Commissioner of Internal Revenue v. Banks, 2005 U.S. LEXIS 1370; 73 U.S.L.W. 4117; 2005 WL 123825 (U.S. 2005). The United States Supreme Court held that prior to the American Jobs Creation Act of 2004, the portion of an award for lost earnings in a termination case must be treated as income for the purposes of taxation, thus reversing decisions of the 9th and 6th Circuits and supporting decisions of a number of other circuits. Under federal tax law before the American Jobs Creation Act of 2004, it was possible for applications of the Alternative Minimum Tax (AMT) to result in an award winner being worse off after an award than if a case had never been filed. After that Act, award winners can deduct attorneys fees before any application of taxes, including the AMT, occurs, eliminating the possibility of an award winner being made worse off after an award. However, the AJCA was not made retroactive and does not apply to previous awards.

Jones & Laughlin Steel Corp. v. Pfeifer, 103 S. Ct 2541, or 462 U.S. 523 (1983). This is the single most important case in the field of forensic economics. Justice Steven delivered the opinion of the United States Supreme Court, which sets out a framework for how damages in a personal injury case should be presented by an economic expert.  The court is very careful not to specify a particular set of methods, as urged on it by various amici briefs that were filed, saying: “Because our review of the foregoing cases leads us to draw three conclusions. First, by its very nature the calculation of an award for lost earnings must be a rough approximation. Because a lost stream can never be predicted wtih complete confidence, any lump sum represents only a ‘rough and ready’ effort to put the plaintiff in the position he would have been in if not injured. Second, sustained price inflation can make the award substantially less precise. Inflation’s current magnitude and unpredictability create a substantial risk that the damages award will prove to have little relation to the lost wages it purports to replace. Third, the question of lost earnings can arise in many different contexts. In some sectors of the economy, it is far easier to assemble evidence of an individual’s most likely career path than others.”  Thus, instead of providing specific methods, the court provides a list of the issues that must be addressed in the report and the general framework for the methodologies that can be used to address those issues. The coverage in this case is quite detailed and multiple readings are recommended for forensic economists. 

Norfolk & Western Railway Co. v. Liepelt, 444 U.S. 490; 100 S. Ct. 755; 62 L. Ed. 2d 689 (1990). In a 7 to 2 decision, the Supreme Court held that taxes should be subtracted from projections of lost earnings on a wrongful death action unless the amounts were de minimus and that trial court judges should permit a jury instruction that an award of damages is not taxable under federal income tax law. The court said: “The amount of money that a wage earner is able to contribute to the support of his family is unquestionably affected by the amount of the tax he must pay to the Federal Government. It is his after-tax income, rather than his gross income before taxes, that provides the only realistic measure of his ability to support his family. It follows inexorably that the wage earner’s income tax is a relevant factor in calculating the monetary loss suffered by his dependents when he dies. . . Admittedly there are many variables that may affect the amount of a wage earner’s future income-tax liability. The law may change, his family may increase or decrease in size, his spouse’s earnings may affect his tax bracket, and extra income and unforeseen deductions may become available. But future employment itself, future health, future personal expenditures, future interest rates, and future inflation are also matters of estimate and prediction. Any one of these issues might provide the basis for protracted expert testimony and debate. But the practical wisdom of the trial bar and the trial bench has developed effective methods of presenting the essential elements of an expert calculation in a form that is understandable by juries that are increasingly familiar with the complexities of modern life. We therefore reject the notion that the introduction of evidence describing a decedent’s estimated after-tax earnings is to speculative or too complex for a jury.”  

Social Security Board v. Nierotko, 327 U.S. 358; 66 S. Ct. 637 (1946).  This decision held that a worker was entitled to include quarters for which pay was received in the form of back pay as quarters to be counted toward the 40 quarters needed for Social Security eligibility. This means that a forensic economic expert does not have to calculate the number of quarters as a possible source of loss to the plaintiff.  It also held that the IRS rule then in place that Social Security taxes should be based on earnings for years awarded back pay. This has since been changed to the year in which an award is received, as also upheld by the Supreme Court in United States v. English, 532 U.S. 200; 121 S. Ct 1433 (2001).       

United States v. Cleveland Indians Baseball Company, 532 U.S. 200; 121 S. Ct 1433 (2001). This decision held that for FICA (Social Security) and FUTA (Medicare) tax purposes, back wages should be attributed to the year in which they are actually paid, reversing a decision of the 6th Circuit on this issue.”  In other words, all back pay received in a current year is taxable under FICA and FUTA in the current year. This is parallel to how other income taxes are applied to back pay awards. The Court also said (quoting a brief from the “Company”): “Social security tax ‘contributions,’unlike private pension contributions, do not create a property right to benefits against the government, and wages rather than [tax] contributions are the statutory basis for calculating an individual’s benefits. Suggested by Jerry Martin.

