Christopher J. and Vickilynn M. McCann - Page 7

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          A.   Contentions of the Parties and Background                              
               Petitioners contend that all of the $839,000 payment is                
          excludable from gross income as damages for personal injuries               
          under section 104(a)(2) and that none is includable in income as            
          interest.  Respondent contends that $255,983 of the $839,000                
          settlement is interest includable as income under section                   
          61(a)(4).  We agree with respondent for reasons discussed below.            
               Petitioners bear the burden of proving that they may exclude           
          the $839,000 LPCF payment from income under section 104(a)(2).2             
          Rule 142(a)(1).                                                             
               Gross income does not include damages received (whether by             
          suit or agreement) on account of personal injuries or sickness.             
          Sec. 104(a)(2).3  However, interest received on damage awards for           
          personal injuries is not received on account of personal injuries           
          or sickness and is not excludable from income under section                 
          104(a)(2).  Rozpad v. Commissioner, 154 F.3d 1, 6-7 (1st Cir.               
          1998), affg. T.C. Memo. 1997-528; Brabson v. United States, 73              

               2  Petitioners do not contend that respondent bears the                
          burden of proving that sec. 104(a)(2) does not apply.  Rule                 
               3  The Small Business Job Protection Act of 1996, Pub. L.              
          104-188, sec. 1605(a), 110 Stat. 1838, amended sec. 104(a)(2) to            
          limit the exclusion to amounts received for personal physical               
          injuries or physical sickness.  The amount at issue in this case            
          was received before the effective date of the amendment, and,               
          thus, the amended version of sec. 104(a)(2) does not apply.                 

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