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Click here for the full text of this decision FACTS:Chad Chamberlain won a $9.2 million personal injury suit against Louisiana. The damages award included $3.7 million in prejudgment interest. The Internal Revenue Service assessed income tax on Chad’s parents against the prejudgment interest. The Chamberlains paid the tax under protest, but the IRS disallowed their claim for a refund. The Chamberlains sued the government. They acknowledged that the prejudgment interest generally is part of gross income, but they also argued that it was excluded from gross income by Internal Revenue Code 104(a)(2). The district court ruled for the government, finding the prejudgment interest was not excluded from the Chamberlains’ gross income. HOLDING:Affirmed. The court confirms that the characterization of prejudgment interest for income tax purposes is a question of first impression for this circuit. The U.S. Supreme Court’s ruled in United States v. Burke, 504 U.S. 229 (1992), that a back-pay award received in the settlement of a Title VII case was not excluded from gross income under 104(a)(2). Later, in Commissioner v. Schleier, 515 U.S. 323 (1995), the court held that an award of back pay and liquidated damages received in settlement of an age discrimination claim was not excluded, either. And in United States v. O’Gilvie, 519 U.S. 79 (1996), the court held that punitive damages on a wrongful death award were not excluded. “Taken together, Burke, Schleier, and O’Gilvie provide that, to be excluded from taxation under section 104(a)(2), an amount must be received in an action seeking recovery for tort or tort type rights, and must constitute damages received”on account of’ personal injury. In addition, O’Gilvie indicates that, in order to constitute damages received”on account of’ personal injury, an amount must be awarded”by reason of’ or”because of’ personal injury, and must compensate a victim for the loss of personal or financial capital.” The case giving rise to the prejudgment interest in this case is based on tort-type rights. But because the U.S. Supreme Court did not address whether prejudgment interest is received “on account” of personal injury, the court looks to other circuits. The court finds that neither the 1st, 3rd and 10th U.S. Circuit Courts of Appeals have found a direct link between the personal injury and the award of prejudgment interest. The 3rd Circuit, for instance, discussed how prejudgment interest does not return the victim’s personal or financial capital lost because of the injury. Instead, prejudgment interest amounts to damages awarded for delay in having to wait. The court agrees with these circuit courts that prejudgment interest lacks the direct relationship to personal injury necessary to meet the tests set out in Schleier and O’Gilvie. “Unlike damages paid to compensate an individual for the loss of normally untaxed human or financial capital, prejudgment interest compensates an individual for his lost time value of money. . . . [P]rejudgment interest is more naturally associated with an injured person’s opportunity cost for the lost use of funds than it is with his lost human or financial capital.” The court also finds that prejudgment is not awarded as a substituted for lost human or financial capital. Furthermore, there is no significant difference between prejudgment interest in Louisiana and prejudgment awarded under the various state laws considered in the circuit court rulings. Although it is true that, under Louisiana law, prejudgment is compensatory in nature, its taxability turns on whether it compensates an injured party for his or her personal injury. Finally, the court notes the “well-established rule” that exclusions from income are to be construed narrowly. OPINION:Patrick E. Higginbotham, J.; King, C.J., Higginbotham, and Davis, JJ.

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