United States Tax Court

Dunkin v. Comm’r, 2005 U.S. Tax Ct. LEXIS 10 (U.S. Tax Ct. 2005). In a divorce, Mrs. Dunkin was awarded $2072 per month as her share of his defined benefit pension as of August 19, 1997. This slightly less than half of John Dunkin’s defined benefit pension based on California’s community property law. John Dunkin did not retire on August 19, 1997 and the California courts ordered John Dunkin to begin making payments of $2072 per month to his wife in lieu of the benefits she would have received if he had retired. He deducted the costs of her pension from his income for purposes of income taxation. The IRS argued that he should pay income taxes on all of his income. The tax court ruled in John Dunkin’s favor that he could deduct amounts paid to his ex-wife from his income for purposes of taxation. This is a clearly reasoned decision that is worth reading.   

Vincent v. Commissioner of Internal Revenue, T.C. Memo 2005-95 (U.S. Tax Court 2005). This decision involved a case in which the parties to an employment discrimination law suit had settled. As a part of the settlement agreement, the settlement was described as for ulcers created by the employment dispute. The IRS had sent a tax deliquency notice and Vincent appealed. The court held that: “While the underlying litigation was adversarial, once Whittier agreed to a settlement amount and negotiated the inclusion of indemnification and release of liability clauses, the negotiation as to the characterization of the settlement proceeds ceased to be adversarial. Petitioner wanted a large portion of the recovery connected to a tortlike peronsl injury so that she could avoid taxes under section 104(a)(2).” Tax Court held that Vincent was liable for taxes on the entire amount of the settlement.   

United States Court of Claims 

Euken v. Secretary of Health and Human Services, 34 F.3d 1045 (Fed. Cir. 1994). This decision of the Federal Circuit Court of Appeals held that FICA taxes are “appropriate taxes” to deduct under the Vaccine Act. The petitioner claimed that since the vaccine injured child would never collect Social Security retirement benefits, FICA taxes should not be deducted from the child’s lost earnings. The Court said: “[T]he argument that Cory would not receive any Social Security benefits is simply not pertinent to the question of whether FICA taxes are appropriate taxes to deduct from the average gross weekly earnings of a private sector worker. . . Accordingly, we conclude that FICA tax, like federal and state income taxes, is an appropriate tax to deduct in determining a lost earnings award under the Vaccine Act. It should be noted that this decision applies only to Vaccine Act cases, but other federal courts in other types of cases have ruled in a similar fashion with respect to including FICA taxes as a type of income tax that needs to be deducted when deducting income taxes.

Pappas v. Watson Wyatt & Company, 2008 U.S. Dist. LEXIS 34 (D. Conn. 2008). This decision cited Sears v. Atchison, Topeka & Santa Fe Ry, 749 F.2d 1451, 1456 (10th Cir. 1984) and other cases allowing tax grossups in requesting a tax adjustment based on adverse tax consequences apparently arising from her attorney fees. The court held that the cited decisions did not apply because: “Unlike the plaintiffs in cases that she cites, nowhere does she express any concern that a lump sum damage award would place her in a higher tax bracket. Instead, the Plaintiff is effectively asking the Court to review the tax code and fashion a remedy where the provisions of the tax code fail ro allow her to deduct her damages from her gross income.”  

2nd Circuit

Raymond v. United States, 355 F.3d 107 (2nd Cir. 2004). The court ruled that the entire amount of an award for lost earnings in a wrongful termination case must be declared as income for the purposes of income taxation. While a worker can treat an attorney's contingency fee as a deduction, this triggered the Alternative Minimum Tax in Raymond's case, increasing the amount of tax he owed on his award significantly. The district court had ruled that Raymond's income for taxation was the net value of the award after subtraction of the attorney fee. The 2nd Circuit overruled the District Court's decision. 

3rd  Circuit

    Court of Appeals

Eshelman v. Agere Systems, Inc., 2009 U.S. App. LEXIS 1947 (3rd Cir. 2009). The 3rd Circuit held that it was not an abuse of the trial court’s discretion to have provided an additional monetary award to offset the negative tax consequences of the plaintiff’s back pay award. The Court said: “A chief remedial purpose of employment discrimination statutes such as the ADA is ‘to make persons whole for injuries suffered on account of unlawful employment discrimination. . .  Congress armed the courts with broad equitable powers to effectuate this ‘make whole’ remedy. . . District courts are granted wide discretion to ‘locate a just result’ regarding the perameters of the relief granted in the circumstances in each case.” The Court added: “[E]mployees may be subject to higher taxes if they receive a lump sum back pay award in a given year, meaning the employee would have a greater tax burden than if he or she were to have received the same pay in the normal course. This is the origin of Enshelman’s argument that she should receive an additional sum of money to compensate her added tax burden.” The decision further explained that Enshelman had: “submitted an affidavit from an economic expert who calculated the amount of tax-effect damages based on the back pay award, the applicable tax rates, and Enshelman’s tax returns for the appropriate years. . . Having reviewed the record, we hold that the District Court did not abuse its discretion in awarding Enshelman $6,893 as compensation for the negative tax   consequences of receiving her lump sum back pay award.” 

