Hoyal v. Pioneer Sand Co., Inc.

Justice RICE,

dissenting.

The case at hand presents the question of whether a trier of fact, in determining the net pecuniary loss to the plaintiff in wrongful death actions, may receive and consider evidence of the income taxes owed by the decedent. Because this court has not addressed this issue previously, and there are compelling reasons to include the decedent's income tax liability in the determination of net peeu-niary loss, I respectfully dissent. I would make the rule absolute and reverse the trial court's order.

I. This Court Has Not Previously Performed A Substantive Analysis Of The Issue At Hand

This court has assumed without analysis that one must take account of the taxes the decedent owed on his or her earnings, when determining the net pecuniary loss to the plaintiff, See Lewis v. Great W. Distrib. Co., 168 Colo. 424, 427, 451 P.2d 754, 755 (1969) (discussing plaintiffs' net pecuniary loss with regard to decedent's "pay after taxes"). However, Lewis represents this court's only statement on the issue, and it did not involve an in-depth analysis. Though we discussed "the nontaxability [jury] instruction" in Rego Co. v. McKown-Katy, 801 P.2d 536, 588 (Colo.1990), that case involved a very different issue: whether juries should be instruct*721ed that wrongful death awards are exempt from federal taxation, thereby preventing juries from "inflating damage awards based on wrongful speculation about tax consequences." Id. at 539. We noted that only a minority of jurisdictions had adopted the United States Supreme Court's holding, in section II of its opinion in Norfolk & Western Railway Co. v. Liepelt, 444 U.S. 490, 496-98, 100 S.Ct. 755, 62 L.Ed.2d 689 (1980), that juries should be instructed that the plaintiff's damage award is not subject to federal taxation. Rego, 801 P.2d at 588-89. However, we did not mention or analyze the holding in section I of the Liepelt decision regarding the relevance of taxes the decedent would owe on his or her future income. Id. We also addressed personal income tax liability in Boettcher & Co. v. Munson, 854 P.2d 199, 208 (Colo.1993), but in the context of whether a jury should be instructed to adjust the plaintiffs award in Colorado Securities Act actions to account for tax advantages the plaintiff received from the defendant's wrongful conduct. We concluded that such an adjustment was unnecessary, because the plaintiff's damage recovery in a securities action is subject to taxation, id. at 207, and in any event the Internal Revenue Service would likely disallow any prior tax benefits. Id. at 205-206. Thus, we concluded that instructing juries to account for tax benefits in seeu-rities actions would inappropriately subject the plaintiff to double taxation. Id. at 207.

The case at hand presents a question very different from those addressed in Rego and Boettcher which, read most generally, concern income taxes the plaintiff will owe upon receipt of a damages award. Here we must address whether the jury may consider the income taxes the decedent would have owed in determining the net pecuniary loss to the plaintiff.1

IL Juries Should Be Allowed To Consider The Decedent's Income Tax Liability In Calculating The Plaintiff's Net Pecuniary Loss In Wrongful Death Actions

The net pecuniary loss rule is intended to compensate the plaintiff for the loss of pecuniary benefits the decedent would have provided to him or her, had the decedent survived. Pierce v. Commers, 20 Colo. 178, 182, 37 P. 721, 722 (1894). To determine a plaintiffs net pecuniary loss, Colorado courts have considered the decedent's age, health, earning ability, probable life expectancy, and disposition to aid the plaintiff, among other things. See id.; Newland v. Holland, 624 P.2d 983, 985 (Colo.App.1981). These factors are used in what can be broken down into the separate calculations of (1) funds likely available to the decedent over his or her lifetime, and (2) the portion of those funds that the decedent likely would have provided to the plaintiff.

In determining the funds likely available to the decedent over his or her lifetime, one cannot consider only his or her earnings. One must also consider the taxes the decedent would pay on those earnings, because funds paid to the government are funds that would not be available to the decedent to give to the plaintiff. See Liepelt, 444 U.S. at 498, 100 S.Ct. 755 (holding that under the Federal Employers' Liability Act, "[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 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."). Indeed, the plaintiff in this case does not dispute that the decedent's income tax lability is logically relevant to the question of her net pecuniary loss. Rather, she argues that such evidence should be ex*722cluded because it is confusing to juries and requires speculation.

The United States Supreme Court was confronted with similar arguments when it addressed whether the decedent's tax liability should be considered in Federal Employers' Liability Act cases when awarding damages for the "deprivation of the pecuniary benefits which the beneficiaries might have reasonably received" from the decedent-a standard that is functionally the same as net pecuniary loss. See Liepelt, 444 U.S. at 493, 100 S.Ct. 755. The court found that though future tax lability was indeed impossible to precisely predict, other factors required for the calculation of the survivor's lost pecuniary benefit, such as "future employment itself, future health, future personal expenditures, future interest rates, and future inflation are also matters of estimate and prediction." Id. at 494, 100 S.Ct. 755. Though it can be complicated to predict such things, "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." Id.

