law and is therefore excludable under
section 104(a)(2). We disagree. The Court of Appeals for the
First Circuit concluded that prejudgment interest is separate and
distinct from damages under Rhode Island law. Rozpad v.
Commissioner, supra at 6.
In Kovacs v. Commissioner, supra at 130, we held that
statutorily imposed interest in a wrongful death case under
Michigan law is not excluded from income under section 104.
Petitioners contend that Kovacs v. Commissioner, supra, was
wrongly decided, in part because it is inconsistent with the
legislative history of section 104(a)(2). We disagree with this
argument, which was rejected by the Court of Appeals for the
First Circuit in Rozpad v. Commissioner, supra at 5.
Petitioners rely on McShane v. Commissioner, T.C. Memo.
1987-151, where we found that a settlement did not include
interest. However, McShane does not control because in that case
the parties agreed in a bona fide arm's-length negotiated
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