Kovacs v. Comm'r of Internal Revenue, Nos. 5617–90 to 5620–90.

• Court: United States Tax Court
• Writing for the Court: RUWE
• Citation: 100 T.C. No. 10,100 T.C. 124
• Parties: Rosemary S. KOVACS, et al.,1 Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Docket Number: Nos. 5617–90 to 5620–90.
• Decision Date: 24 February 1993

100 T.C. 124
100 T.C. No. 10

Rosemary S. KOVACS, et al.,1 Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 5617–90 to 5620–90.

United States Tax Court.

Feb. 24, 1993.

[100 T.C. 125]

Dan A. Darnell and Robert B. Pierce, for petitioners.

Lynn M. Brimer, for respondent.

OPINION RUWE, Judge:

Respondent determined deficiencies in petitioners' 1987 Federal income taxes and additions to tax as follows:

+-------------------------------------------------+
                ¦ ¦ ¦Addition to Tax ¦
                +------------------+------------+-----------------¦
                ¦Petitioner ¦Deficiency ¦Sec. 6661 ¦
                +------------------+------------+-----------------¦
                ¦Rosemary S. Kovacs¦$220,572 ¦$55,143 ¦
                +------------------+------------+-----------------¦
                ¦Lois E. Kovacs ¦34,992 ¦8,748 ¦
                +------------------+------------+-----------------¦
                ¦Mary Ann Kovacs ¦33,103 ¦8,276 ¦
                +------------------+------------+-----------------¦
                ¦Kathleen L. Kovacs¦30,184 ¦7,546 ¦
                +-------------------------------------------------+
                

Respondent has conceded the additions to tax under section 6661.²

The primary issue remaining for decision is whether “interest”, which petitioners received pursuant to Michigan Compiled Laws (M.C.L.) section 600.6013 (1987), on “damages” that were awarded to them in a wrongful death action is excluded from gross income under section 104(a)(2). The deductibility of attorney's fees paid by petitioners will depend upon our resolution of the primary issue.

Petitioners resided in Fowlerville, Michigan, when they filed the petitions in this case.

The parties submitted this case fully stipulated pursuant to Rule 122. The stipulation of facts and attached exhibits are incorporated herein by this reference.

Rosemary S. Kovacs is the widow of Charles L. Kovacs, who was killed in 1976 when the truck that he was driving was struck by a locomotive operated by the Chesapeake & Ohio Railroad Co. (C & O). On September 25, 1978, Mrs. Kovacs, as administratrix of her husband's estate, filed a complaint in the Livingston County Circuit Court against C & O and others in accordance with M.C.L. section 600.2922 (the Michigan wrongful death statute).

On May 28, 1982, a Livingston County Circuit Court jury delivered a verdict in favor of Mrs. Kovacs, awarding damages

[100 T.C. 126]

in the amount of $1,500,000, later reduced to $995,000.³ The Michigan Court of Appeals affirmed, as did the Michigan Supreme Court. Kovacs v. Chesapeake & Ohio Ry. Co., 351 N.W.2d 581 (Mich.Ct.App.1984), affd. 397 N.W.2d 169 (Mich.1986).

On March 17, 1987, C & O issued a check in the amount of $2,254,741.70, payable to Rosemary Kovacs, administratrix of the estate of Charles L. Kovacs, deceased, and C. Robert Beltz, her attorney. The check for $2,254,741.70 was full payment for damages in the amount of $995,000, $6,134.53 in costs advanced, and $1,253,607.17 in interest on the damages, pursuant to M.C.L. section 600.6013. Pursuant to M.C.L. section 600.6013, interest was calculated from the commencement of the action until March 17, 1987, the date the judgment was satisfied.

By order of the trial court, Mrs. Kovacs received 66– 2/3 percent from the net proceeds and her daughters, Lois, Mary Ann, and Kathleen, each received 11 – 1/9 percent. The total award of $2,254,741.70 was disbursed as follows:

+-----------------------------------------------------------------------------+
                ¦Attorney's fees ¦$749,535.72¦
                +-----------------------------------------------------------------+-----------¦
                ¦Costs advanced ¦6,134.53 ¦
                +-----------------------------------------------------------------+-----------¦
                ¦Rosemary S. Kovacs ¦999,380.96 ¦
                +-----------------------------------------------------------------+-----------¦
                ¦Mary Ann Kovacs ¦166,563.50 ¦
                +-----------------------------------------------------------------+-----------¦
                ¦Lois Elizabeth Kovacs ¦166,563.50 ¦
                +-----------------------------------------------------------------+-----------¦
                ¦Rosemary S. Kovacs, conservator of the Estate of Kathleen L. ¦166,563.50 ¦
                ¦Kovacs, a minor ¦ ¦
                +-----------------------------------------------------------------------------+
                

Petitioners did not report any part of the amounts received on their 1987 Federal income tax returns, nor did they deduct any part of the attorney's fees. Respondent determined that petitioners should have included the interest portion of the award in gross income. Respondent allocated the interest among the recipients in proportion to the percentages in the trial court's order. Respondent also determined that, under section 212(1), petitioners were entitled to miscellaneous itemized deductions, subject to the 2–percent floor provided by section 67, for attorney's fees attributable to the interest portion of the award. Respondent allocated the

