Norfolk & Western Railway Co. v. Liepelt

Mr. Justice Stevens

delivered the opinion of the Court.

In cases arising under the Federal Employers’ Liability Act,1 most trial judges refuse to allow the jury to receive evidence *491or instruction concerning the impact of federal income taxes on the amount of damages to be awarded. Because the prevailing practice developed at a time when federal taxes were relatively insignificant, and because some courts are now •following a different practice, we decided to answer the two questions presented by the certiorari petition in this wrongful-death action: (1) whether it was error to exclude evidence of the income taxes payable on the decedent’s past and estimated future earnings; and (2) whether it was error for the trial judge to refuse to instruct the jury that the award of damages would not be subject to income taxation.

In 1973, a fireman employed by petitioner suffered fatal injuries in a collision caused by petitioner’s negligence.2 Respondent, as administratrix of the fireman’s estate, brought suit under the FELA to recover the damages that his survivors suffered as a result of his death. In 1976, after a full trial in the Circuit Court of Cook County, the jury awarded respondent $775,000. On appeal, the Appellate Court of Illinois held that it was “not error to refuse to instruct a jury as to the nontaxability of an award” and also that it was “not error to exclude evidence of the effect of income taxes on future earnings of the decedent.” 62 Ill. App. 3d 653, 669, 378 N. E. 2d 1232, 1245 (1978). The Illinois Supreme Court denied leave to appeal.3

The evidence supporting the damages award included biographical data about the decedent and his family and the expert testimony of an economist. The decedent, a 37-year-old man, was living with his second wife and two young children and was contributing to the support of two older children by his first marriage. His gross earnings in the 11 months prior to his death on November 22, 1973, amounted to $11,988. *492Assuming continued employment, those earnings would have amounted to $16,828.26 in 1977.

The expert estimated that the decedent’s earnings would have increased at a rate of approximately five percent per year, which would have amounted to $51,600 in the year 2000, the year of his expected retirement. The gross amount of those earnings, plus the value of the services he would have performed for his family, less the amounts the decedent would have spent upon himself, produced a total which, when discounted to present value at the time of trial, amounted to $302,000.

Petitioner objected to the use of gross earnings, without any deduction for income taxes, in respondent’s expert’s testimony and offered to prove through the testimony of its own expert, an actuary, that decedent’s federal income taxes during the years 1973 through 2000 would have amounted to about $57,000. Taking that figure into account, and making different assumptions about the rate of future increases in salary and the calculation of the present value of future earnings, petitioner’s expert computed the net pecuniary loss at $138,327. As already noted, the jury returned a verdict of $775,000.

Petitioner argues that the jury must have assumed that its award was subject to federal income taxation; otherwise, it is argued, the verdict would not have exceeded respondent’s expert’s opinion by such a large amount.4 For that reason, petitioner contends that it was prejudiced by the trial judge’s refusal to instruct the jury that “your award will not be subject to any income taxes, and you should not consider such taxes in fixing the amount of your award.”

Whether it was error to refuse that instruction, as well as the question whether evidence concerning the federal taxes on *493the decedent’s earnings was properly excluded, is a matter governed by federal law. It has long been settled that questions concerning the measure of damages in an FELA action are federal in character. See, e. g., Michigan Central R. Co. v. Vreeland, 227 U. S. 59. This is true even if the action is brought in state court. See, e. g., Chesapeake & Ohio R. Co. v. Kelly, 241 U. S. 485, 491.5 In this case the Appellate Court of Illinois recognized that the practice then being followed in Illinois was subject; to change when this Court addresses the issue.6 We do so now, first considering the evidence question and then the proposed instruction.

I

In a wrongful-death action under the FELA, the measure of recovery is “the damages . . . [that] flow from the deprivation of the pecuniary benefits which the beneficiaries might have reasonably received. . . .” Michigan Central R. Co. v. Vreeland, supra, at 70. 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 fol*494lows inexorably that the wage earner’s income tax is a relevant factor in calculating the monetary loss suffered by his dependents when he dies.