Berryman v. Consolidated Rail Corporation, 1995 U.S. Dist. LEXIS 12768 (E.D.Pa.1995). This is the third of three decisions reached by judges for the U.S. District Court for the Eastern District of Pennsylvania within one month, all of which had relied on Maylie v. National Railroad Passenger Corporation, 791 F.Supp. 477 (1992).  The other two decisions were Sparklin v. Consolidated Rail Corporation, 1999 U.S. Dist LEXIS 10857, and Troy v. National Railroad Passenger Corporation, 1995 U.S. Dist. LEXIS 10596. In each of these decisions, including Maylie, the plaintiff had not claimed any lost retirement benefits. Correspondingly, the court held that Railroad Retirement Board taxes paid to fund those retirement benefits could not be subtracted from lost earnings.   

Blue v. The Western Railway of Alabama, 469 F.2d 487 (5th Cir. 1972). This decision provides extensive discussion of methods for calculating tax liabilities just prior to Norfolk & Western Railway Company v. Liepeldt, 100 S.Ct. 755 (1974). The 5th Circuit held that it was reversible error that the plaintiff had not been permitted to give evidence based on gross earnings and remanded for a new trial. In Liepeldt, the U.S. Supreme Court held that taxes must be subtracted, rendering the decision in Blue moot. Suggested by Jerry Martin. 

Hernandez v. M/V Rajaan, 841 F.2d 582 (5th Cir. 1988).  This decision provides an interesting discussion of whether in injured Mexican worker who was illegally in the United States could recover for lost earnings in the United States. The corrections made by the 5th Circuit Court of Appeals to damages of the trial court judge on lost earnings based on the worker’s earnings record is also interesting. The decision ruled clearly that social security taxes are taxes that must be subtracted in the meaning in federal maritime cases. Of greatest interest, however, was the rejection of household service losses and the consideration of double counting between damages awarded for loss of household services and the provision therefore in a life care plan. The court said: “It is indisputable that Hernandez, a paraplegic, has lost his ability to perform household services in the future. However, the trial court is not at liberty to grant damages for lost household services in the absence of any evidence that Hernandez performed household services in the past. . . In addition, because Hernandez received an award for attendant care, the additional recovery for lost household services would constitute double recovery.”  Submitted by Stephen Horner. 

Johnson v. Penrod Drilling Co., 510 F.2d 234 (5th Cir. 1975). This decision is five years before Liepelt seven years before Pfeifer and was rendered moot by those decisions. However, it provides useful historical insight into federal rules regarding lost earnings prior to 1980. From the Federal Reporter headnotes: "Such contingencies, variables and predictions as the impact of income taxes, taxe effect of contingent attorney's fees and taxability of interest earnings were to be withheld from jury's consideration in determining award of damages for future lost earnings.  Award for damages was to be based on predicted gross earnings lost . . . In determining award of damages for future lost earnings, triers of fact should not be instructed with respect to future inflationary or deflationary trends, and should not be advised to consider such alternative descriptions of inflationary or deflationary trends as purchasing power of the dollar or the consumer price index." This case also provides a useful review of differenced between the federal circuits that existed in 1975 and good descriptions for earlier federal decisions relating to inflation and taxes.

Johnston v. Harris County Flood Control District, 869 F.2d 1565 (5th Circuit 1989). This decision involved a plaintiff who won an jury award under Title VII of the Civil Rights Act and 42 U.S.C.S. Section § 1983 for wrongful termination. The decision includes extensive discussion that would assist a forensic economist in understanding the nature of awards in wrongful termination cases. The 5th Circuit held that the decision about whether or not to treat Social Security disability benefits as a deductible offset from an award for back pay was within the discretion of the trial court judge. It held that the plaintiff by ceasing to search for new employment had failed in his duty to mitigate damages, requiring offset for that purpose. It also discussed the difference between back pay and past earnings loss that is “personal-injury-like” in character in that the former are subject to federal income taxes and the latter are not. This suggests that front and back pay can be coupled into the same decision with past and future earnings loss and that tax treatment of front and back pay is subject to tax while past and future earnings loss are not.  The court also held that a plaintiff is liable for the Social Security taxes that would have accrued in the  year the wages were due.  This latter holding was subsequently overruled by United States v. Cleveland Indians Baseball Company, 532 U.S. 200; 121 S. Ct 1433 (2001). Based on that decision Social Security taxes are currently based on the year in which back pay is received. Suggested by Jerry Martin. 

Madore v. Ingram Tank Ships, 732 F.2d 475 (5th Cir. 1982). Social security taxes were properly deducted from earnings in projecting lost future earnings.

Pickle v. International Oilfield Drivers, Inc., 791 F.2d 1237 (5th Cir. 1986). Social Security/Medicare payroll taxes should be subtracted from projections of lost earnings.

Smith v. United States, 2004 U.S. Dist LEXIS 23903 (5th Cir. 2004). The estate of Louis R. Smith brought suit claiming that it was owed a refund of federal estate taxes based on the fact that retirement accounts held by the decedent were overvalued because the valuation of those accounts did not take into account the future income tax liability of beneficiaries deriving from those accounts. The trial court granted summary judgement on the grounds that beneficiaries were not entitled to such a tax reduction. The 5th Circuit upheld the trial court.   

