John B. Leonard Betty B. Leonard v. Commissioner Internal Revenue Service, James v. Crews Dorothea G. Crews v. Commissioner Internal Revenue Service

John B. Leonard, III, Betty B. Leonard, James V. Crews ánd Dorothea G. Crews (taxpayers) appeal a decision by the United States Tax Court upholding in part the Commissioner of Internal Revenue’s (Commissioner) determination of tax deficiencies for the taxpayers’ failure to report as ordinary income the prejudgment interest portion of an inverse condemnation award. The taxpayers also challenge the tax court’s method of calculating the amount of attorney fees which is deductible from the prejudgment interest portion of the award. In addition, the Crewses appeal the tax court’s upholding of additional penalties assessed against them by the Commissioner for substantial understatement and negligent underpayment of their income tax.

We have jurisdiction pursuant to 26 U.S.C. § 7482 (a). We affirm the tax court’s determination that the taxpayers’ prejudgment interest award is ordinary income and that the Crewses are liable for additional penalties for substantial understatement and negligent underpayment of tax on that income. We reverse the tax court’s determination of the amount of deductible attorney fees, and we remand for recalculation of the -tax deficiencies of all of the…