[100 T.C. 127]

amounts of interest income and deductions for attorney's fees, after taking into account the 2–percent floor, as follows:

+-----------------------------------------------+
                ¦ ¦Interest ¦ ¦
                +------------------+----------+-----------------¦
                ¦ ¦Income ¦Attorney's Fees ¦
                +------------------+----------+-----------------¦
                ¦Rosemary S. Kovacs¦$ 835,730 ¦$260,961.16 ¦
                +------------------+----------+-----------------¦
                ¦Mary Ann Kovacs ¦139,290 ¦43,448.67 ¦
                +------------------+----------+-----------------¦
                ¦Lois E. Kovacs ¦139,290 ¦43,251.67 ¦
                +------------------+----------+-----------------¦
                ¦Kathleen L. Kovacs¦139,290 ¦43,637.67 ¦
                +------------------+----------+-----------------¦
                ¦Totals ¦$1,253,600¦$391,299.17 ¦
                +-----------------------------------------------+
                

Petitioners filed a timely petition with this Court.

Section 61(a)(4) provides that gross income includes “interest”. See Kieselbach v. Commissioner, 317 U.S. 399, 403–404 (1943); Tiefenbrunn v. Commissioner, 74 T.C. 1566, 1572 (1980); Smith v. Commissioner, 59 T.C. 107, 111–113 (1972); Wheeler v. Commissioner, 58 T.C. 459, 461–462 (1972); Trez v. Commissioner, T.C.Memo. 1976–141. Nevertheless, petitioners argue that the “interest” they received pursuant to M.C.L. section 600.6013 (1987) ⁴ is excludable from gross income under section 104(a)(2). Section 104(a)(2) provides that gross income does not include:

the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness; [Emphasis added.]

For damages to be excludable under section 104(a)(2), the taxpayer's underlying claim must be for tortlike personal injury. United States v. Burke, 504 U.S. 229, ––––, 112 S.Ct. 1867, 1870 (1992) (quoting sec. 1.104–1(c), Income Tax Regs.). The underlying claim in the instant case is for wrongful death, which clearly lies in tort, see Prosser & Keeton, Law of Torts, sec. 127, at 945–960 (5th ed. 1984), and it is undisputed that the amount designated as “damages” was awarded on account of a personal injury.

Petitioners take the position that the term “damages” in section 104(a)(2) should be construed expansively so as to

[100 T.C. 128]

include interest on such damages. However, it is a longstanding rule of statutory interpretation that statutes providing exclusions from income must be construed narrowly. Commissioner v. Jacobson, 336 U.S. 28, 49 (1949). Section 104(a)(2) makes no mention of “interest”. In order for us to accept petitioners' position—that interest on damages is excluded from income by section 104(a)(2)—we would have to interpret the term “damages” broadly and overrule previous opinions. This we decline to do.

There is no more persuasive evidence of the purpose of a statute than the words which the legislature used to give expression to its wishes. United States v. American Trucking Associations, 310 U.S. 534, 543 (1940). This maxim is especially true in interpreting tax statutes. Crooks v. Harrelson, 282 U.S. 55, 61 (1930); United States v. Merriam, 263 U.S. 179, 187–188 (1923); Masonite Corp. v. Fly, 194 F.2d 257, 260–261 (5th Cir.1952). “[T]he words of statutes—including revenue acts—should be interpreted where possible in their ordinary, everyday senses.” Crane v. Commissioner, 331 U.S. 1, 6 (1947); Miller v. Commissioner, 93 T.C. 330, 338 (1989), revd. on other grounds 914 F.2d 586 (4th Cir.1990). The term “damages” connotes the “compensation or satisfaction imposed by law for a wrong or injury”. Webster's Third New International Dictionary (1986). The word “interest” in this context means “the price paid for borrowing [i.e., withholding] money”. Id.⁵ Petitioners had the right to, and did, demand payment of the damages when they filed their wrongful death claim. The Michigan courts upheld the validity of the claim and awarded damages plus statutory interest from the date the claim was filed. The statutory interest from the date on which petitioners filed their claim to the date of payment, therefore, falls within the established definition of interest.⁶ In ordinary parlance, interest requires a

[100 T.C. 129]

principal sum. In the instant case, the damages are the principal sum on which the interest is owed, and ordinary usage suggests the two are separate. See 25 C.J.S., Damages, sec. 1(b) at 614 (1966) (“The term ‘damages' is to be distinguished from other terms, such as ‘debt’, ‘interest’, ‘penalty’, ‘salary’, and ‘value’.”).

We last analyzed this issue in Aames v. Commissioner, 94 T.C. 189 (1990), in which we held that “interest” was not excludable under section 104(a)(2). In that case, the taxpayer had sued his attorney for malpractice for failing properly to prosecute the taxpayer's personal injury claim and was awarded damages and interest thereon. We drew a distinction between the damages and the interest on such damages, noting that the nature of interest is that it is paid because of the delay in the receipt of a principal amount. In Aames, the principal amount was the amount awarded as “damages”. Id. at 193.

This issue first arose in Riddle v. Commissioner, 27 B.T.A. 1339 (1933), which concerned the excludability of damages and interest awarded thereon in connection with...