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Interest on personal injury award not excludable.

The Kovacses won damages of about $1 million in a wrongful death suit against a railroad company. After exhausting all judicial appeals, the railroad paid the Kovacses $2,250,000, made up of the $1 million in damages plus $1,250,000 in interest required under Michigan law. (Interest was calculated from the date the lawsuit began.)

The Kovacses did not report any of the $2,250,000 as gross income. The IRS claimed the interest portion had to be included.

IRC section 104(a)(2) excludes "damages received ( whether ... as lump sums or as periodic payments) on account of personal injuries or sickness...." The Kovacses argued the term damages should be construed broadly to include interest on damages. They also argued that because section 104(a)(2) excludes "periodic payments" of damages, which would be determined by taking into account the time value of money, it would be inconsistent to tax interest on damages.

Result: For the IRS. The statute clearly refers to damages, not interest. Therefore, interest on personal injury damages is not excludable and the $1,250,000 is gross income. The fact that periodic payments are excludable is not relevant, since the Kovacses did not receive periodic payments.
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Article Details
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:May 1, 1993
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