Sosa v. M/V Lago Izabal, 736 F.2d 1028 (5th Cir. 1984). Concluded that to the extent that certain items were not medical expenses but devices to alleviate physical suffering or mental anguish, they duplicated a separate award for "pain and suffering, bodily injury, mental anquish, and loss of the capacity for the enjoyment of life." Discusses taking into account taxation of a future earnings award. This could would have allowed either an addition to the lump sum award to take into account taxes on the interest on a fund as suggested in DeLucca v. United States or Hollinger v. United States or by using lower tex exempt instruments as considered in Flannery v. United States. 

Tallentire v. Offshort Logistics, Inc., 754 F.2d 1274 (5th Cir. 1985). “In computing future earnings, the defendant’s economist deducted social security taxes for the decedent’s life span. Taylor in essense argues that social security payments are similar to payments to a pension plan, and that in any case social security deductions are matched by the employer’s contribution, so there is no loss of income. Although this argument has a certain amount of superficial appeal, our cases establish that social security taxes should be deducted in computing future earnings. See Culver v. Slater Boat Co., 688 F.2d 280, 302 (5th Cir. 1982), modified in other respects Culver v. Slater Boat Co., 722 F.2d 114 (5th. Cir. 1983); Madore v. Ingram Tank Ships, Inc., 732 F.2d 475 (5th Cir. 1984).

Bell v. New Hampshire Insurance Company, 2008 U.S.  Dist. Lexis 43322 (E.D.La. 2008). The plaintiff had not been previously filing income tax returns, but presented as evidence of amounts deposited in his checking account prior to the accident, as well as a signed letter from his employer estimating his income per week to be $720. The plaintiff had presented an economic expert.  The Court said: “A plaintiff need not produce an economist to testify as to the probability or improbability that Plaintiff would have earned similar amounts during the remainder of his work life . . . Louisiana law does not indicate that in order to prove the income asserted by Plaintiff, Plaintiff must present tax returns as proof of income . . . While tax returns serve as the best single source of evidence on the subject of future earnings and earning capacity, Plaintiff’s uncorroborated testimony is sufficient to prove a loss of past wages as long as such proof reasonably establishes the claim . . . While Defendant correctly points out that 26 U.S.C. 1402(b) requires a self employed person to file a federal income tax return if his annual income exceeds $400, Plaintiff is not presently on trial for a violation of this federal law. . . Sans income tax returns, the trier-of-fact must determine if the amount claimed by Plaintiff proves reasonable in light of the evidence proffered and testimony presented at trial.” The decision also discusses how Louisiana law deals with the intersection of workers’ compensation liability and uninsured motorist coverage.

6th Circuit

8th Circuit

    Court of Appeals

Lindsey v. Commissioner of Internal Revenue, 2005 U.S. App. LEXIS 19027 (8th Cir. 2005). Paul Lindsey had received $2 million “‘in settlement of his claims for tortious interference with contracts, for personal injury including injury to Mr. Lindsey’s personal reputation and emotional distress, humiliation and embarrassment.” He did not declare the $2 million for tax purposes and the Internal Revenue Service sought back taxes and penalties. The 8th Circuit held that Linsey had not identified what percentage of the settlement damages was allocable to physical injury or physical sickness and “the record lacks any evidentiary basis for concluding a specific portion of the $2 million settlement is allocable to Lindsey’s injury or physical illness,”“opting for an all-or-nothing approach.” The 8th Circuit upheld the tax court in charging taxes on the whole amount of the award. Submitted by David Jones.

     District Courts in the 8th Circuit (AR, IA, MN, MO, NE, ND, SD)

9th Circuit     

    Court of Appeals

Biehl v. Commissioner of Internal Revenue, 2003 U.S. App. LEXIS 25119 (9th Cir. 2003). The 9th Circuit upheld the decision of the United States Tax Court in Biel v. Comm’r, 118 T.C. 467, 2002 U.S. Tax Ct. LEXIS 29 (2002). This decision reaffirms the position of the 9th Circuit that federal income taxes must be paid on the entirety of an award for lost earnings due to wrongful termination without regard to amounts paid in attorney fees. Amounts paid in attorney fees may be deducted as an itemized deduction, but doing so frequently triggers the Alternative Minimum Tax, under which itemized deductions are not allowed. This imposes a sizable tax cost on an award winner. The federal circuits are divided on this issue. 

Banaitis v. Commissioner of Internal Revenue, 2003 U.S.App. LEXIS 17913. (9th Cir. 2003). The 9th Circuit, which had ruled in previous cases from Alaska and California that attorney fees could not be deducted from an award for purposes of determining tax liability of an award recipient, ruled that this could be done in Oregon based on differences between Oregon law specifying the rights of law firms to contingency fees and those in Alaska and California. The 9th Circuit goes on to consider at some length decisions by the 5th Circuit in Cotnam v. Commissioner, 263 F.2d 119 (5th Circuit 1959), which was based on Alabama law and the 6th Circuit in Estate of Clarks v. United States, 202 F.3d 854 (6th Cir. 2000), which was based on Michigan Law. The 9th Circuit saw the distinction in the strength of the law firm’s property rights in the award. Submitted by David Jones. 

