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intended to remedy physical or emotional injuries arising from
Officer Harman’s actions.
In sum, we conclude that the settlement proceeds were paid in
lieu of lost fishing income and not on account of personal injury
or sickness. As a result, we sustain respondent’s determination
that the Harman settlement proceeds are gross income includable on
the Nortons’ Schedule C for 1993.
Issue 3. Taxability of Prejudgment Interest
On April 21, 1988, Mr. Norton was injured in an automobile
accident. The Nortons sued both the driver and the vehicle owners
(the Boehm lawsuit). On December 28, 1992, an amended final
judgment was entered awarding the Nortons $95,235 in damages
together with $45,298 in prejudgment interest, as well as
attorney’s fees and costs. The Nortons received the $95,235 in
1992; they received the $45,298 in 1993. The Nortons did not
report either the damage award or the prejudgment interest on their
1992 or 1993 Federal income tax returns.
The parties agree that pursuant to section 104(a)(2), the
$95,235 damage award is excluded from the Nortons’ gross income.
However, in the notice of deficiency respondent determined that the
$45,298 in prejudgment interest is includable in the Nortons’ gross
income.
The Nortons claim that under Alaska State law, prejudgment
interest is classified as damages and as such is excluded from
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