Although federal courts have consistently received evidence of the amount of the decedent’s personal expenditures, see, e. g., Kansas City S. R. Co. v. Leslie, 238 U. S. 599, 604, and have required that the estimate of future earnings be reduced by "taking account of the earning power of the money that is presently to be awarded,” Chesapeake & Ohio R. Co. v. Kelly, supra, at 489, they have generally not considered the payment of income taxes as tantamount to a personal expenditure and have regarded the future prediction of tax consequences as too speculative and complex for a jury’s deliberations. See, e. g., Johnson v. Penrod Drilling Co., 510 F. 2d 234, 236-237 (CA5 1975), cert. denied, 423 U. S. 839.

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 or 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 too speculative or complex for a jury.7

*495Respondent argues that if this door is opened, other equally relevant evidence must also be received. For example, she points out that in discounting the estimate of future earnings to its present value, the tax on the income to be earned by the damages award is now omitted.8 Logically, it would certainly seem correct that this amount, like future, wages, should be estimated on an after-tax basis. But the fact that such an after-tax estimate, if offered in proper form, would also be admissible does not persuade us that it is wrong to use after-tax figures instead of gross earnings in projecting what the decedent’s financial contributions to his survivors would have been had this tragic accident not occurred.

Respondent also argues that evidence concerning costs of litigation, including her attorney’s fees, is equally pertinent to a determination of what amount will actually compensate the survivors for their monetary loss. In a sense this is, of course, true. But the argument that attorney’s fees must be added to a plaintiff’s recovery if the award is truly to make him whole is contrary to the generally applicable “Ameriican Rule.” See Alyeska Pipeline Service Co. v. Wilderness Society, 421 U. S. 240, 247. The FELA, however, unlike a number of other federal statutes,9 does not authorize recovery of attorney’s fees by the successful litigant. Only if the Congress were to provide for such a recovery would it be proper to consider them. In any event, it surely is not proper for the Judiciary to ignore the demonstrably relevant factor of income tax in measuring damages in order to offset *496what may be perceived as an undesirable or unfair rule regarding attorney’s fees.10

II

Section 104 (a) (2) of the Internal Revenue Code of 1954, 26 U. S. C. § 104 (a)(2), provides that the amount of any damages received on account of personal injuries is not taxable income.11 The section is construed to apply to wrongful-death awards; they are not taxable income to the recipient.12

Although the law is perfectly clear, it is entirely possible that the members of the jury may assume that a plaintiff’s recovery in a case of this kind will be subject to federal taxation, and that the award should be increased substantially in order to be sure that the injured party is fully compensated. The Missouri Supreme Court expressed the opinion that “it is reasonable to assume the average juror would believe [that its *497verdict will] be subject to such taxes.” Dempsey v. Thompson, 363 Mo. 339, 346, 251 S. W. 2d 42, 45 (1952). And Judge Aldisert, writing for the Third Circuit, agreed:

“We take judicial notice of the Tax consciousness’ of the American public. Yet, we also recognize, as did the court in Dempsey v. Thompson, 363 Mo. 339, 251 S. W. 2d 42 (1952), that few members of the general public are aware of the special statutory exception for personal injury awards contained in the Internal Revenue Code.
“ ‘[T]here is always danger that today’s tax-conscious juries may assume (mistakenly of course) that the judgment will be taxable and therefore make their verdict big enough so that plaintiff would get what they think he deserves after the imaginary tax is taken out of it.’
“II Harper & James, The Law of Torts § 25.12, at 1327-28 (1956).” (Footnote omitted.) Domeracki v. Humble Oil & Refining Co., 443 F. 2d 1245, 1251 (1971), cert. denied, 404 U. S. 883.

A number of other commentators have also identified that risk.13

In this case the respondent’s expert witness computed the amount of pecuniary loss at $302,000, plus the value of the care and training that decedent would have provided to his young children; the jury awarded damages of $775,000. It is surely not fanciful to suppose that the jury erroneously believed that a large portion of the award would be payable to the Federal Government in taxes, and that therefore it improperly inflated the recovery. Whether or not this specu*498lation is accurate, we agree with petitioner that, as Judge Ely wrote for the Ninth Circuit,

“[t]o put the matter simply, giving the instruction can do no harm, and it can certainly help by preventing the jury from inflating the award and thus overcompensating the plaintiff on the basis of an erroneous assumption that the judgment will be taxable.” Burlington Northern, Inc. v. Boxberger, 529 F. 2d 284, 297 (1975).