DeLucca v. United States, 670 F.2d 843 (9th Cir. 1982).  A damages award should be increased by the amount necessary to offset tax obligations created by interest within the loss replacement fund.

Felder v. United States, 543 F.2d 657 (9th Cir. 1976). As a matter of law, income taxes should be deducted from an FTCA (Federal Tort Claims Act) award for lost compensation. Felder held that while substantive state law governs FTCA awards, the calculation of damages is a question of fact. “In this context the state standard is not binding upon a federal court.” The court also added, “We note in passing that most FTCA cases (28 U.S.C. § 2402), one of the main reasons for disfavoring deduction of taxes is avoided, namely, that calculation of the tax would be too confusing for the jury.” Revision suggested by Ed Foster.

Furumizo v. United States, 381 F.2d 965 (9th Cir. 1967). This case was tried under the Federal Tort Claims Act (FTCA), under which the judge made the ruling without a jury. Among other issues on appeal, Mrs. Furumizo argued that her loss should not have been calculated on the basis of after tax earnings. The 9th Circuit said: “Here the question is, what support would have been available to Mrs. Furumizo from her husband’s earnings, if he had lived. The old saw about the certainty of taxes is still good. It is reasonably certain that what would have been available would have been after-tax dollars, not pre-tax dollars. See Southern Pacific Co. v. Guthrie, 9 Cir., 1951, 186 F.2d 926. We think that, at the least, the court could take this fact into consideration, although it might not have erred if it had refused to do so.” 

Hollinger v. United States, 651 F.2d 636 (9th Cir. 1981).  A damages award should be increased by the amount necessary to offset tax obligations created by interest within the loss replacement fund.

Rivera v. Baker West, Inc., 2005 U.S. App. LEXIS 27170 (9th Cir. 2005). The plaintiff appealed tax withholding by the defendant in a wrongful dismissal action on the grounds that the settlement was intended to reimburse the plaintiff for physical injuries and therefore should be excluded from the plaintiff’s gross income. The 9th Circuit held that the district court had reasonably classified the award as for back pay and thus subject to withholding and affirmed the trial court decision. Suggested by Jerry Martin.

Shaw v. United States, 741 F.2d 1202 (9th Cir. 1984). This case evaluates the treatment of taxes in the 9th Circuit. Taxes on the interest on an award must be taken into account. However, a district court may not assume that the failure to deduct taxes on lost compensation will offset taxes on the income generated by the lump sum award unless two conditions have been met: First, the state whose law otherwise applies must also have adopted the offset approach. Second, the district court must be unable to arrive at its own reliable estimates of future inflation from the testimony of expert witnesses.

Robertson v. Hecksel, 2005 U.S. App. LEXIS 17201 (11th Cir. 2005). The mother of a 30 year old adult decedent brought an action for her own loss of support, loss of companionship, and pain and suffering resulting from the death of her son in a 42 U.S.C. § 1983 action on the basis of a deprivation of her Fourteenth Amendment right to a relationship with her adult son. This claim was dismissed by the trial count. The dismissal was affirmed by the 11th Circuit on the grounds that there is no constitutionally-protected liberty interest in a continued relationship with an adult child. The 11th Circuit pointedly did not minimize the value of the loss of such a relationship, but said: “[I]t is the province of the Florida legislature to decide when a parent can recover for the loss of an adult child. We will not circumvent its authority through an unsupported reading of the Fourteenth Amendment.”  

Tucker v. Fearn, 2003 U.S. App. LEXIS 11536 (11th Cir. 2003). This decision holds specifically that loss of society damages resulting from the death of a minor child cannot be recovered by a parent under general maritime law. The implication, however, is that loss of society damages are not allowable under any circumstances in maritime law. The decision reviews the different maritime acts that authorize wrongful death litigation and the decisions that have previously been reached to preclude loss of society damages under those acts. In 1978, the U.S. Supreme Court disallowed loss of society damages under the Jones Act in Mobil Oil Corp. v. Higginbotham, 436 U.S. 618 (1978) and under the Death on the High Seas Act (DOHSA) in Miles v. Apex Marine Corp., 498 U.S. 19 (1990). 

    District Courts in the 11th Circuit (AL, GA, FL)

Bravo v. United States, 2005 U.S. Dist. LEXIS (S.D. Florida 2005). [fn. 52.] “Plaintiffs presented testimony by Dr. David Williams, an economist, who performed economic calculations based on Mr. Foreman’s report. The Court found Dr. Williams to be credible and adopts his report and many of his calculations.” [fn 53.] “Defendant United States presented testimony by Dr. Kenneth Clarkson, an economist, whose report the Court finds flawed and inaccurate in many respects. For example, he relied on government data which government openly disclaims in writing on its website as being unreliable for for the very purpose for which Dr. Clarkson used it. He underestimated the 2005 inflation rate by more than 50 percent (estimated 2 percent v. the actual 5 percent) even though the Consumer Price Index information providing the correct numbers was readidly available. He also failed to deduct appropriate exemptions on Kevin’s projected income, which were necessary to reach the accurate tax rate. Because of this failure, he calculated a markedly incorrect tax rate that was more than triple what the actual tax rate should have been, blaming the error on his “Turbo Tax” computer program. As a result, his calculation on this point was wrong – by more than 300 percent.” The decision goes on to describe Dr. William’s damages methodology in some detail. 