Several states' courts have come to the same conclusion in interpreting their own wrongful death statutes. See Floyd v. Fruit Indus., 144 Conn. 659, 186 A.2d 918, 925-26 (1957) ("It would be difficult to conceive of a more unjust, unrealistic or unfair rule than one which would lead a jury to base their allowance of reasonable compensation for the destruction of earning capacity on the hypothesis that no income taxes would be paid on net earnings."); Adams v. Deur, 173 N.W.2d 100, 105 (Iowa 1969) ("It is to us self-evident future probable taxes are no more speculative than any other element a trier of the facts is permitted, if not required, to consider in the determination of wrongful death damages."); Tenore v. Nu Car Carriers, Inc., 67 N.J. 466, 341 A2d 618, 628 (1975), abrogated on other grounds by DeHanes v. Rothman, 158 N.J. 90, 727 A.2d 8 (1999).

The Supreme Court's reasoning in Liepelt has also been adopted by leading commentators. See Restatement (Second) of Torts § 914A emt. ce (1979) (concluding that in wrongful death actions, award to plaintiffs cannot be based on gross earning because the decedent "could not have given them funds that he spent on himself or paid in taxes or used for other purposes; and an appropriate percentage of his expected earnings, taking into consideration these various types of expenditures, is proper"); Dan B. Dobbs, 2 Law of Remedies § 8.6(4), at 504 (2d ed. 1993) ("[Blecause the measure of damages in wrongful death cases gives the survivors only the contributions the deceased would have made but for the death, and because these contributions could not have included any sums that would have been paid as taxes, it has been commonly thought that income tax effects should be considered in death cases even when not considered in injury actions.").

I find this reasoning persuasive, and I would therefore hold that there is no valid reason to prevent triers of fact from considering evidence of the decedent's tax Hability in calculating the plaintiff's net pecuniary loss. I cannot see that a calculation of future tax liability is unduly speculative considering the other predictive calculations a trier of fact is asked to evaluate in determining net pecuniary loss. Though the tax laws may change, we have decades of historical data (almost a century in the case of the federal income tax) providing likely parameters for such changes. Such predictions are usually the province of competing experts, who provide competing calculations that the trier of fact can evaluate. Ever since the 1980 Liep-elt decision, experts have been making these calculations for cases pending in federal court, and there are now secondary sources available to guide experts in those calculations. See, eg., W. Cris Lewis & Taylor J. Bowles, "Alternative Approaches to Tax Adjustments in Appraising Economic Losses," in Economic Foundation of Injury and Death Damages 398 (Roger T. Kaufman et al. eds., 2005); W. Cris Lewis & Taylor J. Bowles, "A Statistical Analysis of Federal Income Tax Rate Stability Over Time and Implications for Valuing Lifetime Earnings," in Economic Fowndation of Injury and *723Death Damages 405 (Roger T. Kaufman et al. eds., 2005); Elizabeth M. King & James P. Smith, Computing Eeonomic Loss in Cases of Wrongful Death 78-89 (1988); Stuart M. Speiser & John Maher, Recovery for Wrongful Death and Injury: Economic Handbook ch. 11 (4th ed.1995). Considering that we are already asking triers of fact to evaluate experts' predictions of an individual's future earnings, it should not be overly difficult or confusing to ask the trier of fact to evaluate experts' application of a predicted tax rate to those future earnings.

In fact, the case at hand illustrates this point. First, the plaintiff's expert provided a report calculating the decedent's future earnings under several seenarios, without accounting for the decedent's income tax liability. The defendant's expert then issued his own report, criticizing the plaintiff's earnings projections on several grounds, and also insisting that they must be adjusted for federal and state income taxes. The defendant's expert presented his own projections of the decedent's income, and also adjusted the opposing expert's projections, all accounting for projected tax liability. The plaintiff's expert then submitted a rebuttal report defending his projections of income and insisting that tax liability was irrelevant, but also providing a critique of the opposing expert's tax calculations and projections. The plaintiff's expert then adjusted the opposing expert's projections using his own income tax projections. In this way, the trier of fact would be provided with competing projections of the decedent's net future income, and the tax projections would be only one of the many differences that the trier of fact would have to consider in evaluating which damage model was most correct. Excluding the decedent's income tax lability would not make these calculations significantly simpler, but it would guarantee a less accurate prediction of the plaintiffs net pecuniary loss.

We have previously noted that the net pecuniary loss rule "serves to negate any possibility of a windfall to the decedent's heirs by denying them compensation for injuries which were not their own." Espinoza v. O'Dell, 6388 P2d 455, 464 (Colo.1981). Awarding wrongful death damages without accounting for the decedent's tax lability creates a wholly different policy of providing plaintiffs with windfall awards that exceed their actual damages-in essence, taking money the Internal Revenue Service lost and giving it to the plaintiff,. Because I believe any major change in such a well-established policy should come from the legislature, I would make the rule absolute and reverse the trial court's order. For these reasons, I respectfully dissent from the majority's opinion.

I am authorized to state that Justice COATS and Justice EID join in this dissent.

. Federal courts applying Colorado law have addressed the issue presented here with conflicting results. On the one hand, the Tenth Circuit Court of Appeals affirmed a district court's holding in a diversity case that it was proper for a trier of fact to consider the decedent's income tax liability in determining net pecuniary loss. Deweese v. United States, 576 F.2d 802, 807, 808-09 (10th Cir.1978). On the other hand, another district court judge noted that "income tax is not mentioned in the many factors that trial courts are supposed to consider in determining net pecuniary loss," declined to speculate on how this court would rule on that issue, and therefore excluded evidence of the decedent's income tax liability in a diversity case. Gerbich v. Evans, 525 F.Supp. 817, 819 n. 4 (D.Colo.1981).