We hold that it was error to refuse the requested instruction in this case. That instruction was brief and could be easily understood. It would not complicate the trial by making additional qualifying or supplemental instructions necessary. It would not be prejudicial to either party, but would merely eliminate an area of doubt or speculation that might have an improper impact on the computation of the amount of damages.

The judgment is reversed, and the case is remanded to the Appellate Court of Illinois for further proceedings not inconsistent with this opinion.

It is so ordered.

35 Stat. 65, as amended, 45 U. S. C. § 51 et seq.

The issue of liability was vigorously contested at the trial and was the subject of extensive consideration by the Appellate Court of Illinois, First District. See 62 Ill. App. 3d 653, 378 N. E. 2d 1232 (1978). No aspect of that issue, however, is now before us.

App. to Pet. for Cert. A27-A28.

Respondent argues that the excess is adequately explained by the jury’s estimate of the pecuniary value of the guidance, instruction, and training that the decedent would have provided to his children.

One of the purposes of the Federal Employers’ Liability Act was to “create uniformity throughout the Union” with respect to railroads’ financial responsibility for injuries to their employees. H. R. Rep. No. 1386, 60th Cong., 1st Sess., 3 (1908). See also Dice v. Akron, C. & Y. R. Co., 342 U.S. 359, 362; Brady v. Southern R. Co., 320 U. S. 476, 479; Hill, Substance and Procedure in State FELA Actions—The Converse of the Erie Problem?, 17 Ohio St. L. J. 384 (1956).

“The Supreme Court of the United States has not spoken on this issue. Absent an authoritative pronouncement by that court we will follow the decisions of our own supreme court in Raines v. New York Central R. R. Co. (1972), 51 Ill. 2d 428, 430, 283 N. E. 2d 230, cert. denied (1972), 409 U. S. 983, . . . and Hall v. Chicago & North Western Ry. Co. (1955), 5 Ill. 2d 135, 149-52, 125 N. E. 2d 77. . . .” 62 Ill. App. 3d, at 668-669, 378 N. E. 2d, at 1245.

This is not to say, however, that introduction of such evidence must be permitted in every case. If the impact of future income tax in calculating *495the award would be de minimis, introduction of the evidence may cause more confusion than it is worth. Cf. Fed. Rule Evid. 403.

See McWeeney v. New York, N. H. & H. R. Co., 282 F. 2d 34, 37 (CA2 1960), cert. denied, 364 U. S. 870.

See Civil Rights Act of 1964, Tit. VII, §706 (k), 78 Stat. 261, 42 U. S. C. § 2000e-5 (k); Clayton Act, § 4, 38 Stat. 731, 15 U. S. C. § 15; and numerous others collected in Alyeska Pipeline Service Co. v. Wilderness Society, 421 U. S., at 260-261, n. 33.

The dissent takes the position that § 104 (a) (2) of the Internal Revenue Code, see nn. 11, 12, infra, which makes personal injury awards nontaxable, “appropriates for the tortfeasor a benefit intended to be conferred on the victim or his survivors.” Post, at 498-499. But we see nothing in the language and are aware of nothing in the legislative history of § 104 (a) (2) to suggest that it has any impact whatsoever on the proper measure of damages in a wrongful-death action. Moreover, netting out the taxes that the decedent would have paid does not confer a benefit on the tortfeasor any more than netting out the decedent’s personal expenditures. Both subtractions are required in order to determine “the pecuniary benefits which the beneficiaries might have reasonably received. . . .” Michigan Central R. Co. v. Vreeland, 227 U. S. 59, 70.

The statute contains an exception for the reimbursement of medical expenses that have been taken as a deduction. The section provides in relevant part:

“Except in the case of amounts attributable to (and not in excess of) deductions allowed under Section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include—
(2), the amount of any damages received (whether by suit or agreement) on account of personal injuries or sickness. . . .”

See Rev. Rul. 54-19, 1954-1 Cum. Bull. 179.

See, e. g., Burns, A Compensation Award for Personal Injury or Wrongful Death Is Tax-Exempt: Should We Tell the Jury?, 14 DePaul L. Rev. 320 (1965); Feldman, Personal Injury Awards: Should Tax-Exempt Status Be Ignored?, 7 Ariz. L. Rev. 272 (1966); Nordstrom, Income Taxes and Personal Injury Awards, 19 Ohio St. L. J. 212 (1958).