E.E.O.C. v. Joe’s Stone Crab, 15 F. Supp. 2d 1364 (S.D. Fla 1998). This decision in a wrongful discrimination case did not award front pay because the Court determined that each of the claimants would have voluntarily terminated employment prior to the entry of judgment. Back pay was determined through the period when claimants were have been likely to work for Joe’s Stone  Crab. The decision went on to say that it would have been appropriate to take into account negative tax consequences of lump sum payments for back pay. However, the Court also pointed out that the E.E.O.C. failed to provide the Court with “sufficient competent foundation evidence” to make appropriate calculations. Therefore, the Court declined “to award money damages to offset whatever tax liability a claimant will experience by receiving a lump sum.”

Purdy v. Belcher Refining Company, 781 F. Supp. 1559 (S.D.Ala. 1992). Social Security/Medicare payroll taxes should be deducted from lost earnings.

Dashnaw v. Pena, 304 U.S. App. D.C. 247; 12 F.3d 1112 (D.C. Cir. 1994). The D.C. Circuit rejected grossing up an award to account for tax effects. The Court said: “Dashnaw . . . argues that the District Court should have granted him additional compensation to help cover the higher taxes he will have to pay becaus he will receive his backpay in a lump sum rather than as a salary paid out over a period of years. Absent an arrangement by voluntary settlement of the parties, the general rule that victims of discrimination should be made whole does not support “gross-ups” of backpay to cover tax liability. We know of no authority for such relief, and appellee points to none. Given the complete lack of support in existing case law for tax gross-ups, we decline so to  extend the law in this case. We therefore reject Dashnaw’s request for additional compensation to cover his tax liability. 

Fogg v. Gonzales, 407 F. Supp. 2d 79 (D.D.C. 2005). This decision related to protracted litigation involving employment discrimination that had begun in 1995. The District Court reached this decision on remand from the D.C. Circuit. Thus the back pay award in this case was for a ten year period. The Court said: “Fogg requests that any back pay award be grossed up by 14 percent to reflect the adverse tax consequences of a lump sum award. Similarly, Fogg acknowledges that the amount of worker’s compensation payments deducted from the award should be increased by 30% to reflect the tax free nature of those payments. . . Considering that inclusion of a tax component in a back pay award may be appropriate where, as here, the litigation is protracted . . . the court finds it appropriate to adjust both the back pay award and the deduction for workers’ compensation payments received, in accordance with Fogg’s request.”

Murphy v. Internal Revenue Service, 2007 U.S. App. LEXIS 15816 (D.C. Cir. 2007). Reversing a decision from last year, the D.C. Circuit has reversed itself on the question of whether awards for “non-physical” damages in personal injury matters could be taxed. The D.C. Circuit had ruled last year that emotional distress damages could not be taxed, but has now reversed itself in ruling that such damage awards can be taxed. Submitted by Tony Riccardi.   

Federal Circuit

    Court of Appeals

Dashnaw v. Pena, 304 U.S. App. D.C. 247; 12 F.3d 1112 (D.C. Cir. 1994). The D.C. Circuit rejected grossing up an award to account for tax effects. The Court said: “Dashnaw . . . argues that the District Court should have granted him additional compensation to help cover the higher taxes he will have to pay becaus he will receive his backpay in a lump sum rather than as a salary paid out over a period of years. Absent an arrangement by voluntary settlement of the parties, the general rule that victims of discrimination should be made whole does not support “gross-ups” of backpay to cover tax liability. We know of no authority for such relief, and appellee points to none. Given the complete lack of support in existing case law for tax gross-ups, we decline so to  extend the law in this case. We therefore reject Dashnaw’s request for additional compensation to cover his tax liability. 

Fogg v. Gonzales, 407 F. Supp. 2d 79 (D.D.C. 2005). This decision related to protracted litigation involving employment discrimination that had begun in 1995. The District Court reached this decision on remand from the D.C. Circuit. Thus the back pay award in this case was for a ten year period. The Court said: “Fogg requests that any back pay award be grossed up by 14 percent to reflect the adverse tax consequences of a lump sum award. Similarly, Fogg acknowledges that the amount of worker’s compensation payments deducted from the award should be increased by 30% to reflect the tax free nature of those payments. . . Considering that inclusion of a tax component in a back pay award may be appropriate where, as here, the litigation is protracted . . . the court finds it appropriate to adjust both the back pay award and the deduction for workers’ compensation payments received, in accordance with Fogg’s request.”

Alaska

Kulawik v. ERA Jet Alaska, 820 P.2d 627 (Alaska 1991). In this wrongful death action, the plaintiff’s economist initially deducted income taxes to compute personal consumption even though no taxes had been subtracted from lost earnings. The Alaska Supreme court rejected this argument, saying: “Kulawik cannot invoke the rule in Beaulieu as a sword to compute future gross income and simultaneously use Beaulieu as a shield against reducing future disposable income. . . If future tax liability is too speculative to calculate in determining future net income, . ., then it is equally speculative in calculating future disposable income.” Thus, even though the percentage used to calculate a personal consumption percentage was based on personal disposable income and not gross income, that percentage had to be applied to gross income to determine the personal consumption reduction. The decision also indicates that the estate of a decedent may recover for any loss of prospective inheritance from the future estate of a decedent without having to prove that the estate would have been left to the statutory survivors. Suggested by Paul Taylor.

Canavin v. Pacific Southwest Airlines, 148 Cal. App. 3d 512 (1983). Covers treatment of income taxes, earnings, discount rates, and sets the date for calculating worklife and life expectancy. (Submitted by Jerry Martin.)

Cox v. Superior Court of Los Angeles County, 98 Cal.App.4th 670 (2002). Covers issues of collateral source and taxation in California. This case specifically refers to medical malpractice cases tried under MICRA (Medical Injury Compensation Reform Act of 1975). It does not apply to other types of cases.  For tax issues in most cases, see Rodriguez v. McDonnell Douglas Corporation, 87 Cal.App.3d (Cal.App. 1978). The relevant passage is the final comment in the case: “We conclude that the trial court did not commit error in refusing to admit evidence of future tax consequences to affect the determination of the amount of the awards to plaintiffs.” (Submitted by Jerry Martin.) 

Sharian v. United States, 2002 AMC 2089 (N.D.Cal. 2002). This maritime decision held that it is proper to deduct Social Security and Medicare taxes from a calculation of lost earnings.

Delaware

Ferguson v. Valero Energy Corp., 2009 U.S. Dist. LEXIS 34888 (E.D. Pa. 2009). This is an opinion by Judge Mary A. McLaughlin interpreting Delaware’s Wrongful Death Act and Survivor’s Act as they apply to categories of damages. There is no discussion of an economic expert in the decision. The case involved the death of a single adult man who was living with, but not financially supporting his father. The father was suing for damages under the Delaware Wrongful Death Act. The decedent’s brother was suing for damages under Delaware’s Survival Act. The judge held that there was sufficient evidence that the decedent had provide household services to assist his father, but no evidence to suggest that the decedent had financially supported his father. The judge also said: “Delaware courts have consistently held that the Wrongful Death   Act allows the recovery of that portion of the decedent’s lost earnings that would have been saved, over and above the decedent’s spending on his maintenance, and passed on to his estate.” The plaintiff’s had sought “any and all hedonic damages allowed for the loss of the decedent’s life and enjoyment of future life as permitted by Delaware law or as evidence of the pain and suffering and mental anguish” of the decedent. Judge McLaughlin’s discussion of hedonic damages under the Survivor’s Act relied heavily on the decision in Sterner v. Wesley College Inc., 747 F. Supp. 263 (D.Del. 1990). Under Delaware law, any claim for hedonic damages has to be as a part of pain and suffering and not as an independent category of damages “at least under circumstances like those in Sterner and here, where only a brief interval occurred between decedent’s injury and death. . . .The Court therefore predicts that if Delaware law were to allow for the recovery of hedonic damages for life’s pleasures and loss of enjoyment of life, then the Survivor’s Act would allow recovery of such damages only to the extent they were suffered for the period of time between the injury at issue and the decedent’s death.   

Georgia

CSX Transportation v. Williams, 230 Ga. App. 573; 497 S.E.2d 66 (Ga. App. 1998). This decision contains two key holdings. Plaintiff’s medical expenses as a result of his injury in the amount of $23,594.51 had been fully paid by medical insurance provided by CSX. The trial court ruled that the medical insurance under contract GA-2300 was a collateral source. The Williams court held that such payments could be offset because the collective bargaining agreement specified that such offsets were allowed and indicated that the $23,594.51 should be subtracted from the award. The second holding of importance is that the requirement under FELA law that taxes should be subtracted from lost earnings was conditional upon the defendant providing expert testimony that would assist the jury in making these reductions. The Court drew a distinction between the right of a defendant to ask for a jury instruction that an award is not taxable and a defendant’s right to have taxes subtracted from lost earnings was distinguished as follows: “Unlike the general charge that the award is not taxed and that the jury should not inflate its award to make up for any potential taxes, a charge directing the jury to reduce that portion of its verdict representing lost income so as to calculate an after-tax figure requires that the jury have facts as to what tax rate to apply. Instructing a jury not to do something does not require evidence, whereas instructing it affirmatively to calculate numbers requires that the jury have the tools to perform that calculation. It cannot simply guess, or fashion an arbitrary formula.” 

Norfolk Southern Railway Company v. Perkins, 224 Ga. App. 553; 481 S.E.2d 545 (Ga. App. 1997). In an FELA case, the Georgia Court of Appeals held that the trial court did not err in excluding reference to Perkins’ receipt of railroad retirement benefits as requiring income taxes to be subtracted from lost earnings. It quoted an earlier Georgia decision, CSX Transp. v. Levant, 200 Ga. App. 856 (1991), rev’d on other grounds, 262 Ga. 313 (1992) as follows: “Since the railroad retirement taxes would ultimately be paid directly to [Perkins] upon his retirement, we find no error with the trial court’s exclusion of this evidence.” 

Illinois

Klawonn v. Mitchell, 105 Ill. 2d 458; 475 N.E.2d 857 (Ill. 1985). The Illinois Supreme Court held that defendants were not entitled to a jury instruction that tort awards are not subject to federal or state income taxes. The court said: “In our opinion proof of pecuniary loss, not simple under the best of circumstances, should not be rendered more complex by injecting the question of income tax or other extraneous factors.” Since the legal action in question involved both wrongful deaths and personal injuries to surviving injury victims, the decision applies to both types of actions. 

Michigan

Gorelick v. Department of Highways, 127 Mich. App. 324; 339 N.W.2d 635 (MI 1983). This decision considers whether or not taxes should be subtracted in a personal injury matter with a surviving victim. The Michigan Supreme Court held that the trial court had erred in subtracting income taxes from Plaintiff’s income in making its award. The Court said: “Generally, in fixing damages for lost future earning capacity resulting from personal injuries, courts must disregard the income tax consequences.” After citing several authorities, the court added: “The decisions indicate that deductions for prospective taxes are only proper where specifically provided for by statute.” However, the court also said: “Defendant has not pointed to any other statute which might have authorized the court’s deduction of prospective taxes, but even if it had, the court would still have erred in making such a deduction, because defendant failed to meet its burden of introducing competent expert testimony concerning plaintiff’s prospective tax status. . . Even when the trial court offered defendant an opportunity to present such evidence, defendant chose not to do so, offering instead only raw tax tables whose prospective applicability to plaintiff was open to question. The court lacked a factual basis for reducing plaintiff’s award, and should have declined to do so. We conclude that the reduction of the award for prospective taxes was error, citing Longworth v. Dep’t of State Highways, 410 Mich. 538; 302 N.W.2d. 537 (MI 1981). Suggested by Bill King.

Ferrante v. Sciaretta, 365 N.J.Super. 601; 839 A.2d 993 (N.J. Super. 2003). This decision of the New Jersey Superior Court held that a plaintiff was entitled to an addition to her award based on both front and back pay for the negative tax consequences of a lump sum award. The court reviewed cases in federal district court in Pennsylvania and the court of appeals in Washington in holding that negative tax consequences were compensable. The Court cited the fact that the economic expert for the plaintiff, Donald Welsch, had provided defendants with a calculation of tax consequences before the jury’s verdict and a revised calculation based on the actual verdict. The Court also said: "[D]efendants never sought or conducted the deposition or any document production of Donald Welsch’s earlier reports, opinions and supporting documents. Nor did defendants ever identify a rebuttal expert on economic damages or negative tax consequences. As a result, this court concludes that defendants have no standing to assert a net opinion objection to Donald Welsch’s conclusion that plaintiff’s negative tax impact as the result of the jury award was $107,000. The Order of Judgment of May 22, 2003 will be modified to award this sum"   Submitted by Frank Tinari.

Ruff v. Weintraub, 105 N.J. 233; 519 A.2d 1384 (N.J. 1987).  The New Jersey Supreme Court held that taxes should be deducted from personal injury damages, having already ruled to that effect in wrongful death damages in Tenore v. Nu Car Carriers, 67 N.J. 466 (N.J. 1975). It also held that a trial court must instruct the jury that personal-injury damages are not subject to federal or state income taxes. The Ruff Court discussed its rationale and its agreement with the reasoning of the U. S. Supreme Court in Norfolk & Western Ry. Co. v. Liepelt, 444 U.S. 490, 100 S.Ct. 755 (1980). There is language in this decision that makes it appear that employee paid Social Security taxes are to be considered a part of taxes to be deducted, but that is unclear. (Submitted by David Jones.)   

Hinzman v. Palmanteer, 81 Wash.2d 327 (1972). The Supreme Court of the state of Washington held that no deduction for income taxes need be made from an award except where “extremely high income is involved.”

Pham v. City of Seattle, 2007 Wash. LEXIS 123 (WA 2007). The Washington Supreme Court held that the plaintiffs in an employment discrimination case were not entitled to a supplemental award to compensate for the additional income tax consequences attributable to noneconomic damages. The trial court had awarded a supplemental award to compensate for the additional tax consequences of receiving front and back pay in a single lump sum, but declined to do so with respect to noneconomic damages. The Court of Appeals held that it was in error to deny a supplemental award for tax consequences of noneconomic damages. The Supreme Court reversed the Court of Appeals and affirmed the trial court’s decision. 

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Last Modified: June 8, 2009

Updated to June